Good day, and thank you for standing by. Welcome to the Autoliv, Inc. third quarter 2026 financial results webcast and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anders Trapp, Vice President, Investor Relations. Please go ahead.
Thank you, Madeleine. Welcome everyone to our third quarter 2026 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt, our Chief Financial Officer, Monika Grama, and me, Anders Trapp, VP, Investor Relations. During today's earnings call, we will highlight several key areas, including our strong performance in a challenging market environment, ongoing mitigation actions to offset cost headwinds. We are going to give an update on the latest market developments and our shareholder returns, and our full-year guidance on the potential impact of ongoing geopolitical and market challenges.
Following the presentation, we will be available to answer your questions. As usual, the slides are available on autoliv.com. Turning to the next slide, we have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference non-GAAP measures. The reconciliations of historical GAAP to non-GAAP measures are disclosed in our quarterly earnings release, available on autoliv.com, and in the 10-Q that will be filed with the SEC and at the end of this presentation.
Lastly, I should mention that this call is intended to conclude at 3:00 P.M. Central European Daylight Saving Time, so please follow a limit of two questions per person. I will now hand over to our CEO, Mikael Bratt.
Thank you, Anders. Looking on the next slide. We delivered a strong third quarter in a tough environment, with adjusted operating margin exceeding our earlier indications and reflecting disciplined execution across the business. The progress we achieved during the quarter reinforces our confidence in further profitability improvement through year-end. Together with strong customer partnerships and ongoing efficiency initiatives, we believe we are well-positioned to continue delivering value for our stakeholders.
Our positive sales momentum in Asia continued during the quarter. In China, we once again outperformed light vehicle production, driven by strong growth with Chinese OEMs, where our sales outperformed by almost 20 percentage points. In India, we grew sales by nearly 30% organically, reflecting mainly the trend of increased safety concerns in vehicles in India. Adjusted operating margin reached 9.7%, ahead of earlier indication, reflecting strong operational execution and higher engineering income.
I am pleased that our cash flow was strong despite working capital build-up due to strong sales in September. In the quarter, we repurchased over 1.2 million shares for $150 million and paid dividends of $63 million. Based on what we know today, we reiterate our full year 2026 guidance of flat organic sales with continued significant outperformance of light vehicle production, both with Chinese OEMs and in India.
Following the first nine months of the year and continued raw material headwinds and higher logistic costs, we have narrowed down our adjusted operating margin guidance to be around 10.5%, which is at the low end of the range of around 10.5%-11%. This reflects the effectiveness of the mitigation actions outlined later in the presentation. Operating cash flow guidance remains unchanged. CapEx is now expected to be around 4% of sales, compared with the previous expectations of less than 5% of sales.
We also have several positive developments to highlight from the quarter, both in terms of our footprints and our product offering. Expanding in China is key to strengthening Autoliv's innovation, global competitiveness, and long-term growth. To support this and our growing partnerships with Chinese OEMs, we have opened our second R&D center in China. We also launched the Human Body Model Safety Suite, a virtual safety development platform that helps automakers evaluate occupant protection through advanced crash simulations.
By helping customers improve safety performance earlier and shorten development time, it strengthens Autoliv's value proposition and growth opportunities. Looking now on the next slide. Third quarter sales were virtually unchanged despite light vehicle production declining. This was due to outperformance relative to light vehicle production, including tariff-related compensations and favorable currency effects. Adjusted operating income for the third quarter decreased by 3% to $262 million.
The decline reflects a $15 million supplier compensation, which benefited the third quarter of last year. The adjusted operating margin was 9.7%, 30 basis points lower than last year. Operating cash flow was $239 million, a decrease of $19 million. Looking now on the next slide. We continue to deliver broad-based operational improvements. Our positive direct labor productivity trend continued during the quarter, supported by the execution of our strategic initiatives, including automation and digitalization. Gross profit decreased by $26 million, with the gross margin declining from 19.3% to 18.4%.
Approximately half of the year-over-year decline was attributable to the noted supplier compensation recognized in the prior year. Looking ahead, we expect fourth quarter gross margin to develop favorably compared to Q4 2025. RD&E net expenses decreased year-over-year, driven by higher engineering income. As previously communicated, the increase in engineering income was primarily related to the timing of specific customer development projects. SG&A expense remained virtually unchanged, both year-over-year and sequentially.
