Autoliv Inc

NYSE:ALV

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and 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.

[Anders Trapp, Vice President of Investor Relations]

Thank you, Cicilia. Welcome everyone to our third quarter 2018 earnings presentation. Here at 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 results 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 '18 financial results and outlook for the full year 2018.

At the end of our presentation, we will remain available to respond to your questions, and as usual, the slides are available through a link on the homepage of our corporate website.

Turning to the next page, we have the Safe Harbor statement, which is an integrated part of this presentation, and it includes the Q&A that follows.

The result herein presents the performance of Autoliv giving effect to the Veoneer spin-off historical financial results of Veoneer are reflected of 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 PM Central European time. So please follow a limit of two questions per person.

I will now turn it over to our CEO Mikael Bratt.

[Mikael Bratt, Chief Executive Officer]

Thank you, Anders. Looking now into Q3 2018 highlights on the next slide. First, I would like to say that I'm pleased that our growth momentum continued despite the increasing challenging market conditions we've 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 grow organically by more than 6% despite light vehicle production declined by about 2% according to HIS as unfavorable market fundamentals took the toll on global outdoor demand and production.

We have 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 higher level in the quarter, supporting our growth opportunities for the long term.

In the third quarter the industry has 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 outpace global light vehicle production by 8.5 percentage points in the quarter. However, we are 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 logistic system having to manage significant, and laid 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 environments 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 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 on-boarding 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 and antitrust-related matters and separation costs decreased by around 5% from $205 million to $194 million, impacted by uneven utilization of our assets and 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 costs of capacity alignments and anti-trust 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. The sales were driven by previous quarter's 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 has 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 the luxury brand Lynk & Co were the major contributors to the growth.

In Europe, we have been affected by weaker demand 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 1, 2018.

Looking to our key launch models Q3 '18 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 in '18 and first half of '19.

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 softening Chinese market. Annually these models should represent around 4% of sale and our content per vehicle in the range of $100 to close to $300. This compares favorably to our global average supply value of $80 to $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 to 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 demand increase has been in the U.S. with 90% more launches than the same period last year. We expect the 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, retail sales, fell in the third quarter by 6%, with September tally down 11%. Most automakers posted sharp declines in the past months showing that the downturn in the Chinese car market has broadened. Only 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 into 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.

The U.S. light vehicle sales rebounded slightly in September from slowdowns in July and August. As automakers pushed vehicles to be the lot 2018 models before 2019 became available in October. Inventory levels remain 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 regional 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 inflator sales ahead of the introduction of new more stringent WLTP CO2 emission testing on September 1. From a technical testing perspective, the WLTP headwinds should be temporary. There is however some uncertainty on how long-term demand effects 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 before at the beginning of the quarter. We continue to see WLTP effects also in the fourth quarter, IHS forecast of 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. It 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 in 2018 by HIS 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.

[Mats Backman, Chief Financial Officer]

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 effects of around $40 million and organic sales growth of about $125 million, our consolidated net sales reached $2 billion in the quarter. Our gross margin declined year-over-year. The net operating leverage on the highest 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 on-balance 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 a higher RD&E, partly offset by lower cost per 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 was $0.62, about $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 costs of about 20 basis points, and a net currently headwind of about 20 basis points. The negative leverage from the highest 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 WLTP, and in China due to lower customer demand. Our supply chain production and logistic systems thereby had to manage both significant the late changes 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 and production overheads and RD&E, as well increased the use of premium phrase. As our premium focus has to be on quality and delivery, we have allocated resources accordingly and have therefore not being 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.

However, at 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 declined. We have initiated a number of actions to address our launch-related costs through management of our product, processes, employees and supply base. These actions include production line we designed to improve product flows, increased product standardization for future launches that will reduce costs per testing and tooling.

