Veoneer, Inc.

Thank you very much, Huberto, and welcome everybody to our third quarter 2020 earnings conference call and webcast presentation. Here in Stockholm, we have our Chairman, President, and Chief Executive Officer, Jan Carlson; Chief Financial Officer, Mats Backman; and myself, Thomas Jönsson from Communications & IR.

During the call today, Jan will comment on our current business highlights and talk a little bit about launches and technologies as well. Then Mats will walk you through our financial results, efficiency programs and provide some commentary on our updated outlook for the remainder of year 2020.

After this, we’ll remain on the line for a Q&A session. As usual the slides and earnings release are available through a link on the homepage of our corporate website.

If we look to the next page we have the Safe Harbor statement which is an integrated part of this presentation and includes the Q&A that will follow here today. During the presentation, we will reference some non-US GAAP measures where the reconciliations of these figures are disclosed in the quarterly press release and the 10-Q that will be filed with the SEC.

This call is intended to conclude at 4:00 PM CET, so I ask everybody kindly to limit yourself to a maximum of two questions so we can get request in as possible during the short time we have. With that I will now turn it over to our CEO, Jan Carlson.

So Jan, please take over the call.

Thank you very much, Thomas. And also a warm welcome to this earnings call from my side here.

Now looking on to our business highlights on the third quarter by turning the page. Yes, we are all aware of the macro environment remains very challenging and uncertain, despite the volatility we have experienced between the second and third quarter.

We continue to gain strong momentum with our execution on new technology and customer program launches and or MAI program. The MAI program has been an important contributor to improving our operating and cash flow performance year over year thereby helping to mitigate the effects created by COVID-19.

We are especially pleased with our strong cash flow performance for the quarter where our cash balance remains relatively unchanged at $846 million from the previous quarter, mainly due to our continued focus on working capital and CapEx. We announced with Qualcomm, our intent to collaborate on ADAS collaborative and AD solutions powered by Veoneer’s next generation perception and driving policy software stack and the Qualcomm Snapdragon ride scalable SoC and accelerators.

In addition, we completed the divestiture of the BBS the US operations to set up and considering the current market conditions we continue to see sourcing delays of business however our order intake remains ahead of our prior year’s levels at approximately $600 million over the last 12 months. The encouraging sign is we see a robust pipeline of opportunities which align with our product portfolio roadmaps as we head into the fourth quarter and 2021.

We also expect to return to organic growth during the fourth quarter and accelerate that into 2021. I would like to extend my sincere thanks to the entire Veoneer team for their continued resilience and strong performance.

The team has focused on our execution and launching new technologies and customer programs without compromising quality and our first priority is the health and safety of our associates. Now looking onto the next page, as we have mentioned earlier 2020 is the beginning of an unprecedented launch period that will continue over the next several quarters.

The launches highlighted on this slide not only illustrate our strong active safety portfolio of the Gen4 Mono AND Stereo Vision cameras, 77 gigahertz radars and ADAS ECUs but also a highly regarded perception and driving policies software stack. Over the next several quarters, this software stack will be launched across multiple new customer models.

And on October 5, the Mercedes GLE was recognized with the highest rating of nine competitors according to the 2020 AD Test Rating System and we are proud to be the main active safety peer one on this important vehicle which includes our stereo vision camera or radar or ADAS ECU and Perception software. These are all important proof points that we have the right product portfolio and technology roadmaps to create long-term shareholder value.

If we now turn to page, we have updated our top 50 new program Customer Launches for 2020 to reflect the recent divestiture of VBS US business. In addition, we now include a first look on the first quarter of 2021.

In addition we now include a first look on the first quarter of 2021. This illustrates a continuous pipeline of new program launches for our active safety portfolio building a strong base already established this year.

During the third quarter the customer launch delays seems to have stabilized with no new substantial changes to our previous communication. In aggregate the top 15 2020 vehicle models and platform launches represent approximately $300 million of average annual sales with an average content per vehicle of approximately $165.

