Autoliv, Inc. (ALV) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to today's Quarter Three Autoliv Financial Results 2019 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I must also advise you that this conference is being recorded today on Friday, 25th of October, 2019. And I would now like to hand the conference over to your first speaker today, Mr. Anders Trapp, VP of Investor Relations. Please go ahead, sir.

Thank you, Carl. Welcome everyone to our third quarter 2019 earnings presentation. Here in Stockholm, we have our President and CEO, Mikael Bratt; our Interim Chief Financial Officer, Christian Hanke; and myself, Anders Trapp, Vice President, Investor Relations. During today's earnings call, our CEO will provide a brief overview of our third quarter results as well as provide an update on our general business and market conditions. Following Mikael, Christian will provide further details and commentary around the Q3 2019 financial results and outlook for our full-year 2019. At the end of our presentation, we will remain available to respond to your questions. And as usual, the slides are available through a link on the homepage of our corporate website. On the next page, we have the Safe Harbor statement, which is an integrated part of this presentation and, of course, includes the Q&A that follows. During the presentation, we will reference some non-US GAAP measures. The reconciliations of historical US 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. All figures in this presentation refer to continuing operations, i.e. excluding discontinued operations. Lastly, I should mention that this call is intended to conclude at 3:00 P.M. CET sharp. So, please follow a limit of two questions per person. I will now turn it over to our CEO, Mikael Bratt.

