Veoneer, Inc.
Q2 2020 Earnings Call Transcript

Published: 24 Jul 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Earnings Release Call. At this time, all participants are in a listen-only mode. [Operator instructions] I must advise you that this conference is being recorded today. I would now like to hand your today, Thomas Jönsson. Please go ahead sir.

[Thomas Jönsson:]

Thank you very much, Summer, and welcome everyone to our second 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 and IR. During the call today, Jan will comment on our current business highlights as well as providing an update on our strategic reviews, launches and technology. Mats will then walk you through the financial results, efficiency programs and provide commentary on our updated outlook for the remainder of this year. After this, we'll remain on the line for the Q&A session. And as usual, slides and earnings release are available through a link on the home page on our corporate website. If we move to the next page, we have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows 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. This call is intended to conclude at 3

[Jan Carlson:]

Thank you, Thomas, and welcome everyone to our second quarter earnings call. Turning the page and we have the business highlights for our second quarter. For us, in Veoneer, the health and safety of our associates is the first priority and we are taking the necessary actions to protect our people and safeguard our operations as the COVID-19 pandemic continues to create challenges to our industry. Before moving onto our business highlights for the quarter, I would like to extend my warm and sincere thanks to the entire Veoneer team for the way they have performed under these circumstances, staying focused on execution, launching new technologies and customer programs, while continuing to make progress with our market adjustments initiatives. During the quarter, the OEMs in China and rest of Asia gradually recovered, however, still below pre-crisis volumes, while the OEMs in Europe and North America were essentially shut down for the first two months of the quarter then gradually recovered in June. Although we see some optimism in the third quarter customer call ups, we remain cautious about second half recovery, which will ultimately be connected to the underlying consumer demand. The results over market action initiative and program continue to gain traction and thereby mitigating the negative contribution effects caused by the lower light vehicle production volumes resulting from the COVID-19. During the quarter, we are pleased to have completed the integration of Zenuity and we continue to make progress towards finalizing the VBS divestiture. Despite unfavorable timing effects in working capital and longer than expected finalization of the VBS divestiture, we're pleased with our strong position of 851 million at the end of the quarter. The positive impact over MII actions on cash flow is expected to result in a significant improvement in our cash flow in 2020 as compared to 2019. Considering the current market conditions, we continue to see some launch delays; however, our order intake remains fairly robust at more than 300 million of average annual sales during the first half of 2020 and more than 600 million over the last 12 months. Turning the page, here we have summarized our key accomplishments during the first half of 2020, many of which are directly part of our market adjustment initiative program, which we started during Q1 last year. Within our strategic reviews, the VNBS Asia divestitures in combination with the Nissin Kogyo dispute resolution generated approximately 190 million of net cash proceeds. We also completed the split of our Zenuity software joint venture and successfully integrated approximately 200 software experts into our system development team, and we expect to receive some compensation during the first half of 2021. Although the VBS divestiture has taken longer than expected to finalize, we expect to have found a good home for our associates and a reliable solution for our customers. Looking now to our efficiency improvements, we are pleased with the outcome of certain customer negotiations, where we recovered approximately 80 million above normal engineering reimbursements as well as our continued focus to reduce gross costs in our RD&E and SG&A. With 2020 being the beginning of an unprecedented launch phase for Veoneerm, we successfully completed the Polestar 2 launch including the latest Zenuity software stack as well as the introduction of our Gen4 mono-vision camera. In addition, we are on track with our launch readiness for our upcoming heavy launch period starting with the second half of this year. As a result of all these actions, we have been able to improve the year-to-date operating loss versus last year by $79 million and our cash flow before financing activities by $262 million, all during unprecedented pandemic. And lastly, we have seen a very successful startup of our facilities and remote working for most of our support staff and thanks to the dedication and perseverance of our facility associates. Looking now on the next page, as mentioned on the previous earnings