Q3 2019 Earnings Call
Ladies and gentlemen, thank you for stunning light and welcome to the days quarter three obsolete financial results swing Tonight in conference call at this time.
I'm certain that listen only mode.
Speaker presentation, there will be a question and answer session. Just a question. During this session you will need to press you start in one of your telephone.
I'd like to that this conference is being recorded today Friday 20 feet off topic 2019, and I would now like turn the conference over to your first speaker today Mr. Anderson troubling VP Investor Relations. Please go ahead Sir.
Thank you called.
Welcome everyone to our third quarter 2019 earnings presentation.
We have our president and CEO Michael.
Turning chief.
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Myself on the top Vice President Investor Relations.
[laughter] during todays earnings call, our CEO will provide a brief overview.
Third quarter results as well.
Update when our general business on market conditions. Following my Chris will provide further details the commentary around the Q3.
2019 financial results and outlook for our full year 2019 at the end of our presentation. We wouldn't remain available to respond to questions. On that's you show the site or available to link on the old page.
Website.
On the next page.
The Safe Harbor statement, which is an integrated part of this presentation and of course includes the Q4 clubs.
During the presentation, we referenced some non U.S GAAP measures reconciliations all historical you with gets to non-GAAP measures are disclosed in our quarterly press release.
10-Q that will be filed with the FCC.
All figures in this presentation referred to continuing operations <unk>, excluding discontinued operations, mostly I should mention that this call is intended to conclude a three P.M.C.C. sharp. So please follow the limits of some questions per person.
I'll turn it over to our CEO Michael.
Thank you on Dutch looking now into Q3 2019 highlights on the following page.
First I would like to say that them generally pleased that our operations report operations reported improved adjusted operating margin compared to the second quarter, despite challenging beacon and cost for raw materials.
The reason for to improve through month is mainly the actions initiated in a previous quarters to mitigate the defect.
Tough market conditions and elevate the launch costs.
Although the rate of decline in the light vehicle production slow down somewhat uncertainty remains high market outlook by Hfs continued to be revised down.
Oh, we do not see any turnaround in the light vehicle production in the near term.
The strike at General Motors affected our operations in North America, adding to the challenges we already phase.
We continued to outperform light vehicle production growing organically 4.6 percentage points more done light vehicle production driven mainly by a strong development in China.
Being a truly global company, we feel the full force over to global light vehicle production decline and the wave of new launches east smoke generates our outperformance.
This quarter marks the sixth consecutive quarter of substantially higher organic growth compared to the market.
The increasing our market share.
[noise] order intake share continued at the good evidence supporting prolonged outperformance.
Being close to our customers are key to strengthening our competitiveness into quarter two new customer collaborations were announced first then creation of a North American Road safety research lab involving China with great worn.
Secondly, developing next generation passenger airbags in cooperation with Honda.
We continue to actively managed to be since acting downturn.
I think interaction of direct workforce head count in the second quarter, we reduced.
To the workforce by further 800 during the third quarter.
Compared to a year ago headcount is about 1600 less.
Despite growing our assays organically by more than 1% year over year.
Looking now at destruction efficiency program more in detail on the next slide.
Here, we have summarized the structural efficiency program as we have identified structural cost improvement opportunities.
We have ordered it started to see the positive effects over to program, although limited into quarter four.
For full year 2019, we expect savings to amounts to around 10 million.
And the program should reach its full effect by December 2020 .
Most countries, where we have operations will be impacted to higher impact in North America and Europe is expected.
Headcount is estimated to be reduced by almost 800, which is about 4% of total indirect head count.
The cost for program is estimated to be around 60 million U.S. dollar and the cash out to be spread from Q2 19 to Q2 2020 .
Annualized savings is estimated to be around 60 million U.S. dollar, which is equal to about 5% of indirect labor costs.
We continue to evaluate our global operations and to optimize our footprint. It's likely that this will result in additional restructurings in further future quarters.
This is of course, not all we do to improve our long term efficiency, we're investing in building the foundation for improving the value chain from end to end such as flexible optimization digitalization and then engineering efficiency, we intend to discuss these more in detail during our.
MD on November 19.
Looking now at the recap our third quarter financial performance on the next slide.
Our consolidated net sales virtually flat compared to Q3 18 impacted by weaker currencies wind organic sales increasing by more than 1%.
Despite the global light vehicle production falling by more than 3%.
Adjusted operating income excluding cost for capacity alignments anti trust related matters and separation cost decreased by around 6% from 194 million to 193 million.
Impacted by lower light vehicle production on raw material pricing.