Thank you, Anders. Looking now into to the Q3 2019 highlights on the following page. First, I would like to say that I'm generally pleased that our operations reported adjusted operating margin compared to the second quarter despite challenging vehicle and cost for raw materials. The reason for the improvement is mainly the actions initiated in previous quarters to mitigate the effect of tough market conditions and elevated launch costs. Although the rate of decline in the light vehicle production slowed down somewhat, uncertainty remains high. Market outlook by IHS continued to be revised down and we do not see any turnaround in the light vehicle production in the near term. The strike at General Motors affected our operations in North America, adding to the challenges we already face. We continued to outperform light vehicle production growing organically 4.6 percentage points, more than light vehicle production, driven mainly by a strong development in China. Being a truly global company, we feel the full force of the global light vehicle production decline and the wave of new launches is what generates our outperformance. This quarter marks the sixth consecutive quarter of substantially higher organic growth compared to the market, further increasing our market share. Order intake share continued at a good level, supporting prolonged outperformance. Being close to our customers are key to strengthening our competitiveness. In the quarter, two new customer collaborations were announced. Firstly, creation of a North American road safety research lab involving China with Great Wall. Secondly, developing next-generation passenger airbags in cooperation with Honda. We continue to actively manage the business cycle downturn. Adding to the reduction of direct workforce headcount in the second quarter, we reduced totally workforce by further 800 during the third quarter. Compared to a year ago, headcount is about 1,600 less despite growing our sales organically by more than 1% year-over-year. Looking now at the structural efficiency program more in detailed on the next slide. Here, we have summarized the structural efficiency program as we have identified structural cost improvement opportunities. We have already started to see the positive effects of the program, although limited in the quarter. For full year 2019, we expect savings to amount to around $10 million and the program should reach its full effect by December 2020. Most countries where we have operations will be impacted, though higher impact in North America and Europe is expected. Headcount is estimated to be reduced by almost 800, which is about 4% of total indirect headcount. The cost for the program is estimated to be around $60 million and cash out to be spread from Q2 2019 to Q2 2020. Annualized savings is estimated to be around $60 million, which is equal to about 5% of indirect labor costs. We continue to evaluate our global operations and to optimize our footprint. It's likely that this will resolve in additional restructurings in further future quarters. This is, of course, not all we do to improve our long-term efficiency. We are investing in building the foundation for improving the value chain from end to end such as flexible organization, digitalization and engineering efficiency. We intend to discuss these more in detail during our CMD on November 19. Looking now at the recap of our third quarter financial performance on the next slide. Our consolidated net sales virtually flat compared to Q3 2018, impacted by weaker currencies with organic sales increasing by more than 1% despite the global light vehicle production falling by more than 3%. Adjusted operating income excluding cost for capacity alignments, antitrust related matters and separation costs decreased by around 6% from $194 million to $183 million, impacted by lower light vehicle production and raw material pricing. The adjusted operating margin decreased by 50 basis points to 9% compared to the same quarter of 2018. Adjusted EPS decreased by $0.05 compared to Q3 2018, mainly due to lower operating income. Looking now on the market development. The negative trend that started around mid-last year has continued. Global light vehicle production is estimated to have fallen by 6% year-to-date, the worst performance since the financial crisis in 2008 and 2009, and with more than 3% in the third quarter according to HIS. China's light vehicle market contracted for the 15th straight month in September. Despite dealerships in many provinces providing generous discounts and some efforts by the government to boost sales. Light vehicle sales and light vehicle production both fell by approximately 6% in the quarter. Consequently, we did not see any meaningful reduction of light vehicle inventories and we continued to see OEMs still carrying fairly high inventories. US light vehicle sales finished the quarter up 1% compared to last year, while sales in Mexico fell by more than 8%. Light vehicle production in North America decreased by 1% which was almost 3 percentage points lower than the originally forecast at the beginning of the quarter. One reason for the lower light vehicle production was the strike at GM's US facilities. Thanks to the higher vehicle sales, inventories declined by [indiscernible] to a healthy 3.6 million. European light vehicle registrations were 2% higher and light vehicle production was 1% higher than during the same period in 2018. However, the important West European production is still on a low level as it dropped 1% this year following the double-digit decline in Q3 2018 when many OEMs reduced volumes due to the WLTP introduction. Looking to our sales growth on the next slide. Our sales continued to outperform global light vehicle production, substantially outgrowing light vehicle production in China, rest of the world and Americas. In the quarter, Americas and China contributed with $30 million and $40 million respectively to the organic growth. This was partly offset by slowing sales in Europe. In North America, sales were driven by product launches from previous quarters, mainly with Honda, GM, Nissan, BMW and Tesla. The organic growth of around 4% was close to 5 percentage points higher than the change in light vehicle production. Our sales in South America increased by 31% organically, substantially outperforming light vehicle production. In Europe, we have been affected by weaker demand from a number of OEMs, including Daimler, JLR, BMW and Toyota. Additionally, our sales were negatively affected by OEM delaying a key model launch, which now is on track. These and a few other important launches should improve our relative performance in the fourth quarter. Sales in China increased organically by 11%, thanks to the strong order intake in recent years, outperforming light vehicle production with both global and domestic OEMs. Combined, we outperformed by around 17 percentage points. The higher sales were mainly driven by higher sales to global OEMs, mainly Honda and VW. Our sales in Japan underperformed light vehicle production due to negative mix, impacted by car models selling well ahead of the increase in consumption tax on October 1. As we have said before, we expect an improved sales performance from new product launches in Japan to begin in Q4 2019. Sales in rest of Asia outgrew light vehicle production by 8 percentage points, despite an organic sales decline by 3%. The sales decline was mainly a result of the weaker market in India. Looking to our key model launches in Q3 2019 on the next slide. Here, you see some of the key models launched during the third quarter. These models are well distributed across the globe and have an Autoliv content per vehicle from $100 up to $400 per car. Particularly interesting is to see our content on the Peugeot 208, one of Europe's best selling models. The 208 will be offered both with traditional combustion engines and a full electrical powertrain. Both versions with the same safety content from Autoliv. Going into the fourth quarter, we again have a high level of launch activities to support new vehicles to be introduced over the coming quarters, and that will prolong outperformance of LVP. I will hand over to our interim CFO, Christian Hanke, to speak on the financials.

