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Edited Transcript of ALV earnings conference call or presentation 29-Jan-19 1:00pm GMT

Q4 2018 Autoliv Inc Earnings Call

Stockholm Feb 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Autoliv Inc earnings conference call or presentation Tuesday, January 29, 2019 at 1:00:00pm 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 & Executive VP of Finance

* Mikael Bratt

Autoliv, Inc. - President, CEO & Director

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Conference Call Participants

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* Ashik Kurian

Jefferies LLC, Research Division - Equity Analyst

* Brian Arthur Johnson

Barclays Bank PLC, Research Division - MD & Senior Equity Analyst

* Christopher Patrick McNally

Evercore ISI Institutional Equities, Research Division - MD

* Deeya D'souza

Morgan Stanley, Research Division - Associate

* Emmanuel Rosner

Deutsche Bank AG, Research Division - Director & Research Analyst

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Analyst

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Julian Radlinger

UBS Investment Bank, Research Division - Equity Research Analyst

* Richard Michael Kwas

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

* Vijay Raghavan Rakesh

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Q4 2018 Autoliv Inc. Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today on Tuesday, the 29th of January 2019. On the call with you today are the VP, Investor Relations, Anders Trapp; President and CEO, Mikael Bratt; and Group CFO, Mats Backman.

I'd now like to hand the call over to your first speaker, Anders Trapp. Please go ahead, sir.

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

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Thank you, Alice. Welcome, everyone, to our fourth quarter 2018 earnings presentation. As Alice said, here in Stockholm, we have our President and CEO, Mikael Bratt; our CFO, Mats Backman; and myself, Anders Trapp, VP, Investor Relations.

During today's earnings call, our CEO will provide a brief overview of our fourth quarter and full year '18 results as well as provide an update on our general business, market conditions and targets. Following Mikael, our CFO Mats Backman will provide further details and commentary around the Q4 '18 and full year '18 financial results and the outlook for the full year '19. 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 spin-off. Historical financial results of Veoneer are reflected as discontinued operations with the exception of cash flows, which, up until Q2 '18, are presented on a consolidated basis of both continuing and discounted 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-K 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 the Q4 '18 highlights on the next slide. First, I would like to say that I'm pleased with our sales growth and cash flow despite the increasingly challenging market conditions we faced in the second half of the year. I'm also pleased with the order intake while our profitability still needs to improve.

I 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 operation excellence.

2018 was an eventful year for our company. In July, we spun off Veoneer, creating a more focused and flexible Autoliv to meet the opportunities and challenges in our industry. Our new management teams is off to a good start. Some of our team members are new in their executive management position, but all of them have extensive experience in the automotive industry and with Autoliv.

In the second half of the year, the industry faced substantial reductions in volumes, especially in Europe impacted by WLTP and in China due to lower demand for new vehicles. Thanks to our large number of product launches, I'm happy to be able to say that we outpaced global light vehicle production significantly, with an accelerating rate towards the end of the year. I'm also very pleased to report that our order intake continued at a high level in 2018, supporting our growth opportunities for long term.

Looking now at our updated 2020 target on the next slide. Our sales and earnings capacity is further supported by the continuing strong order intake in 2018. Our targets of reaching more than $10 billion in sales and around 13% in adjusted operating margin remain unchanged. However, due to the slowdown in global light vehicle sales and production and increasing raw material pricing, we do not expect to reach these targets in 2020. I want to be very clear that the targets have not changed and that we aim to reach them at a later stage when market fundamentals are more solid.

IHS now forecasts substantially slower growth in the global light vehicle production for 2020. IHS forecast has been reduced by 5 million vehicles or more than 5% since when we set out 2020 targets in 2017. The annual growth rates for 2018 to 2020 have thus been lowered from 2.3% that was included in our regional 2020 targets to now only 0.6%. Although we do not expect to reach the targets by 2020, we do expect improvements in sales and adjusted operating margin in 2020, assuming light vehicle production returns to growth.

Looking now at our order intake in 2018 on the next slide. Our order intake for the full year continued on the same high level as in 2017, supporting our growth opportunities also beyond 2020. This is strong evidence that our company is the leading company in the passive safety automotive industry and shows that we have successfully managed the operations, ramping up of previous year's high level of order intake.

Our key performance indicator, customer satisfaction, has improved substantially and is at a high level, the best we have had for several years. However, this does not mean that we can relax. We always strive for improving products, services, processes and costs.

We estimate that we booked about 50% of available order value in 2018, making 2018 the fourth consecutive year of booking around more than 50% of available order value. The order intake is broad based. We have improved our market position in 3 dimensions: product category dimension, regional dimension and customer dimension.

Looking by customer, in 2018, there were 15 OEMs that made significant passive safety sourcing. We are pleased that we took order intake share above 80% with 3 different customers, and it was only one customer where we were just below 40% order intake share. We can, therefore, conclude that our 2018 order intake was further strengthening our already broad customer base.

Looking now at the recap of the fourth quarter highlights on the next slide. Our growth momentum continued in the fourth quarter albeit at the lower pace due to softening of the Chinese and Western European markets. The growth was mainly driven by the large number of product launches in North America.

In the quarter, Autoliv's organic growth outpaced global light vehicle production by almost 10 percentage points as global light vehicle production declined by more than 5%, according to IHS, as unfavorable market fundamentals took the toll on global auto demand and production. We had a solid operating cash flow in the quarter, enabling us for the full year to almost reach last year's level of continuing operations. However, we have experienced continued headwinds from raw material pricing, which together with the volatility of market demand and launch-related costs tempered the operating leverage on the stronger sales growth.