The adjusted operating margin decreased by 50 basis points.
9% compared to the same quarter of 2018.
Adjusted EPS decreased by five cents compared to Q3 18, mainly due to lower operating income.
Looking now on the market development.
The negative trend that started around mid last year has continued global light vehicle production is estimated to have fallen by 6% year to date, the worst performance since the financial crisis in 2008 and 2009.
And with more than 3% in the third quarter. According to my Hs.
China light vehicle market contracted.
For the 15th straight month in September .
Despite dealerships in many provinces, providing generous discounts and some efforts by the government to boost sales.
Light vehicle save and light vehicle production, both fell by approximately 6% in the quarter.
Consequently, we did not see any meaningful reduction of light vehicle inventories and we continue to see Oems still carrying fairly high inventories.
US light vehicle sales finished the quarter up 1% compared to last year.
While sales in Mexico fell by more than 8%.
Light vehicle production in North America decreased by 1%, which was almost three percentage points lower than originally forecast at the beginning of the quarter.
One reason for the lower light vehicle production was a strike DDMS us facilities.
Thanks to higher vehicle sales inventories declined by 300000 units do it helps the 3.6 million.
European light vehicle registrations were 2% tire and light vehicle production was 1% higher than during the same period in 2018.
However, the important west European production is still on a low level.
It's dropped 1% this year following.
The double digit decline in Q3 18, when many Oems reduced volumes due to the W. LTP introduction.
Looking to our sales growth on the next slide.
Our sales continued to outperform global light vehicle production substantially outgrowing light vehicle production in China rest of World and America.
In the quarter America Sunshine contributed with 30, and 40 million respectively to doing Gannett growth. This was partly offset by slowing sales in Europe .
In North America sales were driven by product launches from previous quarters, mainly with Honda GM, Nissan BMW and Tesla.
The organic growth of around 4% was close to five percentage points higher than the change in light vehicle production.
Our sales in South America increased by 31% organically substantially outperforming light vehicle production.
In Europe , we have been affected by weakened demand from a number we EMS, including Daimler.
BMW and two of them.
Additionally, our sales were negatively affected by OEM delaying a key modern launch which now is on track.
This and a few under important launches should improve our relative performance in the fourth quarter.
Sales in China increased organically by 11% thanks to the strong order intake in recent years outperforming light vehicle production when both global and domestic Oems.
Combined we outperformed by around 17 percentage points.
The higher sales were mainly driven by higher since the global Oems, mainly Honda and VW.
Our sales in Japan underperformed light vehicle production due to negative mix impacted by car models selling well ahead of the increasing consumption tax on October one.
As we have said before we expect an improved sales performance from new product launches in Japan to beginning in Q4 2019.
Sales in rest of Asia outgrew.
I think your production by eight percentage points, despite an organic sales declined by 3%.
Thanks decline was mainly a result of the weak markets in India.
Looking to our key model launches in Q3 19 on the next slide.
You see some of the key models launched during third quarter.
These models are well distributed across the globe and have an alternative content per vehicle from hundred us dollars up to 400 us dollars per car.
Particular interesting is to see our content on the petrol 208, one of Europe's best selling models.
The 208 will be offered both with traditional combustion engines and the full electric in powertrain.
Both versions with the same safety content from overseas.
Going into the fourth quarter, we again have a high level of launch activities to support new vehicles to be introduced over the coming quarters and that will prolong outperformance of LPP.
I'll now hand over to our interim CFO Christiana hankin speak on the financials.
Thank you Michael looking now to water financials on the next page.
We have our key figures for the third quarter.
Including negative currency translation effects of around 30 million and organic sales growth of 25 million. Our net sales reached 2 billion.
Our gross margin declined year on year, the net operating leverage on the higher organic sales with more than offset by higher commodity costs. Additionally, we experienced lower capacity utilization in most regions due to the sharp drop in light vehicle production.
Our adjusted operating margin of 9% declined year on year, mainly due to the lower gross profit and a slightly higher SDMA in relation to sales.
Comment here is that the savings from the structural efficiency program with very limited in the third quarter.
Our adjusted return on capital employed and return on equity were 19% and 23% respectively.
And we have maintained our quarterly dividend 62 cents looking now on the next slide.
Our adjusted operating margin of 9% was 50 bips lower year on year.
Illustrated by the short the adjusted operating margin was negatively impacted by higher raw material costs of 60, Bips and 30, Bips from SDMA and nordine.
Partly offset by 30 bips from FX effects.
Despite the low organic growth our operations yielded a positive margin contribution.
This improvement was mainly a result of improving launch related costs and effects from continuous improvement business cycle management and of course growth from new product launches.