Thank you, Mikael. Looking now to our financials on the next page. We have our key figures for the third quarter, including negative currency translation effects of around $30 million and organic sales growth of $25 million. Our net sales reached $2 billion. Our gross margin declined year-on-year. The net operating leverage on the higher organic sales was more than offset by higher commodity costs. Additionally, we experienced lower capacity utilization in most regions due to the sharp drop in light vehicle production. Our adjusted operating margin of 9% declined year-on-year, mainly due to the lower gross profit and a slightly higher SG&A in relation to sales. A comment here is that the savings from the structural efficiency program was very limited in the third quarter. Our adjusted return on capital employed and return on equity were 19% and 23% respectively. And we have maintained our quarterly dividend at $0.62. Looking now on the next slide, our adjusted operating margin of 9% was 50 bps lower year-on-year. As illustrated by the chart, the adjusted operating margin was negatively impacted by higher raw material costs of 60 bps and 30 bps from SG&A and RD&E, partly offset by 30 bps from FX effects. Despite the low organic growth, our operations yielded a positive margin contribution. This improvement was mainly a result of improving launch-related costs and effects from continuous improvement, business cycle management and, of course, growth from new product launches. These positive factors were partly offset by the disproportionate negative impact the LVT decline had on mature platforms with normal operating leverage. Looking on the next slide. Operating cash flow was strong and amounted to $195 million, which was $43 million lower than from continuing operations in 2018, mainly explained by the lower net income. Q3 cash flow last year was particularly strong, with a cash conversant of more than 100%, while it was 85% this quarter. Capital expenditures amounted to $122 million in the third quarter, which is about 6% in relation to sales. In the third quarter of 2018, capital expenditures for continuing operations were $117 million or around 5.8% of sales. For the full year 2019, we expect capital expenditures in relation to sales to be in line with 2018. Excluding the EC antitrust fine, last 12 months of operating cash flow was $820 million and the last 12-month cash conversion on net income was 78%. Looking now to our earnings per share on the next slide. We have the UPS development. Reported earnings per share declined by $0.36 to $0.98. The main drivers behind the decrease are around $0.31 from higher costs for capacity alignments and approximately $0.08 from lower adjusted operating income. In Q3 2019, the adjusted earnings per share decreased by $0.05 to $1.30 compared to the same period one year ago. Looking now to our financial position on the next slide. We have, as you know, a long history of prudent financial policy. Our balance sheet focus and shareholder-friendly capital allocation policy remain unchanged despite the current market conditions. Autoliv's policy is to maintain a leverage ratio of around 1 times net debt to EBITDA within a range of 0.5 to 1.5 times. As of September 30, 2019, the company had a leverage ratio of 1.8 times, which is slightly lower compared to what we reported for June 30. The main reasons for the high leverage ratio are the capitalization of Veoneer in 2018 and the payment of the fine for the remaining portion of the EC investigation in the second quarter of 2019. Our strong free cash flow generation should allow deleveraging and should allow continued returns to shareholders, while providing flexibility. We expect to be around 1.7 times by the end of 2019. This excludes any other discrete items and other non-foreseeable changes to our business. Looking at market development for the rest of the year 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. According to HIS, fourth quarter is expected to – and the North American light vehicle production is seen down 10% for the fourth quarter, partly as a result of the UAW strike in the beginning of the quarter affecting all GM assembly plants in the United States. LVP in China is expected to continue to decline, but at a more modest rate than what we have seen in recent quarters. European Q4 production is anticipated to decline by around 2% on lower demand. Japanese production will see a tipping point after October 2019 due to the increasing consumption tax from 8 to 10 percentage points, which affects domestic demand and an export sector which will be negatively impacted by a stagnant global demand. It is worth noting that, since January of this year, IHS has reduced their full year 2019 expectations of global light vehicle production by 6.4 million units or by 7 percentage points to around 86 million units. Reflecting the increasing uncertainty in the market, our base scenario for global light vehicle production in 2019 is a decline of 6% to 7%, which is lower than the IHS outlook of 5.9%. The reason for our more negative view of global light vehicle production compared to IHS is that we have seen drops in call offs in Japan, India and Korea due to lower demand and delays of certain new models. However, we expect to outgrow light vehicle production by 6 to 7 percentage points. Looking on the next slide, we have summarized our full-year 2019 indications. The uncertainty remains high in a falling LVT environment and we currently do not see any signs of a turnaround in light vehicle demand and, therefore, we now indicate full-year 2019 sales and profitability in the lower end of our previously communicated ranges. These indications exclude cost for capacity alignments and antitrust-related matters and assumes mid-October exchange rates prevail. Note that the exchange rates have been quite volatile in recent history and could well continue to be so in the near future. Our financial outlook assumes a 6% to 7% decline of global light vehicle production. The range reflects the continuing high level of uncertainty in the automotive markets. We expect our organic growth to be around 7 percentage points higher than global LVP. Consequently, our full year indication is for a 1% organic sales growth with a negative currency translation effect of around 3% percent, resulting in a net sales decline of around 2% for 2019. Reflecting the lower light vehicle production assumption, our indication for the adjusted operating margin is around 9% for full-year 2019. We expect the 2019 raw material costs to increase by approximately 60 basis points. We anticipate the currency effects on the operating margin for full-year 2019 to be relatively neutral, operating cash flow excluding the previous EC antitrust payment and any unforeseen events is expected to be between $700 million to $800 million. I will now hand back to Mikael.