Turning to the light vehicle market development in the third quarter, let's move to the next slide. According to Mobility Global's October forecast, global light vehicle production declined by 1.9% in the third quarter, approximately 20 basis points below the expectations in July. The weaker-than-expected production environment was primarily driven by lower volumes in China among global OEMs, as well as softer production in North America and Japan. This was partly offset by stronger-than-expected performance in India and South America.
The regional mix of global light vehicle production was approximately 90 basis points unfavorable during the quarter, mainly reflecting stronger production growth in lower content markets relative to other regions. Despite these market headwinds, our sales remained virtually unchanged year-over-year, supported by our continued outperformance relative to light vehicle production, favorable currency effects, and tariff-related compensation. We will talk about the expected market development in the fourth quarter more in detail later in the presentation.
Call-off accuracy has deteriorated somewhat compared with the beginning of the year, driven mainly by China, while other regions have returned to almost normal levels. Maintaining high call-off accuracy remains critical as it enables efficient production planning, inventory management, and optimal capacity utilization across our operations. Looking now on our sales growth in more detail on the next slide. Our consolidated quarterly net sales was virtually unchanged despite market headwinds.
Excluding currencies, our organic sales decreased $30 million or by 1%. Based on the latest light vehicle production data from Mobility Global, we underperformed the market by almost one percentage point globally. In Asia, excluding China, we outperformed the market by almost three percentage points, driven by continued strong sales growth in India, where we outperformed by 11 percentage points. Japan also contributed to the outperformance as we outperformed in Japan by almost four percentage points.
In China, we delivered outperformance of around one percentage point, mainly because our sales growth to Chinese OEMs exceeded their light vehicle production growth by almost 20 percentage points. As a result, Chinese OEMs accounted for 58% of our sales in China in the quarter, compared to 46% for the same period last year. While performance in Americas overall was in line with light vehicle production, North America delivered stronger results, outperforming light vehicle production by 2% performance.
Globally, Chery, Suzuki, and NIO were the largest drivers of sales during the quarter. Despite light vehicle production decline in China accounted for 20% of sales. Asia, excluding China, accounted for 20%, Americas for 34%, and EMEA for only 26% due to summer shutdowns. Moving on to the next slide. The third quarter of 2026 saw a high number of new launches, primarily in China but also in Americas. The strong launch activity in China reflects Autoliv's continued momentum in this strategically important market and supports our ongoing outperformance relative to the market.
Higher content per vehicle was driven in part by the adaptation of front center airbags across many of these new vehicles, as well as pedestrian protection systems. From a sales potential perspective, the BMW X5 and iX5 were the most significant launches during the quarter. Looking ahead, we expect a substantially higher number of launches in the fourth quarter compared with the same period last year, making 2026 a record year in terms of launch activity. This record will not stand for long, as we expect a new record launch year again in 2027. Let's continue with the next slide. I will now hand over to Monika.
Thank you, Mikael. I will talk about the financials more in details on the next few slides. Turning to the next slide. This slide highlights our key figures for the third quarter of 2026 compared to the same quarter of 2025. Our net sales were $2.7 billion, representing a 0.5% decrease. Gross profit decreased by $26 million, and gross margin decreased by 90 basis points. The driver behind the lower gross profit was mainly the $12.5 million supplier compensation in 2025, as Mikael mentioned, as well as higher costs for raw materials. This was partly offset by positive FX effects and supplier cost reductions.
The adjusted operating income decreased from $271 million to $262 million, and the adjusted operating margin decreased from 10.0% to 9.7%. The reported operating income of $254 million was $8 million lower than the adjusted operating income, mainly related to capacity alignment activities. The adjusted earnings per share diluted decreased by $0.13 to $2.19. The main drivers were $0.16 from higher taxes, $0.09 from lower operating income, partly offset by $0.11 from lower number of outstanding shares diluted.
Our adjusted return on capital employed and adjusted return on equity were solid, 24% and 25% respectively. We repurchased shares for $150 million and paid a dividend of $0.87 per share. Looking now on the adjusted operating income bridge on the next slide. In the third quarter of 2026, adjusted operating income decreased by $9 million year-over-year. Operational contributed $34 million, despite slightly lower sales, primarily driven by cost reduction activities. RD&E and SG&A net had a $17 million positive effect, mainly reflecting $26 million higher RD&E reimbursement.
