Veoneer, Inc.
Q1 2020 Earnings Call Transcript

Published: 24 Apr 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Q1 2020 Earnings Release Conference Call.At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator instructions] I must advise you that this conference is being recorded today, Friday, 24th of April, 2020.And I would now like to hand the conference over to your first speaker today, Thomas Jönsson, Executive Vice President Communications and Investor Relations. Thank you. Please go ahead sir.

[Thomas Jönsson:]

Thank you very much, Bernard and warmly welcome everybody to our first quarter 2020 earnings conference call and webcast presentation. Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; Chief Financial Officer, Mats Backman; and myself Thomas Jönsson, Communications.During the call today, Jan will comment on our current business situation and highlights as well as providing an update on our strategic reviews and the new customer program and product launches. Mats will walk you through the financial results, efficiency programs and then provide some commentary on our updated outlook for the remainder of 2020. After this, we'll remain on the line for the Q&A session.Of course slides and earnings release are available through a link on the home page on our corporate website. So if we turn the page, we have on the next page the Safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that will follow here today.During the presentation, we will reference some non-U.S. GAAP measures and the reconciliations of these figures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC. The call is intended to conclude at 2

[Jan Carlson:]

Thank you very much, Thomas. I also would like to say a very warm welcome to everyone to this first quarter earnings call for 2020. If we turn the page again, we have our business highlights for the first quarter. The spread of the coronavirus is first and foremost a global health crisis and our thoughts go out to everyone around the world suffering from its consequences.For us in Veoneer, health and safety is our first priority and we are taking actions to protect our people and safeguard our operations. It is frankly speaking unbelievable the impact the pandemic is having on global economies and in particular the automotive industry in just 90 days.The latest IHS figures indicate, an $18 million drop or 24% in 2020 from last year. However, we have taken a more conservative approach in our recent planning assumptions. Although, China and rest of Asia are gradually recovering, albeit, well below the pre-crisis levels. OEMs in Europe and North America, which are essentially shut down through April are planning for a staggered recovery during May.This sequence of events has triggered us to take additional actions with our market adjustment initiative program with the goal of to offset the lower contribution from lower sales with cost mitigation and other cash flow actions.We are pleased with the market adjustment initiative results during the first quarter, as we improved our already strong cash balance to now $970 million and we will continue our focus to improve our cash flow and the operating loss performance versus 2019.Considering the current market situation, we foresee some launch delays. However, our order intake remained fairly robust at approximately $175 million of average annual sales during the first quarter.Lastly, I would like to reach out to the Veoneer team and express my sincere gratitude and utmost appreciation for your dedication and strong contribution as we navigate through this difficult and uncertain crisis together.Now looking on the next pace -- page. The pace of the light vehicle production decline has clearly accelerated over the last 90 days. We now see approximately 84 million fewer vehicles today for the time period 2019 to 2022 as compared to what we saw in June 2018. This is an additional 34 million fewer vehicles than what we reported last quarter.This equates to essentially a 21% reduction in the global light vehicle production development for future years to come. Clearly the entire auto industry will be impacted by this downward adjustment in light vehicle production. However, we expect there will be some type of rebound at some point and it may take several years to recover to the levels in 2019.As a consequence of this market uncertainty and potential changes to our customer launch cadence, it is too early to provide any updates on our growth beyond 2020. Fortunately for Veoneer, our future growth will be much more product and launch-driven and less dependent on the light vehicle production growth. Therefore, we continue to focus on successful launches while driving effective cost control and cash flow management.Looking on the next page on our market adjustment initiative program, this slide summarizes the three pillars that comprise our market adjustment initiative program, which includes efficiency improvements investment priorities and product portfolio optimization.All of these actions were taken around this time last year to create financial stability and sufficient liquidity to fund operations and support our investments for growth. Now we see that a significant deterioration in our underlying market conditions, we are taking additional actions in the