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Edited Transcript of VNE.N earnings conference call or presentation 13-Feb-19 1:00pm GMT

Q4 2018 Veoneer Inc Earnings Call

Feb 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Veoneer Inc earnings conference call or presentation Wednesday, February 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jan Carlson

Veoneer, Inc. - Chairman, President & CEO

* Mathias Hermansson

Veoneer, Inc. - CFO & Executive VP of Financial Affairs

* Thomas Jönsson

Veoneer, Inc. - EVP of Communications & IR

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Conference Call Participants

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* Agnieszka Vilela

Nordea Markets, Research Division - Research Analyst

* Brian Arthur Johnson

Barclays Bank PLC, Research Division - MD & Senior Equity Analyst

* Daniel V. Galves

Wolfe Research, LLC - Director of Equity Research & Senior Analyst

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* Emmanuel Rosner

Deutsche Bank AG, Research Division - Director & Research Analyst

* Erik Golrang

* Erik Paulsson

Pareto Securities, Research Division - Analyst

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* Jairam Nathan

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Analyst

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Maynard Joseph Um

Macquarie Research - Analyst

* Steven Bryant Fox

Cross Research LLC - MD

* Vijay Raghavan Rakesh

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst

* Viktor Lindeberg

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2018 earnings release call. (Operator Instructions) I must advise you the call is being recorded today, Wednesday, the 13th of February, 2019. I would now like to hand the conference over to your speaker today, Jan Carlson. Please go ahead.

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Thomas Jönsson, Veoneer, Inc. - EVP of Communications & IR [2]

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All right. Thank you very much, Steve. Here it's actually Thomas Jönsson, Communications and IR, to kick off the call briefly before Jan takes over. So welcome, everybody, to our fourth quarter 2018 earnings call presentation. So as said, here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; Chief Financial Officer, Mathias Hermansson; and myself, Thomas Jönsson. During today's call, our CEO will comment on our general business environment, progress we're making in Veoneer, in particular on order intake, product portfolios, some market adjustment initiatives that we're taking. And after this, our CFO will look on our financial results and then turn over back to our CEO, who will provide some commentary on the 2019 outlook. Then we will remain on the line for Q&A session.

Of course, slides are available through a link on the homepage of our corporate website. So if we turn 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 this presentation here today.

During the presentation, we will also reference some non-U. S. GAAP measures here. The reconciliations of these figures are disclosed in the quarterly press release and the 10-K that will be filed with the SEC. We intend to conclude the call at 3:00 p.m. PST. So I ask everybody to please limit yourself to 2 questions each.

With that, I will now turn it over to our CEO, Jan Carlson. Jan, please?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [3]

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Thank you very much, Thomas, and welcome, everybody, to today's earnings call for Veoneer. I would like to start out today's call by thanking the entire Veoneer team for their dedication and energy and the quality focus during 2018. It's very much appreciated.

We are very pleased that we ended 2018 with a record order intake of more than $1.2 billion average annual sales, which equates to an estimated lifetime order value of around $5.9 billion.

Looking to our business environment, we see a mix of uncertain light vehicle production and rapid change in the industry priorities. The continued WLTP effects and somewhat weak underlying demand in Western Europe, negative development of light vehicle sales and production in China and the uncertainty around the U.S. SAAR are expected to create a soft first half of 2019.

We expect the situation to improve during the second half. However, we view the light vehicle production for 2019 to be flat to slightly down as compared to 2018.

Over the last several months, the industry seems to have come to the realization that Level 4 and 5 autonomous vehicles will take longer and cost more than originally expected. And we see a definite shift and focus in the industry towards Level 2 and Level 2+ driver support systems based on conversations with our customers. This means that our core addressable Active Safety market will be more important for a longer period of time. This has led us to actively review our investment priorities and the focus of our product portfolio to identify the most effective way to allocate capital and meet these new market realities.

Despite these challenges, we enter 2019 with great enthusiasm and confidence and look forward to strong organic growth during the latter part of this year, then leading into a strong trajectory into 2020 through 2022 towards our long-term targets.

Looking to the next slide. We're extremely happy with our customer progress over the last 3 years. As a reference point, this slide illustrates our customer status in Active Safety at the end of 2017. But if we immediately flip to the next page, we can see the improvement we made in Active Safety during 2018 across most customers and product areas. Our record order intake during 2018 in Active Safety of close to $900 million is equivalent to an estimated lifetime order value of around $3.8 billion.

This level of order intake is well above our current market share and almost 2x our order intake of Active Safety in 2017.

