Good day. Welcome to the Autoliv Inc. Q3 2018 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Anders Trapp. Please go ahead, sir.
Thank you, Cecilia. Welcome everyone to our third quarter 2018 earnings presentation. Here in Stockholm, we have our President and CEO, Mikael Bratt, our Chief Financial Officer, Mats Backman, and myself, Anders Trapp, Vice President of Investor Relations. During today's earnings call, our CEO will provide a brief overview of our third quarter result and outlook, as well as provide an update of our general business and market conditions. Following Mikael, our CFO, Mats Backman, will provide further details and commentary around the Q3 2018 financial results and outlook for the full year 2018. At the end of our presentation, we will remain available to respond to your questions. 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 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-Q 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 Q3 2018 highlights on the next slide. First, I would like to say that I am pleased that our growth momentum continued despite the increasing challenging market conditions we faced in the third quarter. I also 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. Our growth momentum continued in the third quarter, driven mainly by a large number of product launches in North America. Autoliv grew organically by more than 6% despite light vehicle production decline by about 2% according to IHS. Unfavorable market fundamentals took their toll on global auto demand and production.
We had a solid operating cash flow in the quarter, supporting our indication of reaching around last year's level for continuing operations. I'm also pleased that our order intake continued on a high level in the quarter, supporting our growth opportunities for the long term. In the third quarter, the industry faced substantial reduction in volumes from our customers, especially in Europe, impacted by the WLTP, and in China, due to lower demand for new vehicles. Our recent product launches are on track, and we outpaced global light vehicle production by 8.5 percentage point in the quarter. However, we experienced continued headwinds from raw material pricing and currency movements in the quarter, which, together with the volatility of market demand and launch-related costs, tempered the operating leverage on the strong sales growth.
The volatility of market demand in the quarter resulted in our supply chain production and logistics system having to manage significant and late changes to OEM production plans, which corresponding to 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 similar environment for the rest of the year with continued uncertainty for light vehicle production, especially in China and Europe, leading to continued challenges with uneven utilization. We are closely following the 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 down or up. We are implementing actions to reduce costs related to product launches.
This includes production line redesign to improve product flows, new methods for onboarding new employees, and reorganization of our supplier support to help our suppliers to meet the growing demand. Looking now at the recap of our third quarter financial performance on the next slide. Executing on a strong order book, this quarter marks the second quarter of a step-up in growth. Our consolidated net sales increased by more than 4% compared to the same quarter of 2017, with organic sales increasing 6%. Adjusted operating income, excluding costs for capacity alignments, antitrust related matters, and separation costs, decreased by around 5%, from $205 million to $194 million, impacted by uneven utilization of our assets, elevated launch-related costs, raw material pricing, and currency movements. While the adjusted operating margin decreased by 100 basis points to 9.5% compared to the same quarter of 2017.
EPS diluted increased by 11% to $1.34 as compared to the same quarter of 2017, as a result of lower cost for capacity alignment and antitrust related matters. Looking to our sales growth on the next slide. Consolidated net sales in the third quarter increased year-over-year by 4.1% to $2 billion, with an organic growth of 6.4%, partly offset by negative currency translation effects of 2.3%. Sales outperformed light vehicle production according to IHS in all regions except rest of Asia, due to weaker sales in South Korea. In the quarter, North America contributed with $120 million to the organic growth. Sales were driven by previous quarters' product launches, mainly with FCA, Honda, and Nissan. The organic growth of 22% was more than 20 percentage points higher than the light vehicle production growth.
Despite South America's light vehicle production growing by only 2%, our sales grew organically by 16%. As a result of the strong growth in South and North America, our region Americas accounted for 34% of total sales in the quarter, compared to 30% in the full year of 2017. In China, both global OEMs and local OEMs contributed to the strong performance. Newly introduced models from Geely, including their luxury brand, Lynk & Co, were the major contributors to the growth. In Europe, we have been affected by weaker demands from a number of OEMs, mainly related to temporary production cuts connected to the new EU emission testing regulation, WLTP, which was implemented on September 1st, 2018. Looking to our key launch models Q3 2018 on the next slide. Here you see some of the key models which have been launched during the third quarter.
These models should be important drivers for our organic sales growth during Q4 2018 and first half of 2019. Three of the models are built in North America, continuing the strong momentum we have seen over the last quarters. Three of the models are China-specific, which will help mitigate the effects of a softening Chinese market. Annually, these models should represent around 4% of sales and our content per vehicle in the range of $100 to close to $300. This compares favorable to our global average supply value of $80-$90 per car. Looking now to our product launches. Our strong launch momentum continues. We continue to see the ramp-up of product launches of business awarded in 2015-2016, as illustrated by the chart. The ramp-up of growth is developing according to plan.