Looking at the next page. Our operating cash flow amounted to $238 million compared to $218 million in the same quarter of 2017. Note that our cash flow statements include discontinued operations, up until the second quarter of 2018. The increase was primarily driven by the cash flow impact from higher net income of working out the changes, partly offset by lower Veoneer. Capital expenditures amounted to $117 million, which is about 5.8% in relation to sales. Capital expenditures in the third quarter of 2017 for continued operation were $122 million. For the full year '18, we expect capital expenditures to remain in the range of 5% to 6% of sales. Beginning 2019, we expect the capital expenditures to sales ratio to begin to normalize towards the historical range of 4% to 5%.

Looking at full year '18, excluding any discrete items, we expect our operating cash flow of continued operations to be on a similar level as in 2017.

Looking now for 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 anti-trust related matters. In the third quarter of '18, 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 of $0.14 cents from higher tax rate and $0.09 cents from lower adjusted operating income.

Looking now for 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 year 2015 to 2016 in 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 fourth quarter '18 dividend was set at $0.62, unchanged versus third quarter, but an increase of $0.02 versus a year ago. Autoliv policy is to maintain a leverage ratio of around 1x 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 1.6x even though we reduced our net debt by $60 million in the quarter. Our strong free cash flow generation should allow first 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 1 times sometime in 2019. And this is excluding any discrete items and other known foreseeable changes to our business.

Turning the page, we have summarized our full year 2018 indications. Full year '18 indications assumes mid-October exchange rates prevail and excludes cost for capacity alignment, anti-trust related matters and cost related to the spin of electronic segment. Our for full year '18 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. There are about 6% organic sales growth indication is lower than earlier indication of about 8%, reflecting the weaker than expected market developments in third and fourth quarter, especially in Europe and China.

Our indication for the adjusted operating margin is 10.5% for the full year '18, which is lower than the previous indication of more than 11%, reflecting our weaker sales indication. We expect the headwind for raw materials to continue throughout 2018 and to be close to $30 million higher year-over-year due to higher costs for non non-ferrous metals, steel and iron. This is unchanged since the beginning of the quarter. We now anticipate the currency effect on the operating margin for the full year '18 to be slightly negative instead of being neutral as we previously indicated after the second quarter.

The projected tax rate excluding discrete items is expected to be around 28% for the full year '18. The projected operating cash flow for continuing operations, excluding any discrete items is expected to be in a similar level as in 2017. The projected capital expenditures for continuing operations full year '18 is expected to be in the range of 5% to 6% of sales.

With this, I'll leave back for Anders.

[Anders Trapp, Vice President of Investor Relations]

Thank you, Mats. Turning the page, this concludes our formal comment for today's earnings call. And I would like to now open up the line for questions. I will now turn it back to you Cicilia.

[Operator]

Thank you. [Operator Instructions] We will now take our first question from Hampus Engellaut from Handelsbanken. Please go ahead.

[Hampus Engellaut, Handelsbanken]

Thank you very much. I have two questions. First question is on the launch costs, if you could talk a bit about that. Is the launch cost in Q3 higher than Q2? If I look at the number of launches, needs to do that. And second question is on this will to two problem, I guess, with your visibility on your customers call-offs, I guess, there would be some kind of a capture perfect when this bottleneck has been sold. Could you maybe discuss about expected the numbers, but a little bit how you would plan that 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.

[Mikael Bratt, Chief Executive Officer]

Hi, Hampus, it's Mikael here. Let me through and comment on the launch costs. I think we should really seeing that the launch costs to say is gradually increasing here. I think this general activity is such that is increasing. And 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. So we are well on track there, and with full quality here. So meaning then that the cost per launch has been higher than previously forecasted so to speak. So 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, around potential catch-up effects or increased production here coming out of other side of WLTP. As we've said, for the fourth quarter here we see that the negative aspects of WLTP will have its car loans on the Q4 volumes here. We are, of course, for always following very closely the call-offs and the volume indications from the customers here. So for us it’s of course to continue to secure high flexibility in order to meet the either increasing demand or lower demand. I think going back in time and we have managed significant increases with various short lead times in the past. So that will not be something unusual for us. That's something we are used to handle.

