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Edited Transcript of VNE.N earnings conference call or presentation 23-Oct-19 12:00pm GMT

Q3 2019 Veoneer Inc Earnings Call

Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Veoneer Inc earnings conference call or presentation Wednesday, October 23, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jan Carlson

Veoneer, Inc. - Chairman of the Board of Directors, President & CEO

* Mats Backman

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

* Alexandre Raverdy

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Brian Arthur Johnson

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

* Christopher Patrick McNally

Evercore ISI Institutional Equities, Research Division - MD

* Dan Meir Levy

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* Erik Paulsson

Pareto Securities, Research Division - Analyst

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* Itay Michaeli

Citigroup Inc, Research Division - Director and VP

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Analyst

* Jeffrey David Osborne

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Joachim Gunell

DNB Markets, Research Division - Junior Analyst

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Peter Testa

One Investments S.A.G.L. - Analyst

* Vijay Raghavan Rakesh

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor 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 Q3 2019 earnings release conference call. (Operator Instructions)

I'd now like to hand the call over to your first speaker today, Thomas Jönsson, Vice President Communications. Please go ahead, sir.

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

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Thank you very much, Summer. And welcome, everyone, to our third quarter 2019 earnings call presentation. Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; our Chief Financial Officer, Mats Backman; and myself, Thomas Jönsson. During today's earnings call, our CEO will comment on our current business situation and the progress we're making at Veoneer and, in particular, about the market adjustment initiatives now underway in our company. Then Mats Backman will walk you through our financial results, our efficiency programs and provide some commentary around our outlook for the remainder of 2019. After this, we will have a Q&A session.

The slides that we use are available through a link on the homepage of our corporate website. So if we look now to the next page, 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 the reconciliations of these figures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC. This call is intended to conclude at 3:00 p.m. CET at the latest. So please limit yourself to a maximum of 2 questions each.

With that, I will now turn it over to our Chief Executive Officer, Jan Carlson. Jan, please.

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [3]

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Thank you very much, Thomas. I would also like to welcome everyone to our third quarter earnings call here today. Starting off looking into our business highlights by turning the page. I will start with thanking the entire Veoneer team for their continued dedication and focus on quality, while driving strong operational improvement.

Looking first to the underlying market conditions, the light vehicle production continues to deteriorate to the point where the second half of 2019 is now expected to decline by at least 3% from the first half. This represents a deterioration of approximately 4% or 1.7 million vehicles from July expectations, and we also continue to see a further erosion through 2022.

Looking next to our market adjustment initiatives, we are pleased that the initiatives we began to undertake in the beginning of this year are gaining traction. Our gross engineering costs continue to decline due to improving resource management and outsourcing activities, particularly with some engineering-related activities in Active Safety. We also continue to improve our overall cost structure and net working capital through various initiatives, and we are making further progress with strategic reviews of our joint ventures.

During the quarter, we are pleased to have expanded our Active Safety customer presence, especially in vision, including thermal sensing, radar and our central compute ADAS ECUs. Despite seeing some delays in a new programs sourcing with certain customers, our last 12-month order intake as of third quarter remained around $1 billion future average annual sales.

Heading into the fourth quarter, we see same order intake opportunity, as earlier indicated, although certain opportunities may be delayed through 2020. And lastly, we see some launch delays on certain models and the ramp-up of volumes is slower than expected, while underlying vehicle volumes are somewhat lower.

As a consequence, the expected growth from our 2019 launches have not materialized as expected. Despite this challenging environment, we remain focused on our launch readiness and quality execution ahead of the very heavy launch period in 2020 and 2021.

Looking now on the next slide. As alluded to earlier, we are in the middle of an industry downturn where the light vehicle production outlook has been deteriorating since July of last year. Overall, this now represents approximately 46 million fewer vehicles or close to 12% for the time period 2019 through 2022 and is 9 million fewer vehicles than reported just only 90 days ago. Although this is not clear when we see the floor in the light vehicle production, the current outlook indicates that both 2019 and 2020 will remain around 86 million vehicles. These levels were last seen in 2015 and are off the peak level of around 92 million vehicles in 2017.

The entire auto industry is affected by the limited light vehicle production growth through 2022, and of course, continues to have an impact on our business and targets. This near-term market uncertainties force us to adapt and prioritize our technology road maps and customer opportunities, while having tight cost control and strong cash flow management.

Looking now on to our customer development in Active Safety on the next slide. We continue to make solid progress in expanding our Active Safety product portfolio across our customer base. We are particularly pleased with adding our 7th customer business award for vision and also receiving our 1st thermal sensing award for a RoboTaxi application with a leading global OEM.

In addition, we expanded our radar driver monitoring system and RoadScape presence with new customer wins during 2019. We have also expanded our technical qualification in vision, radar and ADAS ECUs. Consequently, we continue to be optimistic about securing business awards with new customers across the portfolio during the fourth quarter and into 2020.

