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Edited Transcript of VNE.N earnings conference call or presentation 25-Oct-18 1:00pm GMT

Q3 2018 Veoneer Inc Earnings Call

Oct 31, 2018 (Thomson StreetEvents) -- Edited Transcript of Veoneer Inc earnings conference call or presentation Thursday, October 25, 2018 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

* Ashik Kurian

Jefferies LLC, Research Division - Equity Analyst

* Brian Arthur Johnson

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

* Christopher Patrick McNally

Evercore ISI Institutional Equities, Research Division - MD

* Daniel V. Galves

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

* David Jon Leiker

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Erik Golrang

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* Joachim Gunell

DNB Markets, Research Division - Junior Analyst

* Joseph Jerome Heidt

RBC Capital Markets, LLC, Research Division - Associate

* Victoria Anne Greer

Morgan Stanley, Research Division - VP

* 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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Good day, and welcome to the Veoneer Q3 2018 Earnings Presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Thomas Jönsson. 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, Audra. And welcome, everyone, to our third quarter 2018 earnings presentation. Here at Stockholm, we have our Chairman, President and CEO, Jan Carlson; our Chief Financial Officer, Mathias Hermansson; and myself, Thomas Jönsson, Communications and IR.

During today's earnings call, our CEO will comment on the third quarter result, the progress we're making in Veoneer, particularly around order intake and also some commentary on our progress towards our mid- and long-term targets. After this, our CFO will look on our financial results and provide some commentary on the short term.

Then we will remain online for Q&A session. And of course, slides are available through a link on the homepage of our corporate website. So if we turn the page, we have the safe harbor statement, which is an integrated part of this presentation, includes Q&A that follows. During the presentation, we will reference some non-U. S. GAAP measures, and reconciliations of these figures are disclosed in quarterly press release and the 10-Q that will be filed with the SEC. We intend to conclude this call at 4:00 p.m., so I would ask kindly everybody to limit themselves to 2 questions. And with that, I will now turn the microphone 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, Thomas. Welcome everybody to today's call. Before we get started today, I would like to thank the entire Veoneer team for great support and dedication during the third quarter to get our company up and running while we, at the same time, make significant progress with our customers and order intake.

Looking to our business environment, we see some near-term macro and other headwinds. As we have said before, despite our company's strong growth prospects, we are not immune to fluctuations in the underlying vehicle production as we saw during third quarter. The WLTP effect in Western Europe as well as the negative development of light vehicle sales and production in China and the uncertainty around the U.S. SAAR are creating a drag on the near-term light vehicle production, which could also continue into the first half of 2019. All of these currency fluctuations mainly related to the strengthening U.S. dollar are affecting our sales and financial results during the second half of this year.

Looking a little further to the medium term, we see some start of production delays and slower ramp-ups impacting 2019 through 2021 as we need to complete the engineering and launch readiness, even if the sales will take a little longer to materialize. Despite these challenges, we still see a very optimistic future for Veoneer with strong long-term revenue growth and profitability.

Looking now to our customer progress on the next slide. We are very pleased with our customer progress since our Investor Day at the end of May and beginning of June. Our strong order intake through the end of the third quarter is roughly $1.1 billion on a trailing 12-month average sales basis. This is equivalent to around $5.5 billion in lifetime contracts over the last 12 months. As illustrated by the written text on the table, over the last 4 months, we have increased our customer penetration significantly in all product areas with an exception of LiDAR. In summary, we have added 9 new customers to the Bid List, 3 additional customers have become technically qualified and taking orders with 3 new customers, including the 2 we mentioned on our last earnings call.

These pursuit activities have resulted in our second Driver Monitoring customer, our sixth Vision customer and our fourth ADAS ECU customer, which in this instance includes a Robo-taxi application. And lastly, we are very satisfied to now secured our third Brake System contracts with the Detroit-based OEM. These all seem to point to a strong, relevant and competitive product portfolio.

Looking now on the next page. Our order intake momentum has continued into October at a strong pace. During the first 3 weeks of October, our order intake has stepped up to more than $1.3 billion average annual sales over the last 12 months. This is the result of additional business wins with existing customers in both Mono and Stereo vision, Radar, RoadScape, ADAS ECUs and Restraint Control Systems. And additionally, we are satisfied to have secured our feature first software-only award with a premium OEM, which reinforces that this annuity software stack is not only scalable, but capable of supplying important features that OEMs may be lacking.

We should keep in mind that, as we have mentioned before, order intake fluctuates months to months and quarters to quarters, and that we did have a end of 2017 on a very high record level for the quarter and full year.