efficiency improvement area, which Mats will speak more about in his portion of this presentation.Some of these actions include customer cost sharing of RD&E, flexing our direct and indirect costs, as much as possible to lower the customer volumes without compromising launches and reducing professional services, and other discretionary spending.Turning the page, we can look on our investment priorities and product portfolio optimization. We are pleased to have concluded the strategic review process for Zenuity and our Break Systems business.As you already know, we closed the VNBS Asia divestiture during the first quarter. And also yesterday we announced that we have signed a nonbinding agreement to divest the U.S. brake operations to a well-established automotive supplier for a purchase price of $1.We expect the transaction to close during the second quarter and looking ahead, we expect to reduce our future cash outflows by approximately $80 million during 2020 and 2021.From an accounting perspective, we have taken a non-cash impairment of the assets held for sale of $144 million during the quarter, which is partially offset by the $77 million book gain from the VNBS Asia proceeds. We believe this is the prudent approach to take especially during this uncertain macro environment.Back on the April 2, we announced that Veoneer and Volvo Cars have reached a mutual agreement to split the Zenuity joint venture to pursue respective ADAS and AD strategy. Veoneer will integrate and operate the current Zenuity business focused on the development and commercialization of ADAS software for collaborative driving.We expect to bring more than 200 of the current Zenuity employees into our system and software team in Veoneer and generate annual cash savings in the range of $30 million to $40 million, as well as a one-time cash payment of around $15 million subject to the final agreement. The process to split Zenuity is already underway, and is expected to be completed by the third quarter this year.Now, looking on to our product portfolio optimization on the next slide. Here, we have summarized our leading global software platform and features. The image to the left illustrates the complete scope for Zenuity. Zenuity was formed in 2017 with a purpose and focus on software for sensing, sensor fusion, decision and control and vehicle control.Zenuity has done a very good job to deliver a commercial offering to the market focusing on ADAS features. And as you can see by the image to the right of this page, the different features in the white color are existing already today. And the yellow color are features that will be available soon and support our order book.Now, looking on to our scalable architecture on the next page. Our strategy at Veoneer is to build a scalable ADAS system that addresses the needs across the full spectrum of the light vehicle market, including the NCAP requirements and regulations with a focus on scalability and openness. We have already a strong position in sensing technologies complemented by the internally developed perception stack, where we also have a strong market position.The next step is to integrate the ADAS feature stack developed by Zenuity into our systems and software groups, so we can drive synergies and efficiencies towards our scalable system architecture. We anticipate this will create more agility and faster software cycles and also provide better cost control on our future growth. We are confident that this software hardware and system approach is a winning formula for Veoneer to be one of the industry leaders.Now, looking on to our 2020 launches on our next page. Here, we have our top 15 new program customer launches for 2020. As highlighted in red, we have identified the important changes in timing over the last 90 days, where we see some customer launch delays. We have also identified where we see some potential annual vehicle volume changes, although, it is too early to estimate the net impact beyond 2020.In aggregate, these vehicle models and platforms still represent approximately $500 million of average annual sales, with an average content per vehicle of approximately $270 per vehicle, including Brake Systems.Assuming the Brake Systems divestiture closes, we will come back with further updates to this slide on the next earnings call. The content range of these top 15 remains unchanged in the range of approximately $30 to more than $800 per vehicle. We still expect these launches which are more loaded in the second half of the year, and should contribute to our outperformance versus global light vehicle production in 2020.Looking now on our products on the next page, as mentioned on our last earnings call we have summarized here our key new technology launches during 2020. And despite some customer timing delays, as mentioned on the previous slide, those delays are not impacting our internal technology development timing.From a quality, delivery and cost perspective, it is imperative that we maintain our staffing, and focus on successful launches of our core product development, not only in 2020, but also in the years to come, despite the near-term effects of the COVID-19 pandemic.I will now leave it over to our CFO, Mats Backman to walk you through the financials and outlook for 2020. Mats please go ahead.

