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Edited Transcript of ALV earnings conference call or presentation 26-Oct-18 12:00pm GMT

Q3 2018 Autoliv Inc Earnings Call

Stockholm Nov 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Autoliv Inc earnings conference call or presentation Friday, October 26, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Trapp

Autoliv, Inc. - VP of IR

* Mats Backman

Autoliv, Inc. - CFO

* Mikael Bratt

Autoliv, Inc. - President, CEO & Director

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Conference Call Participants

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* Agnieszka Vilela

Nordea Markets, Research Division - Research Analyst

* Ashik Kurian

Jefferies LLC, Research Division - Equity Analyst

* Christopher Patrick McNally

Evercore ISI Institutional Equities, Research Division - MD

* Erik Pettersson-Golrang

SEB, Research Division - Head of Research for Sweden

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* Joseph D. Vruwink

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate

* Julian Radlinger

UBS Investment Bank, Research Division - Equity Research Analyst

* Richard Michael Kwas

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst

* Steven Michael Hempel

Barclays Bank PLC, Research Division - Research Analyst

* Thomas Besson

Kepler Cheuvreux, Research Division - Head of Automobile Sector

* Victoria Anne Greer

Morgan Stanley, Research Division - VP

* Viktor Lindeberg

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Operator [1]

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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.

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Anders Trapp, Autoliv, Inc. - VP of IR [2]

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Thank you, Cecelia. Welcome, everyone, to our third quarter 2018 earnings presentation. Here, in Stockholm, we have our President and CEO, Mikael Bratt; our Chief Financial Officer, Mats Backman; and myself, Anders Trapp, Vice President of Investor Relations.

During today's earnings call, our CEO will provide a brief overview of our third quarter results and outlook as well as provide an update on 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 results herein present the performance of Autoliv, giving effect to the Veoneer spinoff. Historical financial results of Veoneer are reflected as discontinued operations, with the exception of cash flows, which are presented on a consolidated basis of both continuing and discontinued operations.

During the presentation, we will reference some non-U. S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U. S. GAAP measures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC.

Lastly, I should mention that this call is intended to conclude at 3:00 p.m. Central European time. (Operator Instructions)

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

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [3]

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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 faced in the third quarter. I also would like to acknowledge and offer my sincere thank you to the entire Autoliv team for delivering a quarter of strong growth. The team is fully focused on delivering increasing value to our stakeholders through our focus on quality and operational excellence.

Our growth momentum continued in the third quarter, driven mainly by a large number of product launches in North America. Autoliv grew organically by more than 6% despite light vehicle production decline by about 2%, according to IHS, as unfavorable market fundamentals took their toll on global auto demand and production.

We had a solid operating cash flow in the quarter, supporting our indication of reaching around last year's level for continuing operations. I'm also pleased that our order intake continued on a high level in the quarter, supporting our growth opportunities for the long term.

In the third quarter, the industry faced substantial reduction in volumes from our customers, especially in Europe, impacted by the WLTP, and in China, due to lower demand for new vehicles. Our recent product launches are on track, and we outpaced global light vehicle production by 8.5 percentage point in the quarter.

However, we 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 sale growth. The volatility of market demand in the quarter resulted in our supply chain production and logistics system, having to manage significant and late changes to OEM production plans, which corresponding to uneven utilization of our assets while at the same time managing the different challenges of the many launches and the high growth in North America.

We see a similar environment for the rest of the year, with continued uncertainty for light vehicle production, especially in China and Europe, leading to continued challenges with uneven utilization. We are closely following the market development and are ready to act if we got -- if 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, 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 then of lower costs for capacity alignment and antitrust-related matters.

Looking to our sales growth on the next slide. Consolidated net sales in the third quarter increased year-over-year by 4.1% to $2 billion, with an organic growth of 6.4%, partly offset by negative currency translation effects of 2.3%. Sales outperformed light vehicle production, according to IHS, in all regions, except rest of Asia due to weaker sales in South Korea. In the quarter, North America contributed with $120 million to the organic growth. The sales was 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 accounted for 34% of total sales in the quarter compared to 30% in the full year of 2017.

