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Edited Transcript of VNE.N earnings conference call or presentation 29-Apr-19 12:00pm GMT

Q1 2019 Veoneer Inc Earnings Call

May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Veoneer Inc earnings conference call or presentation Monday, April 29, 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, President & CEO

* Mats Backman

Veoneer, Inc. - CFO & Executive VP of Finance

* Thomas Jönsson

Veoneer, Inc. - EVP of Communications & IR

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Conference Call Participants

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* Agnieszka Vilela

Nordea Markets, Research Division - Research Analyst

* Brian Arthur Johnson

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

* Christopher Patrick McNally

Evercore ISI Institutional Equities, Research Division - MD

* Erik Golrang

Skandinaviska Enskilda Banken AB (publ.) - Analyst

* Erik Paulsson

Pareto Securities, Research Division - Analyst

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Analyst

* Joachim Gunell

DNB Markets, Research Division - Junior Analyst

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Steven Bryant Fox

Cross Research LLC - MD

* 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 afternoon, ladies and gentlemen. Thank you for standing by, and welcome to today's Q1 2019 Earnings Release. (Operator Instructions) I must advise you that this conference is being recorded today, 29th of April, 2019.

And without any further delay, I would now like to hand the conference over to your presenter today, 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, Petra, and welcome, everyone, to our first quarter 2019 earnings call presentation. Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; our new Chief Financial Officer, Mats Backman; and myself, Thomas Jönsson, Communication and IR.

During today's earnings call, our CEO will comment on our current business situation and the progress we are making at Veoneer, in particular, about market adjustment initiatives now underway, some of which were announced already in Q4. Then Mats Backman will walk you through our financial results, our efficiency programs and provide some commentary on the 2019 outlook. After this, we'll remain on the line for the Q&A session. And of course, slides are available through a link on the homepage of our corporate website.

Turning the page, here we have the safe harbor statement, which is an integrated part of this presentation and includes 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. We intend to conclude the call at 3:00 p.m. PST. So when you ask questions, we would ask you to limit yourself to a maximum of 2 questions each.

And with that, I will now turn it over to our CEO, Jan Carlson.

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

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:

Thank you, Thomas, and welcome, everyone, to today's earnings call. I will start out today's call by extending a sincere thank you to the entire Veoneer team for their continued quality focus as we navigate through this transition period and prepare for future growth.

Our company, through the record order intake over the last 3 years has built an exceptional order book of more than $19 billion to be delivered to our customers in the near future. These measures indicate that we are on track to deliver on our future growth and market share gains. To support this order book, we have assembled one of the strongest talent pools in the industry, developing cutting-edge technology, supporting one of the most important secular trends in our industry, the trend towards autonomous vehicle. However, we are currently in the middle of some short-term challenges in a rapidly changing market, including lower light vehicle production, a negative model mix due to our current high content per vehicle on premium models and higher development costs due to increased program complexity. We, as many others in our industry, have probably underestimated the extent and impact of these challenges on our company.

As announced during our last earnings call in February, we have several ongoing initiatives to address our cost situation where we expect to see the benefits during the second half of this year and into 2020. Some of these include tapping our R&D cost at $600 million for 2019, reviewing our development priorities for our Zenuity and VNBS joint ventures and developing a scalable product architecture. I will expand on these later on in the presentation.

As a consequence of all of these developments, the company has decided to consider alternatives for approaching the capital markets for a capital raise of up to $500 million in order to maintain our strong balance sheet through this transition period. We believe that by taking these decisive actions, we are strategically on track to be one of the leaders in Active Safety and the development towards self-driving cars.

Now moving on to the next stage. Our growth platform will only become a reality by solidifying the right talent and mix of hardware and software engineers. As illustrated by the graph on the bottom of this slide, our engineering associate base has almost tripled from approximately 1,800 in 2015 to around 5,200 in the first quarter this year, where approximately 70% are working in the product area of software. This ramp up of engineering has been required to not only support the increasing program complexity from our customers, but also to expanding our product portfolio and customer preference, which is the basis for our expected strong order intake of approximately $1.2 billion in 2019 and to expand our order book even further in the future.