[Operator]

We can now take our next question from Rich Kwas from Wells Fargo. Your line is open. Please go ahead.

[Rich Kwas, Wells Fargo]

Hi. Good morning. Just on China, so you indicated its downside risk on the production assumption from IHS. Have you factored some contingency in the updated outlook here for the fourth quarter?

[Mikael Bratt, Chief Executive Officer]

Yes, I think, I mean, as always the outlook or the guidance for the full year based has built on our best knowledge at the time here. And what we have said here is, as a part of that assessment here, we believe that if you look at Asia's figures here that could be potential downward risk here. But we will see here. But once again, I mean it's based on our best knowledge at this point in time.

[Rich Kwas, Wells Fargo]

Okay. And then, 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. But when you think about margin trajectory, it's such, any updated thoughts?

[Mikael Bratt, Chief Executive Officer]

No. I mean, as you see here, we have not changed our targets for 2020, either up or down here, based on where we stand right now. So I mean our focus is towards these targets as we move forward.

[Rich Kwas, Wells Fargo]

Okay. Thank you very much.

[Mikael Bratt, Chief Executive Officer]

So we’re no sourced around that.

[Operator]

We will now take our next question from Brian Johnson from Barclays Capital. Please go ahead sir.

[Unidentified Analyst]

Hi, team, this is actually Steven – on for Brian Johnson. Just to follow-on to Richard’s question in terms of the 2020 targets, which were effectively reiterated, obviously, those were a lot of headwinds here post when those targets were set. So it wouldn't be unreasonable to see further downside of those targets. I just wondering if you could -- it sounds like you implemented some actions or in the process of developing game plan for implementing actions to reduce some costs, reduce elevated launch costs somewhat not to be able to hit those targets. And also from a topline perspective, it looks like your new order intake rate is still holding at a high level, which is good. So is it fair to assume that obviously some of the WLTP, and potentially China production could be more so temporary to 3Q and 4Q. So is it fair to assume that some of these actions that have been taken in a temporary nature of WLTP plus the higher sales -- implied sales growth through 2020, given higher order intake rate, means basically those tend to offset and you could still hit those targets? Or would you say there's some potential downside in those targets now just given the current environment?

[Mikael Bratt, Chief Executive Officer]

So, as I said before, yes, I mean, we have no reason to adjust any targets for 2020, either up or down based on where we stand right now. I think what we're talking about here when it comes to the launch cost this year -- launch cost here is to make sure that we optimize the organization and trim the organization here to manage new normal when it comes to number of launches. And that's something that will take some time, of course, to get efficiency in our launch organization here. And I think we have indicated that it will take several quarters to get that on track. Then of course, when it comes to uneven performance connected to WLTP, et cetera, we expect that to be of a temporary nature. Then of course, we'll see what happens with the overall demand when it comes to vehicles on our customer side. And then we have not made any further outlook than what we have indicated in our guidance for the full year here, so that we will have to come back to.

[Unidentified Analyst]

Understood. So should we be expecting an update in the 4Q release or on the trait? Or is this …

[Mikael Bratt, Chief Executive Officer]

The 2019 guidance is expected to come together with the Q4 release.

[Unidentified Analyst]

Got it. Okay. So no update for 2020. Just one financial in terms of tax aftermath, just can you help us to better understand the tax rate the reason why it moved up in the quarter and for the full year? And then any potential for that to move lower into 2020?

[Mikael Bratt, Chief Executive Officer]

Yes, I mean, if we're looking at underlying tax rate. And, of course, I mean, we have reported 31.1%. On that we have some smaller discrete items given our underlying tax rate of 29.5%, indication for the full year of 20 to 28. But what you need to remember when you're looking at the full year guidance of 28% is the effects from the second quarter, very low reported tax rate because we have 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 my time for the text rate into 2019, but I mean what we have communicated previously is that we shouldn't see some positive effects from the tax reform in U.S. and give them the high growth rates we haven't grew in U.S., that should also be reflected in terms of profitability in U.S., so maybe some positives coming from U.S. in terms of the tax reform. But other than that, it's 28% guidance for the full year that's there.

