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 a question and answer session. I must advise you that this conference is being recorded today on Tuesday, 29th January, 2019.
On the call with you today are the VP, Investor Relations, Anders Trapp President and CEO, Mikael Bratt and Group CFO, Marc Bachmann. 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 Q4 2018 earnings presentation. As Alis 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 Q4 and full year 2018 results as well as provide an update on our general business, market conditions and targets. Following Michael, our CFO, Mats Backman will provide further details and commentary around the Q4 'eighteen and full year 'eighteen financial results and the 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 it includes the Q and 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 ks that will be filed with the SEC. 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, 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 our 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 autolift meet the opportunities and challenges in our industry. Our new management teams is off to a good start. Some of 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 target on the next slide. Our sales and earnings capacity is further supported by the continuing strong order intake in 2018.
Our targets are reaching more than 10,000,000,000 dollars in sales and around 13% in adjusted operating margin remains unchanged. However, 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 they are we aim to reach them at a later stage when market fundamentals are more solid. IHS now forecast substantially slower growth in the global light vehicle production for 2020. IHS forecast has been reduced by 5,000,000 vehicles or more than 5% since when we set out 2020 targets in 2017.
The annual growth rates for 2018 to 2020 has thus been lowered from the 2.3% that was included in our regional 2020 targets to now only 0.6%. Although we do not expect to reach the targets by 2020, we do expect improvements 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 the high level, the best we have had for several years. However, 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 4th 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 3 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 3 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 further strengthening our already broad customer base. Looking now at the recap of the 4th quarter highlights on the next slide.
Our growth momentum continued in the 4th 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 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 VM production plants 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 We 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 if necessary. We have a high number of Tempur employees both in Europe and China, providing flexibility to flex production volumes up or down. We have implemented actions to reduce cost related to cost related to product launches.
This includes production line redesign, employee management and supplier support management. Looking now at the recap of the Q4 financial performance on the next slide. Executing on the strong order book, this quarter marks the 3rd 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 $254,000,000 to $240,000,000 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 drop in light vehicle production in the quarter.
Consolidated net sales in the 4th quarter increased year over year by 1.6% to $2,200,000,000 with an organic growth of 4.2 percent, partly offset by negative currency translation effects of 2 0.6%. 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 $116,000,000 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 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 e emission testing regulation, WLTP, and model changeovers. Sales in China declined organically by 3.7 percent, outperforming light vehicle production by 11 percentage points. The lower sales was mainly a result of domestic OEMs, including Great Wall, Bayoung 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 Q4. 5 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 market. Looking now to our product launches. Our strong launch momentum continues.
We continue to see ramp up of product launches of business order in 2015 to 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 we 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 the 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 large share of our organic sales growth during 2019.
7 of these models were launched recently, 2 are yet to be launched, 2 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 the new production sites growing our sales. Annually, these 11 models represents around 10% of sales and our content per vehicle is in the range of $140 to $300 Looking to our underlying market conditions on the next slide. The light vehicle market became increasingly more challenging in the second half of twenty eighteen. Due to weaker consumer confidence, trade tariffs and regulatory changes.
In the 4th quarter, overall global light declined by about 5% according to IHS. This is 6 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 4th quarter by 13 percent according to CAM. 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 I predicted.
The outcome turned out even weaker as the light vehicle production in the 4th quarter declined by 15 percent according to industry sources like CAM and IHS. U. S. Light vehicle sales rebounded slightly in the quarter from the slowdowns experienced during the summer. Though most of the market fell below a year ago, strong growth from FCA, Tesla and Volkswagen brought the U.
S. Into the black for the quarter the year. Inventory level remains on the healthy level and were less than the region 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 the senior disappointing registration levels noted for November 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 Q4. 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 4th quarter, Including negative currency translation effects of around $57,000,000 and organic sales growth of 91,000,000 dollars Our consolidated net sales reached $2,200,000,000 for the 4th quarter. Our gross 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 gross margin and the higher RD and E, partly offset by lower cost for SG and 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% 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 Q4. 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 and E expenses, other launch related costs and unbalanced utilization of our supply chain, production and logistics systems. The higher RD and 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 6 percentage points 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 $32,000,000 compared to prior year.