calls, this slide provides an overview of our key new technology launches during 2020. Despite some lead customer timing delays, those delays are not impacting internal technology development timing and launch readiness, thereby maintaining our quality, delivery and cost performance. I should acknowledge that this has been a very challenging period for our teams due to constraints that the COVID-19 pandemic has placed us upon. Looking now to our customer launches on the next slide. We have updated our top 15 new program customer launches for 2020, where you can see the updates from last quarter highlighted in red. The updates include some further launch length as well as 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 close to $500 million of average annual sales with an average content per vehicle of approximately $270 including brake systems. Assuming the VBS, the brake systems divestiture closest, we will come back with further updates on this slide on the next earnings call. The content range of these top 15 remains unchanged in a range of approximately $30 to more than $800 per vehicle. We still expect these launches which are more loaded to the second half of the year and should contribute to our outperformance versus global light vehicle productions in 2020. Now looking on our products on the next page, the light vehicle declines and continues with an additional 3 million vehicles, however, not nearly as severe as last quarter. We now see approximately 87 million fewer vehicles to-date for the time period 2019 through 2022, as compared to July 2018. This is an additional 37 million fewer vehicles than we reported at the beginning of this year, and this equates to essentially a 22% reduction in the global light vehicle production development for the period of 2019 through 2022. As illustrated by this chart on the right and the expectation is that our industry will not recover to 2019 vehicle volumes until sometime between 2023 and 2025. As a result of this continued market uncertainty and potential changes to our customer launch cadence, it is too early to provide any updates on our growth beyond2020. Fortunately for Veoneer, our future growth will be much more product and customer launch driven and less dependent on the life cycle production recovery. Therefore, we continue to focus on successful launches while driving effective cost control and cash flow management. Looking on our customer progress on the next slide, we made solid progress in expanding our Active Safety product portfolio across our customer base during the first half of 2020. We are pleased to have added new business award in vision, a 13th radar customer and the 6th customer for software features. Although we see some continued customer delays in sourcing, we continue to not only expand our customer presence, but also increase our market share with certain customers. As mentioned earlier, our order intake remains fairly robust where we, during the first half of this year, approximately 40% of our ordering intake was related to vision systems, while more than 70% was related to Active Safety. Looking now to our market drivers on the next page, on June 26th, the UNECE World Forum for Harmonization of Vehicle Regulations and now it's the deferred finding international regulation on Level 3 vehicle automation. The new regulation marks an important step towards the wider deployment of automated vehicles to help realize ambition of safer, more sustainable mobility for everyone. Starting in January 2021, the regulation provides guideline to the ALKS feature requires Driver Availability Recognition system and a blackbox data storage system for AD. It also outlines requirements for emergency and minimal risk maneuvers and driver transition demand as well as CyberSecurity and software update protocols. We see this as a natural evolution for the Veoneer hardware software and system offering where we already have the required capabilities in in-house within our portfolio control. Lastly, I should also mention that on May 6th, the Euro NCAP announced that it intends to postpone the rollout of its roadmap update by one year from 2022 to 2023. Although this have minor near term effects on our market evolution and the long term market growth trend remains intact. Looking now on the next slide, as a result of the recent Zenuity split, we now have in-house competences under our control including perception and sensor fusion localization and vehicle control, driver policy along with vehicle integration and system engineering as well as full data collection and verification and validation capability. This in combination with our scalable architecture and global presence enables our company to capture the evolution of NCAP and the collaborative driving market L2+. The last piece of the puzzle is to finalize our SoC strategy, which we are working on. We believe our strategy over the long-term will provide the Veoneer with a competitive differentiating advantage, especially in these uncertain times as OEM customers are looking to Tier 1 suppliers with complete components software and system integration capabilities. This concludes my part of our formal prepared remarks for today and I will now turn it over to Mats, please.