The number of product launches year to date have increased by more than 30% compared to a year earlier. Year to date, the main increase has been in the U.S., with 90% more launches than the same period last year. We expect a continued high pace of product launches in the U.S. in the fourth quarter as well. We therefore expect the strong organic growth to continue into the fourth quarter with a strong performance versus our market and light vehicle production. Looking to our underlying market conditions on the next slide. The outlook for major light vehicle market has become increasingly more uncertain due to weaker consumer confidence, trade tariffs, and regulatory changes. In China, the world's largest market, vehicle sale fell in the third quarter by 6%, with September tally down 11%.
Most automakers posted sharp declines in the past month, showing that the downturn in the Chinese car market has broadened. Only a limited few, such as Toyota and Geely, have managed to maintain growth. Inventory levels in China have increased and are now above normal levels. Light vehicle production in the third quarter declined by 4%, according to IHS, which was 7 percentage points worse than the 3% growth that was expected at the beginning of the quarter. IHS expects the softness to continue in the fourth quarter, forecasting about a 3% decline in light vehicle production. As inventory levels are relatively high and the recent trend in sales have deteriorated, we believe there is a downside risk to this estimate.
U.S. light vehicle sales rebounded slightly in September from slowdowns in July and August as automaker pushed vehicles to dealer lots, 2018 models before the 2019s became available in October. Inventory levels remained slightly on the high side during the quarter. Light vehicle production in North America grew by 1.6% year-over-year in the third quarter, according to IHS, which is significantly less than the original forecast of more than 6% growth at the beginning of the quarter. IHS expects light vehicle production to grow 2.6% in the fourth quarter in North America. European light vehicle registration in the third quarter increased by 1.6% after declining by 23% in September, reversing August's inflated sales ahead of the introduction of new, more stringent WLTP CO2 emission testing on September 1. From a technical testing perspective, the WLTP headwind should be temporary.
There is, however, some uncertainty on how long-term demand affects, as European VAT tax rates are partly based on CO2 emission. Impacted by WLTP, light vehicle production in Western Europe declined by 9% in the third quarter, which was about seven percentage points worse than forecasted at the beginning of the quarter. We continue to see WLTP effects also in the fourth quarter. IHS forecast the fourth quarter light vehicle production to be down by about 3% versus last year. In the third quarter, overall global light vehicle production declined by about 2% according to IHS. This is five percentage points worse than the 3% growth forecasted at the beginning of the quarter. Fourth quarter global light vehicle production is forecasted to grow by 0.7%.
The forecast for the full year 2018 by IHS is now for a growth of 0.7%, which can be compared to the estimate of 2.2% three months ago. The lower growth in global light vehicle production is why we are lowering our full-year organic growth indication from about 8% to about 6%. I will stop here and hand over to our CFO, Mats Backman, to speak on the financials.
Thank you, Mikael. Looking now for our financials on the next page, where we have our key figures for the third quarter. Including negative currency translation effect of around SEK 40 million and organic sales growth of about SEK 125 million, our consolidated net sales reached SEK 2 billion in the quarter. Our gross margin declined year-over-year. The net operating leverage on the higher sales was more than offset by higher commodity costs, net currency effects, and costs related to preparation for upcoming launches, as well as ramp-up of recent launches. Additionally, we experienced unbalanced utilization of our assets, mainly in Europe. Our adjusted operating margin of 9.5% declined year-over-year, mainly due to the lower gross margin and the higher RD&E, partly offset by lower cost for SG&A in relation to sales. Our reported earnings per share of $1.34 increased year-over-year by $0.13.
Our reported return on capital employed and return on equity were 20% and 23% respectively. Our dividend of SEK 0.62 was SEK 0.02 higher than a year earlier. Looking now on the next slide. Our adjusted operating margin of 9.5% was 100 basis points lower year-over-year. As illustrated by the chart, the operating margin was impacted by higher raw material cost of about 20 basis points and a net currency headwind of about 20 basis points. The negative leverage on the higher sales was a result of higher RD&E expenses, which increased compared to the same quarter in the prior year by about 40 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 systems. Looking more into these margin headwinds on the next slide.