Now excluding brake systems. The content range of the top 15 in 2020 remains unchanged in the range from approximately $30 per vehicle to more than $800 per vehicle.

And as we mentioned previously these launches are expected to contribute to a return to organic growth during the fourth quarter. Looking now on the recent strategic announcement on the next page.

On August 27 we signed a non-binding letter of intent with Qualcomm to jointly deliver on next generation ADAS collaborative and autonomous driving platform. This platform will range from level 1 to level 4 systems uniquely designed to create an open platform for Tier 1 suppliers and automakers.

The scope of the agreement is intended for both companies to collaborate and jointly deliver a full software stack and SoC platform for next generation ADAS collaborative and autonomous driving. And this joint solution builds on Veoneer software stack for perception and driving policy and the next generation Qualcomm Snapdragon Ride Automotive scalable portfolio of a system on a Chip, Soc and accelerators.

This platform will be marketed and sold to automotive manufacturers and Tier 1 suppliers. And we are targeting customer launches during 2024.

We continue to make good progress with finalizing the definitive agreement and aim to have the transaction signed during the fourth quarter of this year. And so far have had good feedback from a handful of OEM customers and a handful of potential Tier 1 customers.

Now looking on the next page, on the current market situation. The light vehicle production rebound of more than 60% during the third quarter, sequentially from the previous quarter is unprecedented.

Even if we look back to the financial crisis of 2008, 2009 timeframe the eventual recovery took many quarters over several years and was aided by the support of numerous incentive programs. The challenge in front of us today is managing the uncertainty in demand as it is becoming increasingly difficult to predict underlying consumer demand especially given the fact that a substantial portion of the third quarter rebound was replenished, depleted inventories.

This is shown in the current lunch light vehicle production forecast which is approximately 8% higher than the IHS forecast 90 days ago and for the time period of quarter three 2020 to quarter one 2021. Looking ahead as illustrated on the short, the strong recovery is expected to continue into the fourth quarter improving approximately 10% sequentially from the third quarter.

I will now turn over the presentation to Mats Backman, our CFO for review of the financials and outlook for the remainder of the year. Please go ahead.

Thank you, Jan. Looking now for financial results for the third quarter on the next slide.

Considering the sharp sequential rebound in LVP from the second quarter we are pleased to have managed the financial results during the quarter avoiding adverse cash flow effects and premium costs. Net sales for the third quarter of $371 million were slightly better than our internal expectations.

However, we estimate the negative impact resulting from the COVID-19 pandemic was approximately $30 million on organic sales for the quarter. Our ongoing market adjustment initiatives continue to show an improvement in our underlying cost structure, which resulted in an operating loss of $103 million essentially in line with our internal expectations.

Our strong cash position of $846 million at the end of the quarter remained relatively unchanged from the previous quarter due to a positive $6 million of cash flow before financing activities which was driven by our exceptional working capital performance during the third quarter. Despite the COVID-19 impact on our industry, our company continues to be in the middle of a tremendous investment period to support the ramp up of future sales growth which is supported by a strong order book.

In this environment, we continue to look for ways to reduce and even postpone our capital expenditures without compromising current or future launches. During the third quarter, capital expenditure was $19 million or 440 million lower as compared to last year.

So overall we are pleased with the progress we are making on the cost structure and balance sheet as we continue preparations for an upcoming launch period. Looking forward into the details for the quarter on the next slide.

Our sales for the third quarter declined $91 million as compared to the same quarter last year which includes the $77 million related to the VNBS-Asia divesture. The organic sales decline of $27 million or 7% was mainly due to a 9% decline in active safety which to a high extent was driven by the wind down of the mono-vision business with BMW while the 5% of a sales decline was essentially in line with the LVP decline of 4%.

These sales effects were partially offset by a positive net currency translation impact of 3% or $13 million. The gross profit decline of $19 million for the quarter versus prior year was mostly due to the brake system divesture effect of $11 million along with volume and product mix impact caused by the organic sales decline.

