Veoneer, Inc.
Q2 2019 Earnings Call Transcript

Published: 26 Jul 2019

[Operator:]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Second Quarter 2019 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Friday the 26th of July 2019.And now, I would like to hand the conference over to one of your speakers today, Thomas Jonsson. Please go ahead.

[Thomas Jonsson:]

Thank you very much, Michaela. And welcome everybody to our second quarter 2019 earnings call presentation. Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; our Chief Financial Officer, Mats Backman; and myself, Thomas Jonsson, Communications and IR.During today's earnings call, our CEO will comment on our current business situation, the progress we are making at Veoneer, and in particular, about the market adjustment initiatives now underway, some of which we announced already in late 2018. Then, Mats Backman will walk you through our financial results, our efficiency programs and provide some commentary on the 2019 outlook. After this, we will remain on the line for the Q&A session. And, of course, slides are available through a link on the home page of our corporate website.So, if you turn the page, we have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference some non-U.S. GAAP measures. The reconciliations of these figures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC. We intend to conclude the call at 3

[Jan Carlson:]

Thank you, Thomas. I also would like to welcome everyone to this call.Turning the page, I will start out today's call by thanking the entire Veoneer team for their continued focus on quality and dedication to improve the performance of our Company.Looking first to our underlying market environment, the light vehicle production situation remains very mixed and uncertain, particularly in all our major markets where we now see the second half recovery will not be as strong as earlier expected. This impact could be 4% to 5% lower than we anticipated in April of this year. Also, we continue to see an overall deterioration in the light vehicle production through 2022.Looking next on our market adjustment initiatives. We are pleased with our successful capital raise of $627 million in May and funding resolution of our Brake Systems joint venture, which saw us acquire or partner 49% ownership stake in the joint venture’s U.S. operations. In addition, we have started to see the early results of our engineering improvements where we already see a lower run rate in our R&D gross cost. Our cash flow was better than we anticipated in the beginning of the quarter due to working capital initiatives and lower-than-expected capital expenditure.Our order intake development developed as expected during the quarter where our last 12 months was more than a $1 billion average annual sales. As we have said before, the order intake can vary significantly quarter-to-quarter due to timing of customer decision around our business pursuit.And lastly, our launches in 2019 continued to evolve, as planned. However, in certain instances, the ramp-up of volumes is slower than expected and the underlying vehicle volumes are somewhat lower.Turning the page. On this page, we have summarized the latest IHS light vehicle production forecast for 2019 through 2022, both globally and in all our major markets, in comparison to what we saw in July 2018, at the time of spin-off of the Veoneer from Autoliv. Overall, this now represents approximately 37 million fewer vehicles for the time period 2019 through 2022, which is 30 million fewer vehicles than reported just only 90 days ago. This of course has had an impact on our business targets that were communicated at our Analyst Day in June of last year, prior to the spin-off.In addition, over the last several quarters, the industry has come to the realization that level 4, 5 autonomous vehicles will take longer and cost much more money than originally expected. And we see a definite shift and industry focus towards level 2+ driver support system, based on ongoing conversations with our customers. This means that our core addressable Active Safety market will be more important and relevant for a longer period of time. This development should ultimately play into Veoneer’s strength and the focus of our product portfolio. However, it’s too early to know the impact on our business targets.Flipping the page. We continue to make solid progress this year in expanding our Active Safety product portfolio across the customer base. As illustrated on this slide, we have expanded our customer progress across most product areas and continue to be optimistic about securing business with new customers across the portfolio during 2019. Based on our customer activities and pursuit, we remain confident that we will reach our order intake target of at least $1.2 billion average sales by the end of this year.Turning the page. On this slide, we have summarized some of the key new program launches and model facelifts, which will support the improvement of our organic sales development during the latter part of 2019 and into 2020. In certain cases, we see slower ramp-up of volumes and lower underlying vehicle volume as we have seen from the IHS light vehicle production development since the beginning of this year. Our strong lineup of launches is however mitigated by the negative impact from the mono-vision business ramp down at BMW and the temporary negative mix from 24 to 77 gigahertz radar technology. Combined, these launches and facelifts represent between 10% to 15% of our annual sales, depending of course on take rate and light vehicle production assumptions.The average content per vehicle of these models is roughly $110. However, the content range is between $40 and $800 per vehicle.I will now turn it over to our CFO, Mats Backman, to walk through the financials. Mats, please go ahead.