These positive factors were partly offset by the disproportionate negative impact the LDP decline had one mature platforms with normal operating leverage.
Moving on the next slide.
Operating cash flow was strong and amounted to 195 million, which was 43 million lower down from continuing operations in 2018, mainly explained by the lower net income Q3 cash flow last year was particularly strong with a cash conversion.
More than 100%, while it was 85% this quarter.
Capital expenditures amounted to 122 million in the third quarter, which is about 6% in relation to sales in the third quarter of 2018 capital expenditures for continuing operations were $117 million or around 5.8%.
Sales.
For the full year 19, we expect capital expenditures in relation to sales to be in line with 28 team.
Excluding the E C and to trust Fine last 12 month of operating cash flow was 820 million and the last 12 month cash conversion on net income was 78%.
Looking now to our earnings per share on the next slide.
We have the EPS development.
Reported earnings per share declined by 36 cents to 98 cents. The main drivers behind the decrease our around 31 cents from higher cost for capacity alignments and approximately eight cents from lower adjusted operating income.
In Q3 19, the adjusted earnings per share decreased by five cents to $1.30.
Compared to the same period, one year ago.
Looking now to our financial position on the next slide.
We have as you know long history of a prudent financial policy, our balance sheet focus and shareholder friendly capital allocation Poly policy. It remains unchanged. Despite the current market conditions.
Ultimately policies to maintain a leverage ratio of around one.
Times net debt to EBITDA within a range, so 0.5 to 1.5 times.
As of September Thirtyth 2019, the company had a leverage ratio of 1.8 times, which is slightly lower compared to what we reported for June thirtyth. The main reasons for the high leverage ratio or the capitalization of the are nearing 2018 and the payment of define.
For the remaining portion of the ease into investigation in the second quarter or 29 team.
Our strong free cash flow generation should allow de leveraging and should allow continued returns to shareholders, while providing flexibility we expect to be around 1.7 times by the end of 2019. This excludes any other discrete items and other non.
Receivable changes to our business.
Looking at market developments for the rest of the year on the next slide.
The outlook for major light vehicle markets has become increasingly more uncertain due to weaker consumer confidence trade tariffs and regulatory changes.
According to IMS Hs fourth quarter is expected to in the North American light vehicle production is seen down 10% for the fourth quarter.
Certainly as the result of the you a w. strike in the beginning of the quarter.
Shifting all GM assembly plants in the United States.
The P. in China is expected to continue to decline, but at a more modest raise rates than what we have seen in recent quarters.
European Q4 production is anticipated to decline by around 2% on lower demand.
Pennies production will see a tipping point after October 2019, due to the increasing consumption tax from eight to 10 percentage points, which SEC domestic demand and the export sector, which will be negatively impacted by stagnant global demand.
It is worth noting.
Since January of this year is chest has reduced their full year 19 expectations of global light vehicle production by 6.4 million units or by seven percentage points to around 86 million units.
Reflecting the increasing uncertainty in the market our base scenario for global light vehicle production in 2019, it's a decline of 6% to 7%.
Which is lower than the highest yet.
Yes outlook of 5.9% recent for our more negative view of global light vehicle production compared to I guess is that we have seen drops in call offs in Japan, India, and Korea, due to lower demand and delays certain new models.
However, we expect to outgrow light vehicle production by six to seven percentages points.
Looking on the next slide.
We have summarized our full year 19 indications.
The uncertainty remains high falling.
LPP environment and we currently do not see any signs of a turnaround in light vehicle demand and therefore, we now indicate full year 2019 sales and profitability in the lower and of our previously communicated ranges.
These indications exclude cost for capacity alignments and antitrust related matters and assumes mid October exchange rates prevail note that the exchange rates have been quite volatile in recent history and could well continue to be so in the near future.
Our financial outlook assumes a 6% to 7% decline of global light vehicle production. The range reflects the continuing high level of uncertainty in the automotive markets, we expect our organic growth to be around seven percentage points higher than global corn.
Sequentially, our full year indication is for a 1% organic sales growth with a negative currency translation effect of around 3%, resulting in net in a net sales decline of around 2% Fourtwenty 19.
Reflecting the lower light vehicle production assumption.
Our indication for the adjusted operating margin is around 9% for full year 19.
We expect the 2019 raw material costs to be to increase by approximately 60 basis points.
We anticipate the currency effects on the operating margin for full year 19 to be relatively neutral.
Operating cash flow, excluding the previous entrust payment and any unforeseen.
Dan is expected to be between $7 million to $800 million.