[Operator]

We will now take our next question from Erik Golrang from SEB. Please go ahead.

[Erik Golrang, SEB]

Thank you. I have two questions. And I pulled as you've been on the topic you're ahead above that line on. The first one is on order intake. I know if you said state a little bit more about what trends you've seen recently, I assume you're now booking orders beyond 2020, and any updates on that side? And then, the second question also you touched on the topic, but to what extent thus the full year modeling guidance reflect that all or certain share of the operation headwinds that you had in Q3 remains in the fourth quarter? Do you see that there is any ease in terms of the uneven expressed utilization so long? Or do you like more or less you seem like it all stay for the remainder of the year? Thank you.

[Mikael Bratt, Chief Executive Officer]

Let me take the first one here, and I'll ask Mats answering the margin guidance question here. We are not putting out a number for the order intake as such at this point in time. We normally do that only on a yearly basis here. But what we can say is, of course, that the order intake continues on high level and supporting than our market position for a longer term. So I think that's good news in terms of what's happening on that end. And then, when it comes to the margin guidance, Mats.

[Mats Backman, Chief Financial Officer]

I think if you’re looking at the margin, and especially looking at the margin for the quarter and year-over-year, we basically have three buckets of all the things that are affecting the margin. First of all, the kind of external headwind that we see in terms of the currencies and raw materials, the forward events. Secondly, the increased launch costs that we also talked about, and thirdly, this kind of uneven utilization of our assets due to the underlying LVP.

If you are looking on the three items and knowing into the fourth quarter, these kind of uneven utilization of assets, I mean, that's difficult to say if we see sudden changes that we saw in the third quarter, then we’ll have some challenges for balancing thus far. When it comes to the launch costs, I mean, we’ve been putting together a lot of actions in order to mitigate the effects on the launch costs. But what we can see is to have an effect continuing into the fourth quarter as well at the launch costs.

And if you’re looking at the sequential margin development, we always have a kind of seasonality with the higher margin in the fourth quarter, and that is what you will get if you are making the kind of backward 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 that's the kind of the year-over-year comparison that you saw in the third quarter and into the fourth quarter. So that's the kind of the guidance I can give on the full year guidance we have on the margin.

[Operator]

We’ll now take our next question from Chris McNally from Evercore. Your line is open. Please go ahead.

[Chris McNally, Evercore]

Two follow-up questions that's slightly been asked before, but -- so the first one on the 2020 plan, you're saying no change. Is there a time when you may revise or update that and particularly will you give any financials at these analyst events that you are having over the next couple of weeks?

[Mikael Bratt, Chief Executive Officer]

No. I mean, as I said before, I mean, we have no reasons to revise our targets based on where we are right now. And if we would have revision of our targets up or down, we would do that according to all the principles and, of course, not in separate meetings there. So it's not the question at this point in time.

[Chris McNally, Evercore]

Okay. I think just because of the general question, would be given the 2018 starting point is $400 million or $500 million lower, and obviously a lower margin starting point to get to 13% is an implied 33% incremental margin, which I'm not really sure you guys have ever done before. It just seems unless we can quantify some of the launch costs that would subside, and I think the launch costs will continue as you have some business coming on in '19 and '20. That does seem, given some of these headwinds FX, raw materials would continue. It seems it's like a -- it's a steep incline you would expect that you have to get, I don't know, half of the way there in 2019?

[Mikael Bratt, Chief Executive Officer]

I don't have any more comments than what I've already made around that. Mats, if you can, add something on that.

[Mats Backman, Chief Financial Officer]

So, I mean in terms of indications, I mean, as usual, we will issue our full year 2019 indication when we release the fourth quarter report. And I think, I mean, than you're basically half of through the 2020. So I guess, that's a kind of a milestone for that discussion.