Thank you, Christian. Turning the page. As illustrated by this chart, we have been able to gradually reduce the margin declines versus last year from more than 200 basis points in the two first quarters to 50 basis points in Q3 2019. This is despite continued headwinds from raw materials and light vehicle production decline more than expected. The chart also shows sequential improvements. The main reason for the sequential improvement is the business cycle management activities. Improved launch cost efficiency as well as our strong focus on continuous improvement throughout the organization. As implied by our full-year indication, we expect the sequential margin improvement trend to continue in Q4. In addition to positive contribution from our continuous improvements activities, we should start to see effects from the structural efficiency program as well as seasonally higher sales and seasonally higher engineering income and lower raw material headwinds. Although uncertainties continue to affect the industry volumes, we expect to outperform light vehicle production for the remainder of year in all major regions. To put things in context, this year has been dramatic. The year started with light vehicle production expected to grow by 1%, while now nine months later, it is expected to decline by 6% to 7%. That is the 7 to 8 percentage points change for the entire company to deal with. Additionally, we were affected by social unrest in Matamoros, Mexico in the first quarter, which created disturbances and substantial cost increases for us. Although we are not pleased with our profit levels, we are somewhat proud that in such dramatic environment, we are able to guide for around 9% adjusted operating margin. Not least in the light of the usual combination of sharply falling LVP demand and rising raw material costs. Looking now on the next slide. Our CMD is now less than a month away. At our facilities in Utah, we will show how we will improve our company further, taking Autoliv to the next level of growth, cost improvements and returns. I'm looking forward to seeing many of you there. I will now hand back to Anders.

Thank you, Mikael. Turning the page, this concludes our formal comments for today's earnings call. And we would like to now open up the line for question. So, I hand it back to the operator, Carl.

[Operator Instructions]. And our first question comes from the line of Chris McNally from Evercore. Your line in is now open.

Thanks so much. And good afternoon, gentlemen. A couple of questions maybe on the margin progression. I think you commented – obviously, it's been a tough year based on $600 million or $700 million of revenue delta. As we think about 2020, though, I think you guys have laid out a pretty strong argument on the cost structure getting better from the actions that have been pretty much taken place. Just back of the envelope math, it seems like you have $70 million left it to go. So, even if only a portion of that happens, that could be 40 or 50 basis points, you will get some of the raw materials back and then you obviously still have organic growth. So, we get this question a lot. Is it feasible that you could sort of have – look, everything changes on the volume side, but could we have a 75 or 100 basis point improvement next year just on the reversion of some of these factors? And again, putting sort of base production aside, just thinking things stay where they are and don't get better?

Yeah, thank you. We're not in the position now to start to comment on what we believe of 2020 here. But, of course, we are extremely focused here on continuing to adjust our cost base in relation to the overall market development here. And as we have alluded to before, we have also now the full focus on making sure that we capture all the opportunities of being fully focused company on our core businesses here and want to see here improvements along the value chain. So, I think we're being quite clear on our ambitions in driving that. That should support improved profitability in the years to come here. But going into any detailed discussion around 2020 is way too early here. And I think the uncertainty we talked about in the second quarter has just be reinforced in the third quarter here on where the market is going. So, I think we need to be keeping a close eye on that to start with and then take steps on that.

Okay, great. And then just another quick one on the order book. I think you commented, it's been – order levels remain at good levels. Maybe that's not 50% still, but maybe it's something pretty close to it. It's been almost two years since key safety and Joyson took over Takata. It seems like it's been a very subdued reemergence for them. Could you just talk qualitatively about what you're seeing in the bid process? Are they just very selective? Or are they really just trying to retain current customers and not trying to aggressively sort of retake some of the share that was lost?

I can't really comment, of course, on what they are doing because I simply don't know. We are focusing on our business here. And, of course, as a global player, they are visible in the market in the sense that we probably go for a lot of the same business opportunities here. But as you know, it's a tender business and our full focus here is on delivering on our commitments here when it comes to quality and delivery position and, of course, being price competitive. And I think we have shown here, the last couple of years here, that we are in a good position to defend the market share which we are growing into and that is, of course, our full focus. So, I don't see any other priorities for us than to focus on our own business.

Okay, great. Thank you so much.

Thank you.