I will now hand back to Michael.
Thank you Christian turning the page.
As illustrated by this short we have been able to gradually reduce the margin declines versus last year from more than 200 basis points into two first quarter 250 basis points in Q3 2019.
This is despite continued headwinds from raw materials and light to be gold production decline more than expected. The short also shows sequential improvements.
The main reason for the sequential improvement is the business cycle management activities improved lowest cost efficiency as well as our strong focus on continuous improvement throughout the organization.
As implied by our full year indication, we expect this sequential margin improvement trend to continue in Q4.
In addition to positive contribution from our continuous improvements activities, we should start to see effects from the structural efficiency program as well as seasonally higher sales and seasonally higher engineering income and lower raw material headwinds.
Although uncertainties continue to affect the industry volumes, we expect to outperform light vehicle production for the reminder of.
Year in all major regions.
To put things in context. This year has been domestic the year started we like the can production expected to grow by 1%. While now nine months later it is expected to decline by 6% to 7%.
This is 7% to 8% this point change for the entire companies the deal.
Additionally, we were affected by social unrest in Matamoros, Mexico in the first quarter.
Which create the disturbances substantial cost increases for us.
Although we are not pleased with our profit levels. We are somewhat crowd that in such domestic environment. We are able to guide from around 9% adjusted operating margin.
Not least in light of dilution combination of sharply falling and VP demand.
And.
Rising raw materials.
Looking now on the next slide.
Our CMBS now less than a months away.
At our facilities in Utah, we win show, how we will improve our company further taking off to leave to the next level of gross cost improvements and returns.
I'm looking forward to seeing many of you that are I'll now hand back to on this.
Thank you Michael.
Turning the page. This concludes our formal comments for today's earnings call called and we would like to now open up the line quick question, though I hand, it back to the operator call.
Thank you, ladies and gentlemen will not begin the question answer session and Thats. A reminder, leashed asked a question. Please press star one than your telephone and we train him to be announce.
Okay. So right now we have link questions coming and your first question comes from the line of Chris Mcnally.
From Evercore your line is still open.
Thanks, so much and good afternoon gentlemen.
A couple of question maybe on.
The margin progression I think you you commented obviously, it's been tough year based on six or 700 million of.
Have.
Revenue you Delta as we think about 2020, though I think you guys have laid out.
Pretty strong argument on the on the cost structure getting getting better from the actions that have been pretty much taken place I mean, if just back of the envelope math. It seems like you have 70 million left to go so even if only a portion of that happens that could be 40, or 50 basis points, you'll get some of the raw materials back in anyway.
Do you still have organic growth.
So that we get this question a lot is it is it feasible that you could sort of have look everything changes on the volume side, but could we have a 75 or 100 basis point improvement.
Next year, just on the reversion of some of these factors.
No and again, putting sort of based production aside just thinking things stay where they where they are and don't get better.
Yes, I think we are not into position now to start to comment on.
We believe.
When it went to here but.
As we are.
I mean, we focused on continuing to.
Adjusted cost base in relation to.
The overall market development here.
And as we have alluded to before we have also now.
The focus on making sure that we captured all opportunities so being.
Fully focused company on on on our core businesses here and wants to see here improvements along the value chain. So I think were being quite clear on our ambitions in driving that should support.
Improved profitability in two years to come here, but.
Going into any detail discussion around 2020 is way too early here and I think.
The uncertainty we talked about into second quarter.
Just be reinforced into into third quarter here on.
Where the market is going so I think we need to.
The keeping a close eye on on that historically.
Our next steps from there.
Okay, Great and then I am just another quick one on on on the order book I mean, I think you commented it's been.
Order.
Levels remain at at.
At good levels, maybe that's not 50% still but maybe it's something pretty close to it.
It's been almost two years since.
Key safety and Joyce and took over to cut and it seems like it's been a very subdued reemergence for them could you just talk qualitatively about what you're seeing in the bid process are they just very selective are they really just trying to retain current customers and not trying to aggressively sort of re take some of the show.
There that was lost.
I can't really comment though of course on what they are doing because I simply don't don't know I mean, we are focusing on our business here no of course us.
As a global player today or.
Visible in the market in the sense that we probably go for.
So the same business opportunities here, but.
It's a tender business and.
Our full focus areas on delivering on our commitments here when it comes to quality and delivery position and of course being price competitive and I think we have.
Shown here the last couple of years here that we are in good position to to defend the market share in which we are growing into.
At this of course.
Our full and focus so.
I don't see any other.
Priorities for us than to focus on our own business.
Okay, great. Thank you so much.