Just as in the previous quarter, the volatility of market demand in the quarter resulted in our supply chain production and logistic system having to manage significant changes to OEM production plans with corresponding 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 beginning of 2019, with continued uncertainty for light vehicle production, especially in China and Europe, leading to continued challenges with uneven utilization. We are closely following market development and are ready to act if [we find] it necessary. We have a higher number of temporary employees, both in Europe and China, providing flexibility to flex production volumes up or down. We have implemented actions to reduce costs related to product launches. These include production line redesign, employee management and supplier support management.

Looking now at the recap of the fourth quarter financial performance on the next slide. Executing on a strong order book, this quarter marks the third quarter of higher organic growth. Our consolidated net sales increased by close to 2% compared to the same quarter of 2017, with organic sales increasing by more than 4% despite the global light vehicle production falling by 5%. Adjusted operating income, including cost for capacity alignment, antitrust-related matters and separation costs, decreased by around 5% from $254 million to $240 million, impacted by elevated launch-related costs, uneven utilization of our assets and raw material pricing.

The adjusted operating margin decreased by 90 basis points to 10.9% compared to the same quarter of 2017. EPS diluted decreased by $3.32 compared to the same quarter of 2017, almost entirely as a result of the accrual related to the remaining part of the European commission antitrust investigation and discrete tax items.

Looking to our sales growth on the next slide. Thanks to newly introduced models, we could more than offset the short drop in light vehicle production in the quarter. Consolidated net sales in the fourth quarter increased year-over-year by 1.6% to $2.2 billion, with an organic growth of 4.2%, partly offset by negative currency translation effects of 2.6%.

Sales outperformed light vehicle production in all regions except Europe. The underperformance in Europe was mainly due to the light vehicle production in Western Europe, with its high safety content per vehicle declined by more than 9%. In the quarter, North America contributed with $116 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 close to 21% was 19 percentage points higher than the light vehicle production growth. Our sales in South America declined by 9% organically, basically in line with the light vehicle production decline in the region.

In Europe, we have been affected by weaker demands from a number of OEMs, partly related to continued temporary production cuts connected to the new EU emission testing regulation WLTP and model changeovers. Sales in China declined organically by 3.7%, outperforming light vehicle production by 11 percentage points. The lower sales was mainly a result of domestic OEMs, including Great Wall, Baojun and Wuling, reducing their outputs. This was partly offset by slightly higher sales to global OEMs, largely due to stronger performance with Honda and VW.

Looking to our key models launched in Q4 '18 on the next slide. Here, you see some of the key models which have been launched during the fourth quarter. Five of the models are built in North America, continuing the strong momentum we have seen over the last few quarters. All but one are SUVs. Of special interest is the Tata Harrier, which is the new model specifically developed for the Indian market. We proudly supply most of the passive safety products to the Harrier, including driver airbag with steering wheel, passenger airbag, side airbags and curtain airbags. The higher safety content of the Harrier demonstrates the growth opportunities in emerging markets when consumers request the same level of safety as in more developed markets.

Looking now to our product launches. Our strong launch momentum continues. We continued to see ramp-up of product launches of business order in 2015 to 2017 as illustrated by the chart. The number of product launches in 2018 increased by 20% compared to the year earlier. The main increase has been in the U.S. with over 50% and in China with close to 40% more launches than in 2017. We expect a continued high pace of product launches in 2019, especially in China. We, therefore, expect the strong organic growth to continue in 2019, with a similar outperformance versus light vehicle production as we had in 2018, which was close to 6%.

Looking now to 2019 growth opportunities. Here, you see some of the key models supporting our growth in 2019. These models are expected to account for large share of our organic sales growth during 2019. Seven of these models were launched recently, 2 are yet to be launched, 2 are not new launches, but they are to be built in additional production sites to meet global demand. With Autoliv's global production footprint, we are able to support these models at the new production sites growing our sales. Annually, these 11 models represents around 10% of sales, and our content per vehicle is in the range of $140 to $300.

Looking to our underlying market conditions on the next slide. The light vehicle market became increasingly more challenging in the second half of 2018 due to vehicle consumer confidence, trade tariffs and regulatory changes. In the fourth quarter, overall global light vehicle production declined by about 5%, according to IHS. This is 6 percentage points worse than the 1% growth forecasted at the beginning of the quarter.

In China, the world's largest market, vehicle sales fell in the fourth quarter by 13%, according to CAAM. The slowdown is largely driven by weakening consumer demand caused by lower consumer confidence from trade wars, weaker state of economy and lack of demand stimulus. As you might recall, we did expect the drop that was greater than the 3% decline IHS predicted. The outcome turned out even weaker, as the light vehicle production in the fourth quarter declined by 15% according to industry sources like CAAM and IHS.

U.S. light vehicle sales rebounded slightly in the fourth quarter from the slowdowns experienced during the summer. Though most of the markets fell below a year ago, strong growth from FCA, Tesla and Volkswagen brought the U.S. into the [black] for the quarter and the year. Inventory level remains at a healthy level and were basically flat year-over-year. Light vehicle production in North America increased by 1.7%, which is less than the forecast of 2.6% growth at the beginning of the quarter.

