Veoneer, Inc.
Q3 2019 Earnings Call Transcript

Published: 5 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Q4 2019 Earnings Release Conference Call.At this time, all participants are in a listen-only mode. After the speaker presentation, there will be an opportunity to ask questions [Operator instructions]. I must also advise you the conference is being recorded today, Wednesday the 5th of February 2020.I'd now like to hand over to your speaker today, Thomas Jonsson. Please go ahead, sir.

[Thomas Jonsson:]

Thank you very much, Samar. And welcome everybody to our fourth quarter 2019 earnings conference call and webcast presentation and sorry about the slight delay here in the beginning. Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; Chief Financial Officer, Mats Backman; and myself, Thomas Jonsson, EVP, Corporate Communications and IR.During today's call, Jan will comment on our current business highlights, our customer progress and in particular about the very important unprecedented upcoming loss period for new technologies and customer programs we have ahead of us. And last, we'll walk you through our financial results, our efficiency programs and provide some commentary on our outlook for the remainder of 2020. After this, we will remain on the line for the Q&A session.And of course the slides and earnings release are available through a link on the home page of our corporate webpage. So, if we turn the page here, we have the Safe Harbor statement, which is an integrated part of this presentation including the Q&A that follows here today.During the presentation, we will reference some non-U.S. GAAP measures where reconciliations of the figures are disclosed in our quarterly press release, and 10-Q that will be filed with the SEC. This call is intended to conclude at 2 pm CET, so please limit yourself to a maximum of two questions so that way we can work everybody's questions in.I will now turn it over to our CEO, Jan Carlson. So Jan, please take over.

[Jan Carlson:]