[Mats Backman:]

Thank you, Jan. If we now move to the next slide, considering the sharp decline in light vehicle production year-over-year and sequentially, we were able to mitigate the effects very well during the quarter, as illustrated by our overall financial results.Our net sales for the first quarter of $362 million were in line with our March 20 market update, however, were $30 million lower than expected due to the LVP drop resulting from the COVID-19 pandemic.Our underlying cost structure improvements year-over-year including RD&E net, more than offset the negative sales effects resulting in our operating loss, being better than expected, primarily due to our ongoing market adjustment initiative.As Jan mentioned earlier, we are pleased to have improved our cash position during the quarter to $970 million. This was driven by our strong working capital and capital expenditure performance, along with the proceeds from the VNBS-Asia divestiture.Excluding the divestiture of VNBS-Asia, the underlying cash flow of the business was about $80 million for the first quarter, which includes $60 million to Zenuity and $20 million of favorable timing differences in net working capital that will likely affect the second quarter.As you know from previous communications, our company continues to be in the middle of a tremendous investment period to support the ramp-up of our future sales growth which is supported by our strong order book. In this environment we continue to look for ways to postpone and even reduce our capital expenditures, as shown in the quarter, which was $27 million or 7.5% in relation to sales. So overall, in a difficult environment, we are pleased with the progress we are making.Now looking further into the details for the quarter on the next slide. Our sales for the first quarter declined by $132 million, as compared to the same quarter last year, which includes the $46 million related to the VNBS divestiture. The main driver of our 15% organic sales decline was the RCS business, which declined 23%, essentially in line with LVP decline of 24%, while Active Safety declined just 13%. Despite the continued headwinds from the negative radar product mix shift and the gradual phase out of mono vision systems at BMW.Net currency translation effects of 2% accounted for the remaining decline. The gross profit decline of $32 million for the quarter versus prior year was due to the volume and product mix impact caused by the organic sales decline, as the net currency effect was minimal. The VNBS divestiture accounted for $6 million of the decline.RD&E net of $131 million decreased by $25 million during the quarter, compared to 2019, mainly due to the improved gross cost and engineering reimbursements. In addition, SG&A improved $8 million year-over-year due to lower consultancy and IT costs. The VNBS divestiture benefit for RD&E and SG&A combined was $11 million for the quarter.Lastly, our strong operating cash flow for the first quarter was $81 million better than last year, mainly due to the $89 million net working capital improvement, which is a reflection of our ongoing market adjustment initiatives around working capital.Looking now to our sequential performance on the next slide. We should remember that when comparing the fourth quarter sequentially to the first quarter, there are seasonality effects in the figures and I will not quantify those here today. Our sales decline of $94 million as compared to the fourth quarter was primarily due to the VNBS Asia divestiture effect of $58 million. In addition, the RCS sales decline of $35 million or 17% was lower than the sequential decline in LVP of 23%.Active Safety increased organically from the fourth quarter by $17 million or 11%, which is a positive sign for our Active Safety business after several quarters of negative sales trends. The Active Safety development is a reflection of the order intake in 2016 starting to show some positive effects. The gross profit sequential decline of $23 million was partly due to the VNBS Asia divestiture impact of $10 million, while the product and customer mix impact on organic sales accounted for the remainder of the change.The RD&E net sequential increase was due to lower engineering reimbursements. Our operating cash flow improved $95 million due to the $89 million improvement in net working capital, which included $30 million of favorable timing effects from the fourth quarter, which we highlighted last quarter. And lastly, capital expenditures declined sequentially by $18 million due to delaying and postponing where possible without compromising our customer's launches.Looking now to our market adjustment initiatives on the next slide. As Jan mentioned earlier, I will speak about our efficiency programs as a part of the overall market adjustment initiative program, which was launched approximately one year ago and are taking additional actions to offset the negative volume effects from the COVID-19 pandemic. We continue to focus on winning profitable orders within our core products not only from a margin perspective, but also on an MPV perspective with a sharp focus on cash flow. As a part of this, we continue to have ongoing discussions with our customers and suppliers on the scope of current and future contracts.Next, within margin improvements, we now aim to improve RD&E net even further by $100 million as compared to 2019 on a comparable basis. In addition, we continue to reduce professional services, consultancies and other discretionary spending, while flexing our direct and indirect labor and production overhead to match the customer volume fluctuations, without jeopardizing new program launches. In addition, we have implemented a hiring freeze across the organization for the time being.Lastly, on our balance sheet and cash flow, you have already seen the results of the progress we have made over the last year and we intend to make further improvements in capital expenditures and working capital. Although, with the working capital, we should remember that we already have a negative net working capital of $86 million. We are also exploring various local funding programs now available as a result of the COVID-19 pandemic.Looking now to our 2020 outlook on the next slide. As you have heard today, we have taken significant actions to adapt to the current macro environment and mitigate the effects on our operating loss and cash flow. In our planning, we have taken a more conservative approach than the latest IHS figures. As a consequence, we are withdrawing our indication from earlier this year for an organic sales increase in the mid-single digits for full year '20. However, we expect our organic sales to outperform the global LVP, primarily due to our new customer program launches.Due to our additional market adjustment initiatives currently underway, we hold our original 2020 outlook for an operating loss improvement versus 2019. However, we now expect our cash flow before financing activities to significantly improve from 2019, both on a comparable basis. We also target to reduce RD&E net by approximately $100 million in 2020 from 2019 on a comparable basis and target capital expenditures to be less than $150 million in 2020. So overall, I would say, a positive outcome especially considering the uncertain macro environment.I will now turn the call back over to Jan.

[Jan Carlson:]

Thank you, Mats for your presentation. By flipping the page, this concludes the formal remarks for today. And I will now turn the call back to you Bernard to manage the Q&A session.

[Operator:]

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Erik Golrang from SEB. Please ask your question.

[Erik Golrang:]

Thank you. I have three questions. The first one is on your order expectations for the full year in relation to that previous one billion target, is there an update on that? And could you say something about what's going on in terms of sort of tender discussions with customers? Are there a lot of delays? Are they –

[Jan Carlson:]

Hello?

[Erik Golrang:]

Yeah. Can you hear me?

[Jan Carlson:]

I can hear you, but there was somebody else in.

[Mats Backman:]

The operator.

[Jan Carlson:]

Okay. All right.

[Erik Golrang:]

Yeah. So first question on the – an update on the order situation and ambitions for the full year. Second question I know that you don't give a new 2020 sales guidance, but you do reference an IHS estimate several times. So, assuming they're correct in terms of their split regionally and so on what would be your organic development for the year? And then thirdly, this very substantial RD&E reduction, I mean, what's the short answer for why that wouldn't sort of limit Veoneer's capabilities and reach medium term? Yeah.