European light vehicle sales declined by 8% in the quarter, continuing the downward trend that started with the introduction of WLTP in September. Underlying demand was weaker than expected as seen in the disappointing registration levels noted for November and December, which, we believe, goes beyond the impact of WLTP. Overall production is believed to have declined by 5%. The decline was concentrated to the important West European market that dropped by 9% while Eastern Europe production increased slightly. In Japan, the year ended on a positive note, with light vehicle sales increasing at an estimate of 5% year-over-year in the fourth quarter.

I will now hand over to our CFO, Mats Backman, to speak to the financials.

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [4]

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Thank you, Mikael. Looking now for financials on the next page. We have our key figures for the fourth quarter, including negative currency translation effect of around $57 million and organic sales growth of $91 million. Our consolidated net sales reached $2.2 billion for the fourth quarter.

Our gross margin declined year-over-year. The net operating leverage on the higher sales was more than offset by higher commodity cost and costs related to preparation for upcoming launches as well as ramp-up of recent launches. Additionally, we experienced unbalanced utilization of our assets in China and Europe.

Our adjusted operating margin of 10.9% declined year-over-year mainly due to the lower gross margin and the higher RD&E, partly offset by lower cost per SG&A in relation to sales. Our reported earnings per share decreased by $3.32, mainly as a result of the accrual related to the EC antitrust investigation and discrete tax items. Our adjusted return on capital employed and return on equity were 26% and 24%, respectively. Our dividend of $0.62 were $0.02 higher than a year earlier.

Looking now on the next slide. Our adjusted operating margin of 10.9% was about 90 basis points lower year-over-year for the fourth quarter. As illustrated by this chart, the operating margin was impacted by higher raw material costs of about 80 basis points, partly offset by net currency tailwind of about 70 basis points. The negative leverage on the higher sales was a result of higher RD&E expenses, other launch-related costs and unbalanced utilization of our supply chain, production and logistic systems. The higher RD&E, which increased compared to the same quarter in prior year by about 40 basis points, was driven by the high number of product launches, especially in North America. In the quarter, launches in North America alone rose by more than 70%.

Looking more into full year '18 performance on the next slide, where we have our key figures for the full year '18. For the full year 2018, Autoliv's sales grew organically by 4.8% comparing to full year 2017, almost 6 percentage points lower than the LVP growth, according to IHS. The largest contributors to the organic growth were North America, China and India, partly offset by Europe and South Korea.

The gross profit increased by $32 million compared to prior year. The gross margin decreased by 0.9 percentage point compared to 2017, mainly due to adverse impact from launch-related costs, raw material costs and currency changes, which more than offset the operating leverage from the increased sales.

The adjusted operating margin, excluding cost per capacity alignment, antitrust-related matters and the separation of our business segment, was 10.5% of sales compared to 11.1% of sales for the full year 2017. The decrease was mainly due to the lower gross margin and higher RD&E costs.

Earnings per share from continuing operations, assuming dilution, decreased by 35% to $4.31 compared to $6.68 for the same period 1 year ago. This was mainly due to the accrual related to remaining portion of the EC investigation combined with higher underlying tax rates.

Our adjusted return on capital employed and return on equity were 22% and 20%, respectively. Our dividend of $2.46 was $0.08 or 3% higher than a year earlier.

Looking now on the next slide, where we have our adjusted operating margin of 10.5% for the full year 2018, which was 60 basis points lower than full year '17. The adjusted operating margin was impacted by higher raw material costs of about 40 basis points and the net currency headwind of about 10 basis points. The negative leverage on the higher sales was a result of higher RD&E expenses, which increased year-over-year by about 30 basis points, mainly as a result of the many product launches as well as other launch-related costs and unbalanced utilization of supply chain, production and logistic systems in the second half of the year. This was partly mitigated by a lower SG&A.

Looking on our cash flow on the next slide. Operating cash flow was strong in the quarter, taking us to more than $800 million in full year 2018 from continuing operations, which is close to our earlier indication. Note that our cash flow statement includes discontinued operations up until the second quarter of 2018. This makes year-over-year comparison difficult.

Capital expenditures amounted to $133 million in the fourth quarter. In the fourth quarter 2017, capital expenditures for continuing operations were $128 million. Full year 2018 capital expenditures for continuing operations amounted to $486 million or about 5.6% of sales. For the full year '19, we expect capital expenditures to decline in relation to sales, as the ratio begins to normalize towards the historical range of between 4% and 5%.

Looking now to our earnings per share on the next slide. Reported earnings per share declined by $3.32 to minus $1.06, mainly due to the accrual related to the remaining portion of the EC investigation, discrete tax items and lower operating income.

In the fourth quarter '18, the adjusted earnings per share decreased by 38% to $1.42 compared to $2.29 for the same period 1 year ago. The main drivers behind the decrease are $0.44 from discrete tax items, $0.24 from higher tax rate and $0.12 from lower adjusted operating income.

Looking now to our balance sheet 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 remains unchanged. Autoliv's policy is to maintain a leverage ratio of around 1x net debt-to-EBITDA within a range of 0.5 to 1.5. As of December 31, 2018, the ratio was back within the range, as we reduced our net debt by $106 million in the quarter.

Our strong free cash flow generation should allow deleveraging and should allow continued returns to shareholders while providing flexibility. We are aiming to be well within the target range by the end of the year 2019 despite the expected fines for the remaining portion of the EC investigation that should -- that could be issued during the first half of 2019. This excludes any other discrete items and other nonforeseeable changes to our business.