Thank you very much, Thomas. I would also like to say welcome everyone to today's earnings call and by turning the page, I would like to start out our presentation today to reinforce the strategic direction of our company as we demonstrated at CES recently. Our focus is on collaborative driving or as many like to reference L2+ solutions.Our unique offering of state of the art sensors and software we belong with are sensor compute capabilities provide both the system and sub-system solutions the market and our customers need. We believe that our total addressable market is not only the largest but also that has the growing market segment where we intended to evolve as a profitable market leader with our scalable architectural sensors, software and sensors compute.As we demonstrated at CES, our first L2+ system will be available in the market already during the first half of 2020, with more to come in the quarter thereafter. This is some important milestone and proof for not only Veoneer but also for this annuity software suite.Before moving on to our business highlights, I would like to pause and extend my sincere thank you to the entire Veoneer team for their great support, dedication in 2019 with a relentless focus on quantity and at the same driving operational improvement.Now moving to the next page, looking first to the underlying market conditions we ended 2019 at a much lower light vehicle production levels than we expected at the beginning of last. This was weighing on our 2019 results. Looking ahead into 2020, we expect the rate of light vehicle production deterioration to slowdown. However, we foresee a continued weakness in the production environment mostly in Europe and China particular in the first half of 2020.Looking at our market adjustment initiatives, we made very good progress during 2019 in RD&E, and humility and efficiency and we intended to carry this momentum into 2020. We have now completed the divestiture of our VNBS joint venture which generated approximately $170 million of net cash and we continue to make progress with the strategic reviews of our remaining Break Systems business and Zenuity joint venture.Our order book at the end of 2019 remained at around $19 billion which 80% is related to our electronic segment. This is despite the downward adjustment in the light vehicle production assumptions of approximately 9% for the period 2020 through 2025 and our lower than expected intake in 2019.And lastly as we enter 2020, our company faces an unprecedented period of upcoming new customer program and product launches with several important new technologies. It is expected that these launches are the long-awaited catalyst for Veoneer to return to organic sales growth during the second half of 2020 and ramp up an even accelerate into 2021 and 2022.Now looking on the next page, as alluded to earlier we remain in the middle of an industry downturn where it appears that the global light vehicle production has still not reached lower. We see approximately 50 million fewer vehicles or close to 13% for the time period of 2019 through 2022 since the spin of Veoneer. This is another 4 million fewer vehicles than we reported last quarter.The entire auto industry is affected by the limited light vehicle production growth through 2022 and continues to have an impact on our business and targets. For Veoneer once our expected organic growth kicks in later this year, we foresee a sales growth for our company of close to 19% CAGR in 2022 from 2019. This expected organic sales growth is approximately 17 percentage points of growth above the light vehicle production market and therefore the focus for our company is about successful launches rather than the level of light vehicle production decline while having affected cost control and cash flow management.Now looking on to our customer development and Active Safety on the next slide; we make solid progress in expanding our Active Safety product portfolio across our customer base. During 2019 we are pleased to have added our seventh different customer, amortization program with a major OEM including [indiscernible] from this annuity software tweak. In addition during the year we became technically quantified with three new additional customers.Looking to radar we've added new business awards with two new customers and are now on to the bid list with 20 customers. In all other Active Safety technologies we expanded our presence as illustrated here on this chart. We estimate in 2019 that approximately 40% of our Active Safety order intake was for L2+ systems and around 45% of the Active Safety order intake included features from the annuity software suite.And lastly as you have likely heard, earlier today we announced a new business award with our eight additional customer. This system award includes our [indiscernible] radars along with a fusion software from Zenuity, which includes diverse features like lane entering control, stop and go adaptive cruise control, automatic emergency braking, traffic sign and light recognition and automated high beam control. These are the important building blocks for higher level of automated driving.Looking now to our order intake on the next page, on this chart we had recast our order intake trend to include only the electronic segment which excludes the Break Systems business. Our strong order intake in restrain control systems and Active Safety has resulted in approximately $15 billion order book. The vast majority of the order book is expected to be directed during the period 2020 through 2026.Keep in mind the market lead time of order to launch is generally in the range of two to four years. However, in our current situation, due to certain customer delays we see closer to four years. As we mentioned before, our best estimate based on current market opportunities is for an order intake of approximately $1 billion of average annual sales for the electronics segment in 2020. This is 25% higher than our last three-years average illustrated on this chart.Looking now on to our 2020 technology and customer launch. On the next page, we have summarized our key new technology launches during 2020. Already during the first quarter 2020, we will be launching our Generation 4 mono vision camera system or Generation 2 Smart and lastly our much awaited first launch of this annuity software suite for autonomous driving.These three technologies represent an important foundation for our expected future customers sourcing with both existing and new customers. During the second and third quarter, we will launch four additional camera technologies including our Thermal Night Vision Generation 4 technology, our First Generation Driver Monitoring System, our Generation 4 Stereo Vision Camera as well as a Customer Stereo Vision Solution for an Asian based OEM.In addition, we will launch our first standalone software feature with premium brand base in Europe during the third quarter. During the fourth quarter, we will launch our first [indiscernible] module for a US-based RoboTaxi application and or 77 gigahertz 1.3 radar, which is a cost and performance improvement over the Generation 1.2 which we launched last fall. And lastly we'll launch our first roads cape high-definition mapping and precision positioning module with a US premium brand during the fourth quarter.Looking now to our specific customer launches on the next page, we have summarized here our top 15 new program launches as well as the products and annual vehicle volumes which are expected to each have more than 10 million of average annual sales. In aggregate, these vehicle modules and platforms represent more than $500 million of average annual sales with a content vehicle of $270 including Brake Systems launches. The content of the top 15 is in the range of approximately $30 to more than $800 per vehicle.We expect these launches as we have mentioned earlier are more loaded to the second half of the year and should significantly contribute to our expected return to organic sales growth in 2020. Throughout the year we will elaborate further on the specific customers and vehicle models as appropriate.This concludes now my formal remarks for today. I will turn the presentation over to our CFO, Mats. Please go ahead.

[Mats Backman:]