In the third quarter, our industry experienced significant changes in the Light Vehicle Production, especially in Europe, impacted by the WLTP, and in China due to lower customer demand. Our supply chain, production, and logistics systems thereby had to manage both significant and late changes to OEM production plans with corresponding uneven utilization. At the same time, we are managing the exceptional growth in North America with continued elevated launch costs. To meet our expectations for quality and delivery for this wave of launches, we have added personnel in production overhead and RD&E, as well as increased the use of premium freights. As our premium focus has to be on quality and delivery, we have allocated resources accordingly and have therefore not been able to achieve the productivity gains that we expect during normal conditions.
As you can deduct from our full-year adjusted operating margin indication, we foresee a similar environment for the rest of the year. As the number of launches is stabilizing, we believe we can gradually focus more on productivity improvement through operational excellence while our launch-related costs gradually decline. We have initiated a number of actions to address our launch-related costs through management of our products, processes, employees, and supply base. These actions include production line redesigns to improve product flows, increased product standardization for future launches that will reduce cost for testing and tooling. Looking at the next page. Operating cash flow amounted to SEK 238 million, compared to SEK 218 million in the same quarter of 2017. Note that our cash flow statement includes discontinued operations up until the second quarter of 2018.
The increase was primarily driven by the cash flow impact from higher net income and working capital changes, partly offset by lower D&A. Capital expenditures amounted to SEK 117 million, which is about 5.8% in relation to sales. Capital expenditures in the third quarter of 2017 for continuing operations were SEK 122 million. For the full year 2018, we expect capital expenditures to remain in the range of 5%-6% of sales. Beginning 2019, we expect the capital expenditures to sales ratio to begin to normalize towards the historical range of 4%-5%. Looking at full year 2018, excluding any discrete items, we expect our operating cash flow for continuing operations to be on a similar level as in 2017. Looking now to our earnings per share on the next slide.
Reported earnings per share improved by $0.13 to $1.34 from lower capacity for capacity alignments and antitrust related matters. In Q3 2018, the adjusted earnings per share decreased by 18% to $1.35 compared to $1.64 for the same period one year ago. The main driver behind the decrease are $0.14 from higher tax rate and $0.09 from lower adjusted operating income. Looking now to our returns on the next slide. We are pleased that returns are higher in the new corporate structure. Return on capital employed and return on equity for the quarter is above what we have recorded in the full years 2015 to 2016 in the old structure. During the last 12 months, we have returned $213 million to shareholders through dividends. Turning to the balance sheet and financial policy on the next slide.
We have, as you know, a long history of prudent financial policy. After the spin, our balance sheet focus and shareholder-friendly capital allocation policy remains unchanged. The Q4 2018 dividends was set at $0.62, unchanged versus Q3, but an increase of $0.02 versus a year ago. Autoliv's policy is to maintain a leverage ratio of around one times net debt to EBITDA and to be within the range of 0.5 to 1.5. As of September 30, 2018, this ratio remained at 1.6 times, even though we reduced our net debt by $60 million in the quarter. Our strong free cash flow generation should allow fast deleveraging and should allow continued returns to shareholders while providing flexibility. As a result, we are aiming to reach the upper end of our target range by year-end and to reach our target level of one times sometime in 2019.
This is excluding any discrete items and other non-foreseeable changes to our business. Turning the page, we have summarized our full year 2018 indications. Full year 2018 indications assumes mid-October exchange rates prevail and excludes cost for capacity alignment, antitrust related matters, and costs related to the spin of the electronic segment. Our full year 2018 indication is for an organic sales growth of about 6% and a positive currency translation effect of around 2%, resulting in a consolidated net sales growth of about 8% for 2018. The about 6% organic sales growth indication is lower than earlier indication of about 8%, reflecting the weaker than expected market development in Q3 and Q4, especially in Europe and China. Our indication for the adjusted operating margin is 10.5% for the full year 2018, which is lower than the previous indication of more than 11%, reflecting a weaker sales indication.
We expect the headwind for raw material to continue throughout 2018 and to be close to SEK 30 million higher year-over-year, due to higher cost for non-ferrous metals, steel, and yarn. This is unchanged since the beginning of the quarter. We now anticipate the currency effect on the operating margin for the full year 2018 to be slightly negative instead of being neutral as we previously indicated after Q2. The projected tax rate, excluding discrete items, is expected to be around 28% for the full year 2018. The projected operating cash flow for continuing operations, excluding any discrete items, is expected to be on a similar level as in 2017. The projected capital expenditures for continuing operations full year 2018 is expected to be in the range of 5%-6% of sales. With this, I'll lead back for Anders.