These were partially offset by a positive net currency effect of $3 million. RD&E net of $124 million decreased by $20 million during the quarter compared to 2019 due to lower growth costs and higher engineer reimbursements.

The net benefit from the brake system divestiture and additional annuity cost was $7 million combined. In addition SG&A improved $2 million year over year.

Also the benefit in other income of $10 million due to the IP recovery mostly offset the lower gross profit year over year in the quarter. Lastly our positive $1 million of operating cash flow for the third quarter was $62 million better than last year mainly due to positive timing effect in net working capital of which $50 million is expected to reverse during the next quarter.

Looking now for sequential performance on the next slide. Net sales of $371 million more than doubled from the $184 million as compared to the second quarter primarily due to the sharp rebound from the depressed LVP levels in Europe and North America due to the COVID-19 pandemic.

The sequential organic sales increase of a $181 million included $85 million in RCS and $87 million in active safety. The reminder of the increase was related to the legacy on the brake system business of $8 million.

The gross profit sequential increase of $51 million was mostly due to the high LVP along with some product and customer mix impact on organic sales. The RD&E net sequential increase of $80 million was mainly due to $80 million or above normal engineering reimbursements in the second quarter which was cost recovery for application development incurred in prior quarters and years.

We had multiple customers. Our operating cash flow $1 million positive increased by a $108 million sequentially.

This increase was mainly due to the $106 million improvement in networking capital from the previous quarter of which $30 million was identified in the second quarter as a timing effect. In addition $50 million of the increase is expected to reverse during the fourth quarter of this year.

And lastly, as mentioned earlier capital expenditure continues to run at low - lower levels without compromising our customer launches. Looking now to our market adjustment initiatives on the next slide.

As we have mentioned earlier the results of our market adjustment in each of these continue to have a significant positive impact on our financial results. Thereby mitigating the negative financial effects from the COVID-19 pandemic for the quarter and full year.

Looking now to our 2020 outlook on the next slide. We continue to looking out for our 2020 outlook on the next slide.

We continue to take significant action to adapt to the evolving macro environment and mitigate the effects of our operating loss and cash flow. Our outlook for the fourth quarter of 2020 is primarily based on our customer call-offs, which remain relatively strong compared to the third quarter and in some geographies are increasing.

For the fourth quarter, we expect the return to organic sales growth and consequently outperformed the global LVP during the second half of 2020 primarily due to our new customer program launches. Currency net is now expected to be a slight tailwind of 1% on our full year 2020 sales development.

Due to a well-established market adjustment in each of the programs, we’re holding our original 2020 outlook for an operating loss improvement versus 2019 on a comparable basis. In addition, we still expect to reduce RD&E net by more than $100 million in 2020 from 2019 on a comparable basis and expect CapEx to be less than $125 million in 2020.

Due to our strong third quarter, we now expect our cash flow before financing activities to be better than negative $170 million for the second half of 2020. So overall, a continued positive outlook especially in the unprecedented LVP situation and very mixed and uncertain macro environment.

I will now turn the call back over to Jan.

Thank you, Mats. With that outlook, we conclude the formal comments for today and turn the page.

I will now leave the call back to Roberto and open up for Q&A. Roberto, please go ahead.

Hi. Good afternoon and thank you.

I wanted to first just start with a question on the RD&E you highlighted you had some extra engineering reimbursements and I think this just continue what we saw in 3Q and you got obviously that very large recovery engineering not the same active but just give us a sense of the potential for further recoveries are you having more conversations with customers to recover some of these prior cost outlays. And then just specific that 4Q I know 4Q is typically a good quarter for recoveries.

What should we expect is there another large recovery to expect in 4Q.

This is Mats. I mean from a seasonality point of view the fourth quarter is always the strongest when it comes to the RD&E with we had a bulk of engineering reimbursements coming in the fourth quarter.

And what we are seeing this year in terms of the high reimbursement in the second quarter that was more kind of a discrete items. But that is not affecting the fact that we have the seasonality into the fourth quarter.