Thank you, Jan. 2019 was a very challenging and complex year for Veoneer as we work to implement capacity for the new program launches as Jan just mentioned but we also worked hard to improve our underlying cost structure.Looking now for the next slide, as we mentioned on the last earnings call, the microenvironment and situation continues to adversely affect our operating results in the near term. Our net sales for the fourth quarter of $456 million was slightly better than our expectation, while our operating loss was much better than expected, primarily due to our market adjustment initiatives around engineering reimbursement.Our operating cash flow was in line with our expectation, however negatively affected by $30 million of timing effects, which we expect to normalize during the first quarter. Despite these timing effects, our net working capital improved by $39 million during 2019 and we remain very close to zero net working capital.We continue to be see a positive development on our underlying cost structure by the sequential improvement in the fourth quarter of $45 million when looking at all the net and SG&A combined. When looking at the year-over-year development for the quarter, the improvement was $32 million for RD&E, net and SG&A combined.Our company continues to be in the middle of a tremendous investment period to support the ramp up of our future sales growth reported by our strong order book. These investments for capacity increases in all major regions resulted in capital expenditures for the quarter of $45 million or 10% in relation to sales.Looking at the further details for the quarter on the next slide, our sales decline of $79 million as compared to the same quarter last year was due to a negative currency translation effect of 1% or $5 million and an organic sales decline of 14% or $74. The organic sales decline was mainly driven by Active Safety of $39 million and restrained control systems of $27 million while Brake Systems declined by $8 million.We did Active Safety the continued negative radar product mix shift from 24 gigahertz to 77 gigahertz technology and the gradual phase out of the monovision systems at BMW were the main driver. The restrained control decline was mainly due to the phase out of certain vehicle models primarily in North America while the decline in Brake Systems was mainly driven by lower volumes on certain Honda models in China.The gross profit decline of $33 million for the quarter versus prior year was due to the volume and product mix impact caused by the organic sales decline and the net currency effect was minimal. RD&E mix of $103 million decreased by $29 million during the quarter compared to 2018 mainly due to the improved engineering reimbursement mentioned earlier. In addition SG&A improved $3 million year-over-year due to lower consultancy and IC cost.We are pleased that during 2019, our market adjustment initiative are driving underlying cost structure improvements in our company. RD&E net for the full year '19 was $562 million which is $70 million below the first half of 2019 annual run rate. While the SG&A annual run rate improved by $30 million when comparing the second half '19 with the first half run rate.Lastly, our operating cash flow for the fourth quarter was below prior year mainly due to the timing affecting the working capital mentioned earlier and other net which is mostly related to the some favorable adjustments to deferred tax and assets and long-term liabilities in 2018.Looking now to our sequential performance on the next slide, our sales decline of $6 million as compared to the third quarter was due to a decline in organic sales as the currency translation effect was minimal. Restraint control system and Brake Systems improved sequentially by $12 million and $7 million effectively while Active Safety declined $25 million due to the vision mix issue as mentioned earlier.The gross profit improvement of $3 million was mainly due our product and customer mix insight. RD&E net and SG&A decreased by $41 million and $4 million respectively as compared to the third quarter and that is due to our market adjustment initiative. As a consequence, the lower operating loss improved our operating cash flow, which was offset by the net working capital change.As mentioned on the last earnings call, we believe the capital expenditures of $59 million last quarter was at the peak level while we have the decline of $40 million sequentially in the fourth quarter.Looking now to our 2019 launches on the next slide, we have summarized in 2019 key new program launches and model face lifts. Although some of these launches didn’t materially contribute our organic sales development in 2019, they provide a strong base to our 2020 growth in addition to the 2020 launches Jan highlighted earlier. Looking not to our 2020 outlook on the next slide.We have based our 2020 outlook excluding the VNBS joint venture in Asia operations since we completed the divestiture on February 3, 2020. Our current customer call and delivery point to a weak first quarter mostly in China and Europe both sequentially from the previous quarter and year-over-year. This leads us to an expected global decline for the first half '20 as compared to 2019. As a consequence we estimate the LVP decline in the low single digits for the full year 2020 as compared to 2019.For the full year '20, Veoneer expects to return to organic sales growth in the mid single digits. This expected sales growth is driven by new program launches, mostly in Active Safety and Break Systems during the second half of the year. During the first half of 2020, our net sales are expected to remain relatively flat sequentially from the second half of 2019 and the ramp up sequentially during the second half of 2020. We expect the currency translation impact to be minimal in 2020 versus last year.During 2020, our market adjustment initiatives are expected to generate further cost structure and balance sheet improvement. During 2020 we expect RD&E net along with our operating loss and cash flow before financing activities to improve from 2019 level on a comparable basis, although most of the improvement is expected during the second half of 2020.I'll now turn the call back over to Jan.

[Jan Carlson:]

Thank you, Mats. Turning the page again, this concludes our formal comments for today's earnings call, but before we open up for Q&A, I would like to make a few comments regarding the unfortunate Corona Virus. We are currently monitoring this and taking appropriate actions on a daily basis related to the effects on the Corona Virus outbreak in China and there is health and safety of our employees is our primary focus.To date we are not aware of any cases of the virus with our employees. However, it's too early to assess the effects on to our China business as this is an ongoing and evolving situation. And by saying that I'd like to turn the call back to our operator Samar. Please take over the call.