[Jan Carlson:]

Okay. Very good. We can start with the first one the order expectations. We are seeing a lower – or foreseeing a lower order intake than the one billion. It's too early to see, I'll come back with you with a number on that, but it will most probably be reduced to a lower number than the one billion, we communicated a quarter ago. The reason for this is, of course the COVID-19 pandemic, and all the activities have been affected by this and the discussions has been delayed and pushed out in time. We are working diligently with the customers. And some orders individual from customer-to-customers and some discussions are ongoing and some guys have been pushed out maybe one or two quarters down the road. On the second point Mats will come back to you and talk about the IHS and the sales.Let me take the third one the RD&E shortcomings. I think the efficiency gain we are seeing here, the fact that we are also restructuring the activities through outsourcing partially et cetera, is not affecting our capability and is not affecting the opportunity to execute on our order book our current order book and also to be able to perform the programs that we have under launch. We are safeguarding this to the highest extent. We are furloughing people here in the company as you have read in the report 1,000 people being furloughed. We have 4,100 people working from home. So the activities and the reductions we are doing here is of course also to handle the COVID-19 in the good way without affecting the execution of our order book. Mats anything about the sale?

[Mats Backman:]

Yeah. When it comes to the underlying LVP assumption for the full year, I mean, I will not give an exact number, when it comes to difference to the IHS update other than that we are more conservative than we see in the IHS update. And why – the reason for this being important is really that when we are making the plans now for 2020, when it comes to the basis for the outlook in terms of cash flow, in terms of our operating profit, you need to recognize that we have in the base assumption, when we're making the calculation being more conservative than the underlying IHS number just to kind of give the message that we are not -- we don't see a more positive outlook rather more negative.But secondly also important to remember, whatever we are kind of ending up with in terms of the -- on the underlying LVP for the year, we are looking at an outperformance for our own organic development due to being more kind of launch driven than in terms of the development rather than the underlying LVP.

[Jan Carlson:]

And also to the third point, just to add to what I said here, the first part of your question, the order intake being lower that will also include lower activities from the engineering side. The pursuit as such is a quite big load of the engineering workforce. And seeing a somewhat lower activity on that one is, of course, helping us then when people are furloughed and we are restructuring the part. So, that's another consequence out of the situation.

[Erik Golrang:]

Thanks and just a quick follow-up to Mats then. And I mean you viewed -- you talked about around 8 percentage points or so I think outperformance versus LVP. Is -- are you looking at a very different number now because of launches being such a big part of it, or is it still in that ballpark?

[Mats Backman:]

No. I mean it's -- I mean there are basically no changes when it comes to our own underlying growth being more driven by the launches. But to kind of give a more -- I wouldn't like to give a more precise number rather than that we're looking at an outperformance of the underlying LVP.

[Erik Golrang:]

Thank you.

[Operator:]

Your next question comes from the line of Dan Levy from Credit Suisse. Please ask your question.

[Dan Levy:]

Hi. Good afternoon. Thank you. I wanted to start with a question on cash. You said you had improved working capitals of $89 million. How much of that was due to your own efforts to better manage the working cap line where you have a number of initiatives versus unwind of working capital during production shutdown? And what should we expect from working capital once production resumes?

[Mats Backman:]

Yeah. So looking at the -- if you take the number, the close to $90 million that we saw in improvements in the quarter. I mean first of all, we talked about this timing effect from the fourth quarter. So we definitely had help from timings from the fourth quarter into the first quarter and that's approximately $30 million.Looking at the different components in terms of working capital, we have improvements in all areas. So if we are looking at the inventories, for an instance about $10 million in terms of an improvement. And I think that's a pretty strong number given that we have to kind of slow down on production towards the later part of the quarter due to the drop in demand with the COVID situation.Looking at accounts receivables, I would say between $30 million and $40 million in terms of improvement. Out of that, more than $10 million related to a reduction of overdues. So, I mean it's not much of a kind of an external help. It's internal processes when we have reduced the overdues.Some of the positive effects also coming from increased factoring then in the quarter. On the payable side, we will have some timing effects going into the second quarter. So as I said, I would estimate in terms of timing effects from the first quarter into the second quarter to be negative around $20 million in the second quarter Dan.So, the improvement we saw in the quarter, I mean you cannot expect to see kind of further improvements from the level we have right now. But, what we're aiming for is to keep the level we have now excluding the kind of the timing effect of approximately $20 million we see going into the second quarter.

[Dan Levy:]

Okay. So, there's as production resumes aside from that payables of $20 million there's not some sharp negative working capital that emerges once production restarts. Is that correct? I mean, really it sounds like there's a lot more here that's -- your own initiatives that have benefited the working capital?

[Mats Backman:]

Yes it is. But naturally, I mean you also -- I mean if we're looking at the second quarter and with the run rate you see on the demand side right now, we will definitely get help of reducing accounts receivable due to the reduced growth so to speak in the second quarter. And once we are getting back then on the demand side, you will naturally see a buildup of account receivables for an instance that will have an effect on the working capital. But I mean for the time being, if you're looking at the first quarter it's very much related to our own activities and actions.