So we are expecting to see higher engineering reimbursements also this year in the fourth quarter.

Okay great. Thank you.

And the second question about your about the order book and the launches and what that implies for the outgrowth. So look we you know we've seen obviously a positive inflection in end market estimates.

And I guess I'm wondering what the implications are for your launch cadence. And I realize it's probably a little too early for questions on 2021.

But assuming the end markets are in line with the expectation we've seen from some of the third party forecasters like IHS I mean what is a reasonable expectation for the type of outgrowth that your order book might deliver. And how long does it take before we get to call it full run rate of all the revenue from that order book hitting, is that more of a 2022 effect.

I was just trying to get a sense of how positive the impact of the end-market recovery on order book and what that does?

Based on the existing cadence that we see and the planning for that we also alluded to on this page where we extended the launches into Q1. We will see an acceleration from Q4 into Q1 already.

So we anticipate to return to growth in Q4, but that from there to accelerate into Q1. More granular information we will be back to you with in the beginning of next year.

Okay. And then just any sense on when we start to see the full run rate of that order book?

Or is this something that just accelerates into 2022? How to think of the rough directional shape of it?

The directional, we can say that it's accelerating into 2021 and during 2021. And let us come back to talk about the future than at a later stage.

It's a little bit too early to see it all. Of course also depending on how the LVP is developing and the macro situation is developing.

But we see from the order book and the platforms that we have lined up for launches that it will accelerate into 2021 and during 2021

Okay great. Thank you.

All right. Good morning or good afternoon.

Thanks for taking my questions. I guess a question first on 2020 launches and looking at slide 5, I think you noted the top 15 launches you're expecting $165 content per vehicle.

That's down from I think you had previous noted $270 CPV expectations. So it sounds like you're saying push out, skewed towards higher content.

So just curious how we should think about implications for 2021? Are we going to see outsized launches of premium content next year and maybe what that could mean for our growth?

Well as you can see also in 2021, Q1 we have now illustrated here the first quarter, you can see that you have a significant content on many of these cars. You can see that also their average vehicle volumes here are significant with over 200,000 units a year in several cases.

So we see that this will continue in the same shape at least in the beginning of the year as we have had in 2020. When we go further down the road, let us come back as I said on the previous question to discuss more in detail when we come back in 2021.

The difference of course here between the previous $270 and then the updated here $165 is that brake systems is out now. So that is of course causing the big difference.

Okay got it. Thank you.

And then maybe just one more you referenced the BMW mono impact. Can you just update us on kind of where we are in that wind down process what we should expect go forward.

It is a longer tail than what we originally expected. But it's very, very thin right now and getting thinner.

But the tail will continue to be there for a while. But it's a very small.

Okay perfect. Thank you.

Thank you. First question is on order intake.

Yes it was pretty low activity in Q3. You said something about a robust pipeline there opportunities.

But what's the outlook here for the fourth quarter. And could you put a -- you previously had an ambition on full year orders $600 million on a rolling 12 month basis where would you hope to see that end up on a full year basis.

And then the second question is on costs going into Q4 is there a lot of discretionary spending coming back here towards year end that that it's perhaps a bit more activity based. And also what's the number if any in terms of government subsidy supporting Q3 earnings.

Okay. I can start with the order intake.

We see a robust pipeline and we see that activities have been lower. Our estimate internally has been that maybe it has been between 30% and 40% lower than what we had expected it to be prior to the COVID 19 due to that effect.

And that is not only for Veoneer. That is what we believe is the industry activity.

So it's from in light of that our order intake in the quarter of around $100 million and an LTM of around $600 million we think it's okay. The pipeline that we have now is several awards to coming up, but you know how it is.

It's very hard to say whether it's going to fall on this side of New Year or be pushed over. I think that depends on the appetite on the OEM side.

But there is a buildup of more activities here. Also very encouraging which is not order but it is initial discussions to point out that the very immediate interest from other Tier 1s and also automakers OEMs on the corporation with Qualcomm.