Looking now on to our 2019 launches on the next slide. We have summarized the key new program launches and model facelifts, which will support the improvement of our organic sales development, especially as we head into 2020. In certain cases, we see some launch delays and slower ramp-up of volumes and under -- and lower underlying vehicle volumes. This is evidenced by the light vehicle production according to IHS, where the second half of 2019 is now expected to sequentially decline 3% from the first half of this year.

It represents, as I said, a change of more than 4% from earlier this year. Our strong lineup of launches is, however, mitigated by the negative impact from the mono vision business ramp up -- ramp down at BMW as well as a temporary negative mix from 24 gigahertz to 77 gigahertz radar technology.

Combined, these new program launches and facelifts represent between 10% to 15% of our annual sales. This, of course, depends on take rates and light vehicle production assumption. The current average content per vehicle of these models is approximately $160. However, the content range is between $40 and up to $800 per vehicle.

Now looking on the next slide. During the quarter, we introduced our scalable open system architecture to our product portfolio at all ride and drive events at Västerås here in Sweden. In a growth market like Active Safety, a platform approach is necessary for a sustainable growth and hence the need for scalable architecture. Our focus is on system, silicon and software. Our emphasis is to have the best system knowledge built on the right selection of hardware with agile software development. The system is based on having a central repository, which allows for the reuse and replication of base technologies, feature integration, safety critical signals and mechanical adaptation and system verification. This means that the only customization that should remain for applications which configure the vehicle interfaces and OEM-specific feature set.

In parallel, we intend to stay ahead of the curve with cutting-edge design. Since one of the largest cost drivers is validation and verification, we focus on the reuse of software verification. And lastly, we intend to utilize the technology advancements in both silicon and AI to have the right partitioning cost and performance.

I will now leave it over for financial highlights to our CFO, Mats Backman, please.

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [4]

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Thank you, Jan. Looking now to our financial highlights on the next slide. As Jan alluded to earlier, the macroenvironment and LVP situation continues to adversely affect our operating results in the near-term.

Our overall net consolidated sales in the third quarter of $462 million was essentially in line with our expectations, while our operating loss and operating cash flow were both slightly better than expected. We're especially pleased with the sequential development of our financial results, where in the third quarter RD&E growth and SG&A have improved sequentially from the first quarter by $25 million combined.

In addition, our net working capital improved $97 million during the first two quarters . As we have mentioned for several quarters now, our company continues to be in the middle of a tremendous investment period to support the ramp-up of future sales growth and strong order book. As a consequence, investment for capacity increases, mainly in Active Safety and Brake Systems, resulted in CapEx for the quarter of $59 million or 13% of sales. Despite this slightly higher run rate, we expect the full year 2019 CapEx to be approximately 12% of sales, roughly in line with the first 9 months of this year.

Looking now in terms of -- into some further details for the quarter on the next slide. Our sales decline of $64 million as compared to the same quarter last year was compromised of negative currency development of 2% or $10 million and organic sales decline of 10% or $54 million. The organic sales decline was mainly driven by Restraint Control Systems of $29 million and Active Safety of $15 million, while Brake Systems declined by $10 million.

Within Restraint Control, the decline was mainly due to the phase-out of certain vehicle models mainly in North America, while a negative radar product mix shift from the 24 gigahertz to the 77 gigahertz technology were the main drivers for Active Safety. The decline in Brake Systems was mainly driven by lower volumes on certain Honda models in China. The gross profit decline of $26 million year-over-year was mainly due to the volume and product mix impact caused by the organic sales decrease and negative currency effects of $4 million.

RD&E net of $144 million increased by $35 million during the quarter as compared to 2018 due to the steep ramp-up of engineering hiring during the last 12 months, while SG&A remained relatively flat year-over-year at $45 million due to lower outside servicing. As a consequence, our market adjustment in each of these, the RD&E net run rate has decreased to approximately $580 million and SG&A to around $180 million.

Lastly, our operating cash flow for the third quarter drove better than expected cash flow before financing activities due to continued strong working capital performance mainly in receivables and inventories.

Looking now to sequential performance on the next slide. Our sales decline of $27 million as compared to the second quarter was compromised (sic) [comprised] of an organic sales decrease of $26 million, mainly driven by Restraint Control Systems of $16 million and Active Safety of $5 million. The growth profit decrease of $4 million as compared to the second quarter was mainly due to the volume and product mix impact caused by the organic sales decrease. RD&E net and SG&A decreased $15 million and $5 million, respectively, as compared to the second quarter due to our market adjustment in each of these. As a consequence, the lower operating loss and decrease in net working capital drove the operating cash flow improvement versus the second quarter. And as mentioned earlier, the capital expenditure increase of $59 million in the third quarter is expected to be at peak level.