[Dan Levy:]

Great. Thank you. And then, my second question is on your relationship with Volvo and Geely. Obviously, you've terminated the Zenuity JV. But Volvo and Geely those are important customers on the Active Safety side. Can you just give us a sense of how much of the Active Safety order book Volvo or Geely accounts for? And is there any risk to future business that you see amid the termination of the JV?

[Jan Carlson:]

I can't give you off-the-cuff a number of the order book. We have significant business to both of the companies as you say. We may have to come back to you on a number of them instead in me being wrong here. The relationship with Volvo is strong. The relationship with Geely is also strong. We are having big important programs with both companies. The split of Zenuity, we don't see any risk of deteriorating the business relationship with this. And the split of Zenuity was growing into the separation based on that Volvo had one priority different from Veoneer.So, I'm looking on this as a happy separation between the part that is going to us and the part that is going to Volvo and I see no deterioration from this based or coming from that or from another aspect either. We are launching important programs right now to bolster and later on to other parts of the -- of Volvo platform. So, we are working very integrated with those guys.

[Dan Levy:]

Okay. But I guess maybe one way to look at it is and that's helpful commentary that some of the order book you already had with them was secured before the JV emerged. So, there -- it's not that your order book was contingent on the fact that you had this JV relationship. Is that correct? I mean, there's some Zenuity business, but it's not much.

[Jan Carlson:]

No, it's not continued at all with them. It's actually -- the relationship comes with that there is a mutual benefit to both partners as we understand it for them to have a close-by supplier integrate -- working in a very integrated way with them and that relationship will last. We had strong orders and relations way before we entered into the joint venture with Zenuity. So, we hope to see that to continue. And so that is not a basis for it. The basis for forming the joint venture was to combine background IP and knowledge from Veoneer together with knowledge from Volvo Cars to be able to create a world-leading software stack for ADAS and AD, which we think we have accomplished to a large extent and we try to describe that here also on the slide set.

[Dan Levy:]

Okay. Thank you very much.

[Operator:]

Your next question comes from the line of Erik Paulsson from Pareto Securities. Please ask your question.

[Erik Paulsson:]

Hi. Erik from Pareto. So I have two questions. First one is regarding your brake control business in the U.S., which you obviously – now is divesting. But you also mentioned in the press release that you will keep a legacy brake control business and that is I think US$70 million for the foreseeable future here. But for how long is that? And will this still be a specific segment? So that's the first question.The second one is on the competitive situation now here in the recent months and especially now beginning of April. How have you seen this develop and change potentially now given this new situation?

[Jan Carlson:]

If you take the first question, I have to ask you some questions back you mean with the competitive situation. But the first part is legacy business that we have here lifetime, so it's approximately $70 million. We are going to conduct that business because it's a legacy business actually separated from the one business that has now is now signed a term sheet about – if we continue for ballpark three years before it's running out. So that is the thing. When you – what do you mean with competitiveness? What is it that you're thinking about on competitiveness in general or –

[Erik Paulsson:]

I mean, the more – now the competitive landscape that is.

[Jan Carlson:]

Okay. I don't think there has been any major changes on the competitive landscape as such. I think all companies in this industry are fighting the COVID-19 situation with different strategies. I think the quarter one results here proves that we have been successful. We don't see any new – we don't see any less competitors coming out here. We see a lesser order activity or discussions around orders as I commented here before. So, some of the discussions are pushed out in time. We are strengthening we think our position by integrating the Zenuity piece into Veoneer. We are focusing our activities and getting a strong road map forward in our scalable architecture. So I think that we are working with the stuff we can control. And in that sense, I guess, we are taking significant steps forward. And we don't see any new guys here or we don't see any guys coming off the boat here either.

[Erik Paulsson:]

Okay. Thank you very much.

[Operator:]

Your next question comes from the line of James Picariello from KeyBanc Capital. Please ask your question.

[James Picariello:]

Hi, guys. Can you hear me?

[Mats Backman:]

Yeah, sure.

[Jan Carlson:]

Yes.

[James Picariello:]

Great. Can you just talk about the timing of the $80 million in cash savings related to the U.S. Brake Systems sale? Will that just take place over the next 12 months once the sale is completed this quarter? And then the program you had slated to launch this year was supposed to be north of $1 billion in lifetime revenue. Just wondering, what led you to the $1 valuation? Thanks.

[Mats Backman:]

Starting with the $80 million and the cash savings, that's over 2020 and 2021. But the majority of that is in 2020.

[James Picariello:]

The majority, okay.