This includes $2 million of unfavorable foreign exchange translation effects. This was partly offset by the $15 million supplier compensation that positively impacted last year's result. Raw material costs had a gross negative impact of $42 million in the quarter, with non-ferrous metals and oil-related components accounting for the majority of the increase. During the quarter, we achieved customer compensation covering more than 80% of tariff costs. However, tariff-related headwinds still reduced our adjusted operating margin by around 35 basis points, including dilutive effects.
Looking now at cash flow on the next slide. Operating cash flow decreased by $19 million to $239 million compared to the prior year, mainly because of lower net income. Trade working capital in relation to sales was 13.5% at the end of the quarter, compared to 13.9% a year ago. The improvement was mainly driven by higher payable in relation to sales, while inventories and receivables to sales were relatively unchanged. Free operating cash flow was positive $124 million, compared to positive $153 million in the prior year.
Capital expenditure net increased by $9 million year-over-year. Capital expenditure as a percentage of sales rose to 4.3%, compared with 3.9% in the prior year, mainly reflecting increased investment in production and RD&E equipment. The cash conversion was 80%, in line with our target of at least 80%. Year- to- date, operating cash flow decreased by $50 million to $598 million compared to the prior year. Now, looking on the next slide. Over the years, Autoliv has consistently demonstrated its ability to generate strong cash flow across a variety of market conditions.
Over the last 12 months, we returned approximately $760 million to shareholders through dividends and share repurchases. Looking at the past five years, we have returned a total of $2.9 billion directly to shareholders, while at the same time strengthening our balance sheet and improving our leverage profile. This includes more than $1.7 billion in share repurchases and nearly $1.2 billion in dividends. During this five-year period, we reduced our outstanding share numbers of approximately 18%.
As of quarter end, approximately $1.9 billion remained available for repurchase under the current board authorized share repurchase program out of the total of $2.5 billion original authorization. Our capital allocation decisions are guided by a disciplined assessment of our balance sheet, cash flow outlook, leverage, credit ratings, and market conditions with a continued focus on delivering long-term shareholder value. Now, looking on our debt leverage ratio development on the next slide.
Autoliv's balance leverage strategy reflects our prudent financial management, enabling resilience, innovation, and sustained stakeholder value over time. Our leverage ratio was 1.3 x at quarter end, compared with 1.2 x a quarter ago. The increase was driven by a roughly $64 million increase in net debt during the quarter, combined with a modest $6 million decrease in trailing 12-month adjusted EBITDA. Despite a quarter-over-quarter increase, our leverage remains at a low level and well within our targeted capital structure. On to the next slide. I will now hand it back to Mikael.
Thank you, Monika. I will talk about the outlook for the remaining of 2026 more in detail on the next few slides. Turning to the next slide. Mobility Global now expects global light vehicle production to decline by 1.9% in 2026, almost two percentage points downgrade from its January forecast, primarily driven by weaker outlooks for China and the Middle East. As we enter Q4, the industry continues to face the effects of the conflict in the Middle East and soft demand in China, partly offset by resilient vehicle sales in other markets.
For the fourth quarter, Mobility Global forecasts global light vehicle production to decline by approximately 4.5% year-over-year. The expected decline is largely driven by lower production in China, where softer domestic demand is only partially offset by continued strength in exports. As a result, Mobility Global has reduced its fourth quarter outlook for Chinese light vehicle production to a 9% decline. In the Americas, light vehicle production is expected to decline by approximately 2%, reflecting inventory adjustments in North America.
In Europe, production is expected to decrease by around 1% as automakers continue to face increasing competitive pressure from Chinese manufacturers. In contrast, Mobility Global has significantly upgraded its Japan outlook to 2% growth from 12% decline. This is driven by production recovery following Q3 plant disruptions caused by natural disasters and continued strong exports of fuel-efficient hybrid vehicles to the U.S. and Europe. Despite the expected year-over-year decline in global light vehicle production in Q4, production is forecast to increase sequentially by more than one million units or approximately 5%.
Now looking on the fourth quarter development more in detail on the next slide. As we look ahead to the remainder of the year, we remain focused on managing a dynamic external environment. We are closely monitoring the potential impact of geopolitical developments in the Middle East, which continues to affect supply chains, raw material costs, and overall vehicle demand. Despite this uncertainty, we expect our financial performance to strengthen in the fourth quarter versus the third quarter.