[Operator:]

Thank you, Jan. we'll now begin the question-and-answer session. We'll take our first question and this comes from Hampus Engellau from Handelsbanken. Please go ahead.

[Hampus Engellau:]

Thank you very much. Two question for me. Firstly if you could maybe just little bit on where you are in the modernization of your product offering and where we should start to see effect from that on the cost side. Secondly, a question of the orders you are guiding for order from $1 billion. I was just wondering how much of this is orders that was pushed out from 2019 through 2020? How should we think about launch cost in the second half of 2020? Thank you

[Jan Carlson:]

So let's start with the second part here. We said that a majority of the gap between what we earlier communicated and the 550 was a delay on that. If we look to the situation as of right now, you can say that half or approximately little more than half of that push out is still up for grabs. So it's still out there for being awarded of the delay that we referred to.We have captured as of today around $100 million in order intake and more than half of that is actually coming from new business. So around half or slightly more than half is coming from new business that was planned this year. So that is the information we can give you now. It is a good start to be able to get around $100 million little more than a month into the year.If we then take the modular situation, this is something that we have been talking about and it has taken a big step already when it comes to marketing this to our customers. We expect to of course look into potential order wins on this design or this concept maybe already this year. The financial effect out of it will kick in of course later. So that is nothing that we'll see as of today or as of 2020.

[Operator:]

Thank you. We'll now take our next question from the line of Brian Johnson from Barclays.

[Brian Johnson:]

I want to start just kind of understand both the RD&E but the performance in 4Q as well as the guide for year-over-year and it would be helpful is to maybe just at least size up the numbers. So how much of the reduction was in 4Q and how does it change in '20 was due to commercial reimbursement, how much was due to perhaps rationalizing the R&D efforts and work on greater IP sharing across project teams, how much was just is going to be pace of launch activity. And how much was maybe just to cutting deeper than maybe you'd like to?

[Mats Backman:]

Maybe we can start -- this is Mats. Maybe we can start with a guidance when we're looking into 2020 where we’re talking about lower RD&E math in absolute numbers compared to 2019 which is turning point. Looking into the fourth quarter in terms of savings and what we have seen sequentially in 2019. We have as we showed in the second quarter, and third quarter and into the fourth quarter, we have reduced RD&E and we have reduced the run rate when it comes to our growth RD&E. So the reduction in terms of the runway costs on the growth side is contributing to those savings.However, looking in the fourth quarter and from a seasonality point of view, we always had a bigger impact in the fourth quarter when it comes to engineering income. In this quarter, we had more impact than normal. We had additional reimbursement done for engineering cost that has been sponsored in 2019.So if you see -- when you see the net number for the fourth quarter, that is not reflecting a kind of a normal run rate to the engineering income and in this quarter, it’s more than normal. But saying that we have had this sequential reduction in the growth RD&E cost every quarter since the second quarter, so you have both sides contributing.Looking into 2020, we’re what we can foresee is that what we are kind of working with is to reduce the cost base and reduce the cost in 2020. Right on top of that, we’re also expecting some additional contribution coming from reimbursements of the higher engineering samples from customers with a combination. But due to the intense launch period in 2020, we also need to kind of be prepared to have the engineering resources needed to hand the launches. But saying that we are still targeting a reduction of the RD&E in 2020.

[Jan Carlson:]

I think it’s also worth to add here that if you look to the higher than normal engineering, compensation or engineering income, Mats is referring to, we have also spent more money growth on engineering to prepare for all these launches that we’re talking about. So it's somewhat communicating somewhat higher engineering income but also significantly higher engineering spend during the year 2019.

[Brian Johnson:]

Okay, and just a follow-on. Could you frame up the transition headwinds from the radar of bandwidth shifts for 24-77 How much was the headwind in 2019? What's expected for 2020 and even beyond that kind of when does it sort of become a tailwind?

[Mats Backman:]

Yes, I mean we will continue to have headwind when it comes to this shift in technology in the first half of 2020. But then as you saw slide, when it comes to launches, you could see that the new technology in quite a lot of those launches, so it will gradually improved on in the second quarter in the second half of the year.