Now looking on some of our development programs on the next page. Over the last several years we have been providing regular updates on our product portfolio and customer programs. As illustrated, we have been gaining traction since the launch of the Mercedes-Benz E-Class where we launched our 4 key technologies all at the same time in early 2016. Since then, we have rapidly expanded our customer wins across all regions and expanded the product portfolio into technologies such as LiDAR, and of course, our sensor fusion software stacked through all Zenuity joint venture. As a consequence, we are now developing Active Safety technologies for 12 customers, and in many cases, multiple products at subsystem or system level. This has added a diversity to our product portfolio and many of these systems are much more complex than our -- than both ourselves and our customers originally anticipated. In some cases, we are even integrating our competitors' products into the system.

These near-term product development challenges will put Veoneer in a stronger position for the long term. However, our cost base is currently elevated to ensure quality and delivery of new programs.

Now looking to the next page. We have illustrated how the light vehicle production forecast for 2019, 2020 and 2021 have deteriorated globally and in all our major markets since the spinoff of Veoneer of -- spinoff of Veoneer from Autoliv in June last year. Overall, this represents approximately 24 million fewer vehicles for the time period 2019 through 2022. This, of course, has had an impact on our business targets that were communicated at our Analyst Days in June of last year prior to the spinoff.

In addition, as mentioned last quarter, over the last several months, the industry seems to have come to the realization that Level 4, Level 5 autonomous vehicles will take longer and cost much more than originally expected. And we see a shift and focus in the industry towards Level 2+, driver support system based on conversations with our customers. This development should ultimately play into Veoneer's strength and the focus of our product portfolio; however, it's too early to know the impact on our business target.

I will go through now on the next page, a little bit more in detail on our market adjustment initiatives that we have started to implement during first quarter. These initiatives focus on three primary areas: efficiency improvements; investment priorities; and product portfolio optimization. Within efficiencies, which Mats will elaborate on shortly, we focus on margin improvements, customer and product focus, along with balance sheet and cash flow efficiency. Within investment priorities, we are currently reviewing and evaluating the scope and development priorities and funding of all joint ventures. As a part of these three views, we have resolved the short-term funding situation of VNBS with an MOU where we are now working towards a definitive settlement and agreement.

With Zenuity, we are currently in discussions to see how we can better utilize these resources towards the market shifting towards Level 2+ systems.

And lastly, to solidify our leadership position in Active Safety in both hardware and software, we intend to remain focused on our core product offering while evolving towards a more product -- modular product architecture to drive scale and cost efficiencies while we are adapting to customer needs. As a result of these market initiatives currently underway, we intend to revisit our short and long-term targets. Through the successful execution of these initiatives, we will create the financial stability necessary to be a winner in the long term and to be the preferred choice for our customers, employees and other stakeholders, as we consider the alternatives for approaching the capital markets for funding.

I will now turn the word over to our CFO, Mats Backman, to further elaborate on the quarter. Mats?

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

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:

Thank you, Jan. If we turn to the next slide, as Jan mentioned earlier, the macro environment in LVP is adversely affecting our operating results for the near term. Our overall net consolidated sales in the first quarter came in at $494 million, roughly $25 million lower than expected. It was new to retail [repeat] in Europe and North America than we saw in our customer call-offs at the beginning of the quarter. As a consequence, our operating loss of $128 million was close to $10 million worse than expected due to the organic sales effect, while our cash flow was in line with our internal planning.

As Jan mentioned earlier, our company continues to be in the middle of a tremendous investment period to support the ramp-up of our future sales growth and record order book. As a consequence, our investment in RD&E, net have increased to $156 million in the first quarter, which is an annual run rate of around $625 million.

In addition, our investments on capacity increases mainly in Active Safety and Brake Control systems resulted in a CapEx of close to $59 million in the quarter. This level of expenditures is quite a bit higher than previous quarter; however, we now expect the full year 2019 CapEx to be about 10% of sales.

Looking now into some further details for the quarter on the next slide. Our sales decline of $100 million as compared to the same quarter last year were compromised by a negative currency development of $28 million and then organic sales decrease of 12% or $72 million, which was mainly driven by Restraint Control Systems of $42 million and Brake Systems of $23 million. In the Restraint Control, this decline was mainly due to the phase out of certain EQ models in most regions, while lower volumes on certain Honda models in China and Japan drove the decline in Brake Control systems.

The Active Safety organic sales decline of 3% or $7 million was mainly due to a negative model mix with premium brand OEMs where we have a high content per vehicle in our major market. The gross profit decline of $27 million year-over-year was mainly due to the volume and product mix impact caused by the organic sales decrease and negative currency effect of $11 million.