In China, both global OEMs and local OEMs contributed to the strong performance. Newly introduced models from Geely, including their luxury brand Lynk & Co, were the major contributors to the growth. In Europe, we have been affected by weaker demands from a number of OEMs, mainly related to temporary production cuts connected to the new EU emission testing regulation, WLTP, which was implemented on September 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 the softening Chinese market. Annually, these models should represent around 4% of sales and our content per vehicle in the range of $100 to close to $300. It 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 continued 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, the main 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 vehicle fell in the third quarter by 6%, with September tally down 11%. Most automakers posted sharp declines in the past month showing that the downturn in the Chinese car market has broadened. Only a limited few, such as Toyota and Geely, have managed to maintain growth. Inventory levels in China have increased and are now above normal levels.

Light vehicle production in the third quarter declined by 4%, according to IHS, which was 7 percentage points worse than the 3% growth that was expected at the beginning of the quarter. IHS expects the softness to continue in the fourth quarter, forecasting about a 3% decline in light vehicle production. As inventory levels are relatively high and the recent trend in sales have deteriorated, we believe there is a downside risk to this estimate.

U.S. light vehicle sales rebounded slightly in September from slowdowns in July and August, as automakers pushed vehicles to dealer lots, the 2018 models before the 2019s became available in October.

Inventory levels remained slightly on the high side during the quarter. Light vehicle production in North America grew by 1.6% year-over-year in the third quarter, according to IHS, which is significantly less than the 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 is -- in the third quarter increased by 1.6% after declining by 23% in September, reversing Augusts' inflated sales ahead of the introduction of new more stringent WLTP CO2 emission testing on September 1. From a technical testing perspective, the WLTP headwind should be temporary. There is, however, some uncertainty on how long-term demand affects and -- 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 7 percentage points worse than the forecasted at the beginning of the quarter. We continued to see WLTP effects also in the fourth quarter. IHS forecasts the fourth quarter light vehicle production to be down by about 3% versus last year.

In the third quarter, overall global light vehicle production declined by about 2%, according to IHS. This is 5 percentage points worse than the 3% growth forecasted at the beginning of the quarter. Fourth quarter global light vehicle production is forecasted to grow by 0.7%. The forecast for the full year 2018 by IHS is now for a growth of 0.7%, which can be compared to the estimate of 2.2% 3 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.

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Mats Backman, Autoliv, Inc. - CFO [4]

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Thank you, Mikael. Looking now to our financials on the next page, where we have our key figures for the third quarter. Including negative currency translation effect 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 higher sales was more than offset by higher commodity costs, net currency effects and costs related to preparation for upcoming launches as well as ramp-up of recent launches. Additionally, we experienced unbalanced utilization of our assets, mainly in Europe.

Our adjusted operating margin of 9.5% declined year-over-year, mainly due to the lower gross margin and the higher RD&E, partly offset by lower cost for SG&A in relation to sales.

Our reported earnings per share of $1.34 increased year-over-year by $0.13. Our reported return on capital employed and return on equity were 20% and 23%, respectively. Our dividend of $0.62 was $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 currency headwind of about 20 basis points. The negative leverage on the higher sales was the result of higher RD&E expenses, which increased compared to the same quarter in the prior year by about 40 basis points, mainly as a result of the many product launches as well as other launch-related costs and unbalanced utilization of our supply chain, production and logistics systems.

Looking more into these margin headwinds on the next slide.

In the third quarter, our industry experienced significant changes in the light vehicle production, especially in Europe, impacted by the WLTP, and in China due to lower customer demand. Our supply chain, production and logistics systems, thereby, had to manage both significant and late changes to OEM production plans, with corresponding uneven utilization. At the same time, we are managing the exceptional growth in North America, with continued elevated launch costs.

To meet our expectations for quality and delivery for this wave of launches, we have added personnel in production overhead and RD&E as well as increased the use of premium freights. As our premier focus has to be on quality and delivery, we have allocated resources accordingly and have, therefore, not been able to achieve the productivity gains that we expect during normal conditions.

As you can deduct from our full year adjusted operating margin indication, we foresee a similar environment for the rest of the year. However, as the number of launches is stabilizing, we believe we can gradually focus more on productivity improvements through operational excellence while our launch-related costs gradually decline.

We have initiated a number of actions to address our launch-related costs through management of our products, processes, employees and supply base. These actions include production line redesigns to improve product flows, increase product standardization for future launches that will reduce costs for 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 statement includes discontinued operations up until the second quarter of 2018. The increase was primarily driven by the cash flow impact from higher net income and working capital changes, partly offset by lower D&A.