Looking now for 2019 outlook on the next slide. Based on our current customer call-offs and deliveries, we see a continued challenging demand environment in China, North America and Japan. This leads us to anticipate a further slight sequential decline in our organic sales during the fourth quarter from the third quarter this year, while we expect operating loss to improve from the third quarter. As a consequence, our organic sales improvement in the second half will likely not materialize as we expected in July due to a continued deteriorating market environment and our new program launch headwinds as mentioned earlier.

Consequently, our organic sales for the full year 2019 are now expected to decline in the low-double-digits compared to 2018 rather than the high single digits as communicated in July. We expect the currency translation impact to be negative 3% as compared to full year 2018. This is 1 percentage point lower than communicated in July. As we indicated last quarter, we expect to see a continued sequential improvement in RD&E net in the second half of this year from the first half, and we remain committed to engineering net cost of less than $600 million.

Based on these assumptions, we expect the operating loss to improve sequentially in the fourth quarter from the third quarter, while the cash flow before financing activities is expected to remain at approximately the same level as the first half of this year due to our exceptionally strong working capital performance in the third quarter.

With that, I turn back the call to our CEO, Jan.

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [5]

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Thank you, Mats. By turning the page, I would like to thank everybody for listening to our formal part of this presentation. We would now like to open up for Q&A, and I turn the call back to our operator, Summer. Please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Joseph Spak.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [2]

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I guess, just maybe a couple points. In the letter, it looks like you expressed some caution on take rates in China. Can you just elaborate on that and sort of what you're seeing there?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [3]

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We are seeing some caution on the take rates in China, and it's related to some pressure we're seeing on the overall market in China. And the Chinese OEMs efforts to get cars sold in a tough environment, they may even take the weapon of decontenting in place, and we have seen some of that happening recently.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Okay. And then just a second question on the order intake delays, and I know that this can be lumpy, but is it -- would you attribute it more to volume and market uncertainty or is there greater technical due diligence going on? And I guess, just bigger picture, I mean, you've talked about delays for a few quarters now and then on Slide 4, you showed the meaningful volume revisions since the spin, I think you said 12%. So at what point is sort of the recent order intake level just become the new normal with the realization that the market is actually different at least in part because of volume?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [5]

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As you look today, the underlying demand for business and pursuits that we are working on hasn't changed. We are of the same amount and there is the same -- some comes in and some falls out, but that's a normal pattern. But overall, it's the same volume and the same number that we are talking to pursuing. But what is causing delays and taking more time is to be certain on the right product primarily, we don't think it's Veoneer related. It's the overall evaluation of the technologies as such and also, we think the overall market situation that is making it a little longer and a little bit more cautious maybe.

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Operator [6]

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And our next question 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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My first question is on vision. You stated you are launching your fourth-generation of vision. It would be interesting to know now that you're starting to see more on the modular side, how the split is between mono and stereo and also how far you will come on mono? Are we talking Level 2+ with mono systems still? That's my first question.

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [8]

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If you talk to the Mono Vision, we are definitely coming into Mono Vision with Level 2+ capabilities. And as you have seen, we have taken our 7th customer order, customer win here during the quarter, which is including fairly advanced software features also from Zenuity into this. We see there is a need for a stereo vision in primarily demanding applications, but still Mono Vision is the prime in the general market and the prime technology in the general market remains to be seen when we come further down the road towards L4 and more and more advanced and high-level systems what the choice is going to be. We believe stereo, as it looks today, is a superior technology, but mono is also very good.

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

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And on this internal measures, market adoptions, et cetera, could you maybe spread a little light on this? Is this related to like reducing headcount or is it more managing other type of costs? I know you mentioned, for instance, that you are increasing collaboration instead of doing something in-house, maybe talk a little about it, just shed some light on how that is playing out?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [10]

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Yes. Hampus, this is Mats. It's a little bit different, if you are looking at the different items. But starting off with RD&E, we have a headcount decrease if you're comparing the second quarter and the third quarter. So it's related to be more cautious when it comes to headcount in order to get down the run rate in terms of the cost. So that is in combination with different efficiency. It's what's going on within RD&E, and we see further opportunities for that as well as we are taking with to make these below $600 million for the full year. You can also see from a sequential point of view that we are decreasing when it comes to SG&A. That is more that we are cutting down on the external services and consultants and are doing more and more in-house as we are building the organization now on a stand-alone basis.

And then on top of that and what I would like to highlight as well in terms of prioritizing cash flow, that's an ongoing working capital initiatives that we have, where we have improved quite a bit both on accounts receivables and inventories, but this is an ongoing daily continuous improvement now going forward.