As we mentioned here in their formal comments, we have entertained a handful discussions with OEMs and another handful of discussions with Tier 1s. So that is also building up here for us.

And there we said in the call earlier here back in August that we would hope at that time to have an order within 12 months on our Qualcomm cooperation. So we are optimistic about that and looking forward to it and also a stronger activity more in general.

In terms of the other question related to cost, so first of all when it comes to the government's support that is about $4 million in the quarter all in all. Looking at I mean more forward looking at on the cost side and in terms of the discretionary costs I cannot foresee any kind of increase is coming through there.

Of course I mean what we have in terms of savings is I would say sustainable on that side. And on top of that if you're looking at even though the COVID-19 and general activities have been somewhat lower out there, internally in Veoneer looking at the third quarter with all the activities going on in terms of the structure of transactions we have had them and other things the activity in the company have been rather high in the quarter.

Yes sir. Thank you very much.

I apologize if I missed it before, but could you please go back over some of the drivers of what seems to be some pretty widespread delays in launches. What's really happening in sort of I'm struck by the fact that I think we sort of like started the year with the expectation for seven points to eight points of gross above market then obviously COVID happened.

And I think second half was going to be above market obviously third quarter was quite a bit below and even for the fourth quarter, it doesn't seem like a very strong growth above market. So I guess again and I do apologize if I missed it.

But what are these delays based on?

Well, first of all, I think we see no more delays. I think it's very important to point out that what you are pointing to here is more of a historical situation where some of the launches was pushed out from the second to third quarter and some others from third to fourth et cetera.

But the current plan seems to be robust. It seems to stay there.

And of course there was a lot of things, if we want to go back and dig into that what's causing it COVID-19 is one thing the fact that people working from home, the fact that people cannot perform tests and a lot of other things in a very volatile situation that is causing delays to happen. But as I said that it seems to be over now and we are on a plan going forward that it seems to be robust.

Okay. That seems to be over now and we are on a plan going forward that it is seems to be robust.

Okay. I mean but to be clear in the fourth quarter there are a lot of delays at least compared to your previous expectation is that all right.

Well there are some of the launches coming from third quarter into the fourth quarter but there are no further delays right now there is no delays. That is happening right now.

Okay. And then the Qualcomm agreements how should we think about it in terms of impact on your RD&E budgets going forward.

I realized that it's really more of a mid-term dynamic. But I mean to the extent that you put together themes towards this like just are you planning on hiring for this is it sort of like higher spending or can this be done within sort of your existing framework.

A lot of the job that was planned to be done is already accounted for in the plans that we had before announcing the Qualcomm things. So the activities is now done together with Qualcomm in a collaboration so a midterm short midterm here we should do not see any deviations from previous assumptions based on the collaboration with Qualcomm.

Then later on in, out years we'll have to come back. It's all depending on how successful we will be with orders et cetera there that I talked about before.

But no big changes or no changes to previous plans.

Great thank you. Good afternoon.

I just want to go back to the order intake, you talked about the overall level of activity. But I was curious if you can comment on your win rates and how that progressed in the third quarter relative to your internal expectations?

I think we have a hit at the win rate in this distressed environment that we could anticipate. I think as we commented here the overall situation has been affecting the order activities and based on what we were targeting more or less expected what to come what we expected to see happening.

It has been a little bit fluid because some orders have been up for discussions and then being delayed et cetera over the last couple of quarters due to the overall situation.

Great. And then just secondly, if we go back to the 2022 revenue target I think from earlier in the year obviously a lot has changed in LVP and FX.

But if we just kind of isolate the order intake, the backlog component of that also in relation to your original I think %1 billion goal. How do we think about that that component in terms of 2022, does that mean you can kind of makeup potentially in the coming quarters or at this point should we think about some degree of a shortfall there?

When it comes to the 2022 situation and the information we have had of the 2022 there is so many things right now that I would not comment on the 2022 targets that we have set out, because a lot of things have happened and they've been affected in the overall situation due to the COVID-19 and we'll come back and speak about that at a later stage.