Thank you, Mats. Turning the page. This concludes our formal comments for today's earnings call. I would like to now open up the line for questions. I will now turn it back to you, Cecilia.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. We will now take our first question from Hampus Engellau from Handelsbanken. Please go ahead.
Thank you very much. I have two questions. First question is on the launch cost, if you could talk a bit about that. Is the launch cost in Q3 higher than Q2. If I look on the number of launches, it maybe should be that. Second question is on this WLTP problem. I guess with your visibility on your customers' call-offs, I guess there would be some kind of a catch-up effect when this bottleneck has been solved. Could you maybe discuss, I don't expect detailed numbers, but a little bit how you would plan that looking at Q1, Q2 next year, since it could probably come into situation with some overproduction unless the consumer stops buying new cars. Those are my questions. Thanks.
Hi, Hampus. Mikael here. Let me start and comment on the launch cost there. I think you should not read it in that the launch cost per se is gradually increasing here. I think that it's the general activity as such that is increasing. What we have said all along here is that what is primarily focused for us in these launches is, of course, to protect the customer, making sure that we meet, of course, the deadlines, which we are. We are well on track there and with full quality here. Meaning then that the cost per launch has been higher than previously forecasted, so to speak. What we're working on now is to trim our launch teams here to be more efficient in the way we are conducting the launches.
On the second question there around potential catch-up effect or increased production here, coming out on the other side of WLTP. As we have said for the fourth quarter here, we see that the negative aspects of WLTP will have its toll also on the Q4 volumes here. We are, of course, always following very closely the call-offs and volume indication from the customers here. For us, it's, of course, to continue to secure high flexibility in order to meet either increasing demand or lower demand. I think going back in time, we have managed significant increases with very short lead time in the past, so that would not be something unusual for us. That's something we are used to handle.
All right. Thank you.
Thank you.
We shall now take our next question from Rich Kwas from Wells Fargo. Your line is open. Please go ahead.
Hi, good morning. Just on China, you indicated there's downside risk on the production assumption from IHS. Have you factored some contingency in the updated outlook here for the fourth quarter?
Yeah, I think, as always, the outlook or the guidance for the full year is built on our best knowledge at the time here. What we have said here is as a part of that assessment here, we believe that if you look at the IHS figures here, there could be potential downward risk here. We will see here. Once again, it's based on our best knowledge at this point in time.
Okay. Just given some of the dynamics here that we're seeing in the broader environment, in China and to some degree the other parts of the world, what's the latest thoughts around the 2020 outlook for margin and growth? Obviously, you have a number of launches that will continue over the next couple of years, when you think about margin trajectory, et cetera, any updated thoughts?
No. As you see here, we have not changed our targets for 2020 either up or down here based on where we stand right now. Our focus is towards these targets as we move forward.
Okay. Thank you very much.
We have no thoughts around that, more than that.
We will now take our next question from Brian Johnson from Barclays Capital. Please go ahead, sir.
Yes, hi, team. This is actually Steven Hempel on for Brian Johnson. Just to follow on to Rick Kwas question in terms of the 2020 targets, which were effectively reiterated. Obviously, there was a lot of headwinds here post when those targets were set, so it wouldn't be unreasonable to see further downside to those targets. Just wondering, it sounds like you implemented some actions or are in the process of developing a game plan for implementing actions to reduce some costs, reduce elevated launch costs and whatnot, to be able to hit those targets. Also from a top-line perspective, looks like your new order intake rate is still holding in at a high level, which is good. Is it fair to assume that obviously some of the WLTP and potentially China production could be more so temporary to 3Q and 4Q?
Is it fair to assume that some of these actions that are being taken, and the temporary nature of WLTP plus the higher implied sales growth through 2020 given higher order intake rate means basically those kind of two offset and you could still hit those targets? Or would you say there's some potential downside to those targets now just given the current environment?
As I said before here, we have no reason to adjust any targets for 2020 either up or down based on where we stand right now. What we are talking about here when it comes to the launch cost here is to make sure that we optimize the organization and trim the organization here to manage a new normal when it comes to the number of launches. That's something that will take some time, of course, to get efficiency in our launch organization here. I think we have indicated that it will take several quarters to get that on track. Of course when it comes to the uneven performance connected to WLTP, et cetera, we expect that to be of a temporary nature. Of course, we will see what happens with the overall demand when it comes to vehicles on our customer sides.
There we have not made any further outlook than what we have indicated in our guidance for the full year here. That we will have to come back to.
Understood. Should we be expecting an update on the 4Q release or around Detroit?
The-
Or is it still-
The 2019 guidance is expected to come together with the Q4 release.