Capital expenditures amounted to $170 million, which is about 5.8% in relation to sales. Capital expenditures in the third quarter 2017 for continued operations 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 from continued operations to be on a similar level as in 2017.

Looking now to our earnings per share on the next slide.

Reported earnings per share improved by $0.13 to $1.34 from lower -- for capacity alignments and antitrust-related matters. In the third quarter '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 from higher tax rate and $0.09 from lower adjusted operating income.

Looking now to our returns on the next slide. We are pleased that returns are higher in the new corporate structure. Return on capital employed and return on equity for the quarter is above what we have recorded in the full year 2015 to 2016 in the old structure. During the last 12 months, we have returned $213 million to shareholders through dividends.

Turning to the balance sheet and financial policy on the next slide. We have, as you know, a long history of prudent financial policy. After the spin, our balance sheet focus on 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's 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 USD 60 million in the quarter. Our strong free cash flow generation should allow fast deleveraging and should allow continued returns to shareholders while providing flexibility. As a result, we're aiming to reach the upper end of our target range by year-end and to reach our target level of 1x sometime in 2019, and this is excluding any discrete items and other nonforeseeable changes for our business.

Turning the page. We have summarized our full year 2018 indication. Full year '18 indication assumes mid-October exchange rates prevail and excludes costs for capacity alignment, antitrust-related matters and costs related to the spin of the Electronics segment. Our 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.

Thereabout 6% organic sales growth indication is lower than earlier indication of about 8%, reflecting the weaker-than-expected market development in third and fourth quarters, 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 a weaker sales indication.

We expect the headwind for raw material to continue throughout 2018 and to be close to $30 million higher year-over-year due to higher costs for nonferrous 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 continued 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.

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Anders Trapp, Autoliv, Inc. - VP of IR [5]

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Thank you, Mats. Turning the page, this concludes our formal comments 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, Cecelia.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Hampus Engellau from Handelsbanken.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [2]

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I have 2 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 on the number of launches, maybe I should do that? Second question is on visibility problem. I guess, with your visibility when your customers' call-offs, I guess, there would be some kind of a catch-up effect when this bottleneck has been solved. Could you maybe discuss -- I don't expect like detailed numbers, but a little bit how you would plan that, looking at Q1, Q2 next year, since it could probably come into a situation with some overproduction unless the consumer stops buying new cars? Those are my questions.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [3]

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Hampus, Mikael here. Let me start and comment on the launch costs. I think you should not really think that the launch cost per se is gradually increasing here. I think it's the general activity as such that this is increasing. And what we have said all along here is that what is primarily a focus for us in these launches is, of course, to protect the customer and making 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 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 effect or increased production here coming out on the other side of WLTP, as we have said, for the fourth quarter here, we see that the negative aspects of WLTP will have its toll also on the Q4 volumes here. We are, of course, always following very closely the call-offs and volume indication from the customers here. So for us, it's, of course, to continue to secure high flexibility in order to meet either increasing demand or lower demand. I think going back in time, we have managed significant increases with very short lead time in the past. So that will not be something unusual for us. That's something we are used to handle.

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Operator [4]

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We shall now take our next question from Rich Kwas from Wells Fargo.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [5]

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Just on China. So you indicated there's downside risk on the production assumption from IHS. Have you factored some contingency in the updated outlook here for the fourth quarter?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [6]

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Yes, I think, I mean, as always, the outlook or the guidance for the full year is 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 the IHS figures here, there could be a 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.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [7]

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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, et cetera, any updated thoughts?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [8]

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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. So we have no thoughts around that.

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Operator [9]

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We will now take our next question from Brian Johnson from Barclays Bank.

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [10]

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This is actually Steven Hempel for Brian Johnson. Just a follow-on to Richard's question in terms of the 2020 targets, which were effectively reiterated. Obviously, there are a lot headwinds here post when those targets were set. So it wouldn't be unreasonable to see further downside to those targets. But just wondering if you could -- it sounds like you implemented some actions or in the process of developing a game plan for implementing actions to reduce some costs -- reduce elevated launch costs and whatnot to be able to hit those targets. And also, from a top line perspective, it looks like your new order intake rate is still holding in 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 are being taken and the 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 to those targets now just given the current environment?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [11]

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As I said before, 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 costs here is to make sure that we optimize the organization and trim the organization here to manage new normal when it comes to the 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 the uneven performance connected to WLTP, et cetera, we expect that to be of a temporary nature. Then of course, we will see what happens with the overall demand when it comes to vehicles on our customer side. There we have not made any further outlook than what we have indicated in our guidance for the full year here that we will have to come back to.