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Operator [11]

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And our next question comes from the line of Brian Johnson from Barclays Capital.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [12]

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Yes, a couple of issues, both relating to margin. So the first is as you look at that RD&E and track that $600 million for next year, any sense of where it could go next year, given the progress you appeared to have made in the scalable architecture and IP sharing across products and clients?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [13]

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No. I think when it comes to numbers and giving guidance, I mean this is something that we will give you when we release the fourth quarter when we are looking at the 2020 outlook. As it is right now, we are very committed to the $600 million that we have been talking about and that's what we're working towards. But then we can see further opportunities, but it's too early to start quantifying anything. The $600 million is what we communicate right now.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [14]

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Okay. And maybe not quantifying for 2020, but if you just think about where operating margin could be, you've guided to just below breakeven back in 2017, obviously both volumes and other things have changed since then. Any sense of what path in terms of when breakeven could be hit and then what that might imply for 2020?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [15]

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No. We will not give any kind of indications of the breakeven in terms of when. But if you look at it from kind of a structural point of view, I mean what we need in order to improve and especially on the gross profit, that's volumes. And we are, as you know, dependent on the LVP and what we are seeing now in 2019 is rather negative on the LVP side. But looking into 2020, with all the launches we have coming up, we -- what we can foresee is the growth that will be more driven by new business and launches rather than the underlying LVP.

But saying that and knowing how complicated it can be with launches, you never know if you have kind of launch costs and other issues when you see the launches coming through. So it's very difficult from a timing point of view to give any indication. But for sure, it's volume in order to improve the gross profit and the volumes will come with the growth and the launches. So that's on gross profit level. And when it comes to SG&A and RD&E, we need to continue to get efficiencies on that side that will bring leverage as well. But to give a kind of a firm year or date, that we cannot do today. But that's directional, at least.

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Operator [16]

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And our next question comes from the line of Joachim Gunell from DNB Markets.

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Joachim Gunell, DNB Markets, Research Division - Junior Analyst [17]

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So we touched upon China, but from a regional perspective here, where is ADAS adoption growing the fastest would you say? And with the cycle continuing turning south, I mean, are there any changes in terms of interest from customers? And we mentioned decontenting here related to Active Safety?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [18]

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No. I think we have a global interest on the Level 2+. And the move from Level 4 focus to more Level 2+ focus is not more outspoken for any of the other region. That is across the globe. You see a higher interest for this coming from OEM, actually, across the board. So scalable architecture focusing on L2+ is the biggest interest what we see around the globe.

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Joachim Gunell, DNB Markets, Research Division - Junior Analyst [19]

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And our next question comes from the line of James Picariello from KeyBanc Capital.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [20]

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Just wondering, I mean, would you be willing to quantify the GM strike impact, what's factored in within your full year guidance?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [21]

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Maybe $1 million or a couple of million on the top line.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [22]

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For the full year?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [23]

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For the fourth quarter.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [24]

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Got it. Okay. And then you just within the quarters, solid cost controls. Can you help us understand what attributes to maybe lower launch volumes as opposed to the sustainable or structural cost out improvement? I mean when volumes and new launches do eventually return, I'm just trying to get a sense for the cost structure in that environment. If launches were -- asked another way, if launches were stronger this quarter, would there have been any material changes to your reported SG&A or RD&E?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [25]

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No. I would say, what we see now is structural costs. As you remember in terms of launches, the big preparations for launches, that's for kind of before the actual launches. So that kind of work continues. So you don't see any kind of lower costs from a launch perspective in the quarter. So it's structural savings that you see.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [26]

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Got it. And then just on Brake Systems, can you remind us -- you obviously have a sizable North America order that starts to ship next year. Can you just provide an update on maybe just the timing of when that significant order does start to hit?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [27]

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Mid to second half of the year.

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Operator [28]

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And our next question comes from the line of Erik Paulsson from Pareto Securities.

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Erik Paulsson, Pareto Securities, Research Division - Analyst [29]

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Regarding CapEx and going forward, we had quite a high number here in Q3 at 30% of sales. What can we expect now for the Q4 and going into 2020? Will it remain at those quite high levels or even go up further?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [30]

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No. For the full year 2019, we're estimating that to be approximately 12%, meaning that we can foresee that third quarter is probably the peak when it comes to capital expenditure.

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Operator [31]

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And our next question comes from the line of Itay Michaeli from Citigroup.

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Itay Michaeli, Citigroup Inc, Research Division - Director and VP [32]

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First question going to the China take rate issue, are you able to quantify what that impact was? And just to clarify, was it in the third quarter, fourth quarter or both?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [33]

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We have seen it in the third quarter. I don't think we have any good way of quantifying it and it hasn’t been materially in the way, but we have seen signs of it happening out there. So I don't think we should draw too much of conclusions out of it. But it has happened, and we haven't seen that. If you go back a year ago, this was not visible, but now it has been seen out there.