Got it. Okay. No update for 2020. Just one financial related in terms of tax for Mats. Just can you help us better understand the tax rate, the reasons why it moved up in the quarter and for the full year and then any potential for that to move lower into 2020?
Yeah, if we're looking at the underlying tax rate because we have reported on 31.1% underlying. We had some smaller discrete items given an underlying tax rate of 29.5%. Indication for the full year of 28%. What you need to remember when you're looking at the full year guidance of 28% is the effect from the second quarter, very low reported tax rate because we had positive discrete items that brought the tax rate in the second quarter down to 8%. It's affected of that when you're looking at the full year number. I wouldn't start now to speculate when it comes to the tax rate into 2019. What we have communicated previously is that we should see some positive effects from the tax reform in U.S.
Given the high growth rates we have in U.S., that should also be reflected in terms of profitability in U.S. Maybe some positives coming from U.S. in terms of the tax reform. Other than that, it's the 28% guidance for the full year that stands.
Understood. Thanks for taking my questions.
We will now take our next question from Erik Bladh from SEB. Please go ahead.
Thank you. I have two questions, I apologize if you've been on the topic. I've had a bad line on and off. The first one is on order intake. I know if you said, talk a bit more about what trends you've seen recently. I assume you're now booking orders beyond 2020 and any update on that side? Then the second question, Mats, I guess you touched on the topic, but to what extent does the full year margin guidance reflect that all or a certain share of the operational headwinds that you had in Q3 remains in the fourth quarter? Do you assume that there's any ease in terms of the uneven excess utilization or so on? Do you more or less assume that it all stays for the remainder of the year? Thank you.
Let me take the first one here and have Mats answering the margin guidance question here. We are not putting out the number there for the order intake as such at this point in time. We normally do that only on a yearly basis here. What we can say is of course that the order intake continues on a high level and supporting then our market position for the longer term. I think that's good news in terms of what's happening on that end. When it comes to the margin guidance, Mats?
I think if you're looking at the margin, especially looking at the margin for the quarter and the year-over-year, we basically have three buckets of the things that are affecting the margin. First of all, the kind of external headwind that we see in terms of the currencies and the raw materials, the 40 basis points. Secondly, the increased launch costs that we also talked about. Thirdly, this kind of uneven utilization of our assets due to the underlying LVP. If you're looking on the three items and going into the fourth quarter, this kind of uneven utilization of assets, that's difficult to say if we see sudden changes that we saw in the third quarter. We will have some challenges for balancing that one.
When it comes to the launch costs, we have been putting together a lot of actions in order to mitigate the effects from the launch cost. What we can see is to have an effect continued into the fourth quarter as well at the launch cost. If you're looking at the sequential margin development, we always have a kind of a seasonality with a higher margin in the fourth quarter, and that is what you will get to if you're making the kind of backwards calculation when it comes to the margin in the fourth quarter. However, when we are saying that this kind of environment will continue into the fourth quarter, that is the kind of the year-over-year comparison that you saw in the third quarter and into the fourth quarter.
That's the kind of the guidance I can give, given the full year guidance we have on the margin.
Thank you.
We will now take our next question from Chris McNally from Evercore. Your line is open. Please go ahead.
Hi, guys. Thank you so much. Two follow-up questions that's slightly been asked before, but so the first on the 2020 plan, you're saying no change. Is there a time when you may revise or update that? Particularly, will you give any financials at these analyst events that you're having over the next couple of weeks?
No. As I said before, we have no reasons to revise our targets based on where we are right now. If we would have a revision of our targets up or down, we would do that according to all the principles and of course, not in separate meetings there. It's not a question at this point in time.
Okay. I think just because the general question would be given the 2018 starting point is SEK 400 million or SEK 500 million lower. Obviously a lower margin starting point to get to 13% is an implied 33% incremental margin, which I am not really sure you guys have ever done before. It just seems, unless we can quantify some of the launch costs that would subside. I think the launch costs will continue as you have some business coming on in 2019 and 2020, that does seem given some of these headwinds, FX, raw materials would continue. It seems just like it is a steep incline. You would expect that you would have to get, I do not know, half of the way there in 2019.
Yeah. I do not have any more comments than what I have already made around that.
No, I mean.
Mats, see if you could add something there.
In terms of indications, as usual, we will issue a full year 2019 indication when we release the fourth quarter report. I think, then you are basically half through the 2020. I guess that's a kind of a milestone for that discussion there.