Our next question comes from the line of James Picariello from KeyBanc Capital. Your line is now open.

Hey, good morning guys.

Good morning.

Good afternoon for you guys. Can you talk about the industry order trends? You made another comment this quarter that bookings activity for the industry was weak yet again. What are your thoughts for the fourth quarter and any color that you could provide as it relates to your share gain trends? Thanks.

Yeah. I think, first of all, as we have indicated here that we have an order intake still on healthy levels. And exact numbers, we will come back to when we close this year. But the point here is really that the order intake we have supports prolonged outperformance as we move forward here. Then in terms of the absolute volume of the orders that – the RFQs that is out there, it's lower than what we have seen in previous year, last year. But we should remember also that every year is not equal here or it depends very much on how the model gears are and all the plans to renew them and so on and it's looking like. So, I'm not reading any changes or fundamental changes to how the ordinary course of business is looking like when it comes to putting out RFQs. It just happened to be a year with a slightly lower activities or numbers out there. But as we have indicated before in Q2 here, we expected second half of the year to be higher than the first half, and that still stands. So, I would say, a gradual improvement. And, of course, it means that Q4 is an important quarter to ultimately define on where we ended up for the full year. So, it's a bit higher activities in Q4 here as expected.

Got it. Thanks for that. And then, hopefully, I didn't miss this, but what was the quantified GM strike impact in the quarter and what are you baking in for the fourth quarter?

We haven't given a number for it. But in the third quarter, you could say it's affected by around two weeks of sales to GM in North America as the strike started mid, end-September here. Mid, I should say. And then, it's still ongoing here. There is – if I understand right – a vote today within the UAW and the workers there to accept the agreement that is in place or not. So, hopefully, we will see an end to the strike later today. That means that is another four weeks, and that four weeks is, obviously, a part of the fourth quarter here. So, all in all, we're talking about them potentially six weeks. And GM sales to us is around 3% on total sales. So, of course, it's a big and important customer to us and has some sizeable impact. But if you look at the totality in a global scene, it is then the 3% of the total.

Thanks guys.

Okay. Our next question comes from the line of Hampus Engellau from Handelsbanken. Your line is now open.

Thank you very much. Would it be possible for you to maybe discuss on what you see in terms of ramp up for 2020? And on a comparable basis, how much launches do you have for 2020 compared to 2019 just to understand the dynamics here? That's my first question. Thanks.

Thank you. I would say that 2020, of course, is the year where we continue to launch on the order book we have talked about here. So, I would say we have now come up to a new normal, so to speak. So, I think in the number of launches, I don't have a number to share here, but I don't expect to see a dramatic step up here as we're now in the midst of the way, so to speak. So, the activity level has risen to a new height here that we will continue on. So, as you remember, the wave started in North America and moved on then to China and we expect now in the fourth quarter Japan starting to gear up and have the outperformance more visible in that part of the world. And by that, we are at the new normal.

And in terms of the adjustments you've seen on your customer base in terms of production, et cetera, have there been any delays that OEMS are delaying a launch of a certain model or is it just that they're reducing the run rate on the back of lower demand?

It's really the run rate that is the effect here. And as we mentioned here earlier in the presentation, we have had some delays of start of production, but it has no connection to the overall market development. It has been more, let's call it, technical decisions from the OEM and it has nothing to do with ourselves and it has, as we see, nothing to do with the overall market development that has been other reason. And not material, I would say.

Thank you very much.

Thank you.

Okay. Our next question comes from the line of Joseph Spak from RBC Capital Markets. Your line is now open.

Thank you very much. Maybe just quickly on the implied fourth quarter margin guidance which is about 200 basis points, so if we follow along with your estimate of the indirect labor savings, that seems like it should be about 50 basis points and then you typically have the lower R&D in the fourth quarter with the recoveries, which seems like it could be maybe 80 basis points. Is the rest just – so, should we think about the remainder as just sort of leverage on some higher sales quarter-over-quarter or is there another factor we should think about for the fourth quarter?

I think the key factors here for the step up in performance here to get towards our full-year guidance here is that we always have the seasonality effects between the quarters, Q3 to Q4. And part of that is, of course, increased sale – it is increased sales and R&D, engineering income. And now, this year also in combination then with the efficiency programs that we are conducting. And as indicated here, we see giving results and its' biting. So, that's the main factors here, but I'll let you do the math there.