Margin expansion is supported by higher sales volumes, increased engineering income, and customer compensation related to raw material inflation. In addition, our ongoing cost efficiency initiatives, including greater optimization and digitalization across our operations, are expected to further enhance profitability and operating leverage. Combined, these actions are expected to result in a meaningful, stronger margin profile by year-end. Despite market headwinds, we expect strong free cash flow generation to continue throughout the year, supporting the ongoing execution of our share repurchase program and dividends.
Looking at our full-year guidance, there are several factors expected to weigh on the adjusted operating margin. Throughout the year, we have taken proactive measures to mitigate the additional headwinds impact in 2026. These are presented in more detail on the next slide. When our original full-year 2026 guidance was set in January, our assumptions reflected a significantly more favorable cost environment than what we see now. Since then, the business has faced additional headwinds amounting to approximately 170-180 basis points.
To address these headwinds, we have taken a broad range of commercial, operational, and cost efficiency actions, including improving direct labor productivity through optimization, digitalization, and continuous improvement initiatives, accelerating value engineering and value analysis initiatives, implementing SG&A cost reduction measures, and tighter spending controls, securing raw material recovery through customer negotiations and indexation, delivering savings through commercial negotiations with suppliers.
Through disciplined execution of these initiatives, we expect to offset most of the incremental headwinds. As a result, the net impact on our full-year adjusted operating margin is expected to be limited, demonstrating the resilience of our business model and our ability to proactively manage a challenging cost environment. Looking now on the next slide. This slide shows our full-year guidance, which excludes effects from capacity alignment and anti-trust related matters.
It is based on no material changes to tariffs or trade restrictions that are in effect as of October 15th, 2026, as well as no significant challenges in the macroeconomic environment or changes in customer call-off volatility or significant supply chain disruptions. We expect to outperform light vehicle production by around 2 percentage points as our organic sales is expected to be flat, while global light vehicle production is expected to decline by 2%. The currency translation effects on sales is expected to be around +2.5% .
While market headwinds have prompted a slight adjustment to our outlook, the change is relatively minor. The guidance for adjusted operating margin is now narrowed to around 10.5%, the low end of our range of around 10.5%-11%. Operating cash flow is expected to be around $1.2 billion . We expect CapEx to be around 4% of sales compared to previous guidance of less than 5%. Our strong cash flow generation and disciplined capital spending support our continued commitment to delivering attractive shareholder returns.
We expect a tax rate of around 30%. Looking on the next slide. This concludes our formal comments for today's earnings call, and we would like to open the line for questions from analysts and investors. But before I do that, I would just like to make a small correction there to my comment when it comes to the sales growth and regional sales mix in the Q3. I accidentally said that we underperformed the market by almost 1%. It should, of course, be we outperformed the market by almost one percentage point globally in the third quarter. With that correction, I would now like to hand it over to Madeleine, our operator.
Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We are now going to take our first question. This question comes from Tom Narayan from RBC. Please go ahead.
Yeah, thanks for taking the questions. The first one is on the EMEA underperformance versus the market. I know you mentioned there were some summer shutdowns there, but I guess I would think that would have impacted the market as a whole, not just Autoliv. Perhaps it was related to the Chinese exports into Europe. I am not sure what your indexation is to those, but just some color on the EMEA underperformance in the quarter, and then I have a follow-up.
Sure. Thank you for your question. I think, first of all, I would say that, yes, Europe is a challenging market, and here we have some swings between the different OEMs. So there are elements of customer mix from our point of view. I think we have said before here that our market share ambitions globally is to protect the market share we have. When you come to the more mature markets, you have more of a stable situation there. When you see some shifts between the customers, of course, it gets a bigger impact than normally if you are in a growth mode or so.
So I should not read too much into those swings you see there. I would also say that, of course, you are impacting this also when you see export from China coming into Europe. But since we are on most of those vehicles also, you have maybe seemingly a minus in the European business, but we have a plus in China, and that doesn't come through when you look at the numbers region by region like that. That's why I would say it's not that that's why, but it's one reason why maybe we emphasize more the overall market share development and outperformance here than the regional shifts.
But of course, key here is to grow for us with the OEMs that are growing and taking market shares globally, which we are doing here. I think the strong outperformance with Chinese OEMs in the quarter here is another evidence of exactly that within the business. Yeah.
And for my follow-up, you described the raw material cost increase resulting in the basis point guidance cut, and I believe it was a $10 million impact to the 2026 numbers. I know you're not giving 2027 guidance today, but just curious how we should think about the raw material cost increase bleeding into 2027. Is the expectation that you could get all of that with recoveries in the year? Or is this a similar dynamic that there's kind of a bleeding that happens to forward periods? I guess, how should we think about this cost increase, that impact?