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Itay Michaeli, Citigroup Inc, Research Division - Director and VP [34]

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Great. And then just to clarify, are you seeing -- what are you seeing in terms of take rates, particularly Active Safety in some of your other regions?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [35]

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Typically, it's stable or positive with regard to our equipment driven to a large extent by the Euro NCAP requirements and legislations. So take rate has been if you look to the market decline in light vehicle production and then market -- addressable market has up until now you can say been reasonably compensating the decline. The take rates have been reasonably compensating the decline. So it has been going up or being steady or positive.

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Itay Michaeli, Citigroup Inc, Research Division - Director and VP [36]

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That's helpful. And then just lastly, on the thermal award, I was hoping you could just comment on, A, how many sensors per vehicle? I don't know if you can comment on the content per vehicle, and then whether you're seeing other similar opportunities within the RoboTaxi space for these sensors?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [37]

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Well, this is our first award in -- for thermal sensing in a Robo cap application. It's one sensor per vehicle, if I'm correctly informed. And more than that, I would stay out of details and to wait until our customer here is giving more information about it.

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Operator [38]

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And our next question comes from the line of Dan Levy from Crédit Suisse.

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Dan Meir Levy, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [39]

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Just wanted to start by asking, into 2020, I know you're not giving guidance, but there are a number of one-off items that you've called out that are impacting revenue in terms of program rolloffs for BMW, Mono program and the radar shift here. Could you just give us a rough sense -- because we've now seen a number of quarters of this -- just into 2020 ballpark, how much is left of these program rolloffs that could impact growth? And how much more has to roll off.

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [40]

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If you look at BMW, the tail is continuing into 2020, but it's a minor portion of the BMW mono vision program that is left there, but it's having a impact, that's not a big one, but it will continue into first half. If you look to the shift 24 gigahertz to 77 gigahertz, the effect out of that will continue, you could say, into mid-2020, ballpark.

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Dan Meir Levy, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [41]

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Okay. So ex these items, though, and setting aside whatever the underlying light vehicle markets will be, that would say there is no other sort of -- and then there is currency -- but there's no other unexpected headwinds that we should be thinking about or any other headwinds we should be thinking about in the model on top line, correct?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [42]

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We have also on the RCS side a continued change of model mix, which is affecting us. So if you -- you have to look back to the order intake for up to 2016, you can say, over lower level of order intake that is now phasing out and the new programs are phasing in. And the shift of that is unfortunately happening in both of our main areas; in Active Safety on the shift of radar 24 gigahertz to 77 gigahertz, which is a technology shift; the ramp-up of vision that we first launched in 2016 is -- follow-on orders on that one is starting to launch right now as we speak, predominantly. And then you have a shift also of RCS program. And that's why we are talking a lot about launches here in 2020, 2021. And we have also some launches here in on the RCS side in 2019 that is ramping into 2020. So we are in a midst of a very heavy development phase with new technologies, new product portfolios and launches on both sides.

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Dan Meir Levy, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [43]

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Okay. Great. And then just 2 very small follow-ups on the order intake. One, if you could just give us a ballpark sense of the regional composition of your order intake because obviously, the light vehicle markets have varied quite drastically between the regions? And then second, are all programs from your order intact -- or your order intake still intact? I mean, we understand that there are obviously delays and lower launch volumes, but has anything been -- any programs have been outright canceled?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [44]

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No. There are very few that have been outright canceled or we have been talking a lot about our major launches and big programs and order intake, some of them here and there, but not any major ones have been outright canceled that we have been awarded, no. We have seen tendencies of delays on bigger programs, one of our major programs in our launch plans here, so that we should not exclude. If you look to the major order volumes in parts of the world in the geographies, you can say Asia, North America plus follow-on orders in Europe, we are big with the bigger volumes already today in Europe. And when you look on order intake and customers here, it's more focused towards North America and Asia.

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Operator [45]

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Our next question comes from the line of David Kelley from Jefferies.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [46]

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A couple follow-ups from my end, and I guess starting with the earlier thermal question. I think there's a recent study pointing to some Active Safety Mono issues at night. I guess, what are you seeing as customer reception to thermal? And you referenced autonomous application, do you think there is opportunity in advanced ADAS as well going forward?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [47]

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All right. We think that there is a lot of interest from AV because what you're identifying here and some of the issues in darker conditions or at night here is making a problem for the AV development. And there is an increased interest from this, and that's why we see this now first order. But in general, you can say that maybe one has gotten the eyes of the opportunity of thermal sensing here being a technology that is very complementary to what's out there as the main sensor environment today.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [48]

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Okay. But do you see -- I mean, is there -- could this bleed into Level 2 ADAS as well, where we have some thermal camera in-house with -- whether it's Mono or more advanced vision camera as well or are we solely talking semiautonomous to Robo type?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [49]