Okay, fair. That's great. Then a second one real quickly. You mentioned the continued good order momentum. You used to put in a slide that showed 50% plus market share gains, and was curious if qualitatively, if that's still the case. Is Joyson or KSS at all back in the market taking a single order, so that maybe 50% plus market share may not be the case on orders specifically going forward, even though the revenue obviously continued to tick up in share?
As I mentioned before here, we will only present the new order intake market share on annual basis. As I indicated here, we continue to see high order intake supporting our market positions in the outer years here. I think that's as much as we can say at this point.
Okay, great. Thanks so much, guys.
Thank you.
Thank you.
We will now take our next question from Thomas Besson from Kepler Cheuvreux. Please go ahead.
Thank you very much. I have two very simple questions. The first is on the LVP. You have short-term on vehicle production in each region. Talking with some of your peers or some of your competitors, it looks like September has been the first time in a decade, they have not been really aware of what could happen the following week. Could you say, first if that happened to you as well, and whether this is improving in October, and whether this is really indicative of major hiccups, or whether this has improved? Second, could you give us an indication on what you're using for your budget assumption for 2019 global light vehicle production? Are you using the October IHS figure or the September IHS figure, or are you becoming more conservative in your budget plans? Thank you.
This is Mats. On the first question when it comes to the OEMs and the behavior, that's exactly what we're talking about when it comes to the late changes in production schedules. That is one component that has been affecting our margin negatively in the third quarter, in kind of underutilization of some assets as we have not been able to shift the planning quick enough then. If that will continue or not, it's very difficult to say. It depends on the kind of underlying LVP in the fourth quarter. In third quarter, it was very much related to the WLTP and the effects from that for single customers then. Difficult to say if we see the same thing into the fourth quarter, but it was completely driven by the situation in Europe then.
On the second one, when it comes to the, Thomas, can you repeat that one, please?
Sure. The second question was, what are you assuming in your budget for the change in global light vehicle production in 2019? Are you sticking with the habits of using IHS or LMC, or are you taking a subjective view, or are you making a choice given the trend we are seeing in global demand currently? I'm asking you if you're still assuming plus two next year, basically, or if you're thinking maybe it's going to be zero or minus two.
It's Mikael here. We use always IHS as the basis for our forecasting or budgeting as you wish. Of course, when we're looking into 2018, that is what we will be using also. Sorry, 2019. Of course, the freshest version of that is always what goes into the numbers when we give an update to the market there.
Thank you very much.
We will now take our next question from Victoria Greer from Morgan Stanley. Please go ahead.
Hi there, a couple, please. Definitely got the message that there's nothing you need to change here on your 2020 targets. We're hearing from quite a few of your competitors that they're seeing some changes in OEM planning around their production schedules, not just in the short term, but in the out years as well. Is that something you're seeing? Maybe some things are coming forward and others are going back, and that's why there's no change to your 2020 targets. Are you just not seeing anything change around the production schedules at all? Secondly, thinking about the dividend, could you give us some steer on the policy and how you will think about that this year?
Clearly in terms of free cash flow, keeping that flat year-over-year, paying the dividend at sort of last year's levels or the current consensus levels is very comfortable in cash terms. In terms of payout ratio, maybe that comes down a little bit with the small EPS downgrade that we do from the guidance change. How will you think about dividend policy for this year?
Hi, Victoria. Mikael here. When it comes to our visibility, when it comes to production delays, et cetera, I would say we do not see any delays of launches and models coming from our OEMs here. We do not see what you refer to there. I would say the question in the out years here is the light vehicle production per se, which we do not have that visibility on at this point in time. I think that's the normal way of looking at the out years here. Nothing to report there. Looks like usual. On the dividend side, as we have said before here, our prime focus right now is to get back into the range. I think Mats explained that earlier here on our ambition to get towards the 1 times net debt to EBITDA also. We do not have a dividend policy per se.
Here I would say we have the intention to continue to be shareholder friendly in terms of giving dividends and returns through buybacks, et cetera here. I would say we will also have a pragmatic view on this. It's not that we need to go down to the bottom of the range in order to trigger some activities here, but we need to be comfortably within the range before we do something.
Okay. Thank you.
We will now take our next question from Viktor Lindeberg from Carnegie. Please go ahead.
Thank you. I had a question on the order intake, but I think it was answered. Maybe I can follow up. If you have seen any changes to the pricing environment. We're looking where you are right now with a very strong market position globally. Are you more picky when it comes to orders and pricing, or is it market share that is the most important sort of driver for you? Secondly, thinking about product launches into 2019, can you remind us of what level of product launches you have? If I don't recall, I think you have said that it will decline at least year-over-year, but can you quantify this? Thank you.