Looking now to engineering and technology on the next page. Investing in engineering is an important differentiator for Veoneer in the marketplace. During the third quarter, we hired around 370 engineers, which means we have now hired approximately 1,000 engineers, whereof 70% are software skills, over the last 12 months. We indicated during our last earnings call that our RD&E expense would increase this year by around $8 million as compared to 2017. We believe that this year-over-year increase will now be $90 million by the time we conclude 2018.

During the quarter, we introduced to the market our Zeus super computer controlled units for automotive grade and autonomous driving applications. This control unit hosts the Zenuity software stack and utilizes the NVIDIA Xavier platform. We target to launch this key technology during 2021.

Based on all of these developments, I will now provide a progress update to our previously announced targets on the next page.

As I mentioned in my introductory comments, in the short term, we see some delays in the start of production and slower ramp-ups of certain customer models, along with some slight delays in expected business wins. These developments result in a downside risk to our 2020 total sales targets, and we are therefore likely to reach the $3 billion in total sales slightly later than previously anticipated. Despite this, Active Safety remains on track to exceed $1 billion in sales in 2020. Based on the attractiveness of our Active Safety portfolio, strong customer relationships and strong order intake, we see a potential upside to our $4 billion 2022 total sales target, particularly for the $2 billion Active Safety sales.

While these signs are encouraging, we note that order intake can deviate significantly from quarter to quarter, making the exact timing of the future sales growth difficult to forecast. To support the continued high order intake, the Advanced System business and further investment for long-term leadership in Active Safety, we intend to further increase our investments in RD&E. This investments decision for future growth means that we now anticipate reaching our 0 to 5% operating income target between 1 and 2 years later than previously communicated.

I will now turn it over to Mathias, our CFO, for further comments around the quarter.

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

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Thank you, Jan. And if you then move to the next slide for the quarter highlights. As Jan mentioned earlier, the near-term macro environment is adversely affecting our short-term performance. So for the third quarter, our operating results were slightly lower than we anticipated. Overall net consolidated sales declined by around 7% as compared to the same quarter in 2017.

However, this sales result of $526 million was roughly $50 million lower than we expected in the beginning of the quarter. As a consequence of the lower sales, our $58 million operating loss was slightly higher than our internal expectation.

If we then look into some further details for the quarter on the following slide, which is Slide 9. The third quarter was the first time where we can look upon Veoneer as a full cost as a stand-alone company. Our sales decline of $40 million as compared to the same quarter last year was comprised of an organic sales decline of 4.7% or $27 million and a currency headwind of 2.4% or $14 million.

The gross profit decline of $10 million year-on-year was mainly attributable to the volume and product mix impact from lower organic sales, as the net currency effects were minor in the quarter.

RD&E developed largely as expected during the quarter, where the $19 million increase to $109 million from last year was largely in line with our own expectations. The SG&A cost increase was $16 million year-over-year and $7 million higher than in Q2, and this increase is mainly related to the additional costs associated with being a stand-alone listed company, of course.

If we look at operating cash flow. We ended the quarter with minus $17 million, and this was slightly better than expected, as timing differences, in particularly working capital, gave a positive impact for the quarter. The CapEx level was in the high single-digit percentage of revenues, which was in line with our previous communication.

Looking now to the full year 2018 on the following slide. Based on the weaker market conditions in the second half of 2018, we have now updated our full year 2018 indications. Consolidated net sales are now expected to be lower than our previous indication due to the declining LVP in our major markets and the continued strengthening of the U.S. dollar during the second half of 2018.

Consequently, we are reducing our sales indication for the full year to an organic sales decline of around 5% as compared to 2017, rather than a decline of around 3% in our earlier indications.

In addition, the currency translation tailwind is reduced to 1% for the full year 2018 rather than around 3%. This means that consolidated net sales are now expected to decline 4% for the full year 2018 compared to last year, rather than flat year-over-year as we already anticipated.

Based on this full year indication, we expect the fourth quarter sales to remain largely at the same levels as the third quarter, and net RD&E to increase around $20 million from the third quarter due to the hiring of all the engineers, as Jan mentioned.

Lastly, a few words on liquidity. We are well financed, of course, with $920 million of cash, and we aim to continue to have a conservative solid financial position over the long term in order to be able to take full advantage of this attractive opportunity that we have ahead of us.

To be clear, we see no need to raise any additional capital today, even given the updated investments as we have outlined.

Going back to what we have said in May at our Investor Day, our capitalization would also cover bolt-on acquisitions as well as providing a liquidity buffer. And I think it's fair to say that this excess buffer is now being used by our increasing investments in RD&E and the short-term market weakness. So I will now turn back to Jan for some closing comments.