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [12]

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So should we be expecting an update in -- on the 4Q release or around Detroit?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [13]

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

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [14]

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

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Mats Backman, Autoliv, Inc. - CFO [15]

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Yes, I mean, if you're looking at underlying tax rate then -- because I mean, we have reported 31.1% and there were some smaller discrete items given the underlying tax rate of 29.5%. Indication for the full year of '20 is 28%. But what you need to remember when you're looking at the full year guidance of 28% is the effect from the second quarter very low reported tax rate because we had positive discrete items that brought the tax rate in the second quarter down to 8%. It's affected of that when you're looking at the full year number. I wouldn't talk now to speculate when it comes to the tax rate into 2019. But I mean, what we have communicated previously is that we should see some positive effects from the tax reform in the U.S., given the high growth rates, we haven't grew in the U.S. That should also be reflected in terms of profitability in the U.S. So maybe some positive is coming from the U.S. in terms of the tax reform. But other than that, it's the 28% guidance for the full year that stands.

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Operator [16]

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

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [17]

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I have 2 questions, and I apologize if you've been on the topic. You had a bad line on and off. The first one is on order intake. I don't know if you said intake. Talk a bit more about what trends you've seen recently. I assume you're now booking orders beyond 2020. Any update on that side? And then the second question, I'd say, you touched on the topic, but to what extent does the full year margin guidance reflect that all or a certain share of the operational headwinds that you had in Q3 remains in the fourth quarter? Do you assume that there is any ease in terms of the uneven asset utilization or so on? Or do you more or less assume that it's all saved for the remainder of the year?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [18]

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Let me take the first one here and Mats answering the margin guidance question here. We are not putting out the 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 a high level and supporting then our market position for a longer term. So I think that's good news in terms of what's happening on that front. And then when it comes to the margin guidance, Mats?

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Mats Backman, Autoliv, Inc. - CFO [19]

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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 3 buckets of things that are affecting the margin. First of all, there are kind of external headwinds that we see in terms of the currencies and raw materials, the forward events. Secondly, the increased launch costs that's we also talked about. And thirdly, this kind of uneven utilization of our assets due to the underlying LVP. If you're looking on the 3 items and going into the fourth quarter, there's 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 will have some challenges for balancing that one. When it comes to the launch costs, I mean, we have been putting together a lot of actions in order to mitigate the effects on the launch costs, but what we can see to have an effect continued into the fourth quarter as well as the launch costs. And if you're looking at the sequential margin development, we always have that kind of seasonality with the higher margin in the fourth quarter, and that is what you will get to if you're making the kind of backward calculation when it comes to the margin in the fourth quarter. However, when we're saying that this kind of environment will continue into the fourth quarter, that is the kind of the year-over-year comparison that you saw in the third quarter and into the fourth quarter. So that's the kind of the guidance I can give, given the full year guidance we have on the margin.

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Operator [20]

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We will now take our next question from Chris McNally from Evercore.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [21]

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

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [22]

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No. I mean, as I said before, 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.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [23]

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Okay. I think just because 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 very 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 just like it's a steep incline you would expect that you'd have to get, I don't know, half of the way there in 2019.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [24]

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

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Mats Backman, Autoliv, Inc. - CFO [25]

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

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [26]

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Okay. Fair. 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. Is Joyson or KSS at all back in the market taking a single order so that maybe 50%-plus market share may not be the case on orders, specifically, going forward even though your -- the revenue, obviously, continues to tick up in share?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [27]

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

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Operator [28]

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

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Thomas Besson, Kepler Cheuvreux, Research Division - Head of Automobile Sector [29]

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I have 2 very simple questions, please. The first is on the visibility you have, short-term on vehicle production in each region. Talking with some of your peers or some of your competitors, it looks like September has been the first time in a decade they have not been really aware of what could happen the following week. Could you say, firstly, that happened to you as well and whether this is improving in October and whether this is really indicative of major hiccups or whether this has improved? And second, could you give us an indication on what you're using for your budget assumption for 2019 global light vehicle production? Are you using the October IHS figure or the September IHS figure? Or are you becoming more conservative in your budget plans?