[Mats Backman:]

Thank you, Jan.Looking out to the next slide. As we have mentioned earlier, the macro environment and light vehicle production continues to adversely affect are operating results in near term. Our overall net consolidated sales in the second quarter of $489 million were slightly better than we expected and our operating loss of $137 million was slightly better than expected due to lower RD&E, net.As we have mentioned for several quarters now, our Company continues to be in the middle of a tremendous investment period to support the ramp-up of our future sales growth and record order book. As a consequence, our investment in RD&E, net, have increased $159 million in the second quarter, which is an annual run rate of close to $640 million. However, our RD&E growth cost improved close to $10 million during the second quarter as compared sequentially to the first quarter this year.In addition, our investment for capacity increases, mainly in Active Safety and brake control systems resulted in capital expenditures of $50 million in the quarter, which was slightly lower than we anticipated at the beginning of the quarter. We now expect the full year 2019 CapEx to be approximately 12% in relation to sales.Looking now into some further detail for the quarter on the next slide. Our sales decline of $83 million as compared to the same quarter last year was compromised of negative currency development of $25 million and an organic sales decline of 10% or $58 million, which was mainly driven by Restraint Control Systems of $26 million and Active Safety $20 million, while Brake Systems declined $12 million. In Restraint Control, the decline was mainly due to the phase out of certain vehicle models, mainly in North America. While the negative radar product mix and the gradual phase out of BMW mono-vision systems were the main drivers for the Electronics segment. The decline in break control systems was mainly driven by lower volumes on certain Honda models in China and Japan. The gross profit decline of $35 million year-over-year was mainly due to the volume and product mix impact caused by the organic sales decrease and negative currency effect of $11 million. As mentioned earlier, RD&E, net of $159 million, increased $40 million during the quarter as compared to 2018 due to the steep ramp-up of engineering hiring of approximately 1,200 associates during the last 12 months. The SG&A increase of $13 million versus prior year was mainly due to the additional costs associated with operating a standalone listed company.Looking now to some of our market adjustment initiatives in more detail on the next slide.As mentioned earlier, we moved quickly with our capital raise during the second quarter. The strong interest and oversubscription of approximately 3 times, resulted in a 15% upsizing of both the common equity and convertible senior notes with gross proceeds of $627 million. I should also mention that we had a very strong support from our top-10 shareholders who either maintained or increased their ownership percentage, as a result of the offering.Looking now to our VNBS joint venture. During the second quarter, we came to resolution around a funding dispute. This resulted in Veoneer acquiring Nissin Kogyo's 49% interest in the joint venture’s U.S. operations.In addition, Nissin Kogyo contributed $20 million as debt repayment for funding Veoneer had previously unilaterally provided to VNBS. Both of these transactions are important enablers to provide financial stability for Veoneer to execute on the growth plan and continue to explore strategic options for our Brake Systems business.Looking now for outlook for 2019 on the next slide.Based on our current customer call-offs and deliveries, we see a continued soft demand situation in China, Western Europe and to a lesser extent, North America. This leads us to anticipate a slightly sequential decline in organic sales during the third quarter from the second quarter this year, while we expect to hold the operating loss in the third quarter to a similar level as in the second quarter.As Jan mentioned earlier, our organic sales improvement in the second half will not be as strong as we expected April. However our sales during the second half are expected to improve sequentially from the first half of 2019. As a consequence of this development, our organic sales for the full year 2019 are now expected to decline in the high single digits as compared to 2018, rather than the mid single digits as earlier communicated.We expect the currency translation impact to remain unchanged at approximately minus 2% as compared to full-year 2018. As we communicated last quarter, we expect to see a sequential improvement in RD&E, net, in the second half of this year from the first half and remain committed to a cap on engineering ne cost of $600 million for the full year.Based on these assumptions, we expect operating margin to improve sequentially in the second half of 2019 from the first half of this year, while our cash flow is expected to remain at approximately the same levels as in the first half this year, due to our exceptionally strong working capital performance in the second quarter.I will now turn the call back to Jan.