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

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Thank you, Mathias. By turning the page, I just wanted to give you an update on the press release that we sent out yesterday regarding a refinement of our organization. We announced yesterday, as many of you probably have seen, that we are taking the next step as a standalone company by refining our organizational structure within our electronics segment. The major drivers for this change are to create an organization with a stronger drive product development and product roadmaps and equally important, simplify our organization to improve speed and transparency and cost efficiency. This refinement to the organization will not affect the reporting of our company in 2 product segments: Electronics and Brake Systems.

So with this remark, I would say that this concludes the formal presentation for today's call and that we would now like to open up for Q&A. And by turning the page, I leave the word back to you, Audra, to guide us through the instructions for 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) We'll go first to David Leiker at Baird.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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I just wanted to dig through the comments about the pushing out the 2020 target to 2022. Sounds like there's 3 things. There are some delays in the pace of new contract launches, the ramp curve is flatter than what you were expecting and then I think I heard you say there is -- that there is -- that the win rate, the timing of wins was slower than you thought. I was wondering if we just drill down into each of those a little bit more detail of exactly what's happening there?

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

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It's essentially 2 parts. Some of our programs are delayed in ramp, meaning that start of production is essentially at the same time, but the ramp up on the models are pushed out, meaning that our technology and our product and our launch needs to take place essentially at the same time, driving the readiness and the validation, and thereby also the cost connected to the program in the original pace. However, sales will come at a slower pace. That is one factor contributing to this. The other factor is, that if you recall, at the Investor Day in May, we said that the order book for 2020 is nearly booked. And when reviewing our strong order intake today, we are concluding that to get orders, even if we have a good order win rate, to get orders that will generate sales in 2020 already is diminishing for not getting down to zero. And that is the other contributing factor to this.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay. And then if we look at those delays, this is in the Active Safety part of your business. Can you characterize whether it is ADAS-related, level 2, level 3? Or is it level 4 or level 5 type projects?

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

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It's level 2, level 3 type of projects.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay. And then just one last one. It also seems you are pulling forward or ramping your RD&E more quickly in the face of these slower win rates and slower launches. There does seem to -- and when we've seen this happen, the RD&E was going up because the wins were bigger than people expected, so they need the front end spend that. Your -- this seems a little bit different.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [7]

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Well, I think we have to be clear that it's not across-the-board we are seeing slower ramps and lower order intake. I think we are seeing a strong order intake, and all, essentially, the launches are according to plan. What we mentioned here are some models in a few programs. That is to be clear here. This is not across-the-board we are seeing a delay throughout our order book. And the increase in engineering is to support that stronger order intake that we are facing or a strong order intake we are facing. Essentially, that is the case. But it's also in our complex programs that we have under -- we have won here throughout the year, we have mentioned several of them. Those are also taking somewhat more efforts than originally planned. But it's a mix of both, but strong order intake is a strong driver for this engineering intake.

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Operator [8]

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We'll move next to Hampus Engellau at Handelsbanken.

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

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Hampus Engellau, Handelsbanken. Two questions for me. I noticed that you're talking about Robo-taxi software and previously when we discussed, you always miss on the Zenuity business, it's been very much geared to passenger cars level 4. Could you maybe talk a little bit about this opportunity and also if this is a change in your development, i.e., you're seeing LiDAR as a primary source for decision making and maybe cameras a redundancy source? That's my first question.

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

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No. This is not a change, and this is not a software. This is a hardware. This is an ADAS control unit, an advanced computer for this application that we are producing. So it's the hardware side on a ADAS control that we are submitting here. There is also a very tight cooperation here with the OEM itself, which is doing a majority of that work.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [11]

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So there is no level 5 software from you guys?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [12]

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No. There is no level 5 software from ourselves in this case.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [13]

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Sounds clear. Can I come back to this outlook change. Would it be possible for you to maybe talk a little bit about how much of this is geared to Passive Safety Electronics? And also if you can discuss Restraint Control here? And maybe also if -- how much Active Safety is playing in, to get a more clear understanding on this push out?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [14]

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This push out that we see here is to a large extent related to, as I said, some models in few programs that is pushed out and where models are delayed. The launch on models on one platform are delayed and that is causing this to happen. So it's essentially on the Active Safety side that we are seeing this delay. When it comes to Restraint Control, we have mentioned before that we have a softer period right now due to slower order intake some years ago, but order intake in Restraint Control as well as in Active Safety is very good and very strong. This will start to ramp in 2020. If you look through the ramp up of Restraint Control and the major ramp ups will happen in 2020. So that is on its way and order intake on the Restraint Control is good from the order side.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [15]

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And a final for me. On the change also on this profitability target for 0 to 5% profitability. Which would you say is the major driver? Is increasing R&D expenses on the back of getting more business? Or is it seeing lower operating leverage or lower organic sales growth?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [16]

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We -- see, it's a combination of, as you said, the lower sales, lower gross profit. But the majority of it is related to the increased investments.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [17]

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Right. And just to clarify, one more for me on this delay. Is this anytime -- anyway related to the WLTP problems that we're seeing, especially on the German OEMs?