Thank you.
Our next question comes from the line of game Speaker Mueller from Keybanc capital. Your line is now open.
Hey, good morning, guys.
Hi, good morning.
Can you could actually if you can you can you talk about the.
Industry order trends I mean, you made another comment this quarter that.
Bookings activity for the industry was weak yet again, what's your what are your thoughts for the fourth quarter and any color you can provide as it relates to.
Your share gain trends thanks.
Yes.
I think first of all of that I mean, as we've indicated here that we have and ordering takes the loan on healthy levels.
Exact numbers, we will come back to when we close this year, but.
The point here is really that the order intake we have supported a prolonged outperformance as we move forward here.
Then in terms of the absolute volume of the orders.
Or excuse that is out there.
It's lower than what currency in previous year last year, but.
You should remember also that every year is not equal here or is it depends very much on how to model.
Year, SAR and all the plans to renew them and so on is looking like so.
I'm not reading in.
Okay.
Changes so fundamentally changes to how the ordinary course of business is looking like when it comes to.
The outdoor assumes is just happened to be a year with.
With slightly lower.
Activities or numbers out there, but as we have indicated before in Q2 here, we expected second half of the year to be higher done.
The first half and that's still stands so I was that a gradual improvement than that of course. It means that Q4 is an important quarter to optimize the defined on on where we ended up for the full year. So.
It's a bit higher activities in Q4 is expected.
Got it thanks for that and then hopefully I didnt Miss this but what was the quantified.
Jim strike impact in the quarter and what are you baking in for the for the fourth quarter.
We haven't.
Given the number for it but.
In the third quarter, you could say it's affected by around two weeks of sales to grow in North America.
The strike started meat.
And September here, I mean should say.
And then.
It's still ongoing here there is.
If I understand right.
Votes.
Today within the.
W and the work is there to accept.
But that is in place or not so hopefully, we'll see an end to strike.
Today.
That means that is another four weeks.
Four weeks is.
Reported.
Fourth quarter here, so all in all we talking about potentially six weeks and.
GM sales to us is around 3% on total sales so.
Of course, it's a big an important customer to us and ask them.
Sizeable impact, but if you look at the totality and global scene.
It is 3% doesn't book.
Thanks, guys.
Your next question comes from the line.
Plus Anglo from handles but can you let mr. Wilson.
Thank you very much.
What did the possible for.
To maybe discuss.
Well just in terms of ramp up.
2020 Dan.
On a comparable basis, how much launches do you have four for 2020 compared to 19 just to.
I understand the dynamic here.
My first question. Thanks.
Yes.
Thank you.
I would say that.
2020 policies.
It's a year, where we continue to to launch on launched on the order book too we have talked about here. So.
I would say we have now come up to.
New normal so to speak so I think in the number of launches.
I don't have a number to share here, but I don't expect to see.
And dramatic step up here.
Yes, we are now and in the midst of the wave so to speak to that activity level has risen to two to new heights units. We continue on so.
Remember waves.
Weve started in the North America moved on to China, and we expect now into fourth quarter.
Japan starting to.
Yes.
Outperformance more visible in that part of the opened and by that I mean, we are.
The new Norman.
And in terms of on the.
Adjustments you see in custom based income terms of.
Production et cetera.
Has there been any delays.
Four or delaying a launch of certain model or is just that.
Using the run rate on the back loaded loans.
He is really the run rate that these.
And then as we manage them earlier in the presentation, we have had.
Some delays so sort of production, but it has.
No.
Section to the overall market development its has been more.
Let's call it technical.
Decisions strong from new OEM.
And it has nothing to do with ourselves with us.
Nothing to do window overall market development is obviously not a reason then and not material.
I would say.
Thank you very much.
Thank you.
Okay. Next question comes from the line of Gilstrap spot from RBC capital markets.
Hello.
Thank you very much.
Maybe just.
Quickly on on the implied.
Fourth quarter margin guidance, which is about 200 basis points. So if we if we follow along with your.
Estimate of the indirect.
Labor savings.
It seems like it should be about 50 basis points.
Typically have the lower.
R&D in the fourth quarter with recoveries, which.
It seems like it could be maybe 80 basis points.
This is is the rest just.
Sure thing about the remainder sort of leverage on some higher sales quarter over quarter are there or is there. Another factor, we should think about for the fourth quarter.
I think the the key factors here.
For the.
Step up in performance.
Two.
Towards our full year.
Guidance here is that.
We always have seasonality effect, so between the quarters Q3 to Q4.
Yeah.
Part of that these of course increased.
These increased sales and.
R&D engineering income.