We're particularly pleased with our increased customer presence and the quality of our order wins. We not only increased our customer awards with our Vision and Radar systems and ADAS controllers, but also established Veoneer in the new product areas with order wins in LiDAR, Driver Monitoring, Roadscape positioning systems and standalone features developed by Zenuity. We estimate that more than 60% of our Active Safety order intake in 2018 was related to Level 2+ systems, including certain autonomous vehicles or Robo-taxi applications.

In addition, we estimate around 25% of our Active Safety orders in 2018 to include various features from the Zenuity software side.

Looking now into more detail on our overall customer progress on the next slide. We can see the improvement we made during 2018 across 3 main product areas. As we alluded to earlier, the Active Safety, we increased our customer awards by 33% and increased the customer base for our offerings by more than 40%.

In Restraint Control Systems, where we have a market leadership position, we increased the customer base for our offerings by approximately 20% and lastly, in Brake Systems, we added a new local Chinese OEM to our list of customer awards, and we increased the customer base of our offerings by approximately 30%.

Looking now to our overall order intake on the next page. In addition to the Active Safety record awards, order intake in Restraint Control Systems was significantly above our current market share. These in combination with Brake Systems drove Veoneer to a record order intake of more than $1.2 billion average annual sales, a 40% year-over-year increase as compared to 2017.

We estimate this equates to a lifetime order value of around $5.9 billion. Based on the opportunities ahead of us, we estimate our order intake for 2019 to be at least as strong as our outperformance -- as our performance in 2018.

Later on, Mathias will provide more color on our historical order intake and how it impacts our organic growth.

Looking now to engineering and technology on the next slide. Investing in engineering will continue to be an important differentiator for Veoneer in the marketplace. During 2018, we hired around 1,100 engineers, which now brings us to close to 4,700 engineers, and where 70% we estimate are software engineers.

Keep in mind that this excludes approximately 600 software engineers within Zenuity. We indicated during our last earnings call that our R&D expense would increase this year by around $90 million as compared to 2017. We finished 2018 at $466 million. This level of engineering support is required to develop our strong order intake over the last 3 years into future sales growth. And lastly, during the fourth quarter, we were awarded a significant LiDAR program with a major global OEM, which we'll launch in 2021 on an autonomous vehicle application. This program is based on the Velodyne surround view scalable reference design, where Veoneer's role is to commercialize the product to automotive grade standard as the Tier 1 commercial and technical interface to the customer.

I will now turn it over to our CFO, Mathias Hermansson, here to speak more about our financial results and the 2019 (sic) [2019] numbers.

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [4]

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Thank you, Jan. So then flip the page to Slide 9. As we have mentioned earlier, the quarter continued to reflect the low order intake levels prior to our significant increased levels in 2016, combined with a large RD&E investments we -- to execute on the strong order book we currently have.

We are, of course, also impacted by the macro-environment and the LVP development as all our peers in the industry. The overall net consolidated sales in the fourth quarter came in as expected at $535 million, a 10% decline as compared to the same quarter in 2017. However, a sequential increase of around $10 million from the previous quarter.

Our Active Safety organic sales growth of 3% during the quarter was hampered by the customer mix effect in Western Europe, due to the WLTP and overshadowed our first Vision launch with Geely and expand Radar business with FCA and Honda. In the fourth quarter, our operating loss of $75 million was in line with our internal expectation following the increases in RD&E, we highlighted during the last conference call.

Lastly, we had strong operating cash flow (inaudible) of $1 million in the quarter, which was mainly due to continued hard work with our capital efficiency and some positive timing effects in working capital. Since our listing in the summer, we have improved operating assets and liabilities more than $65 million to the end of this year -- last year.

Looking now into some further details for the quarter on the following slide. Our sales decline of $58 million as compared to the same quarter last year was comprised of an organic sales decrease of 9%, or $56 million, mainly driven by Restraint Control Systems of $51 million and Brake Systems of $10 million as currency effects were minor in the quarter.

The gross profit decline of $15 million year-over-year was mainly attributable to the volume and product mix impact caused by the organic sales decrease as, again, the net currency effects over here were minor on gross profit.

RD&E of $132 million, increased $37 million year-over-year was, as I mentioned, in line with our communication we had last quarter. Then the SG&A increase of $17 million versus last year was as planned and is essentially unchanged from Q3. This increase is mainly related, of course, to the additional costs associated with being a standalone company from the summer onwards.

The CapEx of $65 million in the quarter was around 12% of sales in the fourth quarter. However, our full year CapEx of around 8% of sales or $188 million was in line with our previous communication. And therefore, we ended the year with $864 million as cash balance.

If we then flip the page, I will just comment a little bit on how the order intake evolved into revenue growth during this year and moving forward.

As we had mentioned earlier, the weak order intake between 2013 and 2015 has negatively impacted our organic sales from 2017 to 2019.