[Mats Backman:]

Thank you, Jan. Looking out for the next slide, considering the steep decline in LVP both year-over-year and sequentially, we're able to mitigate the effects on our financial results very well during the quarter. Net sales for the second quarter of 184 million were essentially in line with our internal expectations. However, we estimate the negative impact resulting from the COVID-19 pandemic was approximately 190 million on organic sales for the quarter. The underlying cost structure improvements year-over-year are primarily due to our ongoing market adjustment initiatives. The primary drivers included organic growth costs and above normal engineering reimbursements, mitigating the negative sales effects, which resulted in an operating loss being better than expected. Our strong cash position of 851 million at the end of the quarter is progressing according to plan despite unfavorable timing effects in working capital of 30 million, which are expected to reverse during the third quarter. Our cash flow before financing activities of negative 141 million includes negative 30 million related to VBS U.S. operations. Despite the COVID-19 impact on our industry, 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 a strong order book. In this environment, we continue to look for ways to reduce and even postpone our capital expenditures. During the second quarter, CapEx was 24,000 million, 26 million lower as compared to last year. So, overall, in an extremely unpredictable environment, we are very pleased with the progress we're making. Looking further into the details for the quarter from the next slide, our sales for the quarter declined 305 million as compared to the same quarter last year, which includes the 81 million related to VNBS Asia divesture. The main drivers of our 53% organic sales declines were the RCS business will decline 50%, while Active Safety declined 56, mainly due to our high CPV on premium brands in Europe and North America, while LVP drops 62% and 70% respectively. Net currency translation effects are 1% accounted for the remaining decline. The gross profit decline of 74 million for the quarter versus prior year was mostly due to the COVID-19 impact on volume and product mix, causing the organic sales decline. Net currency effects were minus 2 million and the VNBS Asia divestiture effect was 30 million accounted for the remainder of the decline. RD&E net was 44 million decreased by 150 million during the quarter compared to 2019, mainly due to the improved growth cost and above normal engineering reimbursements of about 80 million. In addition, SG&A improved 12 million year-over-year due for lower consultancy, IT and associate related costs. The VNBS Asia divestiture benefit for all RD&E and SG&A combined was 11 million for the quarter. Lastly, our operating cash flow for the second quarter was 37 million lower than last year, mainly due to the swing in net working capital, mainly related to accounts receivables and payables which were impacted by COVID-19. Looking now for sequential performance on the next slide, net sales declined 178 million as compared to the first quarter, primarily due to COVID-19 effects the lower LVP mostly in Europe and North America. The sequential organic sales decline 153 million includes a decline in RCS so 62 million, and actually safety decline of 84 million. In addition, the VNBS Asia divestiture impact was 24 million on net sales sequentially from the previous quarter. The gross profit sequential decline of 15 million was mostly due to the lower LVP along with some product and customer mix impact on organic sales. The RD&E net sequential decrease of 87 million was mainly due to the above normal engineering reimbursements and lower associate related costs. Our operating cash flow declined 98 million sequentially and that was mainly due to timing effects in working capital mentioned earlier and the 67 million positive impacts on VNBS Asia divestiture in the previous quarter. As lastly as mentioned earlier, capital expenditure continues to run at lower levels without compromising our customer launches. Looking now for our first financial performance on the next slide, net sales declined 438 million during the third quarter compared to 2019 where VNBS Asia divestiture impact was 128 million. In addition, the organic sales declines in RCS of 154 million or 36%, and Active Safety of 127 million or 34%, accounted for most the remaining sales decline. We estimate the first half COVID-19 impact on organic sales was approximately 220 million. The gross profit declined 106 million for the first quarter compared to 2019 was mainly due to the COVID-19 impact on lower LVP and some product and customer mix effects. The net currency VNBS Asia divestiture impact of 21 million combined. The RD&E net improvement of 140 million was partly due to the above normal engineer reimbursement of 80 million, lower growth costs and the VNBS Asia divestiture impact of 15 million. Our operating cash flow improvement of 44 million for the first half compared to 2019 was mostly driven by the lower operating loss. Capital expenditures declined 58 million first half primarily due to the prudent capital management. Looking now to our market adjustments initiative on the next slide, as we have mentioned earlier, the results of market adjustment initiatives continue to have a significant positive impact on our financial results, thereby mitigating the negative financial effects from the COVID-19 pandemic in the quarter. Looking now for 2020 outlook on the next slide, we have taken significant action to adapt to evolving macro environment and mitigate effect on operating loss and cash flow. Our outlook for the second half of 2020 is primarily based on customer call ups, which are supplemented by the latest IHS estimates. For full year '20, we expect organic sales to outperform the global light vehicle production, primarily due to our new customer program launches while currency net is expected to be a slight headwind of 1% on our sales development. Due to our well-established market adjustment initiative program, we hold to our original 2020 outlook from operating loss improvement versus 2019 on a comparable basis. And we expect our cash flow before financing activities to be negative 200 million for the second half of 2020. We now target to reduce RD&E net by more than 100 million in 2020 from 2019 on a comparative basis, and net targets on capital expenditures to be less than 125 million in 2020, so overall, a positive outlook especially in this very uncertain macro environment and unprecedented LVP environment. I will now turn the call back over to Jan.

[Jan Carlson:]

Thank you, Mats. By turning the page, we will conclude our format comments for today's call and we will now open up for Q&A. So I'll turn the call back to operate the Q&A session, Summer. Please go ahead.

[Operator:]

[Operator Instructions] And your first question comes from Hampus Engellau from Handelsbanken.

[Hampus Engellau:]

Three questions for me. Firstly, first question is more related on the outperformance. Is it fair to assume that it's more geared to fourth quarter? The second question is related to Polestar 2, if you could maybe talk about a little bit about the features that you have in that platform? And also, it may be mentioned somewhat of an installation value, what type of Level 2 plus performance of what we're looking at? Last question is related to the comments you made in order to take the second quarter, so you could maybe relate that to market development i.e., is there outperformance or maybe if you could put numbers on the market share also? Those are my three questions. Thank you.

[Mats Backman:]

Maybe I can start with the first one on, Hampus. This is Mats. So in terms of the outperformance and what we see in sales development, you are correct. That's more pronounced, and in the fourth quarter, we see gradual improvements, sequentially then, very much in line with a launch and they are coming up. So, yes, it is in the fourth quarter.