[Jan Carlson:]

Second part of your question is a strategic review we have conducted. And when we entered into this business, we did it in the Autoliv days in the form of a joint venture, with a strategic desire and an opinion that, working between the electronics and the actuators are a closer relationship than it turned out to be. A lot have happened since we entered into the joint venture.First of all our joint venture part were earn-out not to be interested in growing this business, outside the legacy part. So future, pursuits were not of interest for them. We separated from them. We separated Veoneer from Autoliv. Veoneer has a strategy to clearly focus on the growing ADAS market.Reviewing the brake piece in this and seeing that the connection between, actuators and the scalable architecture, simply is not there. We came to the conclusion that it would be better to separate the business. Of course situation is -- right now is what it is, in the COVID-19 situation.There are a limited number of buyers to such a business, because it has to please and be accepted by the customer. It has to be a good home for our people. And it has to fit with technology and the capability to carry any big program like this.The last piece is of course important that we can save $80 million for use in our core business right now with the situation we have, instead of investing $80 million into something that is not our core business and that is why we ended up here.So, several parameters to make it fly and it has been a discussion continuously between the customer here and also the buyer and ourselves and the also to safeguard home for people. So, that's why we ended up here.

[James Picariello:]

Okay. No. That's helpful. And then, just regarding the dissolved Zenuity JV, you're retaining …

[Jan Carlson:]

Yeah.

[James Picariello:]

…roughly $35 million in related headcount costs right? And that's based on the net $35 million in savings that you outlined when you announced it. How much of the retained $35 million on an annualized basis will be captured in RD&E do you think? Again, I'm just wondering if this is accounted for within your guidance for the $100 million RD&E reduction this year.

[Mats Backman:]

So we have -- I mean the short answer is, yes. But then when you're looking at the different growth, I mean we have been quite specific that we are talking about 200 people when dissolving the joint venture.So, you have cost related to personnel and the 200 people. But we also have other costs related to some systems and IT and so forth. But it's all of it basically captured in RD&E, yes.

[James Picariello:]

And that's included within your guidance?

[Mats Backman:]

Yes.

[James Picariello:]

Thank you.

[Operator:]

Your next question comes from the line of Bjorn from Danske Bank. Please ask your question.

[Bjorn Enarsson:]

Serious problem with the mute button here. But I just had one more question that is on your resourcing situation in the region. You are talking too much about that, I guess, that is doing as good as you can with your upcoming launches. Is that an okay situation or given everything considered?

[Jan Carlson:]

Given everything considered, I think, it is as good as it yes. It has been, of course, going from problems in China to being problems, I would say, all over the world for components here and there. But I think then when things are stabilizing in China, it's getting worse in the other parts of the world. But overall, I think, we are in a good position. The whole thing is that the whole world is standing still so the demand for product isn't that high anywhere.We will have to see and review how the restart of the industry will happen and how the supply chain will cope with the restart when that is happening and when it's ramping up and that's too early to say. But overall we have not had any specific sufferings on the launch -- on the sourcing side.

[Bjorn Enarsson:]

And on these launches that you are addressing here and where there are some delays and pull forward, et cetera are those -- I mean that are the most recent discussions and you are quite happy with that -- those are going ahead according to current discussion or how uncertain are you about the entire situation?

[Jan Carlson:]

No. If we commented here we are fairly certain with -- there has been certainly no cancellations. There has been delays on a number of occasions. There has also as we mentioned here some even -- some few pull forwards. But there are delays on the launches. And -- but you know, you could say that approximately half of them are somewhat untouched and half of them are touched in one way or the other, one or two quarters delayed. So that's the situation.I guess this is still fluid. We are relatively early in this phase anyhow. Major -- many of the launches were from the beginning tuned into second half of the year and to back-end loaded. So we'll remain to see that. But we are monitoring it and we are working with the launches programs to get it ready when our customers get ready. It's an uncertain situation, but for the time being it seems to be as we indicated on the slide here okay.

[Bjorn Enarsson:]

Perfect. Thank you.

[Operator:]

Your next question comes from the line of Itay Michaeli from Citi. Please ask your question.

[Itay Michaeli:]

Great. Thanks. Good afternoon, everybody. Just first on -- just a couple of questions on cash, just to clarify. So the press release mentioned an expectation to enter 2021 in a stable cash position just curious kind of what that is in relation to. Is that in relation to your year end 2019 cash balance? Just hoping that -- clarify that a bit.

[Mats Backman:]

Yes. I think that -- I mean, you can in order to kind of look at the year end 2020 cash balance, I guess, you can use the cash on hand now end of quarter the $970 million as a starting point. And if you're looking at the cash flow for -- before funding -- before financing now for the first quarter, taking out the discreet items in terms of the VNBS divestiture, I would say that we have an underlying cash flow before financing of approximately $80 million. As I said, we have some timing effects that will have an effect on the second quarter approximately $20 million, but that gives a little bit of a sense of the underlying cash flow going forward.

[Itay Michaeli:]

That's helpful. And then, in the event that perhaps the industry struggles to return to normal production, could you give us a sense perhaps of where you expect your April cash balance to come in, or just a sense of maybe what the free cash flow or burn situation looks like in the kind of current environment in the pre-production recovery environment?