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I don't know whether I should speculate on that. We have been out there for some years with our thermal sensing cameras and technologies. It might be the case. It might be so that when technology is available and price coming down that this could be an even more interesting technology. So it's too early to speculate. We are very proud and looking forward very much to this first application and the interest from the high end, and that may spread down at some point in time.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [50]

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Okay, great. And maybe switching gears, a quick question. I am looking at Slide 4, I think the 86 million LVP you referenced in 2019 and 2020, I guess can you talk about, I mean, I know we're not guiding to next year, but just visibility and the production into next year, we're just trying to gauge confidence, given some of the sustained China weakness and the regulatory changes coming down the pipe in Europe?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [51]

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I think it's very hard to speculate beyond quarter 4. We alluded to in our earnings release here that we are somewhat more negative than IHS on the production numbers for the fourth quarter. We also right here in our outlook said we have seen signs of plant shutdowns already for quarter 4 as our releases looks like today. But this is subject to change very, very quickly and can go in either direction. And to speculate beyond fourth quarter, I think, would be not the right thing to do at this stage.

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Operator [52]

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And our next question comes from the line of Vijay Rakesh from Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [53]

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Just as you look at 2020 and the year after, this year was pretty brutal from an LVP decline standpoint, but if next year LVP stabilizes to flat to down 1% and let's say we see a rebound in '21 and you have your order backlog starting to convert, if you were to look, what would be growth that we should kind of expect for the next 2, 3 years?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [54]

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I would -- I mean, we're getting back to the guidance when it comes to 2020. But as we have said, and we're continuing to say, is that what we are expecting is more launch-driven growth going forward that will gradually come in 2020. So I guess, that's what you need to use to kind of model it. But I will not give kind of specific numbers, but launch-driven growth that will gradually come during 2020.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [55]

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Got it. And just to clarify, you are starting to see some of the conversion from the backlog growth that you saw 3 years, 4 years back on that conversion cycle also, right? And as you look at next year, any thoughts on leverage on the OpEx side? That's it.

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [56]

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What do you mean leverage on the OpEx side? Do you mean from the volume coming through or...

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [57]

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Yes.

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [58]

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Yes. I mean that's the tricky part when you're getting into. I mean what you need to remember that we have several major launches coming through next year that will gradually support the growth. And you can -- I mean, the risk is always that you have some fine-tuning issues in the beginning when you are in the midst of launches and so forth. And so when you see the growth start coming, I would -- I mean, in a normal situation, the leverage will gradually improve over time than with the launches and not from day number 1, if you're looking for gross profit level then. If you're looking at the leverage below gross profit and more into RD&E and SG&A, that is what we are -- what we can control and that's what we have started to do then, to take down the cost structure in order to make sure that we're getting the leverage we need than when we're getting into getting the top line and volumes up.

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Operator [59]

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And our next question comes from the line of Agnieszka Vilela from Nordea.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [60]

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So my first question is on the -- your comment on the order intake opportunities. I assume that you referred to the whole of the market when you say that some of these opportunities could be delayed to 2020? And then also if these orders do not realize in Q4, how sure can you be that they will come in, say, Q1 or Q2?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [61]

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Many of these orders are big programs for big customers and very major car lines, and we have very hard to see that this should be canceled or aborted in a way, but you can never guarantee anything and how it goes. And as we have not been awarded the business, it could go to competition, et cetera. We don't think this will disappear. We think this might be or could be or if -- potentially be delayed, it's hard to know, we don't. We reserve our rights a little bit here saying that the same underlying demand is there, but given the volatility in the market, it could be delayed into 2020. So we haven't seen anything falling off of the volume -- as normal, some things fall off and some things come in addition. That's always how it has happened. But if it's something that is meaningful, we haven't seen changed recently.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [62]

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Okay. And then my next question is on your working capital management. We have seen quite good performance over the past year, I would say. You have reduced your inventories and your receivables. And now my question is that when you prepare to -- for the product launches in 2020, should we assume that you will start to build up working capital again and will that happen already in Q4?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [63]

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Yes. I mean eventually when we are giving up big launches, it will be a certain build up when it comes to inventories in order to be prepared for launches. And then you will see the growth start taking off with increasing accounts receivables as well then. So you have that kind of actual development that you will see with higher volumes. I cannot foresee any material change in the fourth quarter when it comes to those items given the kind of the indication we have been given when it comes to the top line and organic growth in the fourth quarter. So -- and I mean that also -- I mean, you are right and when it comes to accounts receivables, some of the improvements that is also due to lower organic growth and we are releasing accounts receivables, but that's only a smaller part of the total improvement.