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

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No. It's not related to that. I think it's very hard to see any pattern -- real pattern in light vehicle production 2 years out. So these adjustments or, what you can say here, risks that we are facing here now is delayed on more launches and strategic matters that we can see our customers talking about, not related to the current uncertainty in the market or WLTP, et cetera.

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Operator [19]

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We'll take our next question from Vijay Rakesh at Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [20]

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Just a couple of questions. I know you talked about a slower ramp with some of the orders. But is it fair to say your win rate and the startup for all these ramps are still on time, it's just that the validation times are extending? And if so, can you give us some color on what the order intake has been trending year-on-year like it did last quarter?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [21]

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If you look on the validation and the ongoing, it's delays on the model ramp up. So it has nothing to do with our part of the story. This is related to the delay. And that's -- that is the situation on the program we're talking about now. When it comes to the order intake, we mentioned $1.3 billion on a trailing 12-month as of to date -- trailing 12-month as of right now. On the quarterly basis, we mentioned $1.1 billion. So we are in to a good start of order intake also for quarter 4. Now mentioning this, we have to remember that end of last year was a very strong order intake time for us. And 2017 ended on a very strong note. And LTM basis can also vary from time to time, but the important thing is the trend line. But all quarters may not, on an LTM basis, be higher than the previous, to remember, because that's how it is. It's discreet, sometimes very big orders, and they may fall off a certain date into another quarter. So $1.3 billion as of today in trailing 12 months.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [22]

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Got it. And on the WLTP side, when do you expect that emission regulation overhang to elevate? I think a lot of the OEMs are still going to recertification. But do you see that resolving sooner? What would you say on how that plays out?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [23]

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We have very little visibility on this one to say, to be honest with you. I stay out of speculating this. When we talk to our customers, some customers say most of their models are through the testing and they are ramping up and some others are into it right now. But I -- personally, I don't have a good view of this right now to give you.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [24]

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Got it. And the last question. On the software side, you talked about some more -- some software wins. Can you give us some idea on how the pipeline looks going forward?

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

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Well, we are working, as we have said before, we are working on between 1 and 2 customers, we said in our last earnings call, for software for Zenuity involvement. We are still working on 1 customer here before the year-end to hope to get before the year-end. So that is still up and running.

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Operator [26]

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And our next question comes from Joseph Spak at RBC Capital Markets.

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Joseph Jerome Heidt, RBC Capital Markets, LLC, Research Division - Associate [27]

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This is Joe Heidt on for Joe Spak, with a quick question just on cash burden. How to think about the funding requirements moving forward? Are there any metrics we should be looking forward to understand if new capital is needed for the business? Like any sort of sensitivity that sales or some increased R&D requirements? Because Mathias, I know you're saying that you guys don't see right now that you need to raise new capital. However, in your release, you do kind of warn that additional funding could be required. So would like to hear some, like, guidance on that and like how we should think about the cash burden moving forward?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [28]

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Right. Thanks. I mean, I think there are 2 things to that point. I think one of them is that when we mentioned that we may look into that, that also is linked on to the acquisition -- bolt-on acquisition we talked about. So to remember that as well. So if we want to continue to do bolt-on acquisitions as we've done before in the history of the company, then obviously we may have to come back and look at the funding. When it comes to the cash outflows, I think you saw in the third quarter that we are fairly strong in managing the cash flows. You will see, probably, the fourth quarter cash flow a little bit weaker, however you call it. And I think the best way of probably looking at this is, is to look at the quarterly cash flows, because I think that you -- on top of the operating cash flow, you obviously have some CapEx as well when we ramp up some of these productions. I think the easiest way to follow that is to actually look at quarterly net cash flows.

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Joseph Jerome Heidt, RBC Capital Markets, LLC, Research Division - Associate [29]

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Okay. That's helpful. And then when we think about the bolt-ons and the cash, let's say, there starts to become a squeeze on cash. I mean, would you guys look to kind of push off on these bolt-ons? Or are you willing to raise capital if you see an acquisition that's attractive enough from a bolt-on perspective?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [30]

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I think it's way too early to talk about this right now. We're just 3 months into this -- the business right now. And -- so I think it's a little bit too early to talk about. But right now, we don't see any need for it.