And now this year also in combination then wind.
Efficiency programs that we are conducting.
And as indicated here, we see giving results and is by thing so so.
The main.
Just here, but.
Yes lets you do the math there.
Before.
Okay, maybe then.
Appreciate his comments and indirect workforce side it looks like on the direct for workforce you also got another.
Maybe 570 employees what can you just update us where you are in that process.
Yes, I think thats something that all our.
Clancy's very close to and.
Or constantly assess.
The needed.
Yeah.
Resources to meet the capacity requirements, we have.
We have to once our customers. So that is a cost constant ongoing process to make sure that we are well balanced in.
In our different plants here and.
Therefore.
We talked quite a lot about the flexibility in.
Agility to meet with.
Changing demands here and I think the organization is demonstrating that they on top of it and showing good.
The missing that area. So I feel that we are managing that than a good way.
So there is no sort of target there that's sort of sort of flexible with how you see the invite.
Yes, there is no absolute targets for.
When it comes to direct work force I mean, if the support of making sure we have flexibility so sad and of course as we always do.
Working intensively with.
Activity improvements so that support of our our our daily business so to speak and of course, when we faces headwinds you can say we.
To put into next year, there about the support or normal business.
Finally, I know you went through the Hs forecasts and the guidance is built off the call offs and you talked about Japan, India Korea, I think you called out.
As areas of.
Maybe some more conservatism just curious so about your thoughts.
I guess relative digests on China and on Europe , because we are hearing some talk of plant shutdowns there as well in the fourth quarter. So is that factored into your outlook as well.
Yes, I think I mean, we see.
We see weaker.
Okay.
Manned across stellar.
Across the board here I think we called out the disease.
Entry CNL because they are the ones that have actually hold up the longest I mean, if you look at the Japan and so forth. So.
And the upon as well still growing into in the third quarter.
Ken.
You can say, partly due to the pre tax.
Due to pretax here, but so we see.
Big shifts there and when it comes to the rest of the regions here it's.
It's still negative and increasing reductions so that is yes, but are you more in line with Hs for those other regions.
Yes.
We don't disclose the.
Region by region exactly how we link up to.
I think you mean, we have was when we have a quarter in front of US here, we look at the core locks, we have and so on so I mean in.
In terms of anything you'll hear about plant closure et cetera, it's very tangible for us of course customer dialogue. So.
Say that I mean.
That is happening in civil for support what we see for the upcoming quarter.
Thank you very much.
Okay. Next question comes from the line of Dk rotation from Mizuho. Your line is now open.
Hi, guys just a couple of questions.
I guess and look at 2020.
Things on the besides should start to look even better just from a comps perspective, given how bad threenineteen was but instead and figure out if you look at China. You mentioned there is multiple.
Discounts in the price is doing for to stimulate NBP, but it's not picked up so was wondering what drives.
Between BP in China into next year.
Thanks.
Yes, I think I mean, we havent really I mean, as I said, we havent comment on 2020 , because I think if it's way too early to.
Have a.
Strong view on how 2020 will.
Play out in terms of demand lead the highest certainty that we have so I think we need to wait to come back on that but I mean dining some many moving parts right now.
Traits these uncertainty.
Across the board I mean, we have everything around to drive line.
Turning.
Restrictions.
In some time to sell restrictions on the traditional drive lines for pushing for new ones. We have in China. Specifically, then as you mentioned.
Situations, where we have to China six and.
Some people also that have.
The shine a five maybe difficult to to offset that vehicle to invest into new vehicle.
So thats changed landscape, a little bit and of course, we have the you political.
Patients surrounding China also here so.
As well as the driveline issue there altogether, so I mean that so many moving parts that.
So I think.
Settle before we have some more color there so we have to come back to that.
In the next next quarter.
Got it and just as you look at.
Europa Western Europe , and I'd say important geography for you.
You look at this year, obviously double LTV was a huge headwind.
Is there any issue at the new carbon regulations next year.
Do you think that would be more much more benign than what we saw this year. Thanks.
I think the expansion next year is silver different nature, so to speak and I think thats that comes more to how the mix of the fleet would look like but I think that also adds to the.
To to make CNTA of some uncertainty for four to commute consumer.
Depending in which you are six and Youre planning to buy the vehicle on the tax implication of that and then of course.
Well.
The respective OEM is starting to meet the targets in the new environment there. So.
I would say.
Creates Elizabeth wait to see for many consumers as we see it right now.
Got it but in terms of meeting it does I think it's very individual undue OEM.
But it's not the same kind of question us WSP was.
Test.
Yeah.