[Mats Backman:]

No. I would -- I mean, I'm -- coming back a little bit to the question we had about the underlying LVP assumption for the full year. In calculating or planning when it comes to both the P&L as well as the balance sheet and cash flow, we have used rather conservative assumptions on the underlying LVP, because I mean it is uncertainty. It's so difficult to say when this will kind of turn from where we are today. So that's a little bit the reason for the more conservative assumption. But I wouldn't elaborate a guess more than that.

[Itay Michaeli:]

Great. And super -- just lastly, and I apologize if I missed this, on the order intake in Q1, can you just talk about your win rates, how your win rates compare to your internal expectations?

[Jan Carlson:]

I think up until end of February, it was okay. You always win some and you lose some. It has been as you saw from our release in March, we had an order win of $160 million, up until end of February and then $175 million for the quarter. So it clearly came down in March following the COVID-19 situation.

[Itay Michaeli:]

Okay. That's helpful. Thank you.

[Jan Carlson:]

Thank you.

[Operator:]

Your next question comes from the line of Victoria Greer from Morgan Stanley. Please ask your question.

[Victoria Greer:]

Hi, there. Afternoon. Can you hear me okay?

[Jan Carlson:]

Yes. Absolutely.

[Victoria Greer:]

Great. Firstly, could you just repeat those numbers on the order book. The $175 million in March I got, but I missed the February number. Could you just give us that again?

[Jan Carlson:]

$160 million by end of February and $175 million in March -- end of March.

[Victoria Greer:]

Great. Thank you. And then I really wanted to come back to your commentary about the RD&E reductions. I mean, I guess, I can -- we can probably think about an element coming just from the program delays that you've talked about, maybe some more reimbursements from OEMs, because you've got the product launches. Could you quantify any of those I guess more mechanical impacts that might bring the RD&E down? And then, should we think here though that in having this RD&E reduction, have you paused or stopped work into any future technology lines that you might otherwise have wanted to pursue in order to bring that RD&E down?

[Jan Carlson:]

If you start with the quantification, I don't have a good number more than we are aiming to save $100 million on RD&E for the full year. So that is the quantification we are looking into and that we are working with. We are introducing several measures into this. Some of it will be a consequence as we mentioned of the COVID-19 and lower pursuit activities. And some of it will be somewhat different organization and somewhat more partnerships and outsourcing. So that is the way we are going to handle the situation until year-end to start with.Your second question is a very key one for us and that is not being the case that we are designing out or stopping activities in our core engineering. Core engineering is for us the key element of Veoneer to be able to have a leading product portfolio, to be able to integrate efficiently the Zenuity people to work on our scalable architecture to capture the growing market in ADAS. Despite LVP decline, we are of the opinion that ADAS as such will be a growing piece of what's there in the light vehicle production. So that is not affected.

[Victoria Greer:]

Great, thank you.

[Mats Backman:]

Maybe to add one thing on the RD&E and the savings we see coming through in 2020. We are talking net RD&E just to remember that. And part of the improvements will come from our engineering income as well with the higher reimbursement. Because one of the key actions we have when it comes to our market adjustment initiatives is the ongoing negotiations and discussions with customers, when it comes to engineering income. So it's the net we are talking about not only gross savings then.

[Victoria Greer:]

Yeah. Thank you. And I guess in the end you have much higher rate of product launches this year versus last year, and so that any way should be a higher reimbursement rate on its own?

[Mats Backman:]

Yeah, but not necessarily. It depends on how successful we are in the negotiations when it comes to changed requests and other things that also might be dependent on already performed engineering. But it's an ongoing discussion with customers.

[Victoria Greer:]

Great, thank you.

[Thomas Jönsson:]

Just to remind, we have slightly less than five minutes left of the call now.

[Operator:]

Okay. Your next question comes from the line of Peter Testa from Investments. Please ask your question.

[Peter Testa:]

Hi. Thank you very much. Two questions please. One is just to try to understand your comments on cash overall. You're looking to obviously reduce the cash burn. You're reducing the R&D by $100 million and the CapEx by so $60 million $70 million, and you have some associate benefits. But on the other hand, you have the working capital which has to be -- come into play for the, say, run rate $500 million ramp up. Can you help us just understand how much you would expect working capital to pick up please with the bringing in of the new projects?

[Mats Backman:]

I think -- I mean looking at -- I mean from where we are today and looking at the development we can foresee for 2020, it's very difficult to start quantifying how much that will affect the build-up of working capital. Of course, what is really uncertain right now that's the timing of the ramp-up of volumes really.I mean first of all, the restart of production that we will hopefully see then going forward. But on top of that also the timing of the new launches. But naturally, when we see that kind of starting up and we will see then an organic growth coming through we will start building accounts receivables. We will have effects also on inventories.But due to the timing, I don't want to quantify that because that then will affect the guidance if you're looking at the 2020 isolated number. But you are right. When we see that inflection point when we're getting into growth, when we are restarting production, we will start growing working capital. But I don't want to quantify that right now.