As mentioned earlier, RD&E, net of $156 million increased $50 million during the quarter as compared to 2018. And this is due to the steep ramp-up of engineering hiring of approximately 1,300 associates during the last 12 months.

The SG&A increase of $21 million versus prior year was mainly due to the additional costs associated with being a standalone listed company and approximately $4 million of onetime professional services costs.

Lastly, other income was $15 million lower as compared to 2018 and that was due to the reversal of the MACOM earn-out provision last year.

Looking now for launches on the next slide. We have summarized some of the key new program launches and model facelifts, which will drive the step up in our organic growth in the later part of 2019 and into 2020. The strong line up of launches is mitigated by the negative impact from the Mono Vision business ramp down at BMW and the temporary negative mix from 24 gigahertz to 77 gigahertz Radar technology. Combined, these launches and facelifts represent between 10% to 15% of our annual sales, depending of course, on take rates and LVP. The average content per vehicle of these models is $135; however, the content range is between $40 and $800 per vehicle.

Looking now for efficiency improvement program on the next slide. As Jan mentioned earlier, as a part of our overall market adjustment initiatives, we're implementing an efficiency improvement program, which includes three primary focus areas: customer and product; margin improvement; and balance sheet and cash flow efficiency. Within products and customers, we will focus on winning orders within our core products and have ongoing discussions with our customers and suppliers on the scope of current and future business.

Within margin improvement, we have identified a number of opportunities, including, but not limited to RD&E efficiency and cost sharing, footprint optimization, decentralizing P&L accountability in our new business units and product line organizations; and lastly, tight cost control of discretionary standing throughout the organization.

Looking now to the balance sheet and cash flow. Our key focus areas will be restrictions on CapEx and specific operating working capital optimization initiatives. Unfortunately, since none of these initiatives have been initiated during the first quarter of 2019, it will take until the third, and in many cases, fourth quarter into 2020 before we see the tangible benefits.

Looking now for outlook for 2019. Based on our current customer call-offs and deliveries, we see a continued weak demand situation in China, Western Europe and to a lesser extent, North America. This leads us to anticipate a slightly sequential decline in our organic sales during the second quarter from the first quarter this year. In addition, we see a sequential increase in RD&E for the second quarter, which we expect to be high for 2019. As a consequence, we expect the operating loss to be higher in the second quarter than during the first quarter '19.

Cash flow is also expected to be worse due to the funding of Zenuity and higher CapEx than in the previous quarter. At this time, we expect the vehicle demand to stabilize and return to growth during the second half of 2019, resulting in an estimated full year LVP being down in the low single digits in 2019 as compared to 2018.

Our sales during the second half of '19 are expected to improve sequentially from the first half of 2019 and return to year-over-year organic growth in the fourth quarter of 2019. These sales assumptions are expected to result in organic sales decline in 2019 in the mid-single-digit, with a net currency translation impact of approximately minus 2% as compared to full year 2018.

Coming back to RD&E. Due to our market adjustment initiative program, we have set a check on engineering net cost of $600 million for 2019. Based on these assumptions, we expect the operating margin and operating cash flow to substantially improve sequentially in the second half of 2019 from the first half of this year. Based on the developments mentioned earlier, the company is considering alternatives for approaching the capital market for funding of up to $500 million.

I will now turn the call back over to you, Jan.

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

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:

Thank you, Mats. By moving the page, we would like to conclude our formal comments for today's earnings call. But before we open up for Q&A, I would like to add some commentary around our acknowledgment that we are considering alternatives for a capital market rate. Earlier in the Q4 earnings release and the 10-K report, it was our assessment that the capital we had would have been sufficient. Since then, conditions and circumstances have changed. The light vehicle production for our planning period has deteriorated further, the results from our market adjustment initiatives program will take longer time to materialize than we originally expected and the order intake has been strong, and continued strong, and we also continued to spend high amount of money in the R&D.

As it became clear that our cash will not be sufficient, we also concluded that the fact relevant to this had to be communicated before we can bring in more capital. However, we are still evaluating how we will address this capital need and will come back when we have clear decisions. Also we know that under the U.S. securities law, we are more limited as to what we can speak about than a Swedish listed company would have been.

So with that addition, I would now like to turn it back to our operator, Petra, for managing our Q&A session. Petra, please?