Thanks.
Thank you.
Okay. Next question comes from the line of.
Hello, Rob from STB lanes sell open.
Thank you have two questions first wanted to follow up on the order intake within sort of market.
Let me ability of orders for this year that you had previously and any day sector 18, with 18, an extraordinarily high order level for the tools.
Markets.
Yes.
The ordinary I don't know what it was a high year so.
I would say yes.
Thank you and then the second question.
You talked about.
Some markets being the indicated to be weaker than the NIH us and so on but I guess, you've had now for four bit more than a year you've been very high volatility in terms of customer calls with very changes with very short lead times, even within the sort of closed window has thats all.
So continued at an unchanged pace.
No no no not in the same fashion as we had it.
And all of them last year than especially Europe was very challenging during the double yet to be.
Situation there.
So this year.
Is less is all that time, the Bob but of course steel as the market. These falling.
It comes with.
Short notice, but it's not like it's going up or down it's more.
For for falling trend.
Okay, given all the agenda to reactivate front, it's compared to last year and not really second half this year versus first off now is really a compared to last year.
That's it thank you.
Thank you.
Okay. Your next question comes from the line in Manila Rosner from Deutsche Bank Your line open.
Good morning tenants it out for a manual.
Good morning, two questions.
First on the margin.
Can you just kind of help us maybe.
Think about the impact in Fourq you from the from the launch costs, the raw mats and FX it looks like especially the raw mats, where we're still pretty material third quarter. So just kind of how we should think about that.
Then on the second question.
It looks like the organic growth in Europe , what was pretty weak in threeq.
Anything to call out there thanks.
Yes, let me start with the second question.
I mean, yes, we were.
Weaker than the overall.
You can production in Europe into third quarter and.
That does it was contributed to two to mix issues and also that we had some platforms, where we were coming off.
From.
And our production.
We're not matched with startup production with the same.
Producer, there and we see this.
The temporary.
Rationing in Q3, so we expect to be back on track so to speak when we get into fourth quarter to supporting then.
And overall Directionally the company with Tom's too.
Increasing.
Our our sales here.
So a temporary mix question you can say.
Yes, and then Michael then in terms of the Q4 and sort of capture that in terms of commodity cost and raw materials. I mean, we've guided for the full year now at 60, Bips and I think if you do that math.
Backwards, because you know what weve communicated for the previous quarters that would result, and the slight lower impact for the fourth quarter of around 20, bips or so the raw material, so that should be an improvement compared to what where we've been in previous quarters.
So that's an addition to what Michael already has said in terms of margin improvement fourth quarter over the third quarter.
And then on the launch costs and the FX.
FX I mean, I think will be relatively neutral.
And in terms of launch cost I mean that has been an improvement throughout the year.
And I think with show that in the third quarter bridge already and we expect that to continue.
To be an improvement compared to last year.
Great. Thanks.
Our next question comes from the line up such Gamal from Jefferies. Your line is still open.
Yes. Good afternoon. Thank you for taking my questions.
First one would actually be on cash flow and we can help me understand a little bit the explanation for the lower cash flow because my understanding is some of the tough booked into your net income our non cash on our own the provision and you also had 15 million separation cost in Q3 last year.
So maybe can help me a little bit understand that the free cash flow swing year on year in context of what I just said.
It's not on the quarter or is are you looking for the quarter. Mr order on the quarter on purely on the quarter.
Yes, I think the big get driver is really the earnings.
Year on year.
But your adjusted EBIT is only down 10 million.
So how much of the of the.
Or of the restructuring costs already cash in the quarter.
Not much cash in the quarter in terms of the shortest that we've taken.
So I think it's really.
Underlying EBIT sort of driven.
And then tax could be another component because I think taxes more negative in this quarter compared to last year.
Driven by actually been driven by the capacity alignment cost.
We booked.
Understood. Okay and my second question just to confirm your guidance includes six weeks of GM strike for the second half two in Q3 and four in Q4, that's correct.
Thats incorporated in our.
What we except for the year, Okay understood. Thank you very much.
Okay next question comes from the line.
Rob machines from Wolfe Research your line just on Wilson.
Hi, This is shrinks to tell on for Rob.
Just had a couple of Hey, just had a couple of quick questions one on.
On the commodity side, you mentioned, it's going to be a 60 basis point headwind for the full year.
If we use their way to think about how much of that is related to two longer term agreements that will likely reset at the end of this year I'm thinking about steel for example.
And how much is related to two spot prices on some of your main commodities.
Yes, I think.
General rule, it will say that I mean, you can't really look at the spot prices at all individuals.