Okay. Maybe then – I appreciate the comments on the indirect work force. It looks like on the direct workforce, you also have got another maybe 570 employees. Can you just update us where you are in that process?

Yeah. That's something that all our plants is very close to. Constantly assessed the needed resources to meet the capacity requirement we have and commitment we have towards our customers. So, that is a constant ongoing process to make sure that we are well balanced in our different plants here. And, therefore, we talk quite a lot about the flexibility and agility to meet with the changing demands here. And I think the organization is demonstrating that they are on top of it and showing good proactiveness in that area. So, I feel that we are managing that in a good way.

So, there's no sort of target there? That's sort of flexible with how you see the environment…

There is no absolute target per plant when it comes to direct workforce. It is a part of making sure that we have flexibility, as I said. And, of course, as we always do, working intensively with productivity improvements. So, that support of our daily business, so to speak. And, of course, when we face these headwinds, you could say we try to put in an extra gear there, but it support our normal business.

Right. Finally, I know you went through the IHS forecasts and your guidance is built off the call offs and you talked about Japan, India, Korea, I think you called out, as areas of maybe some more conservatism. Just curious about your thoughts, I guess, relative to IHS on China and on Europe because we're hearing some talk of plant shutdowns there as well on the fourth quarter. So, is that factored into your outlook as well?

Yeah. I think we see weaker demand across the LVP across the board here. I think we called out these countries here now because they are the ones that have actually hold up the longest. If you look at Japan and so forth. And Japan was still growing in the third quarter. Hence, you could say partly due to the pre-tax here. So, we see a bigger shift there. And when it comes to the rest of the regions here, it's still negative and increasing reductions. So, that is…

But are you more in line with IHS for those other regions?

We don't disclose region by region exactly how we link up to the IHS here. When we have a quarter in front of us here, we look at the call offs we have and so on. So, in terms of anything you'll hear about, plant closure, et cetera, it's very tangible for us, of course, in our customer dialogs. So, I just want to say that when that is happening, it's, of course, a part of what we see for the coming quarter.

Okay. Thank you very much.

Okay. Our next question comes from the line of Vijay Rakesh from Mizuho. Your line is now open.

Yeah. Hi, guys. Just a couple of questions. I think as you look at 2020, things on LVP side should start to look a little bit better just from a comps perspective, given how bad 2019 was. But I was trying to figure out, if you look at China, you mentioned there's multiple discounts the provinces were doing to stimulate LVP, but it's not picked up. So, I was wondering what drives better LVP in China into next year. Thanks.

Yeah. As I said,. we haven't commented on 2020 here because I think it's way too early to have a strong view on how 2020 would play out in terms of demand with the high uncertainty that we have. So, I think we need to wait to come back on that. But there is many moving parts right now that creates this uncertainty across the board. We have everything around the driveline, meaning if there are any restrictions and – in some countries, there are restrictions on the traditional drivelines, pushing for new ones. We have, in China specifically then, as you mentioned, situations where we have the China VI. Then people also that have the China V maybe have difficult to offset that vehicle to invest in a new vehicle. So, that that's changed the landscape a little bit. And, of course, we have the geopolitical situations surrounding China also here. So, as well as the driveline issue there altogether. So, there is so many moving parts that needs to, I think, to be settled before we have some more clarity here. So, we have to come back to that in the next quarter.

Got it. And just as I look at Europe or Western Europe – I know it's an important geography for you. When you look at this year, obviously, WLTP was a huge headwind. Is there any issue with the new carbon regulations next year or you think that would be much more benign than what we saw this year? Thanks.

I think the legislation next year is of a different nature, so to speak. And I think that comes more to how the mix of the fleet will look like. But I think that also adds to the mix here in terms of uncertainty for the consumer depending on which restriction you are planning to buy the vehicle and the tax implication of that. And then, of course, how well the respective OEM is starting to meet their targets in the new environment there. So, I would say, perhaps a little bit wait and see for many consumers, as we see it right now.

Got it. Thanks.

But in terms of meeting it, I think it's very individual on the OEM. But it's not the same kind of question as the WLTP was when it was at test cycle.

Okay. Thanks.

Thank you.

Okay. Your next question comes from the line of Erik Golrang from SEB. Your line is now open.

Thank you. I have two questions. The first one is a follow up on the order intake or the sort of market availability of orders for this year that you had previously. And it dates back to 2018. Was 2018 an extraordinarily high order level for the total market?