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Questions and Answers

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Operator [1]

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:

(Operator Instructions) And our first question comes from the line from Hampus Engellau.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [2]

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:

I'll limit myself to 2 questions. Could you perhaps talk a little bit about the second half here? I guess, what I'm looking for is that how much is the improved organic growth in, let's say, Q4 that you're indicating, related to light vehicle production being better and how much is related to you seeing your order backlog starting to invoice i.e., increasing market shares? That's my first question. Second question is more digital question, if you can maybe highlight how big the MACOM effect was on this reversal of the provision?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [3]

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:

Hampus, this is Mats. The first question when it comes to the second half and the organic growth and the kind of the recovery, most importantly, it's related to the LVP pickup in the second half. And please remember that the comps are much easier in the second half as well than as we saw the downturn to some extent already in the second half last year. But it's also to some extent related to launches that will start coming in the fourth quarter, but then more pronounced into 2020. So it's a mix, but the biggest impact is actually coming from the underlying LVP. Can you please repeat the second question?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [4]

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:

Hampus, you're on mute maybe. Can you hear us? Petra, can you hear us?

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [5]

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:

Yes. Hello?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [6]

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:

Now we can hear you. You went on mute. Could you repeat the second question, Hampus?

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

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Of course. The question on the MACOM, you said that you had reversed an earn-not provision, and I was just asking how big that impact was.

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [8]

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:

I mean, it's about the full amount that you can see on other, around $15 million and that was the reversal we did in the fourth quarter last year, so it's nothing in this quarter, it's just a comparable.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [9]

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:

Just a color to Mats' first answer here. If you look to the IHS numbers for first half, they are for first quarter down almost 7% year-over-year. Second quarter, down 3.5% and in third quarter up 4.5% and in fourth quarter, up almost 3%. So you can see that light vehicle production looks to bounce back, but as Mats alluded to, comparables are easier ones.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [10]

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:

Yes. I guess that is specifically in Europe, I guess, and maybe some instances in China if that materialize.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [11]

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:

Yes.

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Operator [12]

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:

And the next question comes from the line of Brian Johnson.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [13]

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Yes. A couple of things. Can you give us any sense of the timing of the various improvement activities, especially around the engineering cost reduction and kind of when those might actually lead to a decline in the structural cost base?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [14]

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:

Yes. As we indicated for the second quarter, I mean the run rate now we're getting into the second quarter is higher, so we are anticipating to see the peak when it comes to the net RD&E in the second quarter and then gradual improvement throughout the third and fourth quarter. And this is built on a number of different activities in order to get efficiency in RD&E, but the first signs in the third quarter and then into the fourth quarter.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [15]

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:

And in terms of manufacturing cost, is there any possibility for improvement in this year or is it more likely next year?

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

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:

You're right. We're standing in front of a quite heavy launch period here with a lot of engineering activities now first half, second half of this year. And then, launch activities in our plans starting in the second half of this year and into 2020. The gross margin activities that we are undertaking, we believe, will start to give an effect in 2020 and onwards.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [17]

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Okay. And final question. I recognize you're limited in talking about fundraising. But can you give us any sense of debt versus equity, public markets versus strategic investment and kind of size that you'd be looking for?

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

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:

We communicated here in the earnings release of up to $500 million. It will -- probably what we're investigating is a combination of different things, but beyond that, we have no comments. We are not today able to comment further on that.

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Operator [19]

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:

The next question comes from the line from Erik Golrang.

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Erik Golrang, Skandinaviska Enskilda Banken AB (publ.) - Analyst [20]

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:

I have 3 questions. The first one is, Mats you talked about you had discussions with clients on the scope of current business. Could you clarify what that means?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [21]

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:

Yes. That's when we're talking about the efficiency improvement program, but also connected to what Jan said, the -- in terms of the projects being more kind of complex and more changed requests from customers, so the discussion we need to have is about changed requests and what we're doing in the different projects when it comes to engineering with a higher complexity in the project.

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Erik Golrang, Skandinaviska Enskilda Banken AB (publ.) - Analyst [22]

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:

Okay. And second question is on the order intake. Same level on a 12-month rolling basis as last year, but could you highlight anything particular of note this in Q1?

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

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:

Well, the majority of the order intake we saw in Q1 was related to absolute majority, was related to Active Safety. So that was the run rate equally about majority on Active Safety.