The gross 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 gross margin and higher RD and E costs. Earnings per share from continuing operations assuming dilution decreased by 35% to $4.31 compared to $6.68 for the same period 1 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% 20% respectively. Our dividend of $2.46 was 0.08 dollars or 3% higher than a year earlier. Looking now on the next slide, where we have our adjusted operating margin of 10.5 percent 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 cost 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 and 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 our supply chain, production and logistics system in the second half of the year.
This was partly mitigated by a lower SG and A. Looking on our cash flow on the next slide. Operating cash flow was strong in the quarter, taking us to more than $800,000,000 in full year 2018 for continued operations, which is close to our earlier indication. Note that our cash flow statements includes discontinued operations up until the Q2 of 2018. This makes year over year comparison difficult.
Capital expenditures amounted to $133,000,000 in the 4th quarter. In the Q4 2017, capital expenditures for continuing operations were $128,000,000 Full year 2018 capital expenditures for continuing operations amounted to 486,000,000 dollars or about 5.6 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 between 4% 5%. Looking now for earnings per share on the next slide. Reported earnings per share declined by $3.32 to minus $1.06 mainly due to the accrual related to the remaining portion of the EC investigation, discrete items and lower operating income.
In Q4 2018, the adjusted earnings per share decreased by 38 percent to $1.42 compared to $2.29 for the same period 1 year ago. The main driver behind the decrease are $0.44 from discrete tax items, dollars 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 to 1.5. As of December 31, 2018, the ratio was back within the range as we reduced our net debt by $106,000,000 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 year 2019, This excludes any other discrete items and other non foreseeable changes to our business. Turning to 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 effective. And another factor to watch is the Brexit outcome. In China, IHS expect the softness to continue in the Q1, 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 the similar level as we did in 2018, which was almost 6 percent points. Turning the page, we have summarized our full year 2019 indications. With that, we are coming back to how we are planning to guide at our Q4 earnings call.
So 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 costs 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 effects 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% of 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 continued operations in 2018.
The projected RD and E in relation to sales for full year 2019 is expected to decline compared to the 4.8 percent for continuing operations in 2018. And we expect the leverage ratio to be well within our range of 0.5 to 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 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, which of course of the course of 2019, we expect to improve our product launches cost effectiveness.
In addition, as the number of launches are stabilizing at the new high level, we believe we can gradually increase focus on productivity improvements through operation excellence, while our launch related costs gradually declined. 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 would be millions of traffic accidents in 2019, some fatal, some where people will get injured. Therefore, we will relentlessly continue to innovate and 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. And 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'll now begin the question and answer session. And answer session.
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.
So 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? And then also perhaps any color you can give on the cadence within 2019?
This is Mats. So maybe starting with the kind of external factors and looking into currency and raw materials. So when it comes to currencies, we are saying that we expect a neutral effect. However, looking at the raw materials, we're 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.
So that's clearly a negative. Then looking on other items affecting the margin. First of all, when it comes to launch cost, as we communicated after the Q3, we talked about several quarters of launch cost going forward. So that's something we see now in the beginning of the year as well. And also to remember that, I mean, given the kind of assumption we have of the underlying LVP and the market development mainly in China, we see the first half of twenty nineteen to be challenging in order to kind of meet lower volumes and mitigate effects from lower volumes.
So that I would say kind of conclude the underlying assumptions we have for the 10.5%.
That's very helpful. And 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? So the incremental margins that you're assuming on a go forward basis and then how much of the recent headwinds seen in 2018 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. So what we are doing is that we are saying it will not be achieved in 2020, but beyond 2020 here. So the main factors here, I would say, is the light vehicle production, which have changed significantly since we set our targets in 2017. So that of course is a key factor all into this. And also the raw material situation here that has put additional strain on our have had as a target.
But you've had quite a few operational headwinds that you called out in 2018 2019 like is there what kind of did you assume this sort of gets reversed and what kind of tailwind would that provide?