Turning the page. The outlook for major light vehicle markets has become increasingly more uncertain due to weaker consumer confidence, trade tariffs and regulatory changes. According to IHS, the U.S. market is seen as flat or slightly down, while Europe and China are expected to stabilize from the recent volatility. IHS forecasts year-over-year growth in China for the full year '19 despite a weak first half.

The WLTP impact in Europe appears on track to fully fade over the coming months. However, we can see an increasing risk for uncertainty among end-consumers on what drivetrain technology to choose. Corporate and fleet sales teams seems to be less affected, and another factor to watch is the Brexit outcome.

In China, IHS expects the softness to continue in the first quarter, forecasting about 9% decline in light vehicle production year-over-year. As inventory levels are relatively high and the recent trend in sales has been deteriorated, we believe there is a downside risk to this estimate.

Our base scenario for global light vehicle production in 2019 is below the IHS estimate of 1.1% growth. We expect to outgrow light vehicle production at a similar level as we did in 2018, which was almost 6 percent points.

Turning the page, we have summarized our full year 2019 indications. We said we are coming back to how we are planning to guide at our fourth quarter earnings call. So we will guide on a full year basis and on the factors that you can see on this slide. Full year indication assumes mid-January exchange rates prevail and excludes cost per capacity alignment and antitrust-related matters. Our full year '19 indication is for an organic sales growth of around 5% and the negative currency translation effect of around 1%, resulting in a consolidated net sales growth of 4% for 2019.

Our indication for the adjusted operating margin is around 10.5% for the full year 2019. We expected 2019 raw material cost increase to be at least as much as it was in 2018. We anticipate the currency effect on the operating margin for the full year '19 to be neutral. The projected tax rate, excluding discrete items, is expected to be around 28% for full year 2019. The projected operating cash flow, excluding any discrete items, is expected to increase.

We aim to improve the 2018 cash conversion of close to 90% of continuing operations to be around 100% in 2019. The projected capital expenditures in relation to sales full year 2019 is expected to decline compared to the 5.6% for continuing operations in 2018.

The projected RD&E in relation to sales for full year 2019 is expected to decline compared to the 4.8% for continuing operations in 2018. And we expect the leverage ratio to be well within our range of 0.5% to 1.5% by year-end 2019, excluding any unforeseen discrete items.

I will now hand back to Mikael for some concluding words.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [5]

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Thank you, Mats. Turning the page. Our 2019 focus is directed to improve launch effectiveness and productivity. We always strive for improved production and services, processes and costs. These continuous improvements have been key for Autoliv in improving profitability and winning new contracts. In 2019, we will increase focusing on our productivity in all areas, such as production, logistics, testing and engineering.

We have implemented actions to improve effectiveness of product launches, which, of course -- in the course of '19, we expect to improve our product launch cost effectiveness. In addition, as the number of launches are stabilizing at a new high level, we believe we can gradually increase focus on productivity improvements through operational excellence while our launch-related costs gradually climb.

As light vehicle markets are expected to remain volatile, we will monitor and manage accordingly. We will also continue our efforts of flawless execution of new launches, improving customer satisfaction further, and thereby, supporting our new and stronger market position.

Unfortunately, there would be millions of traffic accidents in 2019, some fatal, some where people will get injured. Therefore, we will relentlessly continue to innovate and to deliver best quality products that will save more lives.

I will now hand back to Anders.

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Anders Trapp, Autoliv, Inc. - VP of IR [6]

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Thank you, Mikael. Turning the page. This concludes our formal comments for today's earnings call, and we would like to open up the line for questions. I will now hand it back to Alice.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Emmanuel Rosner from Deutsche Bank.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [2]

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So first question is around your guidance for the margin in 2019. Can you maybe break out the puts and takes in terms of how you get to a flat margin this year? Perhaps what is the expected commodities impact? What is the magnitude of continued operational headwinds on a year-over-year basis? And then also perhaps any color you can give on the cadence within 2019?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [3]

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This is Mats. So maybe starting with kind of the external factors and looking into currency and raw materials. So when it comes to currencies, we are saying that we expect a neutral effect. However, looking at the raw materials, we're expecting a negative development in line with what we saw in 2018, meaning that we had about 40 basis point negative in 2018, and that's the level that we expect at least for 2019. So that's clearly negative. Then looking on other items affecting the margin, first of all, when it comes to launch cost, I mean, as we communicated after the third quarter, we talked about several quarters of launch costs going forward. So that's something we see now in the beginning of the year as well. And also to remember, that -- I mean, given the kind of assumption we have of the underlying LVP and the market development, mainly in China, we see the first half of 2019 to be challenging in order to kind of meet the lower volumes and mitigate effects from lower volumes. So that, I would say, kind of conclude the underlying assumptions we have for the 10.5%.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [4]

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That's very helpful. And I guess, my second question is around your longer-term targets of 13% margin. Can you maybe sort of give us a rough bridge of what would get you there, so the incremental margins that you're assuming on a go-forward basis? And then how much of the recent headwinds is seen in 2018 and '19 on the operational front? How much of that would reverse and become a tailwind?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [5]

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What we have said here is that the target at absolute values here is kept. So what we are doing is that we are saying it will not be achieved in 2020, but beyond 2020 here. So the main factors here, I would say, is the light vehicle production, which have changed significantly since we set our targets in 2017. So that, of course, is a key factor of all into this and also the raw material situation here that has put additional strain on our ability to reach the target here. So that's the main factors to get to where we have had as a target.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [6]

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But you had quite a few operational headwinds that you called out in '18 and '19. Like, is there -- what kind of -- did you assume this sort of gets reversed? And what kind of tailwind would that provide?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [7]

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That is what we have said is the launch-related costs that we have had on -- starting during last year, but we said that in connection with the third quarter here that will take several quarters until we are through that. So it, of course, impacts '19 here. But we are gradually improving here, and we expect that to be behind us at some later date.