[Jan Carlson:]

Thank you, Mats. By turning the page again, we turn to the last slide. And that concludes the formal presentation for today's call. So, I turn the call back to you Michaela to handle the Q&A session. Thank you.

[Operator:]

Thank you so much. Thank you, ladies and gentlemen. We will now begin our question-and-answer session. [Operator Instructions] And the first question comes from the line of Hampus Engellau from Handelsbanken. Please go ahead.

[Hampus Engellau:]

Thank you very much. I have two questions. Starting off on the process with qualifying on customers. Could you comment on how that process is proceeding? My question is more related to our car OEMs taking in that the tech and the software industries moving slightly faster than regular business in the car industry, i.e., is it getting shorter times to qualify or still we have a two-year process?Second question is related to the LiDAR business. If you could talk a little bit about what you’re offering in LiDAR? Are customers looking at LiDAR as redundancy system to the vision or are you also offering LiDAR as a primary source for level 2 class? Those are my two questions. Thanks.

[Jan Carlson:]

So, if we start with the process on customers and how they qualified software, we have seen actually the lead time going up. So, we have seen that customers are paying more and more attention to the fact of functional safety and qualifying processes of the software. And this is why you can see that our development lead time from order to first sales is between three and four years for many of our programs. Other programs have been historically shorter, but we have seen that being the most flexible timeframe right now.When it comes to LiDAR, all of Veoneer LiDAR are mainly two-fold. We have, as you know, a non-exclusive agreement with Velodyne and we have also taken business there for Robocap application. We are also working ourselves in-house with the short-range LiDAR technologies that we are also pursuing to customers right now. And that is also for different types of applications. We are seeing some car manufacturers having LiDAR as a support system. We are not seeing LiDAR replacing vision systems as the prime source, but it's a confirmatory technology to the business system for more demanding applications.

[Operator:]

Thank you. And the next question comes from the line of Bjorn Enarsson from Danske Bank. Please go ahead.

[Bjorn Enarsson:]

I had a question a little bit about the mix on gross margins. And can you talk a little bit about RCS and when we should see that growing, perhaps more in line with LVP and also on the Active Safety brake ramp-up activity -- Active Safety. I would assume we have some improved activities -- ramp-up activities in Q4 and brake ramp-up for the U.S. orders more in 2020. Can you shed some light on that please?

[Mats Backman:]

This is Mats. I can start. And then, maybe Jan can fill in. You are right when it comes to brake control systems. I mean, the big launches and the ramp-up related to U.S., that will take place in 2020. You're correct in that. Looking at Active Safety and RCS, I think, it’s like we write in the report and we feel what we can see in terms of software and development is very much related to the order intake before 2016. We can see phase out of certain models, like we said in Active Safety on BMW for the mono-vision and some radar business as well. When it comes to the more launch-driven growth, we will see that start coming through regular in 2020. And it’s the similar pattern for RCS as well where we have been suffering from a lower order intake pre-2016.

[Jan Carlson:]

And gross margin mix, you can fill me in on that, Mats. But, gross margin mix and you can see the decline and the change of gross margin here is related to the lower volume but also to increased [Technical Difficulty] buildup of our facility and preparing for launch. So, that is having the effect on the mix of the gross margin.

[Mats Backman:]

And maybe two things to add when it comes to gross margins. First of all, we have a pretty FX effect, as I talked about in the presentation but we also have, if you are looking statistically on the brake control systems, we have a smaller impairment also on some of equipment that is affecting about $2 million on gross profit, which is also affecting negatively gross margin.

[Operator:]

Thank you. And the next question comes from the line of James Picariello from KeyBanc. Please go ahead.