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Operator [64]

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And our next question comes from the line of Jeff Osborne from Cowen & Company.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [65]

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Just 2 quick questions on my end. On the delays in orders, just to follow-up on that, is there any notable differences in terms of regions? Are you seeing more delays in China, for example, than Europe?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [66]

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We are talking about discrete orders, and they can be in North America, they can be in -- they can also be in Europe and in Asia, so it's across the board. We are talking about maybe some handful of orders like that. So it's not like a monumental big amount of smaller business. We are talking about significant businesses here that may be pushed over the New Year, but we'll see.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [67]

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Got it. That's helpful. And then the second question I had or the last one was just around the pricing environment. Are you seeing -- you mentioned that part of the delay is just technology evaluation and the macro, but are you seeing anything -- major changes to pricing for any of the major programs that you have?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [68]

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We haven't seen anything on major price pressure or increased APRs. I think the one that we are seeing as a consequence of the market situation is in China, of course, where the pressure is high, and of course, that also transfers to supply base. Otherwise, it has not any bigger change on the pricing pressure side.

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Operator [69]

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And our next question comes from the line of Chris McNally from Evercore.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [70]

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Wanted to just ask a couple of questions on the scalable or the open system architecture that you described. Could you maybe just describe what you actually did to make that change? Because I guess you called it out as sort of an issue that needed to be addressed earlier in the year, and specifically, the change, is it to existing orders or essentially to the new orders that you go out for -- to bid for?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [71]

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No. This is related to new bids and pursuits that we are doing. And the reason why we're seeing this is that the application engineering in our space is taking a unproportionally big amount of the engineering work. That is affecting our resources and that is affecting ultimately the cost situation, and it's not efficient. It's also not efficient when it comes to validation when you have to redo a lot of the work all the time. And it's not efficient when it comes to reuse of data and reuse of experiences from one order to the other. And it's not efficient when it works with scalable going from a lower level to a higher level. But this is a different way of thinking because it involves an ecosystem consisting of silicon suppliers of software houses, in-house resources. And it's a lot about capturing the system aspect of this and being in charge of that system going forward.

We believe that we have a good architecture here. We believe that our collaboration where we do the perception software and where Zenuity do the decision-making software is a very good combination and making the system architecture very powerful.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [72]

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So I guess, Jan, my follow-up question would be if this sort of makes sense from a cost structure -- and I completely understand from the ability to take 1 system to go to another to increase the overall margin -- but it sounds like this won't be a large portion of sort of the 2022 ADAS book that you've booked orders for already. So does that mean that you're sort of finding out that the margin profile of the orders that you booked over the last couple of years are inherently going to be lower than what you previously thought, hence the change and it becomes more profitable business as the open architecture starts to roll through on current orders or, let's call it, 2025 revenue?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [73]

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I think it's a cost issue when it comes to reuse of resources and reinventing the wheel every time. Efficient use of resources and by using collaborations with outsourcing firms for more standardized jobs, having reuse of parts of the software that we can take from one project to the other is taking down cost already now on the development side. And you can see some signs of it already where we are outsourcing the annotation here in partnership, and thereby being able to increase the efficiency of our own resources. And you should look upon it on that to start with, then you should look upon it from a reliability aspect and quality aspect where you have an architecture to be able to reuse data and experience from Level 2+ into Level 3 and then also into Level 4.

But as I said, this requires a tight collaboration with silicon houses, so that you have also an architecture on the silicon, on the SoC being partitioned in a way that you can take bits and pieces from one level into the other.

I think here we have done a great job and our engineering team has done an awesome job in defining this, presenting it to customers and customers are, I would say, almost thrilled about the opportunity to see new ways of doing this, dealing with new partners, dealing with new parts of the system that maybe not have been into it earlier. So I think that this -- there on the shorter-term side more cost effect on the development side and then longer term on the product side. But that is not to your point in 2022, that is maybe 2023 and beyond.

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Operator [74]

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And our next question comes from the line of Alexandre Raverdy from Kepler.

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Alexandre Raverdy, Kepler Cheuvreux, Research Division - Equity Research Analyst [75]

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The first one on the growth next year. So I understand growth should gradually come back, but assuming flat markets for next year, which level of market outperformance do you expect, just in order of magnitude?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [76]

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Yes. I would -- we wouldn't give any numbers when it comes to outperformance in relation to LVP. I mean what we are saying is that we're expecting growth next year, and we're expecting that growth to be driven by the new business, by the new launches and not the underlying LVP. So a launch market share gain driven growth and not LVP related. That's what we're saying.

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Alexandre Raverdy, Kepler Cheuvreux, Research Division - Equity Research Analyst [77]

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Okay. And maybe the second one on a longer-term basis, we've seen some suppliers being more cautious than IHS, expecting no recovery in global production before 2025, so I just wanted to have your view on that, i.e., which scenario you adopted internally? Whether it's based on IHS or something else? And if we assume it's the case, what does it mean for the timing of operating and free cash flow breakeven also in light of the different market initiatives that you took?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [78]

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I'll defer the second half of the question to Mats. But the first part of it, we don't see any other signs beyond the fourth quarter than what IHS had. According to IHS, you are back to 2018 level only in 2022. So we're seeing a bit of bathtub curve here now going forward. And we don't know really beyond 2019 fourth quarter how it's going to look like. It's too early at least for us to have any other opinion than IHS.