[Jan Carlson:]

Okay, if I continue that with a Polestar 2, this is the first launch of our next innovation mono-vision camera, mono-vision 4. And we have also on this car line, the launch of our 77 gigahertz radar technology. We have also the first launch together with the mono-vision camera on the driving and policy stack from Zenuity. And that is also to them to be launched further on to more car lines on the same platform. And then, we also have, as a final part on this program, an ADAS ECU also together for the computing power of the sensor information. So, we have the whole new program technology including the software package on this vehicle. And so far, we have gotten a lot of positive momentum and positive feedback onto it.

[Hampus Engellau:]

[Multiple Speakers] -- sorry.

[Jan Carlson:]

The order, the next one is the order development as you talked about. And on the order intake, as we commented here, we had an order intake of ballpark $440 million for the quarter, ending up to a little more than or $300, a little more than $300 million for the first half of the year. And if we look to the volume, it has clearly been a lower activity on the order side, and it comes natural, of course due to the COVID-19 pandemic. But as we comment in here on the former script, if you look upon it on the first half, we are happy to say that 40% of this value or more than 40% is coming from our vision products and more than 40% of the total order intake for first half is coming out of Active Safety.

[Hampus Engellau:]

And just the follow-up question on the Polestar side, is that -- is it the Level 2 plus system? Or is the Level 3 system or and then we'll put the number on?

[Jan Carlson:]

It's a Level 2, Level 2 plus at the end. It's not directly a Level 3 system. So, it's more than Level 2, Level 2 plus system.

[Operator:]

And your next question comes from Emmanuel Rosner from Deutsche Bank. Go ahead.

[Emmanuel Rosner:]

Hello, everybody. I wanted to ask for a few clarifications regarding the higher engineering recovery. How should we think about it? Was it truly sort of one-time thing? Or is this something that you have efforts to get more off on an ongoing basis? And I was curious, if the guidance for lower RD&E for the year of more than $100 million. Does that include the $80 million with extra recovery in the quarter because it saw, in the first half, your RD&E is already $140 million better year-over-year so that would be already well above the $100 million?

[Jan Carlson:]

Yes, I mean to start with the reimbursement, when it comes to engineering income, this is what you see in the quote is kind of abnormally high. And so this is, to some extent taking care of historical spend and getting reimbursed for. And what we're working on continuously to get kind of more reimbursement going forward for the work we are doing done, but this is more historical rate that meaning that it's a more of a one-time effect in the quarter. Yes, it is included in the guidance, if you're looking at the next RD&E for the full year, but we're also saving more than $100 million in terms of improvement. And what you also need to remember is that, in the second half of the year, you will find the Zenuity RD&E costs on the RD&E and not, as equity method investments and below the operating loss. And that is, I would say for the second half, some $30 million that we're adding in terms of RD&E that is Zenuity related. But again, we're talking about more than $100 million in improvements.

[Emmanuel Rosner:]

So just a clarification on this point, directionally in the second half, do you expect RD&E on a comparable basis to be improved or to the extent that you've really achieved most of the full year goals, these will be more stable?

[Jan Carlson:]

I mean, if I am looking year-over-year, the reduction we have done in terms of growth costs and that will come through in the second half and we will continue to reduce in terms of growth costs. But I mean, when you're looking at the net RD&E that you will not have the same effect in terms of engineering reimbursement in the second half, as you had in the in the first half.

[Emmanuel Rosner:]

Understood. And then my second question is, for and I think earlier this week or maybe last week, announced to reflect this long term partnership with a Tier 2 supplier of algorithm for Active Safety and low level economy. Are you able to comment on whether Tier 1 was selected for this and whether this represents an opportunity or loss opportunity for Veoneer with the Ford business?

[Jan Carlson:]

Now, we are not able to comment on that and we read about it too, but we don't have any commentaries for that.

[Emmanuel Rosner:]

Okay, that's, I understand that. I guess in the past you've attributed some of the lower order intake shortfall on -- I mean a piece of it, last business to potentially newer Tier 2 entrants. I mean, can you maybe elaborate a little bit on the competitive landscape in ADAS, now is this something that you've seen more of recently?

[Jan Carlson:]

When we see and we can all read about partnerships being formed and with the new entrants with some bigger companies coming into, also the area of ADADS, we haven't seen anything on the course that is out and the business work we are bidding for right now that, that has had any major effect on us, will remain to be seen how that is evolving and how also we are evolving in this landscape that is changing. You see our effort on launches. You see our effort on technology here. So, also with the moving landscape, we will also move with it and then we will have to see how we then stand against the newly formed partnerships and entrant new companies coming into this.

[Operator:]

Your next question comes from Victoria Greer from Morgan Stanley. Please go ahead.