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Operator [31]

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We'll go next to Erik Golrang at SEB.

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Erik Golrang, [32]

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First one, just some clarity there on. You talk about the first software only award with a major global OEM. Was that on the Zenuity side?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [33]

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Yes.

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Erik Golrang, [34]

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So does that mean that 1 of the 2...

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

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No. It's a feature software that is beyond the 1 of the 2 that we are talking about. So this is a feature software that we have sold and not like a system like an L3 program, where we take a bigger part of the software stack.

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Erik Golrang, [36]

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I see. So 1 of the 2 potential bigger ones was lost and you're still open for the 1 then?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [37]

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I didn't say it was lost, but I said that we are working with 1 with the aim for this year.

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Erik Golrang, [38]

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Okay. Then on the second question. You -- in terms of trying to sort out when you could turn the business around into actually growing organically, it seems now as we could even have to wait until 2020 before that happens, even though the '16 order pickups should have -- we have a close coming in at some point during 2019. But is there is a risk now that we will have to wait until 2020?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [39]

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We have said, you recall in the Investor Day, that the ramp will come towards end of '19 and '20, and coming predominantly in 2020. That was our statement in Investor Day. And with this change, it's probably now going to come in 2020. That's essentially the effect out of this.

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Operator [40]

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We will go next to Victoria Greer at Morgan Stanley.

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Victoria Anne Greer, Morgan Stanley, Research Division - VP [41]

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A couple, please. And when you talk about slightly later your expectation to achieve the 2020 sales target, I know you won't want to put an exact time on that. But should we be think about that as a quarter or 2 or a year, roughly what would be the magnitude of the change? And secondly, just on the balance sheet, talking about no need to raise additional capital. But if I think about free cash flow, I didn't -- say a negative 2.5% margin. You've got pretty significant negative free cash flow, say, $200 million, $250 million at breakeven on EBIT, maybe that's negative $150 million of free cash. So are those about the right numbers? Because if I'm calculating that correctly and then delaying the EBIT breakeven point for another 1 or 2 years, it's pretty significant on the cash side. So if you could help us to think through that, that will be great.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [42]

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If you look to a downside risk of 2020 target and an upside risk of 2022 -- or upside opportunity, rather, and the risk on the '22 target, those numbers have moved closer to each other, meaning that the $4 billion mark will be passed earlier if we have -- the opportunity is coming through that we see now earlier than '22, and 2020 is coming later than '20. So fair to get sometimes during '21.

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Victoria Anne Greer, Morgan Stanley, Research Division - VP [43]

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So sometime during '21 for the $3 billion. Okay.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [44]

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For the $3 billion, yes.

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [45]

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To your second question, it's Mathias, I think the way to think about it, obviously, is that what I mentioned earlier, that we had a significant buffer when we started the project and now we're using that mainly at the onset for increasing the RD&E. And when you model that out, you will probably end up in a decent estimate on how much incremental RD&E we are spending. So I think that kind of gives you largely a component. We have given the indication here as well in our statement and in my remarks as well is that, that liquidity buffer is coming down. But obviously, there is lot of uncertainty, both up and down, I think. And we still have not made up full plans yet for 2019 and 2020 even, as of now. So there could be lots of change, of course.

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Victoria Anne Greer, Morgan Stanley, Research Division - VP [46]

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But just to give us a sort of some numbers around that. If I thought about -- let's say, I thought about a 0 EBIT margin, would that be right that that's maybe $100 million, $150 million negative free cash flow, roughly?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [47]

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I think if you look -- I mean, the 2 things you should think about is that the Zenuity funding is outside of EBIT and then we also have CapEx. And I think if you look back to our Capital Market Day, I think we have given some specifics on how we see, long-term, those develop, and I think -- I don't think that's changed materially.

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Operator [48]

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We'll move next to Ashik Kurian at Jefferies.

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [49]

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I have got 2. The first one, I'm going to try again what Victoria was asking. I think previously you said, the free cash flow breakeven would be achieved 1 to 2 years after EBIT breakeven. So is that still the case? I mean, are we looking at you reaching a free cash flow breakeven 2 years after revised breakeven target? And also initially when the funding for Veoneer was being decided, I think initially we set up to $1.2 billion, which you revised down to $1 billion. If the exercise would be redone now, would that number still have been $1 billion? Or can you give us some color as to what the adequate funding would have been if you could rerun the exercise?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [50]

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I think, it's -- thanks for the question. I think from -- on the first question, I think we said around 1 to 2, and I think it's largely probably now closer to 1, if that is helpful. And for the second question, I think it's a little bit strange to speculate backwards, but -- so I think it's -- so we refrain from doing that. But obviously, you probably can figure out the answer.