On the pricing environment here, I would say there's no change to the dynamics here. It continues, of course, to be a very competitive industry, and we always need to lean forward here to make sure that we are in the forefront here when it comes to competitiveness in all aspects, pricing, delivery, position, reliability and quality. It's nothing changing there. I wouldn't say that it's either/or, as you indicated here. It's supposed to make sound business all together here and balance all the aspects in our dialogues to be supportive to our customers and have customer focus in everything we do here. I would say it's very much business as usual when it comes to the market dynamics here. On the product launches side, I wouldn't say it is declining, but I would say the step-up is decreasing.
It will be still a big year in 2019 in terms of launches. The step-up relative to previous year will be lower than what we have seen in 2018.
All right. Thanks.
We will now take our next question, Julian Radlinger from UBS. Please go ahead.
Yes, thanks for taking my question, gentlemen. two quick ones from my side. The first one is, on those key models that you mentioned at the beginning of this year, that you said at the time of the full year 2017 results would deliver half
A billion dollars of incremental revenue. You updated us at the time of the H1 results that they delivered about half of that at that time. Can you give us an update on how much revenue those models delivered in Q3?
I don't have the number for Q3 specifically, as I mentioned before here, we see that will come in around $0.4 billion instead of $0.5 billion for the full year here. very much connected to the light vehicle development we have seen here during the second half of the year.
Okay, perfect. Thanks. My second question, another one that's been asked in some form or another. On raw materials, some of your key raw materials have really been shooting up in the last six to nine months. I was just wondering if you can give us a little update on raw materials in 2019. Even if that just means explaining to us how long it takes typically from a raw material price change to translate into a cost change on your P&L. Maybe even just qualitatively, what are we looking at here for next year? Do you see a raw material headwind going into 2019?
Actually, I think it's too early to say. What we have seen is recently stock prices going in the other direction with all the kind of volatility we have had in the market. What you can expect is about six months kind of time lag when it comes to prices and effects on Autoliv. On top of that, it's also very much a question about negotiations with suppliers and on the customer side as well, while we are trying to mitigate the effect. It's very difficult to start already now to talk about the 2019 effect. We need to come back to that when we give the full year guidance for 2019 with the fourth quarter earnings release.
Okay, perfect. That's all from me. Appreciate it, gentlemen. Thank you.
Thank you.
We will now take our next question from Ashik Kurian from Jefferies. Please go ahead.
Thanks for taking my questions. I've got two. First one's on the cadence of your outperformance. I know you highlighted that 2018 is the biggest step up in terms of the product launches. In terms of what you have in your schedule, in terms of the outperformance of growth, which is around 9% in Q3, and I think your implied guidance for Q4 assumes the same level of outperformance. Was second half 2018 and first half 2019 always the period of the peak outperformance, so to say, within your budget? Is there anything that would justify the outperformance continuing at this level for maybe second half of 2019 into 2020 as well?
Coming back to when the guidance for 2019 and we're looking into 2019, I think it's too many moving parts in order to start to quantify any outperformance in 2019. We are happy with the 8.5 percentage points in the third quarter in terms of outperformance. If you calculate backwards with our guidance for the full year, you can see an outperformance in the fourth quarter as well then. I think that to talk about 2019, I would say is premature given the volatility we see in the underlying LVP.
Okay. Maybe I'll try my luck on the margins. I know there's a lot of discussion on the 2020 margins, part of the margin headwind that you have in 2018, as you pointed out, is due to the WLTP and production disruptions. Assuming that some of that reverses in 2019, you still have headwinds from raw materials, is there any way of giving us some color on what is the level of growth you need to have to at least keep your margins flat in 2019? I think the market is clearly discounting a slightly less optimistic LVP scenario than maybe what IHS has.
I know you have a path to 13% with the SEK 10 billion revenue target, but at least for us to have some sort of a sensitivity factoring into in the raw material headwind, et cetera, what is the minimum level of growth you need to have to maybe keep your margins flat year-over-year?
I think it's very difficult to give you a number on that one, especially looking into 2019 and 2020. Using the third quarter as the starting point and the effects you can see year-over-year in terms of margin effects. First of all, external factors like the currencies and raw materials, very difficult to say right now where we will be during this time period going forward. The second big effect in the quarter related to launch costs. You need to remember that we had a year-over-year, if you're looking specifically on North America, we had a 90, 9-0, increase in number of launches in the quarter, and that is the big kind of underlying reason for the increased launch cost. Even though we have a higher number of launches in 2019, the year-over-year increase in launches is less in 2019 then.