[Victoria Greer:]

And two for me, please. And I just want to come back a bit on the RD&E commentary that you've given us already and the 81 million that you had in the quarter. And should we think about that having any sort of impact on the level of reimbursement in Q4, you should be thinking about this as pull forward or really just a one-off on this article stuff and the pace of the reimbursements pretty normal for H2? And can you talk a bit about RD&E for 2021? I guess we need to think about analyzing the 30 million increased from the Zenuity that we will have in H2 also then into each H1 of 2021. And do you have any visibility yet on underlying what could happen to RD&E for next year? And the second one on working capital and for H2, what are you assuming in your 200 million cash flow before financing and loss for working capital? Do you recover that 30 million of timing impact? And then also the 30 million burden you mentioned from VNBS U.S., would we see anything around that reverse once through and once that divestment is complete? Thanks.

[Mats Backman:]

Oh, that was a lot of questions in one. I can -- maybe to start with the working capital and effects in the second half. We had a timing effect where we will recover about 30 million in the third quarter, but other than that, we're looking at less working capital development in the second half. On the RD&E side and the reimbursements that we had in the second quarter, that is one-off and not related to a normal kind of fourth quarter higher engineering incomes. If we are looking at the VNBS effect in the second quarter, we're talking about the negative cash flow effect about 30 million in terms of cash flow before financing coming from VNBS. We will -- once we close this transaction, we will recover at least 16 million out of that 30. But if you're looking in the cash flow, we have a founding item in the quarter of 50 million that's related to that transaction and that will be so to speak when we close different section. So in terms of cash flow before financing at least 60 million will be recovered from the death. I think it's actually a little bit too early to start talking about the RD&E, if the development in 2021. But what I can say is that, we will continue to address the growth costs and we have improvements sequentially going forward as well on the growth course and that will continue to focus on NIM in 2021. When it comes to the engineering reimbursements, I think that what you have seen now in the second quarter is more of kind of an extraordinary thing that you would not expect to have in single quarter.

[Operator:]

And your next question comes from James Picariello from KeyBanc Capital.

[James Picariello:]

Just to clarify, so the -- what's the latest timing on the VNBA, the majority of VNBA sale, the U.S. braking? What's the timing on that?

[Jan Carlson:]

Well, we haven't said any timing. We have hoped to conclude that divestiture during second quarter. It is delayed and it will as far as we can see it today happened within not too long future here.

[James Picariello:]

Okay. And then using this past -- this current quarter as the example, the brake systems, the reported $20 million EBIT loss, what portion of that $20 million loss would leave Veoneer?

[Jan Carlson:]

I mean that's -- the 20 million is fully related to VBS. So, that will be gone so to speak when the divestments are completed.

[James Picariello:]

Okay. Got it. And then within the second half, the $200 million guided cash flow before financing loss that includes the $20 million payment from Volvo that still needs to take place. Is that right?

[Jan Carlson:]

Yes, I think you're referring to the 15 and 1-5 that was mentioned in the regional actually. Yes. So what we have -- in the second half, we have the difference Zenuity effect included in the number there.

[Mats Backman:]

And as we alluded to in the prepared comments here, the payment here is likely to come in 2021.

[James Picariello:]

'21. Got it. And then just going back to order trends through the -- on a trailing 12-month basis, down 40% year-over-year, thereabout. What is the expectation for the second half? How would you expect orders to kind of go from here given the current quoting activity and what you're seeing right now?

[Jan Carlson:]

Hard to say, we are hardly seeing and we are involved in several of discussions. It's a bit difficult to give any forecast or any guidance. Obviously, we believe that it's going to be lower than what we expected in the beginning of the year, but we haven't given any numbers. You remember we said about $1 billion expected for ordering intake for the full year of 2020 at our call in February. But we believe that is going to be lower, but how much remains to be seen here, it depends on what is also pushed over between '20 and '21, not loss, but maybe one year later. So lower than the $1 billion we said, but not any numbers to give you unfortunately.

[James Picariello:]

And then just on RD&E and CapEx -- on a comparable basis as we exit this year, the RD&E and CapEx as a percentage of sales, are these sustainable run rates from here, again, on a comparable basis? Or as we see, at some point here, right, a very nice recovery and strong growth off of a bottom due to these levels as a percentage of sales changed dramatically or are these sustainable run rates?

[Jan Carlson:]

I mean in relation to sales we are in kind of an investment for it right now when we're ramping up for launches and that goes both for the CapEx, as well as our RD&E. Even though looking at the first quarter and second quarter due to the kind of general business environments, we have been cutting down on CapEx. But what you have seen on a quarterly basis in Q3, Q4 last year, Q1 this year and so forth. I mean, when we see the launch is coming through when we see the organic growth from that launches coming down, we need to reduce the CapEx that while according any relation to sales in order to get leverage.