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Erik Golrang, Skandinaviska Enskilda Banken AB (publ.) - Analyst [24]

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:

Okay. And then the final question on cash flow, you stated that operating, despite the weaker profit, your operating cash flow was in line. Was that then because of temporary sort of working capital-related factors? Since I guess, if cash flow was in line you wouldn't have needed more money than you previously thought.

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

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:

Yes. I mean, if we're talking about the outcome for the first quarter, I think, we've been quite successful when it comes to the net working capital because you see from a timing and seasonality, you normally see quite positive effects in the fourth quarter when it comes to the net working capital, and we saw it in this quarter -- in this first quarter as well then, but we also talked about a lot of timing issue. We have been able to mitigate some of those kind of timing issues in our previous last when it comes to working capital in the first quarter. But still, we have some timing -- working positive in the first quarter than that we need to consider that out. So a better than normal first quarter for sure.

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Operator [26]

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:

The next question comes from the line from James Picariello.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [27]

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So just one clarification for the second quarter guidance. Is core sales expected to be down sequentially or just the absolute revenue? Because FX should be less of a headwind, so just trying to capture the magnitude of the 2Q guide for sales.

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [28]

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:

Yes. It's organically down in the second quarter, and that's what we're indicating as well though. Right, we'll pass it on if anything.

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

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:

Got it. And then, since the first quarter wasn't that far off from your own expectations, right, just $10 million as you stated in the release, can you provide some greater context for what your expectations are, in fact, for the sequentially EBIT decline in the second quarter? Because I mean, honestly, I think, that would be to the benefit of us all in terms of calibrating the right trajectory for the year here.

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

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:

Yes, but I mean it's not the only one. We're talking about the second quarter, and when it comes to the sequential development, I mean first of all, we're continuing to see that the lower top line being hit by the lower top line and also the under absorption effect that we saw in the first quarter. But on top of that, what I also said when it comes to the run rate in terms of RD&E, we will peak in terms of net RD&E in the second quarter, meaning that, that will also have adverse effect on the EBIT. If we summarize the different effects and making some kind of an assumption when it comes to the cash flow in the second quarter, we would estimate that, that would be around $200 million, that's the number we are forecasting.

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

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:

Okay. That's helpful. And if I can just slip one more. The U.S. recently expanded its probe of ZF's airbag control unit to 12.3 million vehicles. So -- I mean, do you view this as an opportunity for the RCS business? Do you have any sense for the timing of a decision? Based on your past experience, if a ruling is made, what would be a realistic time frame for that potential recall to take effect and begin shipping?

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

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:

We are monitoring this. I think it's too early for us to have any definitive comment on it. We are following the probe and seeing the outcome of it. We will have continuous discussions with our customers and see what measures will be taken and how this will be, if it will be a change of unit or reflash or whatever type of measures that we have taken then thereby act accordingly, but nothing we can comment on today.

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Operator [33]

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:

The next question comes from the line from Agnieszka Vilela.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [34]

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:

I have 2 questions. The first one is on your CapEx needs. You're now raising CapEx in absolute figures in 2019, despite the fact that sales are going down. Now imagining that you will be delivering to your order book later on, do you foresee that CapEx will increase in absolute terms in the coming years, and by how much?

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

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:

We are increasing the CapEx here because we're seeing the need for the launches that we are seeing in end of '19 and into 2020 that I talked about and that we had on some of the pages here earlier. We don't see that continuing and going forward, as it looks today. If not, order intake would go even up further, but that -- otherwise, we don't see that need for an increase.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [36]

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:

And then my second question is on Brake Systems. What are your expectations for both the kind of sales and EBIT progression for that business? And also if you could share any information about dispute with Nissin Kogyo that would be helpful.

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

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:

We don't guide per se on the different product areas, so I don't have any specific numbers to give you on the Brake business. But when it comes to the discussions we had with Nissin, we are under the MOU resolving the situation we mentioned in the K and we are now progressing into a definitive agreement with Nissin Kogyo. We will then also look through the Brake Control business overall and evaluate how we prioritize our money and our investments going forward as a consolidated product portfolio. If you look to the Brake Control business, overall, it is gaining better momentum in second half as the rest of what we have been talking about, second half being a better half year than first half.