It's very much of dealing with a problem we have now in launch costs. The third big component looking on the third quarter, that's the uneven utilization of assets then. That it is extremely difficult to fully mitigate effects when we have customers that are changing their production plans maybe on a weekly basis. That's the kind of unknown in this one and a little bit also depending on the LVP and changes in LVP. I think that those are the kind of basic assumptions that you need to calculate on and make your own assumptions in order to kind of figure out where we are in that.
Maybe just a quick follow-up on your free cash flow. You managed your free cash flow better than most suppliers. I think it was partly helped by your working capital structure. Just wondering, has anything changed, or you think you'll still be, in case we were to have a slower production environment in 2019, can you get your working capital to support your free cash flow again in 2019?
We are on top of managing our operational working capital. The difference, if you're looking on where we are right now, is that we have actually an underlying growth given the market share gains we have had over the last couple of years when it comes to the order intake. Meaning that if you're looking at the working capital as such, when we are growing organically, you have a growth automatically looking on accounts receivables. We have also been building some inventories related to launches where we need to be prepared for the new launches. I guess the difference from the previous downturn is really the market share gains that we have some regions, like in North America, that we can see now, where we will have China and also Japan to some extent, where we have market share gains that will drive the organic growth.
I guess that's the difference, I can't really see any kind of different starting point in Autoliv today comparing to where we have been before.
Perfect. Thanks a lot.
We will now take our next question from David Lechner from Berenberg. Please go ahead.
Hello, this is Joseph Verbrugge for David. My first question, how has growth from the Americas performed relative to your expectation at the beginning of the year?
I think when it comes to our own organic growth, when it comes to the launches, we are all tracking according to the expectations here. We are following the plan that we have seen. I would say the fluctuation or changes compared to beginning of the year is all related to the underlying light vehicle production here that you have seen also coming through from IHS. We have no other changes than that. We are on track with our own deliveries to the market here.
On slide 11, the supply chain logistical challenges and the first sub-bullets notes exceptional growth in the Americas. Were some of these costs anticipated because of the high level of launch activity and they're worse than expected? They're just tracking in line with your expectation?
When it comes to North America, the elevated launch cost there is connected to what I mentioned before here of making a more efficient launch organization here to be more effective in this. As we have had a 90% step up from previous year in our launch activities, of course, that is a challenge for the organization, and it has come to a higher cost than what we anticipated. That is really what we refer to there. That's what we're working on now to improve.
My last question, it would be your expectation, obviously, your backlog suggests organic growth can remain pretty strong, high single-digit growth in 2019 and 2020. Is it at your expectation that some of the launch costs and other challenges you've experienced with high levels of volume this year, there will be improvement from the 2018 experience in future years?
Yeah. We are working to make efficiency in our launch activities here. As I indicated here, it will have a gradual improvement here, but it will take several quarters until we are in the level where we should be and want to be.
Okay, great. Thank you.
We can take one more question on this call.
Perfect. Our next question comes from Agnishwar Kapur from Nordea. Please go ahead.
Thank you. Could you just quantify the contribution from the market share gains to your sales in the quarter? Was it predominantly related to North America? Also, should we expect more such contribution coming in other regions as well, like in Japan or Europe in the coming quarters? Thanks.
Looking at the growth in the quarter, it's all related to market share gains. If you're just looking on the North American number, it's corresponding to the full growth number, actually. All growth you see and the contribution from launches is actually the full organic growth in the quarter.
Given the very high growth in North America, is it correct to say that these market share gains are appearing mainly in North America today?
Yeah. This is what we have stated before as well when it comes to the market share gains and the higher order intake over the last couple of years. It's mainly related to North America first, secondly, China, and also to some extent to Japan. You have those three regions that we can see the more pronounced market share gains.
Perfect. Thank you. The last question from me on WLTP. What's your feeling about when will these production disturbances ease in Europe?
I think it's a question for the OEMs here. We don't have any second guessing here. What we have said is that we believe and we see that it's affecting also Q4. Beyond that, I think we have to come back to in that case.
Perfect. Thank you.
Thank you.
That will conclude today's Q&A session. I will now hand the call back for any additional or closing remarks.
Thank you, Cecilia. Before we end today's call, I would like to say that we 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 fourth quarter earnings call is scheduled for Sorry, Tuesday, January 29th, 2019. Thank you, everyone, for participating on today's call. We sincerely appreciate your continued interest in Autoliv and hope you have a safe and relaxing upcoming holiday season. Goodbye for this time.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.