That is what we have then said is the launch related costs that we have had on starting during last year. But if we said that we in connection with the Q3 here that will take several quarters until we are through that. So it of course impacts 2019 here, but 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 Rich Kwas from Wells Fargo. Please go ahead and ask your question.
Hi, good morning. On the assumptions under more 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. So is that a fair assumption for you?
And how much should we think about being on China production, light vehicle production being down within your outlook, your revenue outlook?
I think, I mean, China is the main factor in the equation here when we are saying that we are more negative for 2019 here. And it's mainly also in the beginning of the year first half. I think ISS has roughly 9% negative in the first quarter. We see significantly more challenging situation in China for the Q1 here. And so I would say then the second half of the year, I think it's more difficult for us to have our you know, a very different opinion here because the first half of the year then we can see and understand better where we are in relation to our customers' call outs and in the dialogue we have there.
Okay. And then the second
I was going to
say the second quarter you hinted at some risk there as well. So I know you only look out in terms of the current quarter, but should we think of taking whatever IHS has for Q2 and discount that as well and then assume that's factored into your within your full year outlook for the Q2?
Yes. Yes. Okay.
And then 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 difficult to give you some grading of our view on Europe and more than to say that we see Europe as a market which we believe will be weak here moving forward. And 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 connection with Q4 that, that would affect to some extent the Q4 as well, which it did. But I think around the whole WLTP issue, which is the emission regulation here, we have, I would say, a whole wait and see from the consumers here because there this overall question around the diesel versus then alternative drivelines and availability there delaying some decisions from the consumers. Then I would say in Europe also, we have the Brexit situation that are also impact consumer confidence in some countries.
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. So from what I think you're saying is that you haven't you just changed the timing of the targets and not the absolute values, but that would imply that basically the next $1,000,000,000 of revenue you'd have to achieve $360,000,000 of EBIT to hit that $1,300,000,000 number and 36% incremental margins doesn't seem like anything the company's done in the past. So 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, call it, the next $1,000,000,000 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 that primarily than the light vehicle production. So that of course, we see the growth coming from the underlying performance here of the company.
Okay. And 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 twenty nineteen and that still stands. So we'll come back on details around that. And of course, in such a meeting, you will formulate more we will formulate more direction when it comes to the years beyond 2020, but 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 Ashik Green 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've had since the time that you've given the targets, I mean, do you attribute all of that to the external factors, because even when I try to add up the raw material headwinds since 2017 and if I assume another 30, 40 bps for 2019, I think that together comes up to 100 bps. Launch costs again should be in that level as well. So maybe you can try to rephrase the question as to is the 13% dependent on raw material prices reversing by 100 bps and the LVP reaching the levels that you previously had for 2020?
I think it's a combination of both external and internal factors. I mean, to the extent that we have I mean, given the launch cost we have had and what we have been communicating in the Q3 and Q4, that makes a new baseline then as we are starting on a lower level then. We have the raw material. I mean, as I the indication I gave, the 40 bps 2018 will be at least on that level for 2019 as well then. But I think most and foremost is that's the underlying LVP.
Because if you recall when we gave the targets and when we talked about the development between 2017 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%. Whereof the underlying LVP assumption was, if I recall it, 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 5% and we are talking about 6% points outperformance that would indicate the global LVP of minus 1% rather than the plus 2.3 percent. And 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 or 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. I mean we talked about several quarters when we issued the 3rd quarter report and we have no changes to that.
Okay. So for 2019 then, I mean, if you grow organically by 5%, R and D is down year over year, launch cost is not up. So I mean and I think the volatility in LVP cannot be higher than what it is or if it's at the same level as what we've seen in 2018. I mean, there's no other negative surprise that we are missing in terms of the margin work, right?
No. But I think you also need to consider the mix when it comes to the growth and our growth in particular then looking on I mean, if you're just looking at the 4th quarter, I mean, close to 20 percent 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. So that makes it a little bit more difficult to get that kind of leverage comparing to if you have an even growth globally that you were looking at. So and that is particularly valid for the first half of twenty nineteen when we see this kind of turbulence or volatile development in China.