[Jan Carlson:]

We will believe that this should be over by after 2020. So it will abate during the year, and be over by year-end through the high.

[Brian Johnson:]

Okay, thank you.

[Operator:]

Thank you. We’ll now take our next question from the line of Erik Golrang from SEB.

[Erik Golrang:]

Thank you. I have two questions. The first one coming back to the previous formula on the order trends. I didn't fully get everything you said. Did I reiterate that that the round, you lost around $600 million of orders in 2019 compared to what you originally targeted and that 50% of that, or $600 million was pushed into 2020 and that 50% has been lost of that 50% still up for grabs? Is that correct?

[Jan Carlson:]

Some of it has been awarded and some of it has been lost. But we say that the ballpark cooperate still remains progress.

[Erik Golrang:]

Okay, thank you. And then the second question also coming back to previous topic on RD&E spend. Would you sort of make a stab at saying what’s the underlying annualized RD&E spending is in Q4 for the core business i.e. excluding brake systems, Q4 on an annualized basis for the core business?

[Jan Carlson:]

Yes, as we’re guiding now with for 2020, the core business together with U.S. operation when it comes to brake controls. So the comparable net number looking at the net RD&E, that’s $537 million to give you the right baseline and then what we’re saying that we’re targeting an improvement from that level in 2020.

[Erik Golrang:]

Okay, thank you. Then the final question on, I mean, the order delays you experienced in 2019, do you see that all the factors behind that as stabilizing now meaning that this less of a race that we get further delays in ordering activity?

[Jan Carlson:]

I cannot say that, I think this is a very fluid situation amidst lot of discussions and it will be probably more discussions throughout the year. We of course have seen this happening in 2019. We’re trying to make our best estimate what we can win here in 2020. But that is stabilizing and getting more easier to forecast. I don't think I can say that it’s still volatile.

[Erik Golrang:]

Thank you.

[Operator:]

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

[James Picariello:]

Hey guys, just sticking into the guide specifically for the first quarter. Are you expecting both sales and EBIT to be down year-over-year and sequentially? Or is the commentary in the press release just tied to sales?

[Jan Carlson:]

Yes, I mean what was that? I mean if you're looking at outlook, as you're describing, I mean we will year-over-year, I mean it’s definitely a negative organic growth in the third quarter.

[James Picariello:]

What about for EBIT?

[Jan Carlson:]

And what was the second?

[James Picariello:]

Just regarding operating profit for the first quarter, is that also expected to trend down?

[Jan Carlson:]

Yes, I mean look, if you're comparing for the fourth quarter and again from a seasonality point of view, the fourth quarter is all away to strong quarter from a seasonality point of view, very much due to the engineering income effect that we see every year in the fourth quarter, so sequentially it’s negative development into the first quarter, yes.

[James Picariello:]

Okay, and maybe just start RD&E question another way. In the fourth quarter you cut 180 employees. Do you expect additional cuts through 2020 in terms of your targeted headcount reductions or you about done?

[Jan Carlson:]

Well, we’re looking into different type of activities to improve our efficiency in RD&E. And to the extent that it's going to affect also the headcount, it’s primarily a cost focus and efficiency focus where we are looking to work with partners and to what extent that is also going to affect the head count number, I'm not going to speculate at this point in time because it's also how the cost base for the resources that we have will be applied when we’re coming further down the road in the year.

[James Picariello:]

Got it. And just one clarification regarding the 2022 framework, so you're targeting $2.5 billion in sales, you specifically call out active safety revenue to double, which would imply $1.4 billion roughly. So the implication there is that Restraint Controls then surpasses the $1 billion mark, has the growth trajectory for RCS improved when looking at 2022?

[Jan Carlson:]

If you look to overall the growth trajectory, we will see growth in RCS business as well. But as you know the RCS business is the business generally that is developing with the market in line with the light vehicle production market. So the growth coming from coming in RCS is coming from better order wins over the last three, four years than we have seen in the past or before that.

[James Picariello:]

Okay, thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Joachim Gunell from DNB Markets. Please go ahead.

[Joachim Gunell:]

Yes, thank you. So just to start-off with customers apparently postponing some of their investment decisions. What are your view inside the next two years in terms of OEM adoption of ADAS technologies on a more say broader scale versus being more of a comfort features for premium OEMs?