Looking ahead to the later part of this year, the strong order intake over the last 3 years will start impacting our deliveries and revenues, particularly from Q4 this year onwards and continue to drive our organic sales growth for the coming years.

Looking now to some of the key growth drivers on the following slide. We have summarized some of the key lead program launches and model facelifts, which will drive the step up in our organic growth, as I just previously mentioned. This strong lineup of launches is, however, to some extent mitigated by negative impact from the legacy Mono vision business ramp down we have with BMW and temporary effects from the shift from 24 gigahertz to 77 gigahertz Radar technology.

Combined, these launches and facelifts represent between 10% to 15% of our annual sales in 2019, depending on take rates and LVP, but that's the current estimate we have. The average content per vehicle of all these models is around $135; however, the span of the content range is between $40 of the low end and up to $800 per vehicle on the high end.

And now for the outlook and final slide, I will hand over the word to Jan.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [5]

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Thank you, Mathias. Turning the page, we see the outlook for 2019 and some numbers also for 2018. Our current customer call-offs and deliveries that we see currently reflect weaker demand situation in China and in Western Europe. This leads us to anticipate a decline in the light vehicle production during the first 6 months of 2019.

At this time, we expect this demand to stabilize and return to growth during the second half of the year, resulting in an estimated full year light vehicle production being flat to slightly down in 2019 as compared to '18.

Our sales during the first half of 2019 are expected to remain relatively flat sequentially from the second half of 2018, albeit the decline year-over-year and then sequentially improve in the second half of 2019.

Consequently, we estimate our organic sales to be flat to decline slightly for the full year 2019, while we estimate the currency translation impact to be approximately negative 2% as compared to the full year 2018.

As a result of our sales and R&D development, in combination with implementation of our market adjustment initiatives during 2019, we expect a week operating margin and cash flow during the first half of the year. The first quarter is expected to be weaker than the fourth quarter in 2018 with an anticipated improvement during the second half of 2019.

Assuming successful execution of the initiatives that we talked about earlier here, we expect our net cash to cover our funding requirements until the company reaches positive cash flow. However, additional funding may be required if order intake increases beyond our expectations if the underlying near term business conditions deteriorate further or if we would make acquisitions.

Now looking onto the next page. We have come to the end of the formal comments of today's call, and we would like now to open it up for Q&A. So I turn the call back to you, Steve, to moderate the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have today comes from the line of Brian Johnson.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [2]

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Yes, a couple of questions. First, I kind of struck by your language about the move to Level 2+ where they call it auto pilot, it's just driving -- co-piloting, but in particular, what your hint, does that mean you're reprioritizing resources. So a couple of subquestions. Does that imply anything about redirecting resources away from Zenuity towards the core business? And second, just given where your financials are, but given this Level 2+ opportunity, how are you -- what are the levers, if any, around the RD&E expense to improve near-term profitability, especially in light of the shift you're talking about?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [3]

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Okay. When it comes to the focus on Level 2+, I think it has been a lot of articles around the industry and, in particular, what I think many of us saw at the CES, a focus more towards advanced driver support and Level 2+ systems for a period of time. And there has been as well announcements around Level 4 being pushed out in time by several companies here, and we see the same when we talk to many of our customers. And when it comes to how this could impact our prioritization with regards to Zenuity, there is a lot of software needs in L 2+ systems. And of course, it might be some reprioritization inside Zenuity, but overall, the Zenuity resources and talents that we have very skilled talent pool of 600 people that we are very proud of, those are very much appreciated and needed also going forward in the scale of Level 2. When it comes to leverage R&D resources for Level 2+, I think the product focus on cameras, on radars, on ADAS controllers or airbag controllers. It is very much playing in our favor, and we would expect that with the prioritization and also with the effect of a new organization that we launched in December last year, we would see efficiency improvement and leverage on an increased demand in that.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [4]

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Okay. And kind of second question is around the order intake. I mean, just -- if you -- what do you -- if you kind of go out, the order intake implies average sale, think of about $1.2 billion, if you just take those lifetime values of -- so maybe our calculations are wrong if your product cycles are different. What does that mean for the sales sort of midterm? And are you tracking even towards your revised 2020, 2022 guidance?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [5]

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First of all, I think you said, maybe it was -- or maybe I misheard you, you said $1.2 billion lifetime sales, it's lifetime sales of around $5.9 billion or $5.8 billion, so close to $6 billion lifetime sales. This is average annual sales of that $1.2 billion -- little more than $1.2 billion. And if you look to that trajectory and you look to where we are, I think we are tracking well to directionally and also operationally, we are tracking well to the targets, the revised targets that they set out in October. Having said that, I think it's with the initiatives we are looking into it's likely that those targets may be revised at some point, when we are coming down the road as an effect of the market conditions and as an effect of the initiatives that we are taking. But as I said, again, now we are tracking well operationally towards those targets.