[Operator:]

And your next question comes from Dan Levy from Credit Suisse.

[Dan Levy:]

I just wanted to start by going back on the question on the RD&E and the reimbursement. Maybe you could give us a sense perhaps of the order intake that you'd had in recent years. What percent of that order intake was booked with RD&E that was maybe you realized after the fact is higher than anticipated meaning? How wide is the opportunity for you to pursue additional reimbursements and maybe what's the timing of how long it takes maybe achieve those reimbursements?

[Jan Carlson:]

I think it's very difficult to give you any timing of the retroactively reimbursement of RD&E. Most of this, what has come in here in second quarter is for work that has already been done and that we have seen and reached agreement with customers to get additional funding for it and to give any number or any idea of to have such an indication on the format, I think it's almost impossible. What I think is important for you to look upon in our MII program here is that, we are not only looking for cost reductions, we are also looking for income improvements and we are looking for business development of our contracts, and we are renegotiating and negotiating activities, where you can probably see that the specifications have changed over time and that you can recruit some of the work or the extra work that has been done in projects. Because it's the nature of this business is so fast and so much evolving during long programs, things happen with technology along the way. And that is giving us opportunities for renegotiating for maybe getting more income than what was in the original contract. But to give you an indication, I don't think it's even possible.

[Dan Levy:]

Right, I would just think that. You've booked a lot of orders in past years. I guess there's no sense of what percent of that retroactively, you'd say that, with book to authority and that maybe there is some opportunity to no sense on a directional amount, how much that is?

[Jan Carlson:]

If you look upon all our programs, if you look on the slides that we had here in the presentations you can see that the technology development is going hand in hand with the launch platforms. So we are developing technologies along the way as we are launching the car line and it's going across the board of our product portfolio whether it is restraint controllers or cameras to radars, et cetera. And it's very hard to see how -- when you have a program and how that is developing over, let's say, three years development time. A lot of things are happening in the industry along, a three year long program, meaning that you're asked to do different specification requirements at the end to the car line that is launching then you were also at the time of the board. And that vendor's different engineering work and probably gives room for maybe a different discussion around engineering income as well. But to give you a room for an indication, I think it's difficult but most of the programs that you see here are of this nature, as so forth.

[Dan Levy:]

Okay, thank you. And then just a follow-up on the Active Safety landscape and I wanted to follow-up somewhat similar to Emmanuel’s prior question, but it related to this, what we saw earlier this week with Ford, in the past, we've seen a very standard relationship with OEMs in the Tier 1 even to the extent of Tier 2 included with Tier 2 suppliers to the Tier 1, the Tier 1 does all the integration work and gives a complete solutions to the OEM and then it's separately plug and play. Do you find that relationship still holds or have been efforts by the OEMs to handle maybe more of the integration work or more efforts by Tier 2 to handle sensor fusion?

[Jan Carlson:]

I think there are differences between different OEMs. Different OEMs have different ambitions and different skills and experience on our type of products so far. I think that might be situations where more OEMs do more work inside and you can see partnerships being formed and companies having ambition to do so as being OEM. You can't exclude that to happen, but I think what is important is that the Tier 1 integrated, the one that have automotive experience, integrating safety related components. Whether it's coming from big companies or smaller companies, it's essential because it has to work and there are so many examples out there right now where the software has been an issue for many launches with many car companies and has been causing delays etcetera. So I think there is a for Veoneer sake, the position we have being an integrator, being a technology provider is a very good position for us right now, as we alluded to in our prepared remarks here. We have now a complete portfolio of software and driving policy, perception stack, we have a radio program, we have an integration capability, we need also now to find the right partnerships for our tests to see for the scalable architecture going forward. And that is work that is ongoing. And with that, I think we are on a very good face for the next generations to come.

[Operator:]

And your next question comes from Joseph Spak from RBC Capital Markets. Please go ahead.

[Joseph Spak:]

Sorry, to go back to our RD&E here, but it's still a little unclear and I realized the reimbursement was extraordinary in the quarter. But was this something you were planning originally to receive throughout the year and it's the timing that was unusual or is the amount overall unusual for the year?

[Jan Carlson:]

I mean, we had -- looking at the guidance we have on the net RD&E, we could foresee the reimbursements coming through, but then the I mean it is the more kind of a discrete item that we get these kind of amounts in a single quarter. So, planned or not.

[Mats Backman:]

And I think it's also a combination of several discussions with not only one customer. So, we are as we said in our in our EMI program here or working hard on also recouping and talking to customers about reimbursements on the engineering being carried out. So, now it happened to come here several of these discussions coming in, in second quarter, and therefore, also the amount the size of this, I don't think we should have an expectation to see in the quarters to come and even though we will continue to work hard on in the same way to increase our reimbursement for the activities that we do.