[Jan Carlson:]

We see a good adoption rate and as we alluded to in our formal remarks here earlier, we believe that or part of this industry is continuing to see growth. It's driven by legislation, it's driven by cap requirements and the sharpening of the cap requirements step by step in many parts of the world, and this is driving the features and the contents of the vehicle. So we believe that in the world of stress in the automotive industry, we look to see a further improvement of our markets.

[Joachim Gunell:]

And finally, regarding the growth profile in the U.S. operations of brake systems, I mean there's a larger contract ramping up there, I assume but are there anything you want to mention in terms of the growth profile in the U.S. operations as opposed to the Asian one?

[Jan Carlson:]

No, not really. We have commented a couple of contracts there to a global OEM in the U.S. We have a strong focus and launching this, it will launch later on this year, the first part of that contract. As you know we have the brake system from the strategic review for the time being, we’re guiding at this is part of our company and a strong focus to launch the commitments that we have, we’re guiding including these brake systems. But I have no other comments to give besides this for the future, we'll come back to that later throughout the year.

[Joachim Gunell:]

All right, thank you.

[Operator:]

And our next question comes from the line of David Leiker from Baird. Please go ahead.

[Unidentified Corporate Participant:]

Good morning, this is [indiscernible] back on for David. My first question is about the market share of your new contract awards. I guess I'm wondering where are you winning the most new business from a market share standpoint and maybe where's market share trending a little bit weaker? And how does this compare to kind of the prior-year periods?

[Jan Carlson:]

Well, if you look to our market share wins even in 2019 with lower than expected order intake number, we won more than our market share for 2019, so pointing to that, it's better win in our market share. We definitely see wins in all products areas, I would say we see wins in vision as we announced here, we see wins in radar.So, we’re gaining business, I cannot point in all of our product areas, I cannot say that we’re any product areas that is lagging behind particularly, we are seeing new technologies being launched as I mentioned also in my remarks here that should improve also our prospects for the future down the road.

[Unidentified Corporate Participant:]

Okay, and then my second question is just with respect to your confidence in the revenue ramping conversion to profits, for others this has been challenging converting the book of new business profitably. So any comments on that?

[Jan Carlson:]

While this will correct itself and the overhead numbers and the overheads in relation to sales returning to profits will gradually improve down the road when we’re ramping up the sales numbers, this is a challenging market and it requires a lot of upfront investment.So over time we expect the numbers of course to normalize. And we have not given any outlook on 2022, we gave the sales outlook but not any profit numbers or any other indications of normalizing already in relation to sales or becoming profitable. So we'll have to return to you without later stage. But we expect a growth in 2020. We expect that to accelerate in 2021 and in 2022 and gradually down this will normalize.

[Unidentified Corporate Participant:]

Great, thanks for taking my questions.

[Jan Carlson:]

Thank you.

[Operator:]

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

[Bjorn Enarsson:]

Bjorn Enarsson, Danske. Yes, I have a question on the U.S. brake business and also the financial implications from the divestment of the Asian part, if you can help us out with some further clarification and how we should look upon the business in the P&L in the first half, if that's possible?

[Jan Carlson:]

Yes, I mean first of all, you need to separate U.S. part and Asian part because I mean, there is the part that was divested now, that was the joint venture for Asia with the net proceeds of $170 million, but the U.S. part of this is still in and it's also included in the guidance we’re giving them.So I mean that's the baseline is really our core operations meaning active safety together with RCS and plus the U.S. brake operations. So that’s the baseline.

[Thomas Jonsson:]

And then maybe, Thomas here. Maybe as for the historic comparisons, you can also look at the full-year segment report in the press release on Page 5 where we provide a little bit of commentary on the historic sales and ordinary on the Asia part which I think helps get you some reference numbers.

[Bjorn Enarsson:]

And the cash impact has happened now, couple of days ago, yes, okay.

[Thomas Jonsson:]

Yes.

[Bjorn Enarsson:]

Perfect, thank you.

[Operator:]

Thank you. And our next question comes from the line of Joseph Spak from RBC Capital Markets.

[Joseph Spak:]

Thank you. I wanted to head back to the comment about the orders and what sort of up for grabs?I guess just to be clear, are you seeing some more competitors on a portion of that business bidding for that business than you sort of previously assumed or it's a little bit unclear to me sort of what changed on the part that sort of hasn't been awarded yet?