Thank you. Last question, I mean, do you have a chance of passing through some of the raw material headwind? I mean, given that you have close to 50% market share in your industry, I mean, if there's any supplier that's able to pass through by at least try to it should be used. So 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, etcetera, etcetera. So that's a commercial negotiation it 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 and answer your question.
Thank you. Good afternoon, everyone over there.
Hi, Phil.
I guess the I just want to go back to some of the assumptions, right? So you're talking about 5% organic growth. You show the 1% IHS, but it sounds like you're actually much below that. I mean, are you actually guiding like 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. I mean, we are guiding for 5% organic growth in 20 19. But in the same time, we're saying that we're looking at an outperformance in line with what we saw in 2018, meaning 6 percentage points. And that would indicate if you just kind of summarize the numbers, that would indicate that we're looking that our assumption for the global LVP 2019 is rather minus 1%.
Okay. Okay. That's helpful. So then so bringing that down to the margin, right, you talked about a 40 basis point headwind from raw materials. You talked about well, I mean, there's going to be obviously some sort of volume hit as well from the industry, although offset by the backlog and I guess conversion that's going to be key.
But is that really I mean if you're keeping margins flat and it seems like there's some of these headwinds you talked about, is that really what's just what's the offset to the margin is some of the improved conversion on the new business?
I mean, again, I would say it's a combination. We're talking about the kind of launch cost that continues into 2019 with the statement we made after the Q3 of several quarters. So that's one component that you need consider. But secondly, also being very important and especially now in the first half of twenty nineteen, That said, that's the risk for kind of under absorption driven by the volume drop we see in certain markets, taking China for an instance. So 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.
Even though that if we're looking at the Q4 and the outcome, the actual for the Q4, I think our Chinese team have done a great job in mitigating the negative volume effect. But that is a limit to what you can do when you see a sudden drop in volumes like we have seen that.
Right. But I guess if that's that was sort of my point. If you're talking about absorption, still some launch costs, still some raw material costs, but you are so it sounds like I'm hearing more headwinds, but you're still saying the margin is flat, at least for the year. So 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?
Yes. But I mean, first of all, I mean, the launch cost cannot go on forever. We started to communicate that in the 3rd quarter and into the Q4, and that's something that we have multiple activities and actions in the company in order to address launch costs. So that's one component that should improve now over time and that's important to remember as well.
Okay. And then I thought I heard the comment on CapEx that over time you'll get back to the 4% to 5%, which I think is what you've said historically. Is that in conjunction with sort of hitting this $10,000,000,000 number? Is that sort of 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 because I mean it's capacity related investments that we're making. And we have been preparing for this kind of higher volumes for couple of years right now. So 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. So the big support we get is really from the organic growth and higher sales number then.
Thank you very much.
Thank you. Your next question comes from the line of James Picariello from KeyBanc Capital. Please go ahead and ask your question.
Hi, 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 2 to 3 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?
No, I think we definitely see the same type of time horizon when it comes to new orders. I mean 18 to 36 months as you referred to here. I mean, with the weakening light vehicle production, I would say, is nothing that impacts the launch plans here. So in terms of launching new vehicles and for us then supporting these new launches is no changes. And that's why I think we are talking about this outperformance here where we see no changes to that.
Okay. And if we continue to see some commodity deflation or at least some stabilization, given the 3 to 6 month lead time, the delay there and you're realizing it in your P and L. Is there any upside to this another year of 40 basis point headwind from a commodity standpoint if we continue to see some deflation?
I think, I mean, lower raw material price, of course, is helpful over time. But there is a lead time in all that. So I don't think you can make such a rough calculation on that. It's many moving parts into that.
Okay. And 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% to 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, I mean, the only thing we're guiding for is a lower capital expenditures in relation to sales. And then when we're talking about the 4% to 5%, that's a more kind of a normalized historical level that we should aim for. But we are not that granular when it comes to the 2019 other than saying that we will decrease capital expenditures in relation to sales throughout the year.
Thanks very much, guys.
We will now take our next question. Our next question comes from the line of Ryan Johnson from Barclays Capital. Please go ahead and ask your question.
Yes.
Hello there.
Thank you. Your line is now reopened.
Hello. Can you hear me?