[James Picariello:]

Just on the guidance, obviously sales sequentially lower in the third quarter, still expecting second half improvement over the first. Can we dig in on Active Safety core sales down 9% in the quarter? Could you just talk about -- more about what you're seeing in the market, what your expectations are for that business prospectively here in the second half and how we should be thinking about next year?

[Jan Carlson:]

The decline that we're seeing here is coming from what we mentioned here in the slides, predominantly a ramp down of the BMW mono-vision order that we took many years ago and has been still in production up until now, but it’s ramping out. We also saw the shift from 24 to 77 gigahertz radars some years ago. That was taking a toll on our order intake and that is also having an effect on the Active Safety right now.We have to remember that we develop the sensor suite and the basis for the sensor suite is we are living from and further developing right now with the launch of the Mercedes E-class back in 2016. So, before 2016, there was, on the vision side very little weaker take in terms of orders. And we are facing that effect right now. So, that mono-vision order, we took before our own algorithm and our own product portfolio. And that is ramping out. And it takes time until the launches come now, in end of this year and in 2020.If you look into what we see and we face from customers, I think it's clear that we see an increased focus on collaborative driving. We see increased focus on advanced driver support. That is playing well in our favor for our product portfolio in position ADAS controllers and radars. We are seeing level 4 being pushed out. There are numerous of announcements during the quarter of car manufacturers pushing out level 4 program. We consistently see that from our customer base. This is, as I said, in favor of our product portfolio, it's also giving an opportunity for us to have the right priority on the Zenuity people and the Zenuity resources helping us out with features for collaborative driving and driver support.

[James Picariello:]

Got it. That's helpful. And when thinking about sort of second half here, if we exclude the more difficult light vehicle production backdrop, when thinking about your prior 4Q guidance for a return to organic growth, excluding that light vehicle production backdrop, have things gotten delayed a bit, whether it's across Brake Systems, Restraint or Active Safety, what would you attribute to your internal programs?

[Jan Carlson:]

The majority is coming from the light vehicle production. There are some delays here and there, but that is nothing that is -- at least so far we can see that having bigger impact, it’s the light vehicle production as such that is affecting.

[James Picariello:]

Okay. And for Restraint Controls as well? Because that was a business segment that you didn’t expect, based on your visibility and backlog that there would be improvement towards the fourth quarter. And then, just in addition to that, given the situation with ZF’s airbag, ECU, what's your commentary on that? Thank you.

[Jan Carlson:]

I don't think we have any commentary on the ZF’s airbag ECUs. We are seeing a continued strong order intake on RCS business on our airbag controller business. And we have seen that for some time and that is continuing. But those orders that we win right now will take several years before they go into production. But also on the RCS side, it's of course 100% take rates on the car lines, where they are on-board. So, it's the light vehicle production having the effect.

[Operator:]

Thank you. And the next question comes from Erik Golrang from SEB. Please hold a second. Please go ahead.

[Erik Golrang:]

Thank you. I have one question. And apologies if it's been asked; I had a bad line. I was just thinking that there a was a big announcement in the quarter of a collaboration between a number of suppliers, and I think it was BMW and Daimler and a few other OEMs on developing autonomous technologies. And I think Active had the role that you might have had. There are no orders out of that, yes, of course. But, to what extent do you look at sort of collaboration such as this one, that’s actually shirking the market that is approachable to you?

[Jan Carlson:]

I don’t think it is to shrinking the market that is approachable per se. I mean, if you take the collaboration between BMW and Daimler, we are the main supplier to Daimler. We're not the main supplier to BMW. So, we see this as an opportunity to also approach the common architecture that is going to happen. We see the effect out of this already, we see that the discussions between -- if you take BMW and Daimler as an example, we see those discussions having an effect also on the working level, and the architecture and the facts for future generations are under discussions between the companies. So, we believe, all in all, that this is a positive thing for the industry because it will consolidate that development effort, it will harmonize the product architecture and be positive and give possibilities to economies of scale for suppliers. So, that’s our opinion, when it comes to this type of collaboration.

[Operator:]

Thank you. And the next question comes from the line of David Kelley from Jefferies. Please go ahead.