[Joseph Spak:]

Okay, so just -- so the -- in your internal forecast did the total amount of reimbursements for the annual number change, post this post this quarter?

[Jan Carlson:]

Say that again.

[Joseph Spak:]

So, internally I'm sorry you are budgeting for some level of reimbursements. Did that annual number change post what you received this quarter?

[Jan Carlson:]

Yes, I mean that -- again, I mean, this is a discreet item that we see in the quarter. This is not the kind of pull forward of other reimbursements, if you're looking at the normal year of it. But that we will have ongoing negotiations when it comes to reimbursement that we knew included in our plans, but it's not affect things in more normal underlying reimbursements as we see normally coming through into fourth quarter.

[Joseph Spak:]

Okay, so can you -- I mean, there is a lot of puts and takes here then with the reimbursements and taking into Zenuity, some of the other divestitures. On a like for like basis, what's your sense of how gross RD&E is trending?

[Jan Carlson:]

I mean, it's trending down. We can see savings coming through in the growth RD&E quarter-by-quarter sequentially.

[Joseph Spak:]

The second question is, I think you mentioned in the prepared slides or there was a comment about sort of footprint optimization. I guess, you've inherited right your footprint and capacity from the Autoliv days. How do you think about that now given the volume outlook is likely lower than prior, seems like it might be an opportunity to reevaluate, especially with everything going on in some of these regions. But on the other hand, it sounds like you still need to be able to plan for future growth. So how do you sort of balance that decision? And how do you think about your current capacity on?

[Jan Carlson:]

I think we talked about in last quarter earnings quarter, fourth quarter earnings release and it's also looking for partnerships for work that is more suitable to be outsourced, and we are continuing to look for that opportunity. And what is important for us is that we continue to defend and develop our core competence when it comes to software development and hardware development for our core products and vision and radars and ADAS ECUs and airbag controllers. But there are more work that could probably be used within partnerships and that is one face we have already looked at and also care about. So, I think there we're already looking for footprint optimization by using partners then preferably in best cost countries in lower cost countries, where they can and we can benefit from scale that we cannot do more standardized work that we cannot do in a higher skill. But on the other hand, as you say, I mean, this is something we need to safeguard our people and our engineers and our core competences in the software development et cetera so for the sign of Veoneer. So, we have to safeguard that and also make sure that that is further developed for future products and future versions of our product portfolio.

[Joseph Spak:]

So just regarding for certain elements of your business, you think you can move that to sort of a more contract manufacturing type operation?

[Jan Carlson:]

Well, if you're talking about manufacturing and manufacturing process also and very important piece to safeguard the quality of our products and I was talking on engineering type of activities.

[Joseph Spak:]

Okay, engineering, but in terms of manufacturing capacity?

[Jan Carlson:]

Say again.

[Joseph Spak:]

In terms of manufacturing footprint, is there opportunity there or you think you need to [indiscernible]?

[Jan Carlson:]

Of course, we are reviewing everything but nothing that I would be prepared to discuss here in this earnings call. But the manufacturing piece and the manufacturing knowledge and the launch knowledge of advanced products or a key ingredient also in the Veoneer offering and making probably customers looking favorably to Veoneer because we have, long lasting experience of producing safety products.

[Mats Backman:]

Maybe I should clarify. On the all VNE adjust to, as there are so many moving parts, if you're looking at guidance and what we have seen in terms of extras and what we're expecting in the second half. And so, what we have guided is more than 100 million in terms of improvement year-over-year. We had 80 million in the higher than normal kind of reimbursement for engineering now in the second quarter. So that is affecting the engineering income. But if you are making a year-over-year comparison, please remember that we had in the fourth quarter 2019, 25 million in a similar discrete item for engineering reimbursement stuff. So, the next is not 80, if 80 minus 25 if you're looking at the kind of discrete items. And on top of that, you need to -- in your comparison year-over-year, you need to add 30 million in terms of growth cost increase is coming from Zenuity. So that clearly indicates that the more than 100 million improvements is quite a lot of growth RD&E improvement and not only related to engineering income.

[Operator:]

And your next question comes from David Kelley from Jefferies.

[David Kelley:]

I guess looking at Slide 6 to start. You referenced a couple additional launch delays looks like pushed out of quarter and then even there's a partial pull for in here. My question is. How do you see the potential risk of further launch to push out in the second half? And is there better launch visibility given the industry rebound in the last couple months?