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Operator [38]

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:

The next question comes from the line from Vijay Rakesh.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [39]

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:

I saw you guys talked about RD&E at $600 million flat for the year. But if you look at the SG&A, you have a lot of temporary and contract workers. Do you see any flexibility there in the back half in reducing that and drive some leverage on the model?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [40]

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:

Yes. I mean, we're addressing the SG&A as well in the same way. And I think we have quite a lot of potential when it comes to reducing on the consultant and temp side. And I think, it's natural when you're building up a new organization that we have utilized some professional services in order to get started. Now when we are building the organization gradually, I can see that we can reduce the cost, we're getting our own organization up and running better, so it's definitely a potential on the SG&A side. Yes.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [41]

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:

And you talked about order intake. I knew the same levels, but near term with some of the LVP numbers coming in, have you seen any change in content, like are the OEMs reducing content at even L0, L1, L2 in the cars or is it just more of a SAAR LVP impact?

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

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:

No. We have not seen any behavioral change or directional change from the customers due to the current market situation. We have -- we are seeing the trend shift of a more driver support Level 2+ in general from the industry and Level 4 and a higher level of autonomy being pushed out in time. But driving content, it's not the case. It's rather the opposite when you look to the support from your NCAP and the regulatory environment, this will emphasize the need of our products.

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Operator [43]

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:

Your next question comes from the line from Joseph Spak.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [44]

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So pretty much every time you've -- we've gone on this calls you've talked about increasing RD&E to support intake or launches, and this time, a little bit more complexity. In light of that, is the business in that -- in your order intake, do you think that was priced correctly or do you need to go back and try to get some recovery from your customers?

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

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We will do whatever we can do to improve our pricing as we always do, you know how that is, that is not so easy in the automotive industry. We are increasing the RD&E numbers because we are seeing a stronger order intake and we -- strong intake continuing into 2019. We are now capping this. So maybe that is the change of this earnings call we are talking about the capping of the RD&E than to previous earnings calls. I think, also we have to admit that we are seeing more complexity and the more work to be done in these programs than we have originally anticipated. And those are the actions that Mats alluded to in the slide presentation here. We will go back and talk to customers about change requests and also how we can deal with that going forward. It's a moving target. You start a program, you get an award in 2016 that it's going to launch in maybe 2020 or something. During that time frame, there is a lot of things happening that the customers want to have included in the vehicle. And that will cause us more job, more work, increasing the efforts and then we have to also discuss the commercial terms of that with our customers.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [46]

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Great. And then just a follow-up, I guess, on the capping of the RD&E and the restricting on the CapEx. Does that implicitly mean you're capping your order intake at around this 1.1, 1.2 level that you've been at the past couple of quarters?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [47]

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Not necessarily. We are not talking about headcount capping here, we're talking about the cost capping. And we're also looking to the efficiency enhancements of the organization. We have an enormous talented engineering pool here in Veoneer, but we have to remember that 3,500 of these people have been brought on board over the last 3 years. We've started with 1,700 people some years ago, and we are now over 5,000. And it will be too much to ask for everyone to be 100% up and running with the full efficiency when you are on boarded, and so many people in such a relatively short period of time. So efficiency gains is one thing and also reviewing the footprint and how to utilize the resources more efficiently is another thing.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [48]

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Okay. That's helpful. I -- the last question I had is, I just was wondering if you could shed a little bit more light on this line you had in the report about the speed of transition in Active Safety proven to be more difficult than you predicted. Do you mean customers are expecting more view, and what more advanced product than you anticipated or maybe you could just expand upon that statement a little bit?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [49]

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Yes. I think that is the case. I think that customers, as I alluded to just in the previous question here, customers are expecting more to be included in the current ongoing program because the industry and technology is evolving fast. And customer sees more opportunities and opportunity to squeeze in more for a specific car line to a specific start of production. So we have seen that for a period of time. We are also having quite complex programs here and we spoke that about also to the -- in the slideshow or Geely program here for instance where we are system integrating several more components, several of -- or even competitors' components and also a decision-making software from Zenuity. And these are complex programs and is that a program that we should point to that we are getting more complex. I wouldn't do that specifically on the programs, but in general, the complexity of the programs are somewhat better than originally anticipated.

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Operator [50]

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And the next question comes from the line from Steven Fox.