As a comment there, we don't give any details around 2027 yet. It's in connection with the earnings call for Q4. But I would say that when it comes to raw materials, I would say that we expect it to be as challenging in 2027 as it has been in 2026. So I would say that's as much as we can comment really on that specifically. So I would say no headwind or tailwind coming from that. But of course, we are seeing 2026 as a very challenging year that translates and moves into 2027 when we get there. But more details to come.
All right. Thanks all .
Thank you. We are now going to take our next question. This question comes from Emmanuel Rosner from Wolfe Research. Please go ahead.
Oh, great. Thank you so much. Maybe first question focusing on the implied fourth quarter outlook implied by your guidance. This would obviously be a very high margin around 14% or so. Can you maybe give us some sort of sense of how much visibility and confidence you have in some of these drivers of margin step up? In particular, to the extent, the recoveries there, are those already secured? Where are you, I guess, in that negotiation process?
Sure. I think, first of all, Q4 is the stronger quarter in the year, as you know. I think with the full year guidance here, we are confirming that that's also the case this year. Of course, one part that makes it stronger is the engineering income that will be a part also this year. We have alluded to the higher sales, and also as Mobility Global says here now, so another 1 million units in Q4 compared to Q3, so it supports us in the sequential development there. Otherwise, it is to really drive here the customer compensation and tariff recovery in line with what we have done throughout the year here.
I think we have a good momentum there. I would say the difference maybe this year compared to other years is that which is a part of the guidance, of course, it's nothing on top of there. As we understand that the full year impact here is, of course, that this cost pressure continues throughout the year here, and makes it very tight to also fix the full effect in the year, which more speaks to that we are in the lower end of the range than anywhere else in the range there. We move into the fourth quarter here with confidence.
I think the Autoliv team has done a great job maneuvering through this. And as you saw here, the additional headwind on top of what we expected in the beginning of the year, 1.8 percentage points more is quite meaningful. I would say that we have very large absorbed here through price compensations and also our own cost-out activities here. And that also includes material cost optimization with the suppliers also, of course, that we do our cost there. I think we have a good activity plan for the fourth quarter.
Okay. I appreciate the color. As a second question, maybe focusing on China. So appreciate the color on the breakdown between your performance between global and Chinese local OEMs. Can you maybe comment on what portion of your business in China is geared towards exports? Any thoughts on to the extent there are some measures being put around the world to sort of limit some of these exports, whether that would be a good thing for you on a relative basis or a bad thing, something that we should focus on?
Yeah. First of all, I think that the starting point, the export vehicles tend to We don't have a separate supply chain for the export vehicles or the domestic vehicles for our respective customer in China. It's the same models, and then the specification may differ. But in most circumstances, it's the same type of product. So we don't really see that difference, which vehicle goes where, in that regard. But as I said, we are managing these dynamics in a good way, thanks to our global presence and high market share in the total market.
We have talked about that before, that we have a fairly strong diversified portfolio with a widespread representation among the different customers. So if it moves in between, we are on the platforms that also are gaining some traditional or losing, you could say, in all this. If there would be more, let's say, restrictions coming up between the regions on, you can't export, you need to localize. With our footprint, we can support a customer that wants or forced to localize rather than to export from another region.
I think that's really a strength with Autoliv here, is that we can offer our customers a lot of flexibility. If you talk specifically about the Chinese OEMs exporting from China versus Europe, and if you need to localize in Europe, today we are already a part of the China supply chain for them. If they have that set up with CKD, for example, or if they want to localize, then we can support them with local production. So I would say we are well prepared for whatever comes in terms of that dynamic.
Thank you.
Thank you.
Thank you. We are now going to take our next question. This question comes from Chris McNally from Evercore ISI. Please go ahead.
Thanks so much, team. I just wanted to follow on to Emmanuel's question, maybe to put some numbers to it. We are all trying to figure out this Chinese algorithm, right? Which kind of gets a little bit more, the numbers just become less dramatic Q4 and next year. So, for the implied Q4, are you expecting that China organic growth will go sort of back to positive? Then again, for 2027, it is early, but we all kind of know that the exports will be up, whether that is 10% or 20%, we all can debate. But is the expectation that we will still have Chinese organic growth given your sort of customer mix?