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [51]

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The second question is more on your ongoing losses and R&D. And I think the trouble that we probably have in terms of the further step-up in R&D against -- granted a strong order intake. But I would assume that you would have baked in an increase in order intake into your 2020 and 2022 targets already, right? But just, I mean, what is the check? Or what is the control that you will have on increased R&D because it seems like you're raising the R&D spending even on what I would assume is expected level of order intake? And then following on from that, it seems like you're probably guiding to flattish revenue growth in 2019. So should we then extrapolate the losses you imply into -- in the fourth quarter into '19? Or what are the drivers that you have to maybe deliver an improvement on the losses that you have in '18?

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

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I think, if you -- I think I almost forgot your first one. But if I take the second one first, I think what you see right now and the really main part is our R&D cost, R&D in the fourth quarter, which you should try to extrapolate into this new stock in running pointing to '19, I would say. The one thing that you should bear in mind is well, that we had said also in May, I think, that we're seeing increasing engineering income coming from over the next few years probably, as a trend. So that's something that will affect, obviously, the net RD&E cost. And so can you repeat the first question, again, so I get it right?

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Ashik Kurian, Jefferies LLC, Research Division - Equity Analyst [53]

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My first question is just more on what is the criteria on which you are increasing the R&D spend? What is the risk that we could continue to see you coming out with increased losses because your R&D is stepping up? Because to us, it doesn't seem like the order intake is beyond what you should have factored in, granted that you have to hit your 2020 and 2022 targets, right? So just curious to know what are the criteria that you have at least as a internal check to basically control the R&D cost increase.

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [54]

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I think there are -- I think, they are 3 aspects to this. And the one is, obviously, that we see stronger order intake than we had in our original plan. So that's driving more work basically, but it's a good thing, obviously. I think we also see that some of the projects that we're running, that are quite new to us and fairly complex, those ones are under a little bit higher cost than we initially anticipated. And I think the third one is also that we see some good traction, particularly from our Vision business in the orders. So I think we also obviously want to increase our pure R&D spend and build stronger products and accelerate that development. So there's kind of 3 different elements to that.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [55]

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I think, in all essence, the driver for R&D here is customer demand and technology innovation, and the speed of innovation that we see in this industry and how fast it's moving. If you look to our track record here during the quarter by being able to book business in the advanced computing area, we showed now that the first order here for an ADAS controller for Robo-cabs application, we are demonstrating our Zeus super computer for level 4 application. And to be able to be a part of this, its requirement -- is requiring the R&D. But the basic driver for it is customer demand and order intake.

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Operator [56]

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We'll go next to Brian Johnson at Barclays.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [57]

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I want to ask about your wins. We always invite you to our Florida conference where you can enjoy, restock your sunshine. When -- as you think about the competitive landscape in ADAS and Active Safety, certainly there is -- much of the market is dominated by Intel Mobileye and its related resellers, Valeo, Magnum, Aptiv, Hyundai Mobis, et cetera. When your -- and particularly with these Vision wins, do you see them as your primary competition? Or are they with OEMs who are looking for an alternative, so your competition might be more along the lines of Conti, Bosch, Denso and so forth?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [58]

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I think we see them both. And I'm not sure that -- how dominant this Vision market is any longer on new order intakes on the -- by one competitor. I think that situation may have evened out a little bit to where we have been able to win more, relatively speaking, than others in this area. That's our belief. But we meet them all, actually, on competition side, depending on where we are and how the product is looking like. Intel Mobileye is very strong in Vision systems and related areas. So that's where they are in, but where we compete those on a system integration level, we compete with advanced computing boxes, we compete with radar technology, et cetera.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [59]

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Okay. Second question. And if you did it earlier in the call, I apologize, because I rolled over late from another supplier. Certainly, the whole world of autonomous driving has been fairly, obviously, on fire. Can you give us an update of just where Zenuity is in terms of fleet on the road, which is becoming a metric of how people look at this progress? And then it is frankly a bit confusing for us between Volvo, the car company; and Volvo, the truck company. Of course, 2 different companies, both of whom are pursuing autonomous efforts and kind of where -- obviously, the car company is your partner, but are there any opportunities over on the truck side?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [60]

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We have in total, as we communicated, over 100 cars on the road, whereof 30 of them are directly related to Zenuity. We collect around 8 terabyte of data daily for each vehicle that we are up and running. We are continuing to hire people in Zenuity. We have, by now, around 600 people and that we are expected to be around 650 people in Zenuity. So a good traction to people. Of course, we work with Volvo, no secret in that, Volvo Car Corporation, in this one. And beyond that, we stay out of commenting on our other OEM relationships until we are allowed to do so, that we were with Geely on the L3 program that we took together with Zenuity. But we are -- we have also communicated that we have between 5 and 7 pursuits where we are working with. That is still on the same level, so no change in that area. And Zenuity is making a lot of good progress according to plan. So really no deviation from what we have earlier communicated.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [61]