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Operator [6]

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The next question today comes from the line of Hampus Engellau from Handelsbanken.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [7]

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I have 2 questions. First, just starting off from the Active Safety side, the USD 900 million in orders. How much of that was compared to the available market? And what's your grasp on how many years you turn around this market? Second question is on the mix issues here in orders. How is the Mono vision system trending against the Stereo? Is there major part Mono now? Or is Stereo the major part? Those are my 2 questions.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [8]

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Okay. All right. If you take the first part, the breakdown of the Active Safety, we haven't given you any more details around the $900 million. We expect the $900 million to be a significant increase compared to our market share. So we expect that the $900 million here is increasing our share and giving us share gains. Besides that, I have no details on numbers to give you specifically on that. When it comes to Stereo and Mono, there is definitely an increased Stereo interest out there, and we are seeing increased activities on the Stereo vision cameras on many customers. Mono, it's still a very big market and probably it will still be for a long period of time. So that's clear, but the interest of Stereo vision product has been very good.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [9]

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Can I just do one follow-up there. On the Level 2 comment plus, is -- are you achieving Level 2+ for the Mono system?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [10]

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Yes, we are doing that. We are achieving Level 2+ systems with Mono cameras, we are. But quite often, when we are doing that, it's also a blend of both Stereo and Mono, depending on the equipment (inaudible) on the standard. It's also very much fused when you do a Mono camera, it's fused with Radar as a consequence out of using a Mono vision camera in the sense of Level 2+. We call that very much a system order. This is very much system-related business, where you take these 2 cameras -- or these 2 products.

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Operator [11]

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And the next question on the line today comes from Vijay Rakesh from Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [12]

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Just looking at your presentation, you said for fiscal '18, your order, Active Safety order intake or order intake grew 40% year-on-year. I think in Q3, you'd said up 25% year-on-year. This year, you pick up in Q4, just wondering if you can give some more color. I saw you noted that LiDAR and the software pickup, but any more color there?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [13]

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We had a strong order intake in Q4, as we had 2017. We talked about that throughout the year that it's back-end loaded. And it actually looks like even as early as this might be to talk about it, but it looks also that 2019 is back-end loaded when it comes to order -- as it looks for now. Little too early to talk about because a lot of things may happen, but both 2017, 2018 was back-end loaded. We had a good run in the fourth quarter.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [14]

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Got it. And on the OpEx side, are you pretty much done with most of the hiring here. I saw you had a pretty nice chunk in Q4, so 1,100 for the year. Should we expect that headcount kind of to stabilize here as you go through '19?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [15]

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We are looking into this. As we said, here, we're looking through initiatives. We are setting right now a new organization. We set it -- we'll have that up and running and the consequence of that organization and of those 3 priorities and the efficiency gains that we estimate here will show us to what extent we -- how much we will continue to hire going forward. We are absolutely determined to capture talent. We have a lot of good people. We are very proud of our talent pool that we have on the engineering side and the -- overall, in Veoneer, and we should continue to capture that. But of course, we also have to look through the efficiency and the gains out on the resource.

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Operator [16]

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The next question today comes from the line of Erik Golrang from SEB.

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Erik Golrang, [17]

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Two questions. And the first one, did I hear you correctly, you said that 20% of the Active Safety orders last year included some kind of software element from Zenuity?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [18]

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Yes.

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Erik Golrang, [19]

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Okay. Second question, and this is maybe, I don't -- you said that you're tracking operationally towards the target, but expect them to be revised, nevertheless, at some point. Could you just clarify a bit what that means and what specific targets you refer to? Say for margins or...

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [20]

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Yes, I cannot really do that. We cannot really do that. We are seeing change in the market, and we are seeing change in the expectations of the industry towards more L 2+. And that will have an impact. And as a consequence, we are doing prioritization of our investments, we are renewing the product portfolio as a consequence. So -- and I said, it's definitely not going to be it, but I said, it's likely that we will revise our target at some point in time if we are seeing continued change in the market. But it's too early to comment on it. But having said all of that as consequences of what market is -- what change market is going through, I think it is important for everyone to see and hear that we are working operationally towards these targets with good traction, that is important.