We very much of the raw material Weve Hello minority.
It's really through our suppliers here. So so we have.
Six to nine month delay on the way up and under way down. So so thats, what youre seeing here and Thats the absolute priority on how the mechanics works when it comes to raw material.
For us and thus we have talked about it for the big.
The big commodities for us here, Steve nylon and.
That is what we're expecting to see that.
Come off.
Okay. So so basically as.
If I if I if I look at prices now our prices six to nine months prior that Jim your sense of how.
Commodity costs low will fluctuate.
I mean.
Ross Unsealing I would say because.
It's in practical terms of was this more complicated because it is depending on when do you signed a contract from the beginning of us on this progress.
We'll take a long time to really map it up here, but.
I mean conceptually is what you're saying exactly.
Look and see that there is a delay overall, but when you look at the details can be a little bit more complicated but yes.
Okay, and then just last one on.
On R&D.
And then you mentioned there was that it it looks like it was up a little bit.
During the quarter.
How should we be thinking about R&D longer term I believe the.
Prior guidance that was given back in 2018 months for R&D spending to decline.
Start implied by 2020, I'm, just trying to think about.
Where we are in context stones.
Of that.
I think I mean medium to long term medium medium to long term range should be will be in 4% to 5% of sales.
And we have said, we should gradually start to see that coming down in relation to say is not in absolute amount, but of course now with the very sharp decline in the market, it's affecting effects that before some I think under those circumstances, we are really scrutinizing and why.
Taking hold with efficiency in side or the any so I think we're holding the line here because what we should remember also.
I have happened since.
We communicated these in 17 18, there is that we are continuing to.
Take.
Good orders and good order intake levels.
Since then building on our order book So that also means.
As we are growing our activities here. So I would say in absolute amount. We are holding the line here on of course in relation to sales has become tougher.
We still committed to the medium to long term range. So four to five.
Okay. Thank you.
Okay. Next question comes from the line of brand Johnson from Barclays. Your line is still open.
Hi, Good afternoon team. This is Steve Rendle on for Brian .
Just a couple of questions here in terms of the sales outperformance either for the quarter for the full year expectations. The 67% is there any way can you break that down roughly into kind of market share gains.
Versus content growth and then in terms of getting up to that seven percentage points for the full year, how to think about that for.
For the full year and then also just thinking about that performance into 2019.
Do you expect that to continuing than any kind of major headwinds or tailwinds.
I don't think I can break it down for your here exactly on okay. What what is the different details here, but I mean, certainly so that we are taking market share for sure and as we've indicated here. We I mean, we are.
First of all we came from so days, we moved up to 40% to 40% in market share in 2018, and we continue to increase that share.
In two years to come here and moving towards the mid Fortys.
You see here in our order book.
And.
That is what's happening and then of course overall growth. This is also combination of.
Content.
In the vehicles talks about should be.
1% CAGR over who year by year here. So that's of course its component when you look at the top dollar amounts as well but.
I think the important here is that the market share is increasing and we see the underlying long term ela medium to long term.
Market also growing.
Okay and then just.
Looking at slide here in terms of the cost reduction.
You're breaking up I'd like business cycle management versus structural efficiency and within those two buckets theres indirect headcounts being taken out idols. Just wondering if you could provide any color on.
The indirect headcount has been taken out and that's part of the business cycle versus and structural efficiency.
Oh, you expect what you see a real on page four to our the structural efficiency program.
These structural so so that is.
Long term efficiency effect on that so that is not you asked a question obesity management, so that the structural change, which we intend to.
Two.
If you look at on if you look on slide three theres.
Indirect head count being taken out and both the business cycle as well as the structural efficiency. So just wondering what okay.
How to think about that indirect head count.
Between those two different kind of programs or management programs.
I think.
So just in the same here that.
We of course.
The majority of also to the business active management effects here.
Staying.
So.
Part of the structural improvements.
We expect to.
Gain going forward here.
So it's not domestically add back unless you have in direct.
That's actually is very close to operations.
Is that we haven't significant uptick might be some to be added back that support of that but otherwise it's.
Is.
Strategically in the same bucket.
Okay. So that the overall structural efficiency program the 5%.
Kind of reduction net large investments the independent up on.
Volume declines are flat or down or up next year that I understand that really.
The independents.
Got it.
Okay. Thanks for taking the questions.
Thank you.
I think that we have.
Cannot take any more questions, we have a hard stop that three o'clock, which have Paul style. So.
We have effectively call.
Yes, Sir.
Okay.
That does conclude our conference for today. Thank you for participating in the all disconnect.