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Operator [8]

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Your next question comes from the line of Rich Kwas from Wells Fargo.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [9]

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On the assumptions underpinning the outlook. So it sounds like relative to what you printed in the deck with regards to IHS assumptions, you're more conservative. Is there any more detail around what you're assuming for China? IHS has it up for the year. I think most suppliers are assuming a down year. So is that a fair assumption for you? And how much should we think about the China production -- light vehicle production being down within your outlook, your revenue outlook?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [10]

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I think -- I mean, China is the main factor in the equation here when we're saying that we are more negative for '19 here. And it's mainly also in the beginning of the year, first half. I think IHS has roughly 9% negative in the first quarter. We see significantly more challenging situation in China for the first quarter here. And so all said and done, the second half of the year, I think, is more difficult for us to have our -- a very different opinion here because the first half of the year, we can see and understand better where we are in relation to our customers' call-offs and the dialogue we have there.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [11]

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Okay. And then the -- yes, I was going to say the second quarter, you hinted at some risk there as well. So I know you only look out in terms of the current quarter, but should we think of taking whatever IHS has for second quarter and discount that as well and then assume that's factored into your -- within your full year outlook for second quarter?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [12]

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Yes, yes.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [13]

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Okay. And then just a second -- follow up real quick macro-wise. Europe, how conservative are you in Europe? There's still some pressures there. How do you see that playing out over the course of the year? That's been a weak point for you here recently. Just curious on what you're assuming underpinning the market.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [14]

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I think it's difficult to give you some grading on -- our view on Europe than more than to say that we see Europe as a market, which, we believe, will be weaker here moving forward. And as we've indicated in our presentation here is that, of course, you had WLTP effects during the autumn here, and we said in connection with Q4 that, that would affect, to some extent, the fourth quarter as well, which it did. But I think around the whole WLTP issue, which is the emission regulations here, we have, I would say, a whole wait-and-see from the consumers here because this overall question around diesel versus alternative drivelines and availability there delaying some decisions from the consumers. Then, I would say, in Europe also we have the Brexit situation that are -- also impact consumer confidence in some countries.

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Operator [15]

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Your next question comes from the line of Chris McNally from Evercore ISI.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [16]

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Just trying to get a sense, I think, like most to -- just how conservative you're being with this sort of 2020 target pushback really rather than pulling the target altogether? So from what I think you're saying is that you haven't -- you just changed the timing of the target and not the absolute values. But that would imply that basically the next $1 billion of revenue, you'd have to achieve $360 million of EBIT to hit that $1.3 billion number, and 36% incremental margins doesn't seem like anything the company has done in the past. So maybe you can help us on what are we missing. It's clearly volume related, that's an issue, but why would so much fall through to the bottom line on, call it, the next $1 billion of volume?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [17]

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No, as I wouldn't do a calculation for you here, but what we have said here is that we remained the target -- remained the targets, but they are pushed out in time as a consequence of what we have alluded to here in terms of headwinds, primarily in the light vehicle production. So then of course, we see the growth coming from the underlying performance here of the company.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [18]

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Okay. And is there a time that we may get a little bit more detail? You've done CMDs in the past. Is that something that we may hear from -- at some point this year? Or maybe, obviously, if the targets are being moved from 2020, maybe we get new targets for 2021 or 2022? Is that something you're hoping to communicate with more detail over the course of the year?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [19]

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We have said that we will have a Capital Markets during the second half of 2019, and that still stands. So we will come back on details around that. And of course, in such a meeting, you will formulate more -- we will formulate more direction when it comes to the years beyond 2020, but in what shape and form, we will have to come back to.

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Operator [20]

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Your next question comes from the line of Ashik Kurian from Jefferies.

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [21]

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I just have probably a similar question, a question on margins. But with the margin shortfall that you've had since the time that you've given the targets, I mean, do you attribute all of that to the external factors? Because even when I tried to add up the raw material headwinds since 2017 and if I assume another 30, 40 bps for 2019, I think, that together comes up to 100 bps. Launch cost, again, should be in that level as well. So maybe you can try to rephrase the question as to, is the 13% dependent on raw material prices reversing by 100 bps and the LVP raising the levels that you previously had for 2020?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [22]

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I think it's a combination of both external and internal factors. I mean, to the extent that we have -- I mean, given the launch costs we have had than what we have been communicating in the third quarter and fourth quarter, that makes it kind of a new baseline as we are starting on a lower level. We have the raw material -- I mean, as my -- the indication I gave, the 40 bps 2018 will be at least on that level for 2019 as well. But I think most and foremost is the underlying LVP because if you recall when we gave the targets and when we talked about the development between 2017 and 2020, if you took that kind of average or the CAGR when it comes to the growth number from '17 to 2020 was, I believe, 8%, whereof the underlying LVP assumption was, if I recall it, 2.3%, meaning that the 2.3% was really important in order to get the volume and get the leverage. What we see now in 2019, if we take a kind of a snapshot of '19 on our way to 2020, then we're indicating if you take the organic sales growth that we give now 5% and we're talking about 6 to 7 points outperformance, that would indicate the global LVP of minus 1% rather than the plus 2.3%. And I think that's key as in assumption when we are pushing the numbers beyond 2020.