Yeah. Extraordinary. I don't know what it was, a high year. So, I would say yes.

Thank you. And then, the second question, you've talked about some markets being indicated a bit weaker than IHS and so on. But, I guess, you've had now for a bit more than a year – you've have been talking about very high volatility in terms of customer call offs, with very changes with very short lead times, even within the sort of closed window. Has that also continued at an unchanged pace?

No, not in the same fashion as we had it during the autumn last year. Then, especially Europe was very challenging during the WLTP situation there. So, this year, it's less volatile. But, of course, still as the market is falling, it comes with shorter notice. But it's not like it's going up or down. It's more a falling trend, but more than…

Okay. [indiscernible] it's compared to last year and not really second half this year versus first half?

No, it's really compared to last year.

That's it. Thank you.

Thank you.

Okay. Your next question comes from the line of Emmanuel Rosner from Deutsche Bank. Your line is now open.

Good morning. It's Edison [ph] on for Emmanuel. Two questions. First, on the margin. Can you just kind of help us maybe think about the impact in 4Q from the launch costs, the raw mats and the FX. It looks like, especially the raw mats were still pretty material in the third quarter. So, just kind of how we should think about that? And then, on the second question, it looks like the organic growth in Europe was pretty weak in 3Q. Anything to call out there? Thanks.

Let me start with the second question there. Yes, we were weaker than the overall light vehicle production in Europe in the third quarter, and that is what's contributed to mix issues and also that we had some platforms where we were coming off from end of production and were not matched with start of production with the same producer there. And we see this as just a temporary situation in Q3. So, we expect to be back on track, so to speak, when we get into the fourth quarter, supporting then the overall direction of the company when it comes to increasing our sales here. So, a temporary mix question, you could say.

Yeah. And then, Mikael, then in terms of the Q4 sort of capture that – in terms of commodity cost to raw materials, we've guided for the full year now at 60 bps. And I think if you do the math sort of backwards, because you know what we've communicated for the previous quarters, that would result in a slight – a lower impact for the fourth quarter of around 20 bps or so for raw material. So, that should be an improvement compared to what – where we've been in the previous quarters. So, that's in addition to what Mikael already has said in terms of margin improvement fourth quarter over the third quarter.

On the launch costs and the FX?

FX, I think, will be relatively neutral. And in terms of launch costs, that has been an improvement throughout the year. And I think we showed that in the third quarter bridge already and we expect that to continue to be an improvement compared to last year.

Great, thanks.

Okay. Our next question comes from the line of Sascha Gommel from Jefferies. Your line is now open.

Yes, good afternoon. Thank you for taking my questions. The first one would actually be on your cash flow. Maybe you can help me understand a little bit the explanation for the lower cash flow because my understanding is, some of the costs you've booked into your net income are non-cash and are only a provision. And you also had $15 million separation cost in Q3 last year. So, maybe you can help me a little bit understand the free cash flow swing year-on-year in context of what I just said.

Is that on the quarter? Or is that – are you looking for the quarter…

On the quarter. Purely on the quarter.

So I think the big driver is really the earnings year-on-year. But on…

But your adjusted EBIT is only down $10 million. So, how much of the – or of the restructuring costs are already cashed in in the quarter.

Not much of cash in quarter in terms of the charges that we've taken. So, I think it's really the underlying EBIT sort of driven.

Okay.

And tax could be another component because I think tax was more negative in this quarter compared to last year, driven by – actually, driven by the capacity alignment cost that we booked.

Understood. Okay. And then, my second question, just to confirm, your guidance includes six weeks of GM strike for the second half. So, two in Q3 and four in Q4. That's correct?

That's incorporated in our – what we [indiscernible] for the year.

Okay, understood. Thank you very much.

Okay. Our next question comes from the line of Rod Lache from Wolfe Research. Your line is now open.

Hi. This is Shreyas Patil on for Rod.

Hi.

I just had a couple of – I just had a couple of quick questions. One, on the commodity side, you mentioned it's going to be a 60 basis point headwind for the full year. Is there a way to think about how much of that is related to longer-term agreements that would likely reset at the end of this year? I'm thinking about steel, for example, and how much is related to spot prices on some of your main commodities?