I do not know if I would like to give a number there. As we said, the light vehicle production according to Mobility Global is negative in China. Sorry. With that said, I have great confidence in our, I would say, future development of continuing to grow with the Chinese OEMs as we move forward. Yeah, I think we are on the right trajectory here. It is the LVP that gives the delta, so to speak, at the end of the day here. I think we have to wait to see what the net number is. We are on a good trajectory with Chinese OEMs, and I expect it to continue to grow. That is my comment to that.
Yeah. Sorry. Sort of a paraphrase is that growth over market should remain a significant driver. You are focused on the light vehicle, which is obviously pretty negative in Q4, so maybe that is an unfair question. In 2027, so it will be easier. Okay, perfect. If we could just zone in on the inflation, right? The 180 basis points. You have so many pass-throughs, right? The timing we all know. That will be somewhat of a pressure into next year. I was curious, of the 180 basis points, how much was actually the Thailand flooding and logistics, right?
We heard from GM this week that logistics was a headwind in Q3, Q4, because typically those would not be compensated. Just curious if you can call out either or as a bucket, sort of those two, because those are kind of one-off.
Connected to the Thailand flooding, we can call it not material impact in our results in Q4. Of course, this is considering coverage from our property damage and business interruption insurance. Connected to the logistics cost, we see indeed, in some of the divisions, double-digit cost increases, especially in North America. To offset this, we have taken logistic optimization initiatives to reduce the mileage. That is partly compensating the cost. As you well know, this is a cost very difficult to pass on.
So there is a limited impact to a large extent. We are looking on other compensating effects to recover and not per se one-to-one in the same areas.
Okay. Excellent. Great detail. Thanks so much, team.
Thank you. We are now going to take our next question. This one comes from Winnie Dong from Deutsche Bank. Please go ahead.
Hi, thank you so much for taking my questions. Wanted to just follow up on the years guide. I understand now you have narrowed the margin to the lower end. Was there anything that is more specific? I think you have talked a lot about costs already, but anything specific that pushes you to the low end of that range? To a certain extent, what sort of light do you think carries into 2027?
No, I think as we have alluded to here, is the higher than expected cost pressure that we have seen across the board here, which we have had on one of these slides. I think the team has done a great job to offset such a large portion of it that we still can be in the range. So good job there. I think what is more moving into 2027 is really what we talked about here before, connected to the raw materials. I would say that we expect that to continue to be some headwinds. I think that slide is really a good summary of why it's the lower end and not the upper end.
Got it. Thank you so much. Separately, I kind of want to ask about mobility safety solutions. Specifically, I think there's a product in terms of Pyro Safety Switch outside of vehicles. You're kind of marketing them for battery, energy storage, et cetera, which seems like one of the few ways to get growth that's not tied to LVP. Just any initial takes on how to frame the opportunities there?
No, I think it's, as you say, an interesting opportunity here in the light of the electrification that is going on in society. So we are having a dedicated team here, of course, to develop that business. And here we're talking about both the high voltage and low voltage, et cetera, to see what we are doing there. And we have interesting leads, and we are also growing this business as we speak. Then we have decided and elected not to give too much details and numbers at this point in time, because we believe that it's more meaningful to come back to you when we have meaningful volumes around that and can talk more in great detail.
It's a little bit of a, you could say, startup phase right now, but interesting opportunities in the midterm, for sure.
Great. Thank you so much.
Thank you.
Thank you. We are now going to take our next question. This one comes from Jose Asumendi from JPMorgan. Please go ahead.
Thanks so much. Two quick questions, please. Mikael, can you talk about the level of activity in 2027 versus 2026? Just broadly, if you see more product launches coming up in 2027 versus 2026. Related to this, whether you are seeing any substantial production stoppages in Europe in the months of November. Question two is just simply a confirmation that when you think about the raw material negotiations you are having, that you are not in the camp of seeing spillover negotiations of raw materials going into 2027, that you are confident with the raw material discussions in 2026.
We heard from other suppliers that they are seeing some spillover of these discussions into 2027. Whether you are confirming that 2026 raw materials will be negotiated and closed. Thank you.
Yeah, thank you for your question. I think 2027 and launches here, we expect to see a higher number of launches in 2027. We see that continues to increase, and I would say we have a high activity level when it comes to closing new orders and new deals here that gives us this effect. That is a positive, I think, when we look out for next year, and especially then, I guess, in combination with the LVP outlook that Mobility Global have indicated for next year as well. I think when it comes to the challenge around raw material negotiations here, I would not maybe say specifically raw materials alone.