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [23]

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Okay. I think towards the end of last year, you've sounded confident of reducing, if not significantly reducing, the launch cost in 2019 given that the step-up of launches would be comparatively less in '19. Is that still the target?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [24]

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Yes. I mean, we talked about several quarters when we issued the third quarter report, and we have no changes to that.

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [25]

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I guess, for 2019 then, I mean, if you grow organically by 5%, R&D is down year-over-year, launch cost is not up. So I mean -- and I think the volatility in LVP cannot be higher than what it -- if it's at the same level as what you've seen in '18. I mean, there's no other negative surprise that we are missing in terms of the marginal, correct?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [26]

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No. But I think you also need to consider that the mix when it comes to the growth and our growth in particular, looking on -- I mean, if you're just looking at the fourth quarter, I mean, close to 20% organic growth in America in the same time as we have a negative development in Europe and China. Coming back a little bit to what we talked about when it comes to uneven utilization of assets that we are running full speed in one region in the same time as we're mitigating negative volume effects in terms of underabsorption in other regions. So that makes it a little bit more difficult to get that kind of leverage comparing to if you had an even growth globally that you were looking at. So -- in that case that is particularly valid for the first half of 2019 when we see this kind of turbulence or volatile development in China.

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [27]

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Last question. I mean, do have a challenge of passing through some the raw material headwind, I mean, given that you have close to 50% market share in your industry? I mean, if there is any supplier that is able to pass through or at least try to, it should be you. So a bit surprised by you flagging much higher raw material headwinds.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [28]

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There is no automatic pass-through to our customers when it comes to raw materials. It's, of course, a part of our normal discussions -- commercial discussions that we have with our customers annually or, I would say, several times a year here looking at the different items affecting us, affecting them, et cetera, et cetera. So that's a commercial negotiation it ends up in.

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Operator [29]

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Your next question comes from the line of Joseph Spak from RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [30]

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I guess, the -- I just want to go back to some of the assumptions, right. So you're talking about 5% organic growth. You show the 1% IHS, but it sounds like you're actually much below that. I mean, are you actually guiding, like -- on that 5%, do you expect industry sales to be down next year? I guess, what I'm trying to understand is, in '18, which was a challenging year, you still had, I guess, good outgrowth versus a down market. And I'm trying to understand if that ratio stays the same or sort of moderates in '19.

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [31]

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No, it stays the same. It was exactly like I said. I mean, we are guiding for 5% organic growth in 2019, but in the same time, we're saying that we're looking at an outperformance in line with what we saw in 2018, meaning 6 percentage points. And that would indicate it's -- just to kind of summarize the numbers, that would indicate that we're looking -- that our assumption for the global LVP 2019 is rather minus 1%.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [32]

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Okay. Okay, that's helpful. So then -- so bringing that down to the margin, right, you talked about a 40 basis point headwind from raw materials. You talked about -- I mean, there's going to be, obviously, some sort of volume hit as well from the industry, although offset by the backlog and, I guess, conversion, that's going to be key. But is that really -- I mean, if you're keeping margins flat, and it seems like there's some of these headwinds you talked about, is that really what just -- what's the offset to the margin is some of the improved conversion on the new business?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [33]

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I mean, again, I would say, it's a combination -- we're talking about the kind of launch cost that kind of continues into 2019 with the statements we made after the third quarter of several quarters. So that's one component that you need to consider. But secondly, also being very important and especially now in the first half of 2019, that's the risk for kind of underabsorption driven by the volume drop we see in certain markets, taking China for an instance. So coming back a little bit, today's kind of uneven utilization of production assets also need to be considered in this and especially looking at the first half. Even though that if we're looking at the fourth quarter and the outcome, the actual for the fourth quarter, I think our Chinese team have done a great job in mitigating the negative volume effect. But that is a limit to what you can do when you see a sudden drop in volumes like we have seen.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [34]

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Right. But I guess, if that's -- that was my point. You've been talking about absorption -- still some launch costs, still some raw material costs. But you are -- so it sounds like I'm hearing more headwinds, but you're still saying the margin's flat, at least for the year. So I understand there could be some cadence through the year, but what are the -- what are the sort of positive offsets to get you back to sort of a flattish margin?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [35]

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First of all, I mean, the launch costs cannot go on forever. We started -- communicated that in the third quarter and into the fourth quarter. And that's something that we have multiple activities and actions in the company in order to address launch costs. So that's one component that should improve now over time. And that's important to remember as well.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [36]

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Okay. And I thought I heard the comment on CapEx that over time you'll get back to the 4% to 5%, which, I think, is what you said historically. Is that in conjunction with sort of hitting this $10 billion number? Is that sort of the time frame we think that, that should normalize because until then, you're going to need the CapEx to support launches?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [37]

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No, I think it's very kind of clearly connected to the order intake and volumes because, I mean, it's capacity-related investments that we're making. We have been preparing for this kind of higher volume for a couple of years right now. So what we said really is that we think that we have peaked in relation to sales in what we see right now, and now we will gradually start to reduce in relation to sales going forward. The big support we get is really from the organic growth and higher sales number.