[Jan Carlson:]

Yes, we have seen some competitors coming in here. This is evolving technology. And we have seen actually new companies dating for business depending on what type of businesses is, we can see new competitors we have not seen through highest standard in the past coming in and that is related to the active safety piece.On the RCS business, we don't see any new competitors, but on the active safety piece, we can see some of the new competitors. I also wanted to make a clarification here to the question, I think came from Erik Golrang, you mentioned the number of the $600 million being pushed out and then you said half of that being or something.We have not quantified how much of the total delay that is pushed out, we said that the majority of the gap between the number we indicated of between $1.1 billion, $1.2 billion and the 550, majority of that gap was delayed, not to have any mix about quantifications around how much of is up for grabs or so.We still see what we defined being delayed. We still see half of that being up for grabs, to be quite clear to not confuse everyone, all the specific numbers.

[Joseph Spak:]

Okay. And I guess the second question, just back to the R&D. I mean, I know in the fourth quarter sort of not the right run rate, but I guess just more broadly and as you think out here over the next couple of years, how do you think about the R&D spend and either growing that or maintaining that relative to sort of the ambitions to sort of grow the top line, right because there's an element of the RD&E right that that's sort of going to have to go higher as some of that business sort of comes to launch. But then there's also an element that I guess more on the R side and D side than the E side which is sort of keep pace with the industry. And I think if that's starved somewhat, then it seems like there's a corresponding impact to the top line growth?

[Mats Backman:]

No, I think I mean when you're looking at R, D and E, I mean the majority is in application engineering and very much driven by the order intake the pre-launch and launch meaning that if you're looking at more on the R side, I mean that's not where we are cutting down I mean it's more on the application engineering side. And what we have done now in 2019 is I mean we recruited quite a lot of engineers back in 2018 and into the beginning of 2019, what we have been talking about is more efficiencies and consolidating the base that we have.And I wouldn't say that we are kind of risking any business from doing that. So when we see the run rate right now, that's more of a kind of a consolidation and efficiency gains we see. And then as Jan said, now we can look into the kind of the next step for what we can do it together with partners and so forth going forward, but that is still without jeopardizing the go forward.

[Jan Carlson:]

We have skilled set of people here and a lot of good engineers. What is important is that we use them efficiently for what is unique for us and our algorithm development or architecture development, repetitive work of standard type should be preferably used with partners, things that can be reused and redone in application engineering that Mats is talking about here could preferably be done outside.

[Joseph Spak:]

So if the best sort of indicate, if the RD&E sort of more tied to sort of order intake and then as that comes online and converts to revenue, it seems like the RD&E should also increase, I guess, I'm just wondering like and maybe it's difficult to put a fine point on it, but like when do you actually start seeing some of the greater leverage on that spend because it would seem like you'd actually need a couple of years of that higher revenue to sort of really overtake the RD&E to sort of support the order intake. Is that fair?

[Mats Backman:]

Yes, but I mean in terms of leverage, I mean if you're looking at the indication for 2020 when we are saying that what we are targeting is to reduce the RD&E in absolute numbers. And we’re talking about the organic growth on the relative RD&E we will start coming home and you will see some leverage coming through that.But it's also I mean what we have done and when we have reduced the run rate and where we are right now, we also need to remember when we're looking into 2020 and again referring to Jan’s slide, I mean we have five huge launches now coming up in 12 to 18 months. So we also need to be prepared for the launches and we need to have the kind of the resources in place. But even though you see growth in the order intake, I can't imagine that we will have another 12 to 18 months period with those kind of new technology launches with this size. So it is a little bit of a perfect storm looking at where we’re today.

[Joseph Spak:]

Okay, thank you very much.

[Operator:]

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

[Agnieszka Vilela:]

Agnieszka Vilela, Nordea. I have a couple of questions for follow-ups, if I may, please. Starting maybe with the R&D and your guidance when you go to the comparable basis can you just be specific and tell us what's the comparable basis for R&D was in 2019. So excluding the Brakes Asia, thanks.

[Mats Backman:]

537 is the baseline net RD&E full-year 2019 excluding the joint venture.

[Agnieszka Vilela:]

Okay, thank you. And then also, if I calculated correctly then the U.S. Brakes business in 2019 contributed to $60 million in sales. And my question here is what's your expectation for the kind of cadence for the revenue growth for Brakes U.S. in 2020 as you included in your organic growth guidance? Thank you.