It is in general, the cost pressure that we see right now that has been throughout the year, also continuing into Q4. That is a part of the guidance we have for the full year. The answer to your question is not changing that picture. That is important to remember. That is a part of, as I said, the lower end of the range here is also the fact that it is difficult to finishing those raw material negotiations with the cost pressure that we see coming now in October, November to finish that before the year ends. That is because it is continuing to increase.
It is no indication on more difficult or complicated negotiations. It is just that the regular time between the impact and the closure becomes shorter this year as it continues up. Once again, it is embedded in what we have indicated for the full year is nothing on top of very important.
Super helpful. On any major production stoppages in Europe, you are not seeing anything or are you seeing any elements there?
No, nothing to point out. I think, of course, we are always watchful for any activities there, and as you come closer to the year and depending on inventory levels and so on with the OEMs, but we have no visibility or indications at this point in time. I think also looking at the inventory levels in Europe, as far as we can see, it is quite in balance also. There is no indication for any abnormal things there. Yeah, we should be in shape as an industry.
Thanks so much.
Thank you. We are now going to take our next question, and this one comes from Agnieszka Vilela from Nordea. Please go ahead.
Thank you. Hi, Mikael Bratt, Monika Grama, and Anders Trapp. Just one question from me, and that's on R&D. I think you mentioned that you received somewhat more engineering income in the quarter than what you expected. Can you quantify by how much? Do you still expect a positive contribution from engineering income in Q4? Then maybe in relation to that, looking forward, what kind of net R&D costs do you expect into 2027, either in relation to sales or on absolute level?
Thank you, Agnieszka, for the question. Connected to Q4, as we guided, we expect a sequential improvement compared to Q3, and engineering income increase is one of the drivers of this improvement. Yes, it is a positive contributor further in Q4. On the long-term range, we expect pretty similar RD&E net of sales as we had in the previous period. It's no major change that we can announce at this point. This is pretty the trend that we want to maintain and align with our expectations.
On the kind of delta that you saw in Q3 specifically, I think you mentioned that it was a bit better than what you expected on the engineering income side.
As mentioned, it was better compared to prior year. In the first quarter this year, we suffered a negative impact compared to prior year, and it was part of the phasing that we anticipated to a large extent.
Thank you
Thank you. We are now going to take the next question. This one comes from Hampus Engellau from Handelsbanken. Please go ahead.
Thank you. Just one question from me, and that is maybe, Mikael, if you could just share some if you know, of course, the launches for 2027, are they back-end loaded, are they front-end loaded, or should we expect them gradually throughout the year? If you have any view on that would be helpful. Thank you.
Yeah. I think it is not any dramatic phasing on it. It is, of course, not equally distributed between the quarter. There are some strong quarters. I do not have exactly on top of my head the distribution there, but it is not like it is half of them in Q1 or something like that. It is, I would say, normal fluctuation as you see the previous year.
I see. Yeah. All right. Okay.
So very normal, I would expect it to be.
Fair enough. Thank you.
Thank you.
Thank you. We are now going to take the next question. This one comes from Stephen Benhamou from Bank of America. Please go ahead.
Yes. Thanks for taking my question. I have two questions, please. The first one is on your guidance for Q4. Your full-year guidance implies around 400 basis points of outperformance for the last quarter, well above the outperformance delivered in your previous quarters and despite a tougher comp base. What gives you confidence into this acceleration? This is my first question. My second question is about your full-year guidance adjustment. I know you are expecting around 10.5% versus between 10.5%-11%.
Should we read that as a floor, or is there any scenario where the full-year performance could be below 10.5%? This is my second question. Thank you.
Thank you. I think when it comes to the guidance for the fourth quarter, I just would like to come back to basically what I said earlier here, which is that, we enter now Q4 with the, I should say, the confidence of the fact that we have very clear activities lined up here for the fourth quarter to support the numbers here. Starting with what we see here is on the sequence. First of all, Q4 is the stronger quarter. It is always the stronger compared to the previous quarters, also this year, because there is a seasonality to it.
What we see now also sequentially here is that, despite the, I would say, very challenging quarter that we have been in, the team managed to deliver slightly better than what we expected into the quarter when we were here in July. That is because we are delivering well on our improvements activities that we have as an incremental part of our strategy to have an earnings growth altogether. So, when we have all these headwinds, those activities are helping us. So, the higher sales is one.