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Operator [38]

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Your next question comes from the line of James Picariello from KeyBanc Capital Markets.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [39]

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Just a question for Mats. The more obvious question, do you -- are you willing to talk about your decision to move to your sidekick Veoneer? Or is that something that you don't want to address?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [40]

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No, I think I'm leaving that for the Veoneer. It's not maybe for me to comment anything on this call when it comes to that.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [41]

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Okay, understood. All right. Orders are just fractionally down year-over-year. Historically, you guys talk about a 2- to 3-year lead time before production begins. Is that something that you're still seeing at this point? Or given all the headwinds from a global light vehicle production backdrop standpoint, are things getting pushed a bit?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [42]

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No, I think we definitely see the same type of time horizon when it comes to new orders, I mean, the 18 to 36 months, as you referred to here. I mean, with the weakening light vehicle production, I would say, it's nothing that impacts the launch plans here. So in terms of launching new vehicles and supporting these new launches is no changes and that's why, I think, we are talking about this outperformance here where we see no changes to that.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [43]

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Okay. If we continue to see some commodity deflation or at least some stabilization, given the 3- to 6-month lead time -- yes, the delay there, and you're realizing it in your P&L, is there any upside to this in another year of 40 basis point headwind from a commodity standpoint if we continue to see some deflation?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [44]

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I think, I mean, lower raw material price, of course, is helpful over time, but there is a lead time in all that. So I don't think you can make such a rough calculation on that. It's many moving parts into that.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [45]

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Okay. And just last one for CapEx. You say it's going to be down as a percentage of sales year-over-year. Previously you said that we should expect to see some normalization within 4% to 5% of sales range. Is the high end at 5% as something that you're targeting in terms of your capital deployment for '19?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [46]

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No. I mean, the only thing we're guiding for is the lower capital expenditures in relation to sales. And when we're talking about the 4% to 5%, that's a more kind of a normalized historical level that we should aim for. But we are not -- we're not that granular when it comes to 2019 other than saying that we will decrease the capital expenditures in relation to sales throughout the year.

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Operator [47]

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We will now take our next question. Our next question comes from the line of Brian Johnson from Barclays Capital.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [48]

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Hello there?

(technical difficulty)

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Operator [49]

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(Operator Instructions)

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [50]

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Can you hear me?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [51]

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Yes, we can hear you.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [52]

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Yes. Could you give us a sense of the operating margin ideally by region, but just how some of the pressures play out by region? Is it fair to assume that China and Europe were really the source of lack of incremental profits and U.S. was more or less okay? Or is the launch activity in the U.S. weighing that down as well?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [53]

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I mean, we are not kind of that detailed giving margin profitability by region. But if you're looking at the fourth quarter, in particular, when we are talking about increased launch costs, that's related to the region where we have had most launches. I mean, for U.S., for an instance, looking at the fourth quarter, I believe we had more than 70% increase in number of launches in the fourth quarter year-over-year. So in terms of profitability in North America, that's definitely affected by launch costs because that's the region where we have the launch costs and where we have most of the launches. But other than that, I wouldn't get into kind of a more granular guidance when it comes to the profitability by region.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [54]

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Okay. And just next question. When you think of -- since a lot of the issues here seem to be launch related, as we get into '20 and even 2021, expecting a visibility, given your strong win rate, is this about 710 launch cadence likely to continue into those years?

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

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I mean, as we said, there is strong order intake, supports our growth beyond 2020 definitely with what we have seen now for 2018.

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [56]

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If we're looking at launches and by region, so to speak, I mean, the first wave that we have seen has been very much related to North America. But as you probably recall, we have been talking about market share gains mainly in 3 regions, that's North America, China and Japan. And looking into 2019, we will see an increased number of launches in China as well.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [57]

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Okay. And so I guess, final question. Given that, is there anything you're doing just as a broad operational focus to make launches smoother because it seems like for the next 2 or 3 years, there's going to be a fact of life good news for the top line. But as we've seen in 4Q '18 and '19 guide doesn't really help with the margin.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [58]

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Definitely. As we said, I mean, the launch cost -- higher launch cost we have seen during 2018 is being addressed in various ways. And when we say that it will take a couple of quarters to solve that -- or several quarters to solve that it's through, actually, making sure that we have an efficient launch organization for the new higher level of launches that we have seen now as a consequence of the new order intake. So that's through continuous improvement efforts and effectiveness in the launch teams that we'll take care of that.

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Operator [59]

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Speakers, there are 3 remaining questions in the queue if you wish to take them.

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Anders Trapp, Autoliv, Inc. - VP of IR [60]

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Yes, I think we can take them.

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Operator [61]

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The next question comes from the line of Vijay from Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [62]

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Mikael and Mats, just when you look at the U.S., there's a bright spot for you, grew very nicely 2018. What are you expecting in 2019, given some of the challenges on the U.S. side with inventories and rates going up?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [63]

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I think when it comes to the total market in the U.S., we see more a sideways movement there when it comes to the underlying demand. And I think also inventory levels in the industry is at okay-ish level here. So when it comes to that, I think we're looking quite positively on North America we would foresee today. Then of course, our launch activity is continuing in North America. We're not giving a breakdown or indication for the overall organic growth. But of course, North America continued to be a key region in terms of that. And as Mats said here that the wave started in North America, but then China and Japan are the regions where we're looking at growth. So okay on North America.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [64]

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All right. I know you mentioned you haven't seen any pushouts with slowdown in LVP in China and Europe. But especially with some of the OEMs tweaking their mix away from sedans, are you seeing any changes in the order book on your passive side?