Yeah. I think, as a general rule, we will say that you can't really look at the spot prices at all because we – very much of the raw material – majority is really through our suppliers here. So, we have a six to nine month delay on the way up and on the way down. So, that's what you're seeing here. And that's the absolute majority on how the mechanics works when it comes to raw materials for us. And as we have talked about before, the big commodities for us here is steel and nylon and that is what we're expecting to see that start to come off.

Okay. So, basically, if I look at prices now or prices six to nine months prior, that should give me a sense of how commodity costs will fluctuate?

Yeah. A rough feeling, I would say, because it is – in practical terms, of course, it's more complicated because it is depending on when do you sign the contract from the beginning and so on. And it probably will take a long time to really map it up here. But, conceptually, it's what you're saying exactly. You can look and see that there is a delay overall. But when you look at the details, it can be a little bit more complicated, but yeah.

Okay. And then just last one. On R&D, you mentioned it was – it looks like it was up a little bit year-over-year in the quarter. How should we be thinking about R&D longer term. I believe the prior guidance that was given back in 2018 was for R&D spending to decline by 2020. I'm just trying to think about where we are in context of that.

Yeah. Medium-to-long-term range should be – will be in 4% to 5% of sales. And we have said we should gradually start to see that coming down in relation to sales, not in absolute amount. But, of course, now with a very sharp decline in the market, it affects that, of course. I think under those circumstances, we are really scrutinizing and working hard with efficiency inside RD&E. So, I think we are holding the line here because what we should remember also what have happened since we communicated this in 2017/2018 there is that we are continuing to take good orders and good order intake levels [indiscernible] building on our order book. So, that also means that we are growing our activities here. So, I would say, in absolute amount, we are holding the line here. And, of course, in relation to sales, it becomes a little bit tougher, but we're still committed to the medium to long-term range of 4% to 5%.

Okay, thank you.

Okay. Our next question comes from the line of Brian Johnson from Barclays. Your line is now open.

Hi. Good afternoon, team. This is Steven Hempel on for Brian. Just a couple of questions here. In terms of the sales outperformance either for the quarter or for the full year expectation of 6% to 7%, is there any way – can you break that down roughly into kind of market share gains versus content growth? And then, in terms of getting up to that 6 to 7 percentage points for the full year, how to think about that for the full year? And then also, just thinking about that outperformance into 2019, do you expect that to continue and then any kind of major headwinds or tailwinds we should be thinking about?

I don't think I can break it down for you here exactly on, okay, what is the different details here. But it's certainly so that we are taking market share for sure. And as we have indicated here, first of all, we came from 38%, we moved up to 40% in market share in 2018 and we continue to increase that share in the years to come here and moving towards the mid-40s with what we see here in our order book. So, that is what's happening. And then, of course, the overall growth is also a combination of content in the vehicles. As we have talked about, that should be 1% CAGAR year-by-year here. So, that's, of course, it's a component when you look at the total dollar amount as well. But I think the important here is that the market share is increasing and we see the underlying long-term – medium to long-term market also growing.

Okay. And then just looking at slide 3 here in terms of the cost reduction, you're breaking it out by business cycle management versus structural efficiency. And within those two buckets, there is indirect headcounts being taken out by both. Just wonder if you could provide any color on the indirect headcount that's being taken out as part of the business cycle versus the structural efficiency.

No. We expect – what you see really on page 4, the structural efficiency program, that is structural. So, that is a long-term efficiency effect on that. So, that is not – you asked the question on business cycle management. So, that is a structural change which we intend to capitalize as we go forward.

If you look at in slide 3, there is indirect headcount being taken out in both the business cycle, as well as the structural efficiency. So, just wondering how to think about that indirect headcount between those two different kinds of programs or management programs?

I think the answer is still the same here. We, of course, have the majority of also the business cycle management effects here, staying as a part of the structural improvements that we expect to gain going forward here. So, it's not automatically add back, unless you have indirect headcount that actually is very close to operations. That means that if we have a significant uptick, there might be some to be added back to support of that, but otherwise it's strategically in the same bucket.

Okay. So, the overall structural efficiency program, the 5% kind of reduction, that's basically independent upon volumes. If volumes are flat or down or up next year, that 5% number really isn't going to change much?

That's truly independent.

Got it. Okay. Thanks for taking the questions.

Thank you.

I think that we have to – cannot take any more questions. We have a hard stop at 3 o'clock which have passed now. So we – I hand it back to you, Carl.

Sure, sir. Okay. That does conclude our conference for today. Thank you for participating. You may all disconnect.