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Operator [79]

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And our next question comes from the line of Peter Testa from One Investments.

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Peter Testa, One Investments S.A.G.L. - Analyst [80]

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I was -- two questions, please. I was wondering if you could just help us a bit on the shift out a bit in launches? If you could just maybe give a sense of the breadth of that activity that you've seen, is it 1 or 2, is it major items or just small items? And maybe also the driver, whether it's just market and desire to control content cost versus other items in the system maybe not being fully ready for launch, whether it's from yourselves or other members of the coalition trying to drive some of these systems in the cars?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [81]

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I think one reason there -- and you should probably ask the OEMs about this -- but I think the complexity of new car models is playing an impact here. And every car model that is coming out is getting more and more technology into itself, and these launches are more and more complex looking ahead. And that may be an important factor, and you're bringing in, in a relatively short period of time, a lot of new technology. We're not talking about only ADAS system here, we're talking about infotainment, we're talking about powertrain, we're talking about a lot of things that are coming into the car. And having the overall system responsibility here is an increasing challenging task for the OEMs, and that could have an impact here to monitor all the suppliers and getting it all onboard and on all right at the end.

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Peter Testa, One Investments S.A.G.L. - Analyst [82]

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And is that a number of programs or just 1 or so, do you see this?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [83]

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No. But if you look to -- I mean, you don't need to look on the highest level of premium cars, you can look on any type of cars bringing a lot more technology into the vehicles. And in many instances, it's also world's first technology in one way or the other that is increasing the complexity.

So I think that is a part of the situation. I would also speculate in that the OEMs are then also putting different priorities on powertrain development, electrification overall, which also may have an impact on the product as such. A car platform being launched to get prioritizing R&D resources in an OEM to get to the general development of powertrains to be on top of the development, I think, is a dilemma for carmakers as of today.

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Peter Testa, One Investments S.A.G.L. - Analyst [84]

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Right. And then you mentioned in your statement that there was some element of uncertainty around the degree to which your customers would be making product standard or options and the rate of take up of options. Can you give some sort of sense as to what visibility you have at this point as a degree to which your -- the product launches are going into optional packages versus standard packages?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [85]

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I think it's very neutral as it is today. It has been -- in the past up until recently, it has been, as I said in -- on a previous question here, it has been positive and has been compensating for declining light vehicle production. But as we feel, it's kind of neutral today, and we feel that it's driven, again, here a lot by the regulatory environment and Euro NCAP also the legislation and the EU initiative here in 2022 that will drive content coming in our way. So I think that is the underlying driving factor I alluded to that earlier, NCAP 5 star requirement has been a key driver in many years for safety equipment.

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Peter Testa, One Investments S.A.G.L. - Analyst [86]

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Okay, all right. And then last thing is just on -- you mentioned in the press release in early October that the relationship with Zenuity had changed so that it changes the agreement regarding non compete. Can you just give a sense, please, as to how that changes what Veoneer can do versus what Volvo Geely can do regarding this area?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [87]

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Well, this is just a clarification on an opening for Veoneer to act and for Volvo to act. It gives a freedom for us to do things that we were restricted for in the past and also somewhat for Volvo to do things that they were restricted for. It doesn't change the commercial agreement between Veoneer and Zenuity and the agreement between Volvo and Veoneer and Zenuity. Veoneer is the sales channel of Zenuity's products but it gives a little bit better clarification and openness on what we can do and what they can do.

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Peter Testa, One Investments S.A.G.L. - Analyst [88]

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Is Volvo less bound to Zenuity in terms of its solutions as they look at different partners? I mean does that change anything from their perspective on what they can do with their vehicles?

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [89]

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No. No. We don't think so. No.

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Operator [90]

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And our final question comes from the line of [Fernand Abraão from Elron] . There is no response from the line.

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Jan Carlson, Veoneer, Inc. - Chairman of the Board of Directors, President & CEO [91]

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Okay. If that was the final question, I would like to thank everyone for your participation and interesting questions, and the overall interest in Veoneer. We look forward to seeing you at conferences and roadshows during this quarter, fourth quarter. And of course, also looking forward to see you at CES in January, where we will be on display again like last year.

We, of course, also look forward to talking to you at our next earnings call, fourth quarter, tentatively planned for February the 5th in 2020. Until then, I hope you will have a safe and relaxing holiday season in the meantime, and take care out there, everyone, and thank you, and goodbye.

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Operator [92]

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