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Mats Backman, Autoliv, Inc. - CFO [30]

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This is Mats. On the first question, when it comes to the OEMs and the behavior, that's exactly what we're talking about when it comes to the late changes in production schedules. And that is one component that has been affecting our margin negatively in the third quarter in kind of underutilization of some assets, as we have not been able to shift the planning quick enough there. 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 the effects from that for single customers then. So 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 -- okay, can you repeat that one, please?

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Thomas Besson, Kepler Cheuvreux, Research Division - Head of Automobile Sector [31]

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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 can you -- if you are still assuming plus 2 next year basically or if you are thinking maybe it's going to be 0 or minus 2?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [32]

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It's Mikael here. We use always IHS as the basis for our forecasting our budgeting, as you wish. And of course, when we're looking into '18, that is what we will be using also -- sorry, '19. So of course, the freshest version of that is always what goes into the numbers when we give an update to the market there.

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Operator [33]

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

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Victoria Anne Greer, Morgan Stanley, Research Division - VP [34]

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There are a couple, please. Definitely got the message that 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. 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're just not seeing 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, 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?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [35]

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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, is the light vehicle production per se, which we don't have that visibility on at this point in time. So I think that's the normal way of looking at the outer years here. So nothing to report there. Looks like you should. On the dividend side, as we have 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 mission to get towards the 1x net debt-to-EBITDA also. But when it comes to -- so we don't -- we don't have a dividend policy per se. And here, I would say we have the intention to continue to be shareholder friendly in terms of giving dividends and returns through buybacks, et cetera, here. And I would say, we'll also have a pragmatic view on this. It's not that we need to go down to the bottom of the range in order to trigger some activities here, but we need to be comfortably within the range before we do something.

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Operator [36]

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

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Viktor Lindeberg, Carnegie Investment Bank AB, Research Division - Financial Analyst [37]

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I had a question on the order intake, but I think it was answered. So maybe I can follow up on -- 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 picky when it comes to orders and pricing? Or is it market share that is 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?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [38]

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On the pricing environment here, I would say, there is no change to the dynamics here. I mean, it continues, of course, to be a very competitive industry, and we always need to lean forward here to make sure that we are in the forefront here when it comes to competitiveness in all aspects, pricing, delivery, position, reliability and quality. So there's nothing changing there. And I wouldn't say that it's either or as you earlier indicated here. It's, of course, to make sound business altogether here and balance all the aspects in our dialogues to be supportive to our customers and have 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 would say 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 the previous year will be lower than what we have seen in '18.

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Operator [39]

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We will now take our next question, Julian Radlinger from UBS.

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Julian Radlinger, UBS Investment Bank, Research Division - Equity Research Analyst [40]

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So 2 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?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [41]

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I don't have the number for Q3, specifically, but as I mentioned before here, we see that will come in around $0.4 billion instead of $0.5 billion for the full year here, but very much connected to the light vehicle development we have seen here during the second half of the year.

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Julian Radlinger, UBS Investment Bank, Research Division - Equity Research Analyst [42]

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Okay, perfect. 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 have really been shooting up in the last 6 to 9 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 any a raw material headwind going into 2019?

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Mats Backman, Autoliv, Inc. - CFO [43]

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I think -- actually, I think it's too early to say because, I mean, what we have seen is recently spot prices going in the other direction with all the kind of volatility we have had in the market. But you can expect this about 6 month's 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 while we're trying to mitigate effect. So 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 fourth quarter earnings release.

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Operator [44]

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We will now take our next question from Ashik Kurian from Jefferies.

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [45]

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I've got 2. First one's on the cadence of your outperformance. I know you highlighted that 2018 is the biggest step-up in terms of the product launches, in terms of what you have in your schedule, in terms of the outperformance of growth, which is around 9% in Q3, and I think your implied guidance for Q4 assumes the same level of outperformance. Was second half 2018 and first half 2019 always the period of the peak outperformance, so to say, within your budget? Or is there anything that would justify the outperformance continuing at this level for maybe the second half of '19 into 2020 as well?