The tariff compensation and customer compensation are the cornerstones that is critical here, of course, where we have a good momentum in this, as we have seen. We have the higher sales of the 1 million vehicles, once again, on the sequential development here. That makes us see that we should be able to deliver on what we have indicated before. Actually, it has strengthened the case for Q4 compared to July, since we delivered stronger in Q3. So, the momentum carries through into Q4 is our expectations here.
That is why we have the confidence, as you said here, to make this step here. Then, of course, we do not guide for the future years here more than to say that the range for this year was a reflection of the uncertainty in the market and the volatility in the market that we see. But I am really happy that we are able to stay within this range, and I think that is really a sign of strength here. When we move forward here, our ambition and target is still to get to the 12. So, our earnings growth is something we are working on very hard with the different levers that we have identified and communicated before.
So, that still lays as the foundation. Then, of course, if you come, is this the floor or not? It depends, I would say, of course, on the external circumstances here. If we have a pandemic year again, who knows? So, it is a very difficult question to answer broad, but to say that we believe that we have an earnings growth built into our activity plans under normal circumstances.
Thank you. Maybe if I can just add a follow-up question regarding the top line. Coming back to China, can you please clarify why China turned negative organically in Q3? Because, so you delivered outperformance, but when I look at Q1 and Q2, the market was very challenging, and you have delivered positive organic growth. So, why you turn negative in Q3, and why you are more optimistic for Q4? Thank you.
No, I think what all that is referring to is the light vehicle production development that is quite significant. I think so far we have been compensated with the exports. The domestic sales gone down, global exports has gone up, and offset the large part of that. I think we see that the export opportunities limits that offsetting factor, and that's really the LVP growth. As I said before, our own ability to continue to grow and outperform with the Chinese OEMs continues. So we will feel comfortable in our own, I would say, activities and outcome there.
All right. Thank you.
Thank you. We have time for one last quick question. This question comes from Itay Michaeli from TD Cowen. Please go ahead.
Great. Thank you everybody for squeezing me in. Just two quick questions. You've done a really good job of mitigating the 180 basis points, or mostly mitigating the impact this year. But I'm curious to what degree, if any, are some of these mitigation actions a pull forward from initiatives you were planning for subsequent years, and could that affect the trajectory towards your 12% margin target?
I would say no. What we do is, you saw in the last quarter here, Q2 here, we announced the Türkiye, which is an effort also to continue to strengthen us both midterm and long term. We constantly work with our activities plan to make sure that we have enough activities to secure our growth journey, as well as making sure that we can offset the new headwinds that comes our way. It is never done. It is a constant work on all that. I would say what we have done now is to offset this is really, as we said here before, even more stricter control, SG&A activity, enhancing the productivity in our plants, and applying new technology.
I think that is also very, I would say, interesting and inspiring, is also that when we are on this journey, with continuous improvements, you are never done, it is always another 20%, 25% potential there. But now with the new technologies, we see that we also can take more bigger leaps in productivity here to applying things that were not available technically maybe two years ago, but today it is. The whole optimization journey potential grows as we move forward. That is really the focus here, to keep up the high pace on that to manage the headwinds and our own growth journey.
That is very helpful. As a super quick follow-up, maybe just talk through the drivers of the lower CapEx to sales guidance this year and how sustainable that might be into next year. Thank you.
As mentioned, we are narrowing our guidance for CapEx to around 4%. It is a phasing of activities. We prefer to prioritize activities that have a higher payback, and we continue to invest now more accelerated in Q3. But it is pretty just a phasing related to our investments, and the prioritization to the higher payback projects.
That's helpful. Thank you.
Thank you. That was the last question for today. I will now hand the call back to Mikael Bratt, President and CEO, for closing remarks.
Thank you, Madeleine. Looking on the next slide. Before we conclude today's call, I would like to invite you to Autoliv's Investor Day, taking place on 26th and 27th of April next year, 2027, in Shanghai, China. The event will feature management presentations and visit to our operations, combined with a full day at Auto Shanghai 2027, the world's leading automotive exhibition. Attendees will also have the opportunity to experience Autoliv's latest safety innovations and technologies showcased at the event.
We are looking forward to welcome you to Shanghai for an insightful and exciting two days. Finally, our fourth quarter call is scheduled for Friday, January 29th, 2027. Thank you for your attention. Until next time, stay safe.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.