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Erik Golrang, [21]

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Okay. But just a follow up there. I guess, directionally, at least, you have to be able to say what you're thinking about, and I guess, given the lead times, it concerns more about the profitability trend rather than sales. And in one end, you're saying that you're looking into operational efficiency gains potentially and in the other end, you might need more investment to follow the industry where it's heading. So the net, is that more margins earlier on or further out in time?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [22]

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We are not quantifying that at this call. Remember, we launched a new organization in December 10. We are right about to get -- putting this in place and seeing that it's stabilizing and seeing that we will get the gains that we're expecting out of it. And people are working tremendously hard here to execute on the good order books. So let us be back on that with the later stage. But as Brian asked here earlier in the call, the question about leverage. Of course, if the L 2+ will be more focused on the core products of radars and cameras and ADAS controllers in that type of fusion systems, we will, of course, get leverage out of that also in an increased fashion.

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Operator [23]

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The next question today comes from Viktor Lindeberg from Carnegie.

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Viktor Lindeberg, Carnegie Investment Bank AB, Research Division - Financial Analyst [24]

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Maybe following up on the topic of product launch programs and potential revenue target revisions. Just to understand have you seen or is it likely that you will have any cancellations on orders already taken the past year or so relating to the shift in demand? That's my first question.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [25]

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No. No, we don't see any such things. We are seeing an increased awareness of the quality aspect of software. We are seeing an increased awareness of functional safety and the importance of functional safety when you design your software and hardware. So if you drill down in the projects, we are seeing some increased focus on the areas that we have been talking a lot about for a long time that will require some more efforts. But no cancellations.

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Viktor Lindeberg, Carnegie Investment Bank AB, Research Division - Financial Analyst [26]

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Okay, that's clear. And then on your heat map in your presentation on customer status 2017 and 2018, I was just looking at the number of business awards for the LiDAR, and it seems to be unchanged, the awarded business year-over-year. But you have still been awarded a LiDAR contract now in Q4 '18. So is it a change of client or is -- what has happened here?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [27]

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It's the same customer. So we have been awarded orders here through the same customer, so that's why you see the chart being as it is.

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Operator [28]

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The next question today comes from the line of James Picariello from KeyBanc Capital Markets.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [29]

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Just to beat a dead horse here, the $3 billion in sales for 2021, which was kind of the framework as of last quarter. Is that still in play? And does that have any impact on the $4 billion plus target that was clearly communicated as of last quarter as well?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [30]

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As I said, and I'll repeat the whip on the dead horse here. We are working directionally and operationally towards those targets. And I also say that with the order intake that we see, we are tracking well towards those targets. So that is -- there is no change there.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [31]

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Okay. And then can you just elaborate on the market adjustment initiatives internally that you've identified. And then in the prepared remarks or in the press release, you mentioned the context related to your review of investment priorities, the focus of Veoneer's product portfolio. What exactly are you speaking to there? And to what extent should we expect free cash flow or cash flow to improve in the back half, just to get a little more context on your liquidity. You mentioned confidence that you'll be able to fund your investments with net cash on hand until you become free cash flow positive. So just trying to get the bridge there.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [32]

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No -- and I understand that and -- I understand there is a need to be -- to get -- be more granular here, and we will be more granular down the road, but as of this stage, we are reviewing the entire product portfolio based upon that advanced self-driving levels will be pushed out most likely and as is seen in the industry right now. That will mean that the industry will take a path of more L 2+ systems for a period of time, meaning more of our core products, more advanced systems infusion of radars and cameras, et cetera. And this will have an impact to us also later down the road on a financial basis.

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Operator [33]

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The next question today comes from the line of Erik Paulsson from Pareto Securities.

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Erik Paulsson, Pareto Securities, Research Division - Analyst [34]

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This is Erik, Pareto. I was wondering about your engineers hired during 2018. You hired 1,100 during the year, and I think 350 during Q4. Where are those based or are going to be based here in the future? And do you see a problem with the salary inflation, et cetera, or to find people actually?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [35]

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Well, I think we're very proud of the -- in this environment here to be able to recruit 1,100 engineers. Very skilled people, essentially where we can find them around the globe. We have major Vision centers here in Sweden. We have major Radar centers in the U.S., and we are extremely proud to see this happening. We are, of course, looking through the footprint of our R&D activities and for certain areas, where it is applicable, we're also going to use as much as we can best-cost countries. But the most important part for us is to find the right talent. The right talent here to be able to keep up and get a good traction when you go into advanced algorithms and artificial intelligence, et cetera. And we have been successful in doing so. But this is also a part of our whole initiative now with the new organization to look through this.

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Operator [36]

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The next question today comes from the line of Steven Fox from Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [37]

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I had 2 questions. First off, I was just trying to get a further sense for your ability to reach your self-funding goals without another capital raise. You provided some upside and downside potential to needing more funds, but I'm not sure what the error -- the margin of error is with that? Can you give us a sense for what the safety zone is around your current cash level? And then I have a follow-up.