[David Kelley:]

Could you provide some color on the Roadscape win, either regionally or the type of customer you are working with? And then, love to get some commentary on what type of -- what level of Active Safety vehicle that would be embedded in?

[Jan Carlson:]

This is a part of our collaborative driving and being a part of the type of business we're approaching in level 2+. As we announced here, we have added Roadscape business during the first half of this year. So, we have now three customers, and we are then also on the bid list for another four customers on the Roadscape side. But, is predominantly the type of vehicle that we are approaching. So, that is -- we see this as a favorable thing and we have developed this over the number of years since we acquired this several years ago.

[David Kelley:]

Okay, great. Thanks. And maybe as a follow-up and switching gears, obviously the strong working capital improvement in light of deteriorating underlying macro environment. I’d just love to get your thoughts on how we should think about working capital movements in the back half of the year. Obviously, again, the macro seems to be somewhat volatile, but thinking about levers to pull or the opportunity there, any color would be appreciated.

[Mats Backman:]

Yes. I mean, we can use the performance in the second quarter as the kind of baseline. So, we had a really good working capital performance in the quarter. So, the positive contribution, more than $40 million in the quarter, and most of it related to accounts receivables and to some extent on inventory. I mean, actually with the lower organic growth, you will see a positive development on accounts receivable. But, this time, it’s more, I would say, in -- due to activities in the Company where we have been addressing over-dues and the process for invoicing to some extent because we saw the potential already when we released the first quarter report.Looking at inventories, I think, our operations team done a great job in order to avoiding building inventory. We have gone through destocking. And for sure, I mean, if you take destocking that’s under absorption when it comes to fixed costs, meaning that we're taking, hit some gross profits, but we are really protecting the cash flow. So, that will continue.If you’re looking at that as a starting point and moving into the third quarter, I mean, first of all, we need to make sure that have processes in order to retain what we see now, for them to make it sustainable in terms of changes, and I think we can do that. But, I can also see some further potential that even though we had a bigger effect already in the second quarter than anticipated, but I think there are still opportunities to improve more.

[Operator:]

Thank you. And the next question comes from the line of Agnieszka Vilela from Nordea. Please go ahead.

[Agnieszka Vilela:]

Thank you. I have a couple of questions. Starting with the guidance for full year CapEx. Did I hear it correctly that you guide for 12% of sales for the full year?

[Jan Carlson:]

Yes. That's right, about 12% in relation to that.

[Agnieszka Vilela:]

So, some acceleration now in H2?

[Jan Carlson:]

Yes, slight up. But, again, I mean, we are -- I mean, this is something that we are monitoring the whole time. So, if we see lower LVP, lower volume, we are trying to adjust that in line with that. So, meaning that we are now kind of postponing when we see the bid opportunities. But you're right in your assumption. Yes.

[Agnieszka Vilela:]

Perfect. And then, a question on order intake. You still expect that your order intake for 2019 will be at least $1.2 billion. However, the last 12 months number is now a bit lower than it was in Q1, so it built on quite good order intake for the second half of the year. And here, I have actually two questions to that. Number one is that, don't you have quite difficult comparisons in Q4, given that you received quite sizable order for the LiDAR business for RoboTaxis which is probably not recurring. And then number two, given the fact that the car production as you yourself said is substantially lower than what it was before. Don’t you see really a risk for a cut or write-down of some of the order book that you have on the back of that?

[Jan Carlson:]

We will come back on the year-end and look into the order book. We do that once a year. And we look down to the circumstances in the car production. So, we will revert back to that after quarter four this year.When it comes to the order book that we -- on the order intake and the comparables to last year, you are right that quarter four was very heavy last year. Quarter four was very heavy also in 2017. So, it has turned out more by happening but if it's too many years in a row of happening, it’s becoming a trend that the order intake has been backend loaded for us. That is the case also this year. We are also approaching and pursuing new customers that we are not seeing, so that we are looking into expanding our customer base. As we mentioned also here at the slides that in essentially all of our product areas, we are looking to expand that. And on overall, the picture we had with the pursuits and activities that we have, the best estimate that we have is more than $1.2 million for the year, despite all the comparables that you just put.