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Steven Bryant Fox, Cross Research LLC - MD [51]

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Just a follow-up on that last comment about the complexity of integrating your own and others' technology. You made a comment earlier in the prepared remarks about also investing in other new technologies and becoming more modular. Can you just sort of give us a hint as to whether that means that there is bigger adjustments coming to your technology road map in the future? Or whether you need to add core technologies or in other ways, I would love some comments on that given everything else you talked about.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [52]

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What we meant with that was that we're looking to a scalable architecture. When we see the industry trending more towards L2 plus in a bigger scale, in a bigger volume, it is important for us and for everybody to have a scalable technology. Many of our programs that we are running today are directionally different, meaning that there are different product types that are including different architectural structure. And what we're aiming to do here is to define a better scalable architecture to gain better momentum, both of our engineering resources, but also financially, out of our technology. So that's what we've been with the changes of the technology and architecture.

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Steven Bryant Fox, Cross Research LLC - MD [53]

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And does that imply that you see a path to doing that with the current footprint you've mentioned on the R&D side? Or are there other things that you need to do?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [54]

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No. I think that is -- we can do that with the current footprint and we're doing that at the same time as we're going through the initiatives that we have been speaking about today. It will be also a corporation with our supply partners here that we will align on providing the different chip sets and the different drive chip sets into our technology. And of course, as always, a discussion very integrated with customers. So this will be what will take place now during 2019 and we will see the effect of that thereafter.

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Operator [55]

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The next question comes from the line from [Adam Hurwich.]

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Unidentified Analyst, [56]

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Just a follow-up, and I don't want you to comment really on the capital rates. I just want to understand how we're thinking about it much more broadly. Clearly, when we spun out, we had different assumptions as to what the market will give us. Right now, the capital market seems to indicate that if we were to raise equity capital, it might be under punishing valuations. Should we assume that you're looking very broadly at the issue of capital? And if you are, and if it just doesn't work to access the markets, we can reconsider the corporate structure of the company and open it up to all possibilities or options.

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [57]

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Well, I don't think we are not yet that young period. We -- this is a question that could come at the very much later stage, we don't think so, we are now working along the lines of approaching the capital market for funding here. And we are aiming to do that as soon as possible, but apart from that, I don't have any other comments around it and I don't think that question that you have now is something we would like to do it.

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Operator [58]

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And the next question comes from the line from Chris McNally.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [59]

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Two quick questions. And it's really around the thinking about the how to model the magnitude of the change on revenue and EBIT. So I think, what we're all trying to figure out is, when we look at something like Q2, that the delta, the $15 million delta that you're talking about, it just seems more than sort of the shortfall in light vehicle production even considering mix, premium worsen in Europe. So could -- can you just talk about specifically where the delta versus expectations is coming from? Is it a specific platform? Is it take rates within some of the ADAS programs?

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

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No. As Mats (inaudible) fill me in on details here, but it is mix changes. We're over represented on premium cars. You have seen declines on premium cars over the period of time behind us and we're seeing this continuing. We are seeing also that we are rolling off from certain platforms with certain of our products and it takes time before the new products are coming in. So it is following the same pattern as we have been talking about. And we are overrepresented on the platforms that are not performing well in this environment and that is hitting us more than the light vehicle production decline. I don't know if you have any other color Mats?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [61]

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No, I think that covers it.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [62]

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Okay. That's helpful. And then, the second is, as we think about incremental, decremental margins, I think, one of the surprises when we look at the first half is that if you just even look at the change in revenue to the change in EBIT, it's almost 100% and obviously, some is the ramping of the RD&E, but can you just talk to how we could think about the flow through, do you have under capacity issues when -- specifically to ADAS because even things are better in the second half, what's the run rate loss that we could start to expect, meaning is there something other than volume that's running through sort of the $90 million loss and something that's bigger than that in Q2 for electronics?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [63]

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Yes. I would say, in general, we're talking about the 2 components and especially looking at the first half, I mean, it's the volume that Jan elaborates on the background for the lower volumes in the first and into the second quarter. And I mean that's great in -- on the absorption and we can see a gross profit effect from that as well. And I mean, also combined, if you're looking at the first quarter, and I'm -- I was touching a little bit on the working capital for an instance as we have been quite successful given seasonality in the third quarter when it comes to working capital. And one of the success factors is to manage our inventories. And if you are destocking in environments like this, it will also create some under absorption in this environment. So I think that's one point that needs also to be built into this the kind of the negative leverage on the volume.