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Mats Backman, Autoliv, Inc. - CFO [46]

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I think, I mean, coming back to the guidance for 2019 and we're looking into 2019, 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 then. 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.

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [47]

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Okay. Maybe I'll try my luck on the margins. I know there's a lot of discussion on the 2020 margins, but part of the margin headwind that you have in '18 as you've pointed out is for -- due to the WLTP and production disruptions. Assuming that some of that reverses in '19, but you still have headwinds from raw materials, is there any way of giving us some color on what is the level of growth you need to have to at least keep your margins flat in '19 because I think the market is clearly discounting a slightly less optimistic LVP scenario than maybe what IHS has? And so I know you have a positive 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 headwind, et cetera, what is the minimum level of growth you need to have to maybe keep your margins flat year-over-year?

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Mats Backman, Autoliv, Inc. - CFO [48]

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I think it's very difficult to give you a number on that one, especially looking into 2019 and 2020. But I mean, using the third quarter as the starting point and the effects you can see year-over-year in terms of margin effects, first of all, external factors like the currencies and raw materials, it's very difficult to say right now what it will be during this time period going forward. The second big effect in the quarter is related to launch costs. I mean, you need to remember that we had a year-over-year if you're looking specifically on North America, we had 90, 9-0, 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 the 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 launch costs. The third big component looking on the third quarter, that's the uneven utilization of assets there. It is extremely difficult to fully mitigate effects when we have customers that are changing their production plans maybe on a weekly basis. So that's the kind of unknown in this one and a little bit also depending on the LVP and changes in LVP. So I think that those are the kind of basic assumptions that you need to make -- to calculate on and make your own assumptions in order to kind of figure out where we are in that.

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [49]

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

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Mats Backman, Autoliv, Inc. - CFO [50]

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I mean, we are 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 the market share gains we have had over the last couple of years when it comes to the order intake, meaning that if you're looking at the working capital as such, when we're growing organically, you have a growth automatically looking on accounts receivables. We have also been building some inventories related to launches where we need to be prepared for the new launches. So I guess, the difference from the previous downturn is really the market share gains that we have some regions like in North America that we can see now where we will have China and also Japan to some extent where we have market share gains that will drive the organic growth. I guess, that's the difference. But I can't really see any kind of different starting point in Autoliv today comparing to where we have been before.

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Operator [51]

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

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Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [52]

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This is Joe Vruwink for David. My first question, how has growth from the Americas performed relative to your expectation at the beginning of the year?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [53]

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I think when it comes to our own organic growth when it comes to the launches, I mean, we're all tracking according to the expectations here. So we are following the plan that we have seen. I would say the fluctuation or changes compared to the beginning of the year is all related to the underlying light vehicle production here that you have 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.

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Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [54]

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And so on Slide 11, the supply chain logistical challenges, the first sub-bullets notes exceptional growth in the Americas. Were some of these costs anticipated because of the high level of launch activity and they're worse than expected or they're just tracking in line with your expectation?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [55]

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

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Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [56]

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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 that your expectation that some of the launch costs and other challenges you'd experience with high levels of volume this year, there will be improvement from the 2018 experience and future years?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [57]

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Yes, I mean, we are working to make 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 until we are in the level where we should be and want to be.

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Anders Trapp, Autoliv, Inc. - VP of IR [58]

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We can take one more question on this call.

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Operator [59]

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Perfect. Our next question comes from Agnieszka Vilela from Nordea.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [60]

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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 as well like in Japan or Europe in the coming quarters?

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Mats Backman, Autoliv, Inc. - CFO [61]

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

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [62]

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

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Mats Backman, Autoliv, Inc. - CFO [63]

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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 3 regions that we can see the more kind of the -- the more pronounced market share gains.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [64]

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Perfect. And the last question from me on WLTP. What's your feeling about when will this production disturbance has eased in Europe?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [65]

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I think it's a question for the 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 to you in that case.

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Operator [66]

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

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [67]

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Thank you, Cecelia. Before we end today's call, I would like to say that we continue to execute on our growing business volumes and new opportunities with a never-ending focus on quality and operational excellence. Also, I should mention that our fourth quarter earnings call is scheduled for 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. Goodbye for this time.

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Operator [68]

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