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [38]

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Mathias here. I think the way we look upon it is that as we write given that we execute some of these initiatives that Jan alluded to, I think then we should have sufficient headroom for that. Obviously, with the caveat that we have in the release as well with the accelerating order intake and those kind of things.

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Steven Bryant Fox, Cross Research LLC - MD [39]

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Okay. And then in terms of just the leverage that you could create from some of the core radar and camera work that you've done in the past. Can you sort of be more specific on whether you're talking about just building on new orders or do you think there's -- are we talking more operating leverage, less R&D required, et cetera? How does that play out in the different financial metrics. Does that makes the shifting towards some more established technology offers -- offerings that you guys have?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [40]

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Well, what we were talking about if there is a stronger focus or on product -- on the product portfolio, you can of course utilize more of the efforts into application engineering. If you have a wide variety of products that needs to drive core development, of course, and a wide spectrum of different activities that you will allocate to technology development and you need to hire more people for order intake and for application engineering. So the whole name of the game here is for us to keep up the momentum that we have with our system orders, there are system initiatives, but look through the market shift towards more of L 2+ and try to use more of the engineers for the customer applications.

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Operator [41]

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The next question today comes from the line of Maynard Um from Macquarie.

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Maynard Joseph Um, Macquarie Research - Analyst [42]

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You talked about the growing realization through self-driving cars are going to take longer and be more expensive than previously anticipated. Can you talk about the timeline for when you think full self-driving will be here now? And what specific dynamics are there that are driving the costs up?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [43]

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Well, I think the complexities -- you have to have more -- touch a little bit on functional safety here before the validation envelop for the systems and the conditions to make it truly reliable is of utmost important. I think everybody has understood that from the beginning, but coming into it, you realize that it's -- the effort going into it probably more than initially estimated. The other thing is the complexity of the product. I think that is something that is also happening there. So I think that we should remember that the Level 4 and the self-driving cars will come. What this will give the industry is an ability to take it more step by step. You take if in a more qualified, more safe way where you can have the driver in charge, you can develop the core product step-wise, thereby get validation, you get data and you get a robust system. In doing so, it's the benefit for everyone, we believe, and it plays in favor for Veoneer because this is in the heart of where we execute and where our product portfolio is and it's also to the good for the industry as such.

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Maynard Joseph Um, Macquarie Research - Analyst [44]

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Great. And then just for my second question on your net cash comment. Can you remind us on M&A, what your priorities are? And if there is a need to raise cash, what kind of options do you have to do so?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [45]

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Yes, that's -- it's discrete situation. We are looking to additional technologies and we're looking to more of the same. It's hard to describe and to give you some or any specific things. One area that is of interest for collaborations or for technology interest going down the road will definitely be connectivity in a bigger scale. When 5G network is up and running that will one way or the other have an impact on self-driving cars and that is something that we will monitor and we will look into at some point in time when we think it's the right time to do it. But that is as an example of things. But otherwise, we think that for a long period of time in L 2+, radars, cameras, ADAS controllers, will -- LiDARs to some extent will be very important factors where we are already present.

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Operator [46]

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The next question comes from the line of Agnieszka Vilela from Nordea.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [47]

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I have 2 questions. Starting with the BMW. One [of vision] wind down in 2019, '21. Can you just quantify what kind of impact on sales it will have for you?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [48]

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I will think that it -- I can't do that right on the cuff here, I'm sorry for that, but it will be diminishing. It will wind down here sequentially through '19 and into '20.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [49]

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But nothing substantial to think on the growth for your Active Safety?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [50]

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No, no.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [51]

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Okay. And then my second question is on operating costs for 2019. And I had really -- what are your expectations for the R&D cost. Is it fair to assume a kind of run rate of $130 million per quarter going forward? And also when you speak about the kind of efficiencies that you want to implement for organization, do you perceive possibility to reduce your R&D workforce? And then also on OpEx, will there be any kind of extra costs for the COO and CFO leaving your team?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [52]

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It's Mathias here. If I start with your RD&E cost outlook, I think we end the year in a run rate and I think the way we should look upon that is that, that's in the -- for the first half year, that's what largely similar levels you can say. Remember, just also -- just on the growth side, for it to be specific, remember, also I think in Q1 it's likely that our engineering income seasonality wise will be lower. So Q1 will be impacted more as far as we can say that.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [53]

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You had a question specifically to the COO leaving and Mathias here leaving, we don't comment specifically on individual cases leaving, all those relevant numbers will be available in the proxy statement.