[Chris McNally, Evercore]

Okay, so that's great. And then a second one real quickly, you mentioned the continued good order momentum. But you used to put in a slide that showed 50% plus market share gains. And, I was curious if qualitatively if that's still the case. It joys in our case 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 you're -- the revenue obviously continued to pick up and shift.

[Mikael Bratt, Chief Executive Officer]

As I've mentioned before here, I mean, we will only present the new order intake market share on an annual basis. But as I indicated here, I mean, we continued to see high order intake supporting our market positions in delta years here. So I think that's as much as we can say at this point.

[Operator]

We will now take our next question from Thomas Besson from Kepler Cheuvreux. Please go ahead.

[Thomas Besson, Kepler Cheuvreux]

Thank you very much. I have two very simple questions. The first is on validity you have short-term on the 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 decades, they have not been really aware of what could happen the following week? Could you say what has happened to you as well and whether you're improving in October, and whether this is really an indicative of major hiccups or whether this has improved? And second, could you give us an indication of what's 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 plan? Thank you.

[Mats Backman, Chief Financial Officer]

This is Mats. So on the first question when it comes to -- we understand that on the behavior, that's exactly what we're talking about when it comes to the late changes in production schedules. And that is one component that has been affecting our margin negatively in the third quarter in kind of under utilization of some assets as we have not been able to shift the planning quick enough. And if that will continue or not, I mean, it's very difficult to say it depends on the kind of underlying LVP in the fourth quarter. But in third quarter, it was very much related to the WLTP and effects from that for single customer. So it's difficult to say if we see the same thing into the fourth quarter, but it was completely driven by the situation in Europe though. And on the second one, when it comes to the method, can you repeat that one please?

[Thomas Besson, Kepler Cheuvreux]

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? So if you're still assuming plus two next year basically or if you're thinking there is maybe zero or minus two?

[Mikael Bratt, Chief Executive Officer]

It's Michael here. We use always IHS as the basis for our forecasting or budgeting if there is. And of course when we're looking into '18 that is what we will be using also toward '19. So of course, the freshest version of that is always what causing to the numbers when we give an updated market there.

[Operator]

We will now take our next question from Victoria Greer from Morgan Stanley. Please go ahead.

[Victoria Greer, Morgan Stanley]

Hi there, a couple please. And definitely, got the message but there's nothing you need to change here on your 2020 targets. But 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. And 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 target? Or you did not see anything change around the production schedules at all? And then, 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. And, but 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?

[Mikael Bratt, Chief Executive Officer]

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 model coming from our -- models coming from our OEMs here. So we do not see what you referred to there. I mean, I would say the question in the out years here is the light vehicle production per say, which we don't have that visibility on at this point in time. So I think that's the normal way of looking out here. So nothing to report looks like usual. On the dividend side, as we've said before here, I mean, our prime focus right now is to get back into the range. And I think, Mats explained that earlier here on our ambition to get towards the one-time net-debt-to-EBITDA also. But when it comes to -- so we don't have dividend policy to say. And here I would say we have the intention to continue to be shareholder friendly in terms of giving dividends and returns through buyback et cetera. And I would say, we will also have a pragmatic view on this. So 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.

[Operator]

We will now take our next question from Viktor Lindeberg from Carnegie. Please go ahead.

[Viktor Lindeberg, Carnegie]

Thank you. I had a question on the order intake, but I think it was on sets. So maybe I can follow-up on the -- if you have seen any changes to the pricing environment. We're looking where you are right now with very strong market position globally. Are you more peaky when it comes to orders and pricing or issued market share that is the most important sort of driver for you? Then 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.

[Mikael Bratt, Chief Executive Officer]

On the pricing environment here, I would say, it is no change to the dynamics here. I mean, it's continuous, 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. So it's nothing changing there. And I wouldn't say that it's either or as you indicated here. It's, of course, to make sound business altogether here and balance all the aspects and our dialogs to be supportive to our customers and our customer focus in everything we do here. So 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 will say that the step-up is decreasing. So it will be still a big year in 2019 in terms of launches. But the step-up relative to previous year will be lower than what we've seen in '18.