[Mats Backman:]

I mean we have and I'm coming back again to what Jan said, I mean we have one of the big launches all related to the brake controls but that is in the later part of the year, 2020. So it's not, it's not a significant impact on the organic growth guidance for full-year 2020. The balance and the majority of the growth are coming from active sales looking at the growth.

[Agnieszka Vilela:]

All right and then just coming back to active safety sales decline of 20% in Q4. I would appreciate if you could be a bit more specific about the headwinds coming from the shift in radars and also the BMW ramp down. Could you quantify it and also could you specify when exactly these headwinds will disappear?

[Mats Backman:]

I mean the majority if you’re looking at active saves to overall, the majority of the decline that the radar business related to radar and their technology system. And if you’re looking at, if you’re looking forward on the change in trend so to speak we will continue to see a negative impact in the first half of 2020. But bandwidth will gradually improve and you can say that in 2021, we start to get through the technology so to speak, we launched it. So that is very much related to radar.

[Agnieszka Vilela:]

Okay, but do you expect that the negative impacts in H1 will be kind of double-digits on sales?

[Mats Backman:]

You mean from radar alone or?

[Agnieszka Vilela:]

Yes, if it was the majority of the sales decline that was connected to the radar shift in Q4. And if you expect it to continue in Q1 and Q2 will be as kind of severe impact year-on-year?

[Mats Backman:]

I wouldn't see that kind of granular looking on certain products and technologies but first of all the console getting looking into 2020 versus 2019 as we saw the same issue in 2019 but otherwise I will just kind of stick with the overall guidance that we have. Talking about that a tougher first quarter and then gradually improvement and going into growth in the second half of 2020 overall.

[Agnieszka Vilela:]

Okay, thank you.

[Thomas Jonsson:]

Okay, so just mentioned that we have five minutes left, and of course we intend to end on the hour but we will available of course from the Investor Relations after the call.

[Operator:]

Thank you. We will now take one more question and this comes from David Kelley from Jefferies.

[David Kelley:]

Hi, good morning. Just looking at Slide 9, the average dollar content per vehicle of new launches, you referenced $270. I'm assuming that's comparable to the $175 in 2019 that you referenced on Slide 13. Could you talk about the drivers of that increase? How much is product mix? Or is this more tied to the expanding addressable market as your level two launches start to ramp?

[Mats Backman:]

It's affecting the level two, it's affecting the number of feature increase is including and driven by increase and cap requirements and many different factors driving this forward. But as you can see from the state, also including as we mentioned, the brake systems that is part of it. So many different factors driving behind it and technology improvements and increases.

[David Kelley:]

Okay, perfect. Thank you and then a question on active safety win rates. You referenced the increased competition in the space, I guess could you provide some color on how you're converting the bid list? And are you seeing any considerable differences in win rates across product lines or changes in historical win rates as well?

[Mats Backman:]

Now, I cannot quantify that. As we say that when you look to our key components of our sensor suites and our airbag controllers, and also our ADAS controller and our software suite, we are in a very good position. We’re seeing a strong customer interest and we expect this year of launches to prove that and to make it even more visible to customers of our developments and overall product performance here looking a little bit further down the road.We experienced that same step change in 2016 when we launched a previous generation of our sensor suite, now we're coming out with a renewed product portfolio and we expect that to happen. But in as I said and in this phase, you see new entrants is trying to come in and you see people bidding on at least some of the product portfolios here, if not all of it, but some of it coming in and that is expected. We have expected that to happen. So I don't think that is any change from our previous opinion.

[David Kelley:]

Okay, great. Appreciate the color.

[Operator:]

Thank you. And we will no longer be taking questions. I'd like to hand the call back to Jan.

[Jan Carlson:]

Thank you very much. I would like to thank everyone for your participation for interesting questions as of to-date and we of course look forward seeing you on conferences and road shows etcetera during the quarter here. Our next quarterly earnings release is planned for end of April and we'll revert back to you with exact date. We are also intending to hold a business update more generally between our earnings releases in end of late spring or beginning summer and be back to you with more color on that one as well.So until then I wish you all the best and hope you're having a good start of 2020. Thank you very much for attending today's call.

[Operator:]

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