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Operator [54]

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The next question today comes from the line of Joseph Spak from RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [55]

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The first -- 2 questions. The first one really relates, I guess, back to some of the guidance commentary and cash flow. You had a line in there referring to the weak operating margin cash flow in the first half, that it also is related to implementation of market adjustment initiatives. So can you help us -- like what's the cash cost associated with that?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [56]

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I think -- we haven't specified anything of that and it's a little bit too early to say.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [57]

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Okay. Then what about -- I think you contributed $70 million to Zenuity in 2018, but given what you talked about in the shift to Level 2+, like how does that affect the plans for contributions in '19? And can you tell us: a, what you are planning to contribute in '19 to that JV if anything. And then just on sort of base Veoneer, how do we think about CapEx. Is the $188 million that you spent in '18 the right level?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [58]

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I think at this stage, I don't think there is any major difference from what we currently plan.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [59]

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Is that a comment as it related to the CapEx or the contribution to Zenuity?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [60]

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Sorry, the Zenuity contribution.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [61]

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So similar to what you did in '18.

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [62]

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Oh the run rate, where we all know, I would say, because I think it's been growing a little bit.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [63]

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As we said before, Zenuity is an extremely valuable talent pool, and there is a lot of demand for software and a lot of demand for Zenuity contribution into 2+ -- and a lot of our order intake we talked about that before here that 20% is including Zenuity activities and the orders we see a lot of use and the need for Zenuity for the new market needs.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [64]

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Okay. And CapEx?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [65]

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Yes. On the CapEx side, it's on the high single digit level. This is the best estimate we can give you today.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [66]

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Okay. And then last -- the second question is just a clarification as it relates to the LiDAR order with some of the language around it, I think you called it first commercial LiDAR order? Does that mean commercial use, meaning it's for a Robo-taxi initiative from an OEM because -- and if so, I mean, I think you said the goal is to get it to automotive grade, but is that the same grade as would be required for a consumer vehicle?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [67]

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Well, it's both yes on the 2 questions. It is a commercial use for Robo-cap application and it is for commercial use. And the automotive grade here is absolutely the same grade as for any other automotive application and the Velodyne technology is an absolute great technology as such and our contribution here is (inaudible) the Tier 1 for the industrialization and volume production.

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Operator [68]

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The next question today comes from the line of David Kelley from Jefferies.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [69]

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Just a follow-up on the autonomous delays. Is that industry-wide or is it customer specific? And are you seeing any customers abandon Level 4 and Level 5 projects? Or is this solely about the project timelines being pushed out?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [70]

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It's absolutely predominantly a push out, as I think, I'd said it before, the L 4 is not gone by any means. It's delayed, people realize it's getting more and more complex, and I think that is the main path you can see. We have to remember that we talked here about L 4 for a volume market, we talk about that for the formal passenger cars being able to drive by themselves. There is a Robo-cap market where you had (inaudible) at Level 5, that is a bit different character with a different timeline, with different needs and priorities. And that is not working in the same way as the Level 4 for the mass market.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [71]

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Okay, great. And maybe just a follow up and looking at the Active Safety heat map. It looks like Driver Monitoring bids increased year-over-year and you're winning business there? Do you foresee Driver Monitoring application in Level 2+? Or is that tied to Level 3 and fully autonomous? And I guess, how should we think about the addressable market for a project like Driver Monitoring?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [72]

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Yes. We are seeing Driver Monitoring being a part of Level 2+, maybe not to the same definite need as in Level 4, but definitely we are seeing Level 2+ having Driver Monitoring as an ingredient in the system. I think it's also because the carmakers and the industry as such and we, as integrators or suppliers, we also would like to use this technology to learn and to validate the technology and the system before you turn it on, so to say, in the L 4 mode. And by doing so you need to get it on board in the L 2+ scenario in the timeline.

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Operator [73]

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The next question today comes from the line of [Theodore Sousza] from Morgan Stanley. Unfortunately, we have no response from Theodore. I'm just going to release his line. The next question comes from the line of Jairam Nathan from Daiwa Capital Market.

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Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [74]

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Just following on, on the CapEx question from Joe here. The -- from what I understood, a lot of the CapEx this year was related to probably new capacity for -- from the new business at Brake Systems. So is that getting replaced by some other initiatives going forward? If you could kind of explain what the components of CapEx would be?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [75]

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I think you're absolutely right for last year. I think what we will see particularly first half of this year as well is continued fairly high CapEx for the Brake business building up towards the (inaudible) production for that program. And other than that, I think it's general volume buildup for all the Active Safety orders that we've taken over the last few years.

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Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [76]

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So is there kind of a long-term run rate that you can provide us like beyond 2019 once the Brake business bulge is done with?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [77]

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I think it's -- if anything in terms of percentage of revenue (inaudible) should come down.