[Operator]

We will now take your next question Julian Radlinger from UBS. Please go ahead.

[Julian Radlinger, UBS]

Yes. Thanks for taking my question, gentlemen. So 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 '17 results would deliver $0.5 billion 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?

[Mikael Bratt, Chief Executive Officer]

I don't have the number for Q2, specifically. But as I mentioned before here, we see that will coming around $0.4 billion instead of $0.5 billion for the full year here. But very much connected to the light vehicle development we are seeing here during the second half of the year.

[Julian Radlinger, UBS]

Okay, perfect. Thanks. Then my second question, another one that's been asked in some form or another. But on raw materials, some of your key raw materials that we've been shooting up in the last six to nine months, and 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 raw material headwind going into 2019?

[Mikael Bratt, Chief Executive Officer]

I can't, actually, I can't get too early to say, because, I mean, 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. But you can expect there is about six months kind of time lag when it comes to prices and effects on Autoliv. And on top of that, it's also very much a question about negotiations with suppliers and on the customer side as well. But we’re trying to mitigate the fact that 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.

[Operator]

We’ll now take our next question from Ashik Kurian from Jefferies. Please go ahead.

[Ashish Kurian]

Thanks for taking my questions. I've got two. First one is on the cadence of your outperformance. I know you highlighted that 2018 is a big 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 you implied guidance for Q4 assumes the same level of outperformance. Was second half 2018 and first half 2019 always the period that’s the peak outperformance so to say within your budget? Or is there anything that would justify the outperformance continuing at this level. So maybe second half of '19 into 2020 as well?

[Mikael Bratt, Chief Executive Officer]

I think, I mean, coming back to one -- with the guidance for 2019, and while looking into 2019. Yes, I think, it's too many moving parts in order to start to kind of quantify any outperformance in 2019. We are happy with the 8.5 percentage points in the third quarter in terms of outperformance. And if you calculate backwards with our guidance for the full year, you can see an outperformance in the fourth quarter as well done. So I think that to talk about 2019, I would say it's premature given the volatility we're seeing down the line in LVP.

[Ashish Kurian]

Okay. Maybe I’ll try my luck on the margins. I know a lot of discussion on the 2020 margins. But part of the margin headwind that you have in '18, as you pointed out before due to this WLTP and production disruptions, assuming that some of that reverses in '19, but 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, because within the market there is clearly discounting a slightly less optimistic LVP scenario than maybe what IHS has. And so, I know you have a faster 13% with the $10 billion revenue target, but at least for us to have some sort of a sensitivity factoring into in the raw material has been et cetera. What is the minimum level of growth you need to have to maybe keep your margins flat year-over-year?

[Mikael Bratt, Chief Executive Officer]

I think it's very difficult to give you a number on that front, especially looking in 2019 and 2020. But I mean, using the third quarter as a 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 what we will be during this time and going forward. The second big effect in the quarter related to launch costs. I mean, you need to remember that we had a year-over-year, if you are looking, specifically on North America, we had 90 increase in number of launches in the quarter. And that is the big kind of underlying reason for the increased launch costs. Even though we have a higher number of launches in 2019, the year-over-year increase in launches is less than 2019. So it's very much of dealing with the problem we have now in launched costs.

The third big component looking on the third quarter, that's there aren't even utilization of assets there. It's extremely difficult to fully mitigate effects when we have customers that are changing their production plans, maybe on a weekly basis there. So that's the kind of unknown in this one and a little bit also depending on the LVP and the changes in LVP. So I think that those are the kind of basic assumptions that you need to make it to calculate on and make your own assumptions in order to kind of figure out where we are in this.

[Ashish Kurian]

Maybe just a quick follow-up on your free cash flow. I think during the last downturn, you are, probably, one of the better where you managed your free cash flow better than more suppliers, I think was partly helped by your working capital structure. Just wondering has anything changed? Or you think you will still be, in case, we would have a slower production environment in 2019? Will -- can you get your working capital to support your free cash flow again in '19?