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Okay. And in the quarter, of course, Honda took an equity stake in GM's Cruise. Are you open to or talking about equity stakes from any other automakers or any other technology partners?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [62]

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I'll stay out of commenting on that one here on an earnings call. Of course, any proposals that may or may come will be evaluated by the board. So we'll see if and when and how if such a case will happen or if it will happen.

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Operator [63]

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We'll go next to Joachim Gunell at DNB Markets.

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Joachim Gunell, DNB Markets, Research Division - Junior Analyst [64]

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So we touched upon this already in terms of the competitive landscape here. But just if you could elaborate a bit on here. I mean, given that the Mobileye ecosystem is done for, well, basically the majority of the Vision algo market, does your current Vision order intake momentum in that you are actually taking customers from that kind of player?

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

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Yes. We may believe so in some cases that could be the case. We definitely acknowledge that Mobileye in sales area today are a leader because they were much earlier out. They've been around for 10, 15 or more years as a company, have been out with their product. So in sales terms, their market share is definitely, as you say, much, much higher. We have been out with our sensor suite since 2016. And I find it very encouraging from our side to be able to catch up that fast and get into our position today with a strong order intake in Vision to be able to compete in such relatively short period of time. Of course, that's based on heavy investments, heavy R&D focus, heavy engineering recruitments and buildup of the resources making this possible. So we see that the investments really pay off. We see that's paying off in order intake. This will materialize in sales later on. And there we will see how the difference will look like between us and Mobileye later on. But it might be so that we are taking product from Mobileye, may be so.

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Joachim Gunell, DNB Markets, Research Division - Junior Analyst [66]

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Right. Just a final question here. If we could have some color here on the first dedicated software feature sale from Zenuity down. Is that something that will change your strategic priorities? I mean, going on with more feature sales rather than the whole level 3 software stack?

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

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I wouldn't say it will change our strategic priority. But I would say that maybe we should look more careful for the holes that OEMs may have for certain features where we can apply a part of the Zenuity software that is existing and validated. That may be more interesting for other OEMs as well, and we may market this a little bit different. But there is no strategic change or approach going to feature sales as a major avenue instead of a full software stack side.

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Operator [68]

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Next, we'll move to Agnieszka Vilela at Nordea Markets.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [69]

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I have 2 questions. Number one is regarding your guidance. How can you have confidence that you can see upside to the 2022 guidance given the fact that the kind of pace is being lowered right now?

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

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Well, the guidance, if you look on the light vehicle production base, we have traditionally based the plan on IHS numbers for outer years. And given the fact that we are -- that's what we do actually at the baseline to have something to hold on to. If that is varying the whole market, we'll vary, of course. But you have to have some type of comparables. The fact we are seeing an upside is due to the stronger-than-anticipated customer interest and order intake for us that gave us this opportunity to exceed the '22 target.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [71]

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And then if you can comment on the refinement of your organization. What kind of, say, cost savings or operational enhancements do you see coming from that? And will there be any costs associated with that?

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

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We cannot comment on the savings as such. This will be a much different organization with entrepreneurial customer business units running activities separately for each customer, having full responsibility for the activities from order intake through application engineering, production assay, you can call it a little bit a company within a company, which will drive customer attention even further and customer also -- the delivery and quality to customers, but also, of course, the financials. There will be a group of people in charge and will drive that as their main task. The other part that will be significant here is, we will have a dedicated product development organization led by a CPO, reporting directly to me, that will have time to spend on next-generation product. This will give us scale effect. It will give us a better overview of our product portfolio from the advantage of seeing different customers' demand being consolidated into the product lines. So we hope that, that would give us some scale and thereby cost efficiencies matters. Those are the 2 major things that we're driving with the change.