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

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No, I think we continue to see the same as we have alluded to before here, and we always need to lean for 1 year making sure that we have good competitiveness from our side here.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [66]

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All right. Last question. On the launch costs, what are you assuming for 2019? Like, obviously, you have a lot of launches going on in the first half, but for the full year, what is the impact from launch costs?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [67]

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We're not giving kind of an exact number when it comes to kind of launch costs and communicate kind of elevated launch costs for 2019. Just kind of repeating what Mikael said, we talked about the launch costs to be elevated for several quarters. And that's what we're looking into, looking now at the first half of 2019. But we cannot be more specific than that.

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Operator [68]

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Your next question comes from the line of Julian Radlinger from UBS.

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Julian Radlinger, UBS Investment Bank, Research Division - Equity Research Analyst [69]

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Just 2 left from my side. I'll start with the easy one. In the Q3 presentation, you provided a slide that showed the number of launches in 2017, 2018. And in that presentation, you had 2018 740 launches. And now in the latest presentation, that number has gone down to 710. Given that you provided the Q3 presentation pretty far at the end of the year, what has changed in the last 2 months or so that brought that number down?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [70]

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Some launches have been pushed into 2019.

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Julian Radlinger, UBS Investment Bank, Research Division - Equity Research Analyst [71]

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Okay. Simple question, simple answer. The other question I had is maybe just getting back to the 2020 targets one more time or one last time. And putting it a little bit differently than many of the questions that were asked today on that. Can you just explain why you felt confident enough to guide for 2020 targets over a year ago and all the way up to Q3 '18. But now that we're actually closer to that date, you don't want to provide a guidance anymore? Or, put differently, what changed in your visibility most recently that makes you reluctant to provide a guidance when you gave one before that?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [72]

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I think it's important to point out here that the 2020 was not a guidance, it was a target for 2020 set at the Capital Markets -- and communicated at Capital Markets Day in 2017. So that was a 3-year target for the company. So very different from a guidance.

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Julian Radlinger, UBS Investment Bank, Research Division - Equity Research Analyst [73]

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Okay. But...

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [74]

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So what we have done now is that we have said that, I mean, more than $10 billion in turnover remains and around 13% EBIT remains -- adjusted EBIT remains, but it's pushed out in time.

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Operator [75]

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Your final question comes from the line of from Deeya D'souza from Morgan Stanley.

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Deeya D'souza, Morgan Stanley, Research Division - Associate [76]

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I'll keep it very quick. I have 2 questions. One is on the underperformance in EU. You guys, I think, underperformed by 1.5%. Just wondering whether, like, if you could just be a bit more granular on where that comes from because we knew the production was going to fall. I just wanted -- and I think you mentioned higher safety content. I just wanted a bit more clarification on that. And my second question was around your cost reductions in China despite lower production there. I think you said something earlier that the China team were at the limits in cost reductions there. I just wanted a bit more clarification on other regions and how much room for cost reductions you have.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [77]

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I think the first question here in Europe, it's related to mix. And as we alluded to you before, I mean, we are in cars with high content of passive safety products. And when you see that type of volume going down and you see the ones with lower content going up, which was the main difference between Western and Eastern Europe, we have a mix effect that results in a number you saw here and very similar to what we saw here in the previous quarter as well in Q3. When it -- so when it comes down to cost flexibility, I would say that, I mean, we always are focusing on making sure that we have high flexibility in our total value chain. And I think what we referred to here in China is really that they have demonstrated a good work in that area. And we are having the -- we need to make sure and we have to make sure that we are working with that in all our regions, of course, as a part of our daily business here to secure that.

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [78]

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We have -- I mean, looking at China, we have the flexibility, and the team has done a great job as well. But I think it's one thing that we need to remember looking at the development of sales in China. What we are showing for the quarter now -- for the fourth quarter is, I believe, minus 3.7% or something like that, close to minus 4%. But if you're looking into that in more detail, we have a significantly worse development with the local OEMs in China, and we actually have some growth with global OEMs, meaning that we are getting kind of an uneven utilization if we're looking at production lines when we have such a difference in growth between different brands and between the local OEMs and global OEMs, which makes it a little bit tough to mitigate the volume effects when it comes to a fixed [absorption] as well.

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Deeya D'souza, Morgan Stanley, Research Division - Associate [79]

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So you think that it just makes it difficult to kind of predict what the kind of impact would be based on the difference between the local and global OEMs in China?

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [80]

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No, no, no, not to predict the impact as such, but to mitigate the effects from lower volumes.

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Deeya D'souza, Morgan Stanley, Research Division - Associate [81]

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Okay. Yes, makes sense. Is that -- so it's based on mix then and things like that.

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Mats Backman, Autoliv, Inc. - CFO & Executive VP of Finance [82]

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Yes.

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Operator [83]

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Thank you. That was the final question for your call. Speakers, please continue.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [84]

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Thank you, Alice. Before we end today's call, I would like to say that we will 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 first quarter earnings call is scheduled for Friday, April 26 in 2019. Thank you to everyone to participate on today's call. We sincerely appreciate your continued interest in Autoliv and hope to have you on the next call. Goodbye for this time.

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Operator [85]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all now disconnect.