[Agnieszka Vilela:]

Perfect. And just one housekeeping question on the tax level that we can expect, both in P&L and in cash flow for the full year?

[Mats Backman:]

We're not guiding when it comes to taxes. But, given the kind of the financial kind of structure of the Company, what you see in the quarter, I mean, if you take out the discreet items, the tax rate -- the tax cost, that inches around $2 million. So, it should be around zero and then you have discrete items on top of that but that varies from quarter-to-quarter.

[Operator:]

Thank you. And the next question comes from the line of Dan Levy from Credit Suisse. Please go ahead.

[Dan Levy:]

First, I apologize if I missed it, but in the past, you’d said your long-term targets -- your revenue targets were under review. I assume no update on those, correct?

[Jan Carlson:]

Correct. We said and we communicated that together with capital rate that we don’t reiterate those targets and we have not yet communicated any new ones.

[Dan Levy:]

Okay. So, at some point though in the future, you will look to update us on the long-term target, so I assume, the long-term?

[Jan Carlson:]

Well, of course, we will take a strategic view on our Company and where we are going and give you a broader picture of the plan that we have for the Company. To the extent, we will pin down specific numbers and targets, again, we will have to review and come back to. This is an industry that is in constant change. And I think the last quarter, with all the collaborations you see on the supplier side, on the OEM side, it’s making it very hard to just pinpoint the number and the technology changes. But, we have not decided that yet. We will come back to you of course and give you a strategic overview of our Company at some point.

[Dan Levy:]

And then, a follow-up. I wanted to just ask about the composition of your order intake over the past six months. And in particular, I think that some of the challenges you’ve had on profitability, the rising RD&E levels is maybe because you had maybe too wide set of products. You’ve maybe gone beyond sort of the core strength and maybe some of the programs that have taken on that sort of sounds like that there is maybe a lack of scalability of some of the programs that were won. So, to what extent have -- have any of the new order intake that you’ve taken on been more focused on scalability? And to what extent are you -- is it possible that order quarter beyond this year may be flattish or may be even down a bit as you just focus more on taking what you have and scaling it up and growing it profitability, rather than just the pure growth.

[Jan Carlson:]

No. But you are very right. I think, the whole industry is somewhat focusing now with the turn towards more collaborative driving levels 2+, looking for scalable architecture of for instance efficient systems where you go from distributed intelligence to a center compute at some point in time and you look to the development of that over time. We're working on that. We're seeing very good progress on this matter and we're also working that ourselves but also together with Zenuity here to align the two companies and the resources towards just scalability. And we are doing that because we see clearly that that weighs on a Level 2+ being articulated by so many customers now and level 4 being pushed out that this is the right thing for us to do. Still, we are taking orders on the existing architectures. So, this will develop over, I would say, the next 12 months or so.

[Dan Levy:]

And within the core focuses, are you more focused now, on sort of whether it was just more radar or -- I don't know if there's a way to quantify, just like how much you're sort of putting into sort of the core Active Safety programs rather than some of the smaller things like LiDAR?

[Jan Carlson:]

Now, the core project or the core of the core, if you would call it, that is of course the addition of the radars and the ADAS controllers in our Active Safety program. But we have very good additions in LiDAR. And as I mentioned also on a question here earlier, we have internally a very good and powerful development ongoing on short-range LiDAR that we are hopeful will be a good addition to this. But the core of core for us will be the addition of the radar and the ADAS controllers for a long period of time.

[Operator:]

Thank you. And the next question comes from the line of Steven Fox from Cross Research. Please go ahead.

[Steven Fox:]

Thank you very much. Two questions for me. Just looking at your longer term light vehicle outlook. It seems to me like -- and I apologize if my math is off here, but it seems to me like becoming cash flow breakeven is going to be highly unlikely before 2022. I was wondering if you could comment on how directionally you expect to make progress on that. And then, secondly, could you just sort of help understand how long the mix -- the radar mix remains negative on the business, when would that sort of light up and become more of a positive influence? Thank you.

[Mats Backman:]

Can you repeat the first question, again?