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Operator [73]

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We'll move next to Chris McNally at Evercore.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [74]

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Just 2 questions. So the first on the 2020 to 2022 movement on the profitability targets. I mean, you talked a little bit about the factors. But could you just reiterate, which is more important? Is it the higher investment you spoke about for Q4 that gets annualized, that moves the targets out? Or is it the actual production being slightly lower? I'm pretty sure it's the investment, but I just wanted to make sure because it's obviously multiple years out, so some of the weakness in production should be fixed by then?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [75]

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Right, it is the investment that is the majority part of it. It's also affected by the risk of downside and thereby gross profit declining. So the combination there moves the target out between 1 and 2 years. But the majority of it are the investments. I think, as Mathias alluded to here, it's very important to remind ourselves that the increase now we talk about, the $20 million in R&D from quarter 3 to quarter 4 and the annualized level we are exiting quarter 4 on, is probably not the right level as we are seeing an increased customer income coming in 2019 and onwards. So the gross effect here is probably not the right one to look at. It's the net effect that you should really look at for 2019.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [76]

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Okay, that's great, that's really clear. And then the second question. As we look at the revenue cadence between 2018 and 2020, where you discussed sort of some downside to the $3 billion level. It sounds like ADAS is going relatively well. So when I think about 2018, you're roughly at, I don't know, $1.4 billion of non-ADAS, right? So just the Braking and the Restraint. And you are talking about the previous target, was that $1.4 billion gross to roughly $2 billion, ex the $1 billion of ADAS. If next year is not a lot of growth for the non-ADAS business, could you discuss the timing of when Braking and RCS inflects, because obviously that's a big jump to go from $1.4 billion to $2 billion. So just a little bit of when that inflects? I know some of it's second half '19, but maybe give us your updated thoughts?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [77]

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Well, it's hard to go into all the details. You are onto something here taking us into the mix of products where we have seen a weaker development of our RCS business temporarily due to weaker order intake. So a decline in RCS business and a continued growth in ADAS could be a case. I'm not saying it is like that. But it's not that easy to describe here the mix between the different product lines for 2019 and then into 2020. We are seeing a good order intake in both of those areas. We are also mentioning here Brake Control also taking orders during the quarter. So all 3 areas are in generally on a good trajectory from an order intake point of view. Remember, though, that this is coming beyond 2020. These orders that we are taking now is coming beyond 2020. So with this upcoming year, it's a mix change that we may come back to at our earnings call in January to discuss, elaborate further when we leave the outlook there. But otherwise, maybe on the Capital Market Day or so sometime during next year.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [78]

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Okay, that's great. So for Restraint, specifically, it is a situation where some of the legacy orders draining some of the growth now, but you are taking in good orders, so we can think about that reaccelerating 2020 on?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [79]

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Yes, that you can take. That's right.

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Operator [80]

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Next, we'll move to Dan Galves at Wolfe Research.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [81]

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Most of my questions have been answered. Maybe one housekeeping. The SG&A level, do you see more increases for stand-alone public company costs? Or are we kind of at the right level in Q3?

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Mathias Hermansson, Veoneer, Inc. - CFO & Executive VP of Financial Affairs [82]

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I think, we -- you should assume that this is kind of a normal level moving forward. There will be also some swings, I think, in the quarters, but no material ones.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [83]

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Okay, got it. And then more strategically, it seems like kind of in the pursuit of future levels of automation, there is a path, kind of like consumer-owned vehicle path that looks to be targeting highway autopilot type of systems to give people a more relaxing commute. And then the second path to Robo-taxi is more targeting dense urban areas. I mean, these are very different environments. Can you talk about which Zenuity is focused on? Can they focus on both? And just any comments on kind of those 2 different paths?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [84]

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The highway pilot, and they moved from level 2, 3 up through level 4 and further is the path that Zenuity is on as a major trajectory. But if you look through the slides that we presented at the Capital Market Day by Zenuity, there is also a path further on into level 5. But that is at a later stage, not yet defined.

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Thomas Jönsson, Veoneer, Inc. - EVP of Communications & IR [85]

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Okay. We're coming up to the hour here. So we will take the last question.

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Operator [86]

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And that will be Erik Golrang at SEB.

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Erik Golrang, [87]

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It is a quick follow-up. So you talked to us about 2 to 3 years of lead time between order and production start. It seems as if it's closer to 3 to 4 now, maybe the high end of that. Is that the correct assessment?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [88]

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I think it's between 3 and 4, yes. It depends also -- it depends a little bit on type of programs and type of orders. System order, complex system orders, definitely 3 to 4. Other type of more component-related orders, RCS business may be somewhat shorter.

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Operator [89]

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That does conclude the Q&A session. I'll turn the conference back over to the management for any closing remarks.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [90]

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Thank you very much, Audra. I would like to thank, everyone, for the interesting questions and your participation today. We look forward to talk to you, again, at our next earnings call tentatively planned for January 31, 2019. I'd also look forward to seeing you in conferences and roadshows during this quarter here as it takes on. So talk to you end of January next year. And in the meantime, I wish you a good holiday season. Everybody, take care.

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Operator [91]

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And that does conclude today's conference. Again, thank you for your participation.