[Mikael Bratt, Chief Executive Officer]

I mean, we're on top of managing our working capital, operational working capital. I mean the difference if you're looking on where we are right now is that we have actually an underlying growth, given that 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 is such, when we're growing organically, you have a growth automatically looking on accounts receivables. We have also the building some inventories related to launch, but we need to be prepared for the new launches. So I guess the difference from the previous downturn is to 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. But I can't really see any kind of difference that is a starting point in Autoliv today comparing to where we have been before.

[Operator]

We will now take our next question from David Leiker from Baird. Please go ahead.

[Unidentified Analyst]

Hello, this is [indiscernible] for David. My first question, how has growth from the Americas performed relative to your expectation at the beginning of the year?

[Mikael Bratt, Chief Executive Officer]

I think when it comes to our own organic growth, when it comes to the launches, I mean, we are all tracking according to the expectations here. So we are following the plan that we have seen. The -- outside of fluctuation or changes compared to beginning of the year, it's all related to the double, underlying light vehicle production here that you had seen, also coming through from IHS. So we have no other changes than that. So we are on track with our own deliveries to the market there.

[Unidentified Analyst]

And so on Slide 11, the supply chain, logistical challenges, I know the first sub bullets, now it's 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 or they're just tracking in line with your expectations?

[Mikael Bratt, Chief Executive Officer]

No. I mean, it's - when it's comes to North America, the elevated launch costs that is connected to what I mentioned before here of making a more efficient launch, organization here to be more effective in it. So that's why we have had a 90% step-up from previous year in our launch activities. Of course, that is a challenge for our organization. And it has come to higher costs than what we anticipated. So that is really what we referred to there. So that's what we're working on now to improve.

[Unidentified Analyst]

And then 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 your expectation at some of the launch costs and other challenges you have experienced with high levels of volume this year though there will be improvement from the 2018 experience and in future years?

[Mikael Bratt, Chief Executive Officer]

Yes, I mean, we all are working to make a more efficient -- efficiency in our launch activities here. And as I indicated here, it will have a gradual improvement here. But it will take several quarters, something we’re in the level where we should be, and want to be.

[Anders Trapp, Vice President of Investor Relations]

We can take one more question on this call.

[Operator]

Perfect. Our next question comes from Agnieszka Vilela from Nordea. Please go ahead.

[Agnieszka Vilela, Nordea]

Thank you. Could you just quantify the contribution from the market share gains to your sales in the quarter? And was it predominantly related to North America? And also should we expect more such contribution coming from other regions like in Japan or Europe in the coming quarters? Thanks.

[Mikael Bratt, Chief Executive Officer]

I mean, looking at the growth in the quarter, it all related to market share gains. And if you're just looking on the North America number, it's corresponding to the full growth number actually. So all growth you see and the contribution from launches, it's actually the full organic growth in the quarter.

[Agnieszka Vilela, Nordea]

And given the very high growth in North America, then we can also – is it correct to say that this market share gains are appearing mainly in North America today?

[Mikael Bratt, Chief Executive Officer]

Yes. I mean if – and 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. So you have those three regions that we can see that more kind of -- the more pronounced market share gains.

[Agnieszka Vilela, Nordea]

Perfect. Thank you. And the last question from me on WLTP. What's your feeling about when will this production trends ease in Europe?

[Mikael Bratt, Chief Executive Officer]

I think it’s a question for OEMs here. We don’t have any second guessing here. But what we have said is that we believe and we see that it's affecting also Q4. So beyond that, I think, we have to come back proving that case.

[Operator]

That will conclude today’s Q&A session. I will now hand the call back for any additional or closing remarks.

[Mikael Bratt, Chief Executive Officer]

Thank you, Cicilia. Before we end today’s call, I would like to say that we continue to execute our growing business volumes and new opportunities within never ending focus on quality and operation excellence. Also, I should mention that our fourth quarter earnings call is scheduled for Thursday, January 29 -- sorry, Tuesday, January 29, 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. Good bye for this time.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.