[Jan Carlson:]

I think, it's very hard to say, it's I think very much depending on the general climate in the customer demand and the industry overall and the COVID-19 and how the different countries are coping with COVID-19 and what's going to happen and OEMs ability to restart production et cetera. And I cannot speculate into it, we have not seen as, if we see here any delays that are beyond the quarter. We have been pushed over the year-end, but the most of it has been a quarter either within the year over into Q1. And so, it's very hard to say. And the closer you get to the launch, the more difficult it is to can always, of course stop it, if you have some issues. But otherwise, there we emphasis or very much inclined to go ahead and do the launch in a somewhat normal environment. So I don't have any better picture than what we have here. This is the latest update on to it and we are monitoring this. But yet, no other indications and what we present here and more color I can give you.

[David Kelley:]

And then maybe taking a step back, there's a growing discussion and debate around the demand for LIDAR in the ADAS sensor suite. I'm curious to get your thoughts on that and given your relationship with Velodyne. How would that position Veoneer from a competitive standpoint, if we start folding in LIDAR into some of these ADAS lands?

[Jan Carlson:]

Well, we do have our cooperation with Velodyne and we do have projects running with Velodyne. We also do have our internal competence in our internal technology in a short range LIDAR. Also there we have products ongoing with customers. And so, I think that LIDAR is a promising technology for their higher level of autonomy, and there is where it really is necessary and really paying off. And seeing it more into the lower level of L2 class, it's I think at the end of the day a cost issue, it's integration and a cost matter, whether you need it for that performance or not. But we see still being a predominantly a higher level of autonomy product.

[David Kelley:]

And maybe one quick clarification on your point, are you seeing any increased or uptick in customer appetite for LIDAR and let's call it level two plus and all? Or is that still strictly tied to the rest of the sensor suite and LIDAR in your mind so autonomous Level 5, Level 5 applicability only?

[Jan Carlson:]

I would not say, it is increasing, it's not decreasing either. It's following more than line of thoughts that I said here that is more for the higher level of autonomy. And customers are working with higher level of autonomy. You can see partnerships being formed for those ambitions, but it's all dependent also on the COVID-19 and how this will have an overall effect on the industry as a whole and on the efforts being invested into those programs. So hard to say, I don't see it's going in really from a quarterly standpoint here in either direction, either in a more negative or a more positive way.

[David Kelley:]

Got it. Thank you.

[Thomas Jönsson:]

Okay. So, we're almost up to the hour here, but we will take one more question. Thank you.

[Operator:]

And your next question comes from Itay Michaeli from Citigroup. Please go ahead.

[Itay Michaeli:]

Great, thank you good afternoon everybody. Just going back to the order intake, just to clarify, hoping you could just quantify where your win rates have been in Q2 and throughout the year relative to last year. And then maybe if you can size, how much you're quoting today relative to three months ago and maybe six to nine months ago as well?

[Jan Carlson:]

If you are talk about the quoting period or the quoting activities, it has been significantly down in the -- for us, we have seen a significant decline. I haven't a good number whether it's down 30% or 40%, or something, but it has been down, I don't have a good number to give you. But it has been down during the quarter. And I think that it's because of the focus on finishing off the launches and focusing on those activities, we haven't seen any cancellations on the cost side on some that sense and not any major ones at least. So, we expect the quoting activities to pick up again. But again here, this is very hard to predict, it's almost impossible for us to predict what things that's going to happen.

[Itay Michaeli:]

Lastly, on Slide 8, it looks like you have some progress with software features since the beginning of the year, both on the business and the technical qualifications and the awarded business. I was hoping you could just maybe dig into what specific software features these are and maybe what some of the more advanced features that you're seeing some progress with?

[Jan Carlson:]

These are features related to our C1 technology that we have been working with Zenuity that we have now integrated into, our own activities in our own system groups. So, it's related to those features where we have been able to sell also two features as a standalone basis before and we are now seeing an increased customer interest for the software as a feature as such, but also as a part of this bigger system.

[Itay Michaeli:]

Got it. That's helpful. Thank you.

[Jan Carlson:]

Thank you very much.

[Jan Carlson:]

Okay, I guess that concludes our today's formal part and Q&A session. And I would like to thank everyone for your participation today and thoughtful and insightful questions. But before we wrap up today, I would like to take a moment to mention and acknowledge Dave Leiker, who has -- who was unfortunately not with us on our call today, the first time in more than 60 quarters going back to the Autoliv days. As some of you know, David unexpectedly passed away a few weeks ago, our sincere condolences and deepest sympathies goes to Dave's family, as his knowledge, expertise, integrity and passion will be truly missed. Now, looking ahead, our next quarterly earnings call is tentatively planned for Friday, October 23, 2020. And we look forward to speaking to many of you during the third quarter investor calls. Anyway, until then, I wish you good luck and have a good summer. Thank you very much.

[Operator:]

Thank you. That does conclude our conference. Thank you for joining. You may now disconnect.