Yes. Yes, can you 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 is the launch activity in the U. S.
Weighing that down as well?
Well, I mean, we are not kind of that detailed giving margin and profitability per region. But if you're looking at the Q4 in particular, when we are talking about increased launch cost, that's related to the region where we have had most launches. I mean, for U. S. For an instance, looking at the 4th quarter, I believe we had more than 70% increase in number of launches in the Q4 year over year.
So 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 we'll have most of the launches. But other than that, I wouldn't get into a kind of a more granular guidance when it comes to the profitability per region.
Okay. And just next question, when you think of 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 7.10 launch cadence likely to continue into those years?
I mean, as we said, there's strong order intake here supports our growth beyond 2020 definitely
and by region, so to speak, I mean, the first wave that we have seen has been very much related to North America. But as you probably recall, we have been talking about market share gains mainly in 3 regions, that's North America, China and Japan. And looking into 2019, 19, we will see an increased number of launches in China as well though.
Okay.
And so 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 2 or 3 years, there's going to be a fact of life, good news for the top line. But as we've seen in 4Q 2018 2019 guide, doesn't really help with the margin.
Definitely. As we said, I mean, the launch cost is the higher launch cost we've seen during 2018 is being addressed in various ways. And 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. So 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 3 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. So Mikkel and Matt, 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 inventories and rates going up?
I think when it comes to the total market in the U. S, we see more sideways movement there when it comes to the underlying demand. And I think also inventory levels in the industry is at okay ish level here. So when it comes to that, I think we're looking quite positively on North America with what we see today. Then 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 continued to be a key region in terms of that. And as Matt said here, the wave started in North America, but then China and Japan is other regions where we're looking at growth. So 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'll continue to see the same as we have alluded to before here. And we always need to lean forward here, making sure that we have good competitiveness from our side here.
Last question on the launch costs, what are you assuming for 2019? Like obviously you have a lot of launches going on in the first half, but for the full year, what's the impact from launch cost? Thanks.
No, we are not giving a kind of an exact number when it comes to kind of launch costs and communicated kind of elevated launch costs for 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 twenty nineteen. But we cannot be more specific than that.
Got it. Thanks.
Thank you. Your next question comes from the line of Julian Radlinger from UBS. Please go ahead and ask your question.
Yes, thanks a lot. So just 2 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, 2018. And in that presentation, you had 2018, 7.40 launches.
And now and then in the latest presentation that number has gone down to 7.10. Given that you provided the Q3 presentation pretty far at the end of the year, what has changed in the last 2 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 2020 was not a guidance. It was a target for 2020 set at the Capital Market and communicated at Capital Market Day in 2017. So that was a 3 year target for the company. So very different from the guidance.
Okay. So
what we have done now is that we have said that, I mean, more than $10,000,000,000 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 Dia Souza from Morgan Stanley. Please go ahead and ask your question.
Good afternoon, everyone. Good afternoon. Yes, 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 where that like if you could just be a bit more granular on where that comes from, because we knew the production was going to fall. I just wanted and I think you mentioned higher safety content. I just wanted a bit more clarification on that. And 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 how much room for cost reductions you have?
I think the first question here in Europe, it's related to mix. And as we alluded to before, I mean, we are in cars with high content of passive safety products. And 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 Western and Eastern Europe, we have a mix effect that results in the number you saw here and very similar to what we saw here in the previous quarter as well in Q3. Okay. When it comes so when it comes down to the cost flexibility, I would say that, I mean, we are always focusing on making sure that we have high flexibility in our total value chain.
And I think what we refer to here in China is really that they have demonstrated good work in that area. And we are having the 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.
We have I mean, looking at China, we have the flexibility and the team has done a great job as well. But 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 full for the quarter now, for the 4th quarter is, I believe, minus 3.7% or something like that, close to minus 4%. But 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.
So you think 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, no, no. Not to predict the impact as such, but to mitigate the effects from lower volumes.
Okay. Okay. Yes. Makes sense. Is that so it's based on mix then?
Yes.
And 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 operational excellence. Also I should mention that our Q1 earnings call is scheduled for Friday, April 26, 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.