[Steven Fox:]

Yes. So, if I look at your cash burn rate, and I think back to when you thought about going -- cash flows becoming positive, it seems on the fact that you're guiding down light vehicle production expectations that it may take upto 2022 before cash flows become positive. I was curious if you can comment on that and I imagine not specifically but directionally on how you expect to make progress with cash burn rates going forward.

[Mats Backman:]

Yes. No, I mean, we have not been giving any targets, when it comes to cash flow breakeven. But, the thing is that we made capital raise that we have talked about here as well as, the $627 million. And we got a question about this if the funds will be enough or not. What we have stated is that with current plans and with the kind activities that we have, I mean, that's the target to have the cash on hand needed to support the growth we have. So, that's really, I think, what you what you should use in your assumptions. And that capital raise is just one to two months back then, so very much on the LVP forecast that we have seen over the last two months.

[Steven Fox:]

And that's helpful. And then in terms of just the negative mix on radar?

[Jan Carlson:]

This is a mixed and negative situation that will continue into 2020 when we are ramping up the major launches that we have been communicating, been talking about. So, that will gradually be corrected during 2020.

[Operator:]

The next question comes from the line of Garrett Klumpar from RBC Capital Markets. Please go ahead.

[Garrett Klumpar:]

Hey. It’s Garrett on for Joe Spak. Thanks for taking the question. I guess, now that the VNBS situation is resolved and you kind of have more options, how do you see that business fitting into your portfolio, and kind of juxtaposing that Veoneer’s key competencies?

[Jan Carlson:]

We're conducting a strategic review of this business and will look into the opportunities for us to grow this business and to manage this business. But we're also looking for other options which could of course also include the divestment for the business. But that is a strategic review we are right now conducting.

[Garrett Klumpar:]

And then, maybe a bigger picture, I mean, you highlighted kind of over the past year, you’ve seen obviously the pretty steep decline in expected volumes for kind of 2020 and beyond and that might a good starting point and maybe think about how your midterm targets there could change. And obviously, you’re not going to give an update there. But, I mean, in light of the steep volume declines, how should we kind of think about the convexity of Veoneer to offer to help maybe mitigate some of the declines that are expected?

[Jan Carlson:]

Well, we are introducing the initiatives we have communicated here and Mats has been describing in the presentation we will continue to do so. We will be agile when -- or if we would see further declines of LVP and safe measures that we talked as an example here also on CapEx capital expenditures that we -- in that case would also look through. We will look through all and every item if the market would further decline to try to mitigate any type of situation that is there.

[Garrett Klumpar:]

That’s helpful. But, I mean, I guess, just more on kind of top line Veoneer’s outgrowth prospects, I mean, how should we think about that given the lower expected volumes?

[Jan Carlson:]

But as we indicated also in the release, we will return in to organic growth in 2020. And the main reason what we have here is a very launch-heavy period in front of us. We have major programs that is starting to launch towards year-end or the beginning of 2020 and that will continue throughout the entire 2020. We talked about the brake business, we have measure system launches, we have measure vision launches and radar launches also throughout the time of 2020. So, that will come -- those programs in event of a further decline of LVP will of course also be affected because that goes across the board. But for Veoneer specifically, those programs will add effect on the top line.

[Operator:]

Thank you. And the next question comes from the line of Emmanuel Rosner from Deutsche Bank. [Operator Instructions] The next question comes from the line of Dan Galves from Wolfe Research. Please go ahead.

[Dan Galves:]

Thanks very much, and good morning. I was hoping you could help us to kind of dimension the fourth quarter exit rate in terms of profitability. It looks like revenue should be up pretty significantly versus Q3. Is there any way to think about kind of an incremental margin that you expect to get on that extra revenue? And, on the R&D, also looks like a pretty meaningful improvement in Q4. Will that Q4 level be sustainable or is that affected by seasonality of engineering recoveries at all?