[Peter Testa:]

Okay. And then the other question was just around the gross margin. You have some mix changes this time in sales with the ramp down of the BMW project and the changeover going on in the radar technology. But just looking at the gross margin at about 14.5%, can you give us some sense of how much that might be affected by having excess fixed capacity? And maybe give some understanding of how that gross margin should be normalized as you start to ramp up the production of the new projects?

[Mats Backman:]

I mean the thing is if you're looking at the gross profit and on the gross profit margin, I mean, first of all, it's the effect you see in the lower gross profit that's I would say fully due to volume. That's the volume effect. We have partly been able to mitigate some of that effect when it comes to the POH. I mean, first of all, we have been quite successful in adjusting our direct costs in terms of material labor and so forth. But where we are right now in terms of investments for the launches that affects the POH part of that. I mean, the fixed cost so to speak, the POH -- Production Overhead cost then. And that effect has just partly been mitigated because we need to continue to invest on that side in order to prepare for launches then. But naturally then when we're going through something like this and we are really reviewing all costs and with the actions we have that will improve the leverage when we see the volumes turning then.

[Peter Testa:]

Okay. Can you give any sense of how important the Production Overhead is as a proportion of cost of goods?

[Mats Backman:]

I mean we're not specifying the different components. But for sure it's a meaningful part of the total.

[Peter Testa:]

Right. Okay. But other than that the product mix related to the ramp down of the BMW contract and the change in radar technology and so on that this product mix is relatively representative of what we should see going forward from a gross margin perspective but then you get the volume effect as you grow. Is that the conclusion we should we should take away?

[Mats Backman:]

Yes the volume effect is by far the most important part of that.

[Peter Testa:]

Right. Okay. Thank you very much.A - Thomas JönssonAll right. So with that we have time for one more question. But, of course, Ray Pekar and myself from IR will be available also for follow-ups as needed. So one more question. Thank you.

[Operator:]

Your question is from the line of Emmanuel Rosner from Deutsche Bank. Please ask your question.

[Emmanuel Rosner:]

Hi. Thanks for squeezing me in. Really, first question is around your slides I think slide 9 around the launch here and the product delays. It sort of strikes me as surprisingly on time overall. I mean there's some minor delays, but it doesn't feel like really large. And obviously, you still expect some pretty large outperformance versus the market, which means you expect those launches.Can you maybe just tell us how your discussion the level of confidence there how are the discussions going with your automaker customers? Like it feels like some of the second quarter ones I mean a lot of the plants are still shut down. So are they going to really be able to launch on time? And are there any big regional differences in terms of regions where it's likely to happen and others where you're seeing more delays?

[Jan Carlson:]

I think that it's across the board predominantly on time. Some of these are launched in China and some of them are launched in Europe, of course, independent on the brand. And the -- it says European premium brand it can still be launched in China anyhow. So depending on that some of these programs may look like they are impossible to launch in the plants that are shut down, but they will launch anyhow.There is a lot of work preparation ongoing. The final steps the first cars produced et cetera that is ongoing in several of the cases. The question is then, how will the ramp look like and how will it go? That doesn't have that big of an impact for all our launch readiness and for the first start of production. We will have to have it all complete by the time anyhow. Then it comes into how the ramp looks like.So far, the indications are as we are indicating here, half of them pushed out somewhat and the rest of the half ballpark untouched or even some pull forward. So, the discussions are in the launch -- from a launch point of view, still ongoing in a very intense level with all customers and people are working hard even though as customers working from home and do a lot of work. That is an intense work effort ongoing already or still.

[Emmanuel Rosner:]

Okay. That's super helpful. And just one last one. So, your strategic review you've obviously identified and announced the whole bunch of deals. Is there more to come with the review essentially concluded at this point?

[Jan Carlson:]

No. We think we are -- right now where we want to be. We are an electronics safety domain-focused company. We are focusing on the system aspect with the software and hardware capability and a software tech a leading supplier with Zenuity people integrated towards L2 plus, the fastest-growing market in this space. We are an established supplier of passive safety electronics.So, we are where we want to be for the time being. Right now, the reviews and strategic reviews are concluded. You can never guarantee as we sat here and talk different language two, three years ago you can never guarantee anything two, three years out of course, but not for the time being. Now we are focusing around this strategy in the full force ahead.

[Emmanuel Rosner:]

I appreciate the color.

[Jan Carlson:]

Okay. Very much -- then thank you very much everyone for today's participation and interesting questions here and listening to our remarks. We are looking forward to speaking to you again in a conference call here tentatively then for second quarter on Friday, July, 24, 2020 of course. And I really hope you are all now staying safe, prioritizing health and safety first and foremost. And you all take very good care. And thank you very much for today and goodbye.

[Operator:]

That does conclude our conference for today. Thank you for participating. You may all disconnect.