Secondly -- and the second item that you also need to remember, that's -- I'm coming back to the RD&E when we are talking about the higher rates. And if you're looking at the net RD&E in the first quarter, $156 million and that's about $25 million higher in the fourth quarter and we'll see a further increase in net RD&E in the second quarter before we can see that the run rate going down for the second -- for the third and fourth quarter, so that is also contributing together with the volumes to the EBIT effect. So those are the two ones that I think you need to kind of consider.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [64]

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And then is it fair to think about we -- when we get through this sort of as the business ramps, I think, you mentioned second half of '19, '20, '21, can we think about the sort of an incremental margin that's sort of above traditional because you have this RD&E level to start so, call it 30% to 40% of incremental revenue drops to the bottom line. Just thinking about how that EBIT loss progresses in a year or 2 years out?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [65]

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I think it's very, very difficult to talk about the normalized incremental margin in this environment then you need to have the stabilization when it comes to the growth and also the capacity we are building. So I wouldn't get into that to give you any number here because the volatility will be high when you have a ramp-up like we see today. And during good times, it will be high volatility in one direction and when we have some issues it will be in the other direction. So we need to come back with kind of a normalized incremental margin when we see a stabilization. It's too early to talk about that now.

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Operator [66]

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And the next question comes from the line from Joachim Gunell.

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Joachim Gunell, DNB Markets, Research Division - Junior Analyst [67]

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So just a follow-up question here. As you mentioned, Level 3 to Level 5 will take longer and cost more than originally anticipated. What implications in terms of industry interest has that for the Zenuity software perhaps? And with that said, in relation to the customer, you hope to land for being (inaudible) systems?

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Jan Carlson, Veoneer, Inc. - Chairman, President & CEO [68]

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I think it is more of a priority question with Zenuity and how we prioritize the resources. Zenuity has around 650 people working for them with some 70 consultants included in that number. All of them extremely talented for both their way forward in L4 technology but equally also applicable for L2 plus. This is more about the priorities. We don't see any changes on customer interest or customer implications on this one. It's more like the industry is reprioritizing and redirecting its efforts now for driver support -- advanced driver support that are to much higher extent supervised by the driver rather than unsupervised in the long term. We will have unsupervised functions, but in a lower scale in a lower level and those features will improve overtime. And by doing so, you will create data, you will create good quality and robustness in the product.

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Joachim Gunell, DNB Markets, Research Division - Junior Analyst [69]

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Okay. A final question then. I'm curious to hear your view, I mean, as your tech capabilities grow, how has that now changed your relationships with the OEMs in terms of how you work with them? Are you seeing any trends where perhaps OEMs are developing in-house solutions, for instance, for your Active Safety products?

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

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I think it varies from OEM to OEM. You have OEMs today that have a lot of capabilities in-house and you have other OEMs with more limited capabilities in-house. So it is as it has been in the past with many technologies, there are differences on different levels of OEMs or different types of OEMs. We are working integrated, and I think that the whole industry if you look to the environment, you see more integrated and more collaborations and integrated activities between OEMs -- between OEMs and Tier 1s, in particular in the area of autonomous drive.

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Operator [71]

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And the next question comes from the line from Erik Paulsson.

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Erik Paulsson, Pareto Securities, Research Division - Analyst [72]

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I was wondering about the current run rate for Zenuity. You've currently indicated it's around USD 15 million per quarter. What will it be during the remainder of 2019? And then can you say anything about 2020?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [73]

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I will not go into 2020, but looking at 2019, we are forecasting about $75 million.

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Erik Paulsson, Pareto Securities, Research Division - Analyst [74]

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Okay. For the full year, then?

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Mats Backman, Veoneer, Inc. - CFO & Executive VP of Finance [75]

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For the full year, yes.

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Thomas Jönsson, Veoneer, Inc. - EVP of Communications & IR [76]

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Okay. As we have -- yes, I can see we have no further questions on the line at the moment.

All right. Then...

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

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Okay. Very good. I would then like to thank everyone for participating today in today's call and all for the very interesting questions. We will work full force ahead according to the strategy and the initiatives that we have outlined here in our earnings release and we are looking forward to seeing you at conferences and roadshows during the second quarter and of course, in our next quarterly earnings call that's tentatively planned for Friday, July 26. Until then, I wish you all a very good time. Thank you very much for today and participating. Thanks.

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Operator [78]

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And that does conclude the conference for today. Thank you all for participating. You may now disconnect.