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Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [78]

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Okay. Okay. And the other comment about R&D was that you would -- one of the reasons why you would -- you could see R&D coming down is -- as the reimbursements from OEMs kind of -- or customers go up. So did you see some of that this year, last year and is that on track to how you're thinking about?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [79]

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Could you just repeat the question, I'm not really sure we followed.

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Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [80]

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So you guys had said that R&D expense could -- would also -- could come down partly because your reimbursements from customers would go up, would increase. And have you seen -- are you still on track to -- for that?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [81]

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I think -- generally, I think we said that we expect it to go up, I guess, but I think what we also said just now that Q1, I think it's a seasonal effect as well. So the income is going to go up and down between the quarters.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [82]

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Normally seasonality of engineering income is, the engineering income is high in quarter 4. That is what you can see, and then it's coming down because -- I don't know why it is like that in any industry that is working all year round, but that's how it is.

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Operator [83]

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The next question comes from Emmanuel Rosner from Deutsche Bank.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [84]

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So in the press release and in your remarks there are multiple mentions of these initiatives both in terms of a way to improve performance in the second half as a way to make sure that you have enough cash and then mention our future initiative as well. Can you just tell us what the initiatives are? And what sort of benefits we should expect and on what timeline?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [85]

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Well, as we said, we are looking through initiatives of -- we put a new organization in place. We are putting a very strong product and customer focus through that organization based on L 2. We are reviewing our product portfolio and also we are looking through the investment priorities overall in the company. And we are doing this based upon to get ourselves even more customer focus, product focus, but to the highest extent seeing the L 2+. I can't give you any numbers of efficiency gains as of a percentage or as a dollar value by this year, et cetera, but we are seeing -- should see improvements out of this toward this year-end and during second half and towards year-end, that is what we're seeing today.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [86]

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And specifically, on the investment priorities, as a result of the self-driving timeline, is that -- are you specifically reviewing this within your Active Safety business? Or is this a broader review across the organization? Could you be deemphasizing investment in a non-active Safety product lines as a way to sort of like unlock further capital towards what's growing faster than you expected?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [87]

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Well, we are, of course, reviewing the entire product portfolio that we have and looking to the company, we are only a 6 month or a little bit more than 6 months company old right now and we are standing on our feet, we are moving in an environment that is moving extremely fast and we are reviewing our position. We have good traction with customers, good order intake, and we are using the -- should use the best out of our talent pool as in -- of our resources as much as we can. And that will not be limited only to Active Safety, but, of course, across the board.

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Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [88]

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And on what timeline can we expect to hear from you around the sort of specific decisions and actions and whether those are enough?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [89]

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We haven't specifically set out any timeline on this one. We will definitely talk again on -- in April after the first quarter and then July after the second quarters. I'm sure we will have opportunities to discuss products and ask questions around it. And we will give you as much information as we can during those calls and also in the meantime, of course.

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Thomas Jönsson, Veoneer, Inc. - EVP of Communications & IR [90]

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Just a reminder that we have no more than 2 minutes left, so it's probably one question here.

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Operator [91]

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And the next question today comes from the line of Dan Galves from Wolfe.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [92]

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On the operating margin development, over the course of 2019, you're saying that Q1 will be worse than Q4 of '18 on sales that are flattish sequentially. So what's causing the weakening of operating margin during the first half? Is it simply this lower engineering income that you referred to or is there anything else we should be thinking about?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [93]

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I think there are 2 things, generally speaking. I think one is normal seasonality, I think, and the second one of it is the pure operating leverage on the production overhead towards the end of the year (inaudible).

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [94]

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Okay. Got it. And then, I thought, on Slide 12, there was an interesting comment about 10% to 15% of annual sales coming from these key launches and facelifts. I guess, my question is, how much of that is truly incremental revenue as an indication of kind of where 2019 may finish up on a run rate basis on revenue?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [95]

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It's hard. I would say, it's maybe between 50% and 2/3 around that, that is incremental. That's an estimate.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [96]

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Okay, got it. And one more quick one. Can you just remind us of the timeline that you've laid out to get to cash flow breakeven. I believe it was somewhat later than the target to get to breakeven operating income?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [97]

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We have said about 1 year after EBIT positive.

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Thomas Jönsson, Veoneer, Inc. - EVP of Communications & IR [98]

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Okay. So I think we are at the hour and out of time.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [99]

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All right. Thank you very much, Thomas. I then would very much like, again, to thank everybody for your interest in Veoneer for good and challenging questions. And we will give you updates on all the different topics we discussed here, of course, as much as we possibly can at our next earnings call here that we have planned to take place on Monday, April 29, 2019, so this year. That will be the first quarter earnings call. In the meantime, I wish everybody well, and thank everybody for now and goodbye.

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Operator [100]

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Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.