[Mats Backman:]

I mean, what we have been indicating when it comes to the 600 in terms of net RD&E, that we see as a sustainable improvement. But naturally, if you’re looking at fourth quarter from a seasonality point of view, the fourth quarter net RD&E is always lower due to high engineering income. But, the 600 that we have indicated that’s something that we're looking at sustainable. So, that’s the case with us.When it comes to incremental margin, I think, it's difficult to talk about incremental margin until we see the real growth coming through, Dan. So, as Jan said, when it comes to the organic growth and 2020, that's very much a launch-driven organic growth that we see. And naturally, when you have a launch-driven organic growth, you will see that one coming through gradually, in terms of the growth but also gradually when it comes to incremental margin. Because, I mean, it takes some time in order to fine tune everything and getting to the kind of launch earlier.

[Dan Galves:]

Okay. Thank you. And then, just one other one. Prior to the capital raise, did you see any less willingness on the part of customers to source you based on relatively weak balance sheet? And if so, has that now changed, meaningfully?

[Jan Carlson:]

No, we didn't see any hesitation from customers to go into discussions or supporting our business. And you can see that throughout the very good order intake number we have reported. So, that has something to do.

[Operator:]

Thank you so much. And the next question comes from the line of Peter Testa from One Investments. Please go ahead.

[Peter Testa:]

Hi. Thank you very much for taking the question. Just going back to the point you've made about the alliance with Daimler, BMW, Ford, Volkswagen, which is evolving key customers for Veoneer. As I look at the architecture and spec, can you give some sort of sense as to how they see this impacting the scheduling plans they have in those areas, and to what degree these architecture and spec questions touch the existing order backlog of Veoneer?

[Jan Carlson:]

I don’t think it affects. This is the successor to the different car lines they have. And when that is coming, they will work together to deploy that architecture to car lines on both sides. So, we don't see any delay necessarily from that angle on the car lines. But of course, when you combine two organizations, that is of course taking an effect on efficiency, people have to get to know each other et cetera. You should think about this directionally as an effect maybe in 2023 and beyond on the vehicles coming thereafter. That's where you will see this coming into effect. Ahead of that, it’s not -- it's just the same businesses we have today.

[Peter Testa:]

And then, the other question is just as you go into point where the products are ramping up, also the OEMs are also discussing quite a lot of vehicle content and cost content and various different challenges. And I was wondering if you have a good sense at this point what the variant depth is for the ramp-ups and the extent to which the standard versus options, just to kind of understand as you plan and they try to manage content, how those two things intersect, please?

[Jan Carlson:]

I think those items are much depending also on the -- your rank in that environment and the rating has been the requirement to get five star where you see a clear focus on advanced driver support. That has historically and will still be their one of the bigger content drivers. You have also legislation environment in the U.S. and the voluntarily AEB initiatives as we all know. And similar initiatives and similar actions will drive -- we are convinced, drive the content on the ADAS side.

[Peter Testa:]

And so, you feel for there isn't any challenge on discussing content per car, cost content and variant analysis?

[Jan Carlson:]

I think, so far, we have not seen that. We have to be realistic. This industry is standing in front of a huge challenge with the electrification, the autonomous drive, the mobility service, designing, production, volumes et cetera. To just guarantee that this part will be immune for something, that is not the case. But historically NCAP has been driving this, and safety has always been a very big and intense focus, like now environmental issues are a big focus. But safety, will be a prioritized activity. We are convinced with that.

[Operator:]

[Operator instructions] So, there are no questions at the moment. So, please go ahead.

[Jan Carlson:]

Okay. Thank you, Michaela. And I would then like to thank everyone for you participation today in this call, and all the interesting and challenging questions that we have gotten. We look forward to seeing you all in conferences and road shows during the third quarter here coming up. And our next earnings call for third quarter is tentatively planned for Friday, October 25, 2019. So, 25th of October is our tentative plan.I would also like to mention that we intend to hold a technology demonstration and update at the AstaZero Test Track outside Gothenburg in Sweden in second half of September. So, stay tuned all of you for more information regarding that. And I would like to advertise that to you and many of you who can participate. Until then, hoping you all have safe and relaxing summer holiday. Thank you and good bye for now.

[Operator:]

Thank you so much. That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please continue to stand by.