Okay great. Thank you.

I think what is important to point out here to your point is that regarding the launches and the delays there it is an outperformance as we said in the quarter four and that is of course then given the fact that we are returning to growth and expecting to return to growth in the fourth quarter.

Thank you. Good afternoon, everyone.

Thanks for taking my questions. I wanted to ask a little bit about the order activity in HAD areas because Ford said earlier this year they still plan on a Level 4 vehicle being launched in 2022.

GM is now lobbying for a vehicle along with Cruise with no steering wheel and no pedals to come out. So I'm wondering as the activity been a little bit better in that end of the market than what you might have previously expected and the launches may be coming a little sooner than what you thought?

I wouldn't say so. I would say it's as expected or around that what we have seen before.

I wouldn't see that there is an acceleration in it. There is discussions around the Level 4 cars.

And the question is when will it really materialize in some volumes, that's obvious that we will see cars with Level 4 capability come, the question is how many and what areas etcetera. Technology is evolving and the architecture and with the central computers supporting that future feature level and of course that is what we are preparing for also in our cooperation with Qualcomm.

But I wouldn't say that that is accelerated or brought to into an earlier launch. I cannot say that.

Okay. And then with respect to vehicle digitization in this you know accelerating over the next three to five years you know what's it look like in terms of recurring revenue streams for software update in your revenue base as we grow over time are we talking about something along the lines of maybe 1% of revenue or 10% of revenue how substantial does those revenue streams actually become over time.

What I think is that it will accelerate over time and if you look through the cooperation here with Qualcomm we are expecting that to launch in 2024. So I think over time this will be a part of the revenue stream and over their updates when that capability is expanded of course we will see that also coming our way.

And that will that will also come as a part of the collaboration but you know for the time being I think now we are very much attacking the growing the rapid growing market on L2+ into seem to level 3. And that market is really a substantial market for us to increase our activity.

And that is where we are focusing. That is the collaboration with Qualcomm where we're focusing to start with.

And from there we are planning for expansion at some point into more of Level 4 type of activities. But over the year, capability will be a driver, strong driver for updated software and updated features.

Thank you. Wanted to dive-in a little bit to the Qualcomm collaboration agreement.

I guess, one element that's difficult to get our heads around is how the JV would address other Tier 1 suppliers? Can you - so can you give us a sense of kind of what you'd be pitching to other Tier 1 providers?

What it would mean in terms of I mean obviously if you're selling Qualcomm chips they make money, but what's in it for Veoneer to work with other Tier 1s?

For Veoneer, it's a great business and a new market to address by selling or complete perception stack and drive policy stack to the Qualcomm Marketing Channel. And this agreement in collaboration builds upon that Qualcomm will have the go-to-market responsibility for the combo, the combination of the stack and the SEC.

Qualcomm will then be able to address other integrators, other Tier 1s, and Veoneer through Qualcomm then will sell our software stack to a market that Veoneer has not addressed before. Veoneer will continue to address its market as a Tier 1, and of course then, work as we have in the past, addressing directly through the OEMs, the integration of the ambition and stack and the SoC, but also the other products directly to the OEMs.

But the thing here is that we will together with Qualcomm develop, co-develop all software and there will also of course develop their silicon to fit with the requirements that this market will address and thereby also having a very competitive product and we believe looking into the performance of their silicon that it has an advantage from a power point of view from a scalability point of view from a capability point of view when we think this will be a very competitive combination that customers would be interested in looking into.

And I was just drilling down on the Tier 1s again. So when you're at - when I look at your pipeline and you talked about it in the past, so fairly defined sort of Tier 1s used the mobilize vision platform as their starting point, who seemed to have I would assume in this page showing up with their own cuts at ADAS software.

So would Qualcomm be taking us to Tier 1s who may not be active and active safety or their unique things in your stack that maybe you can't sell directly to a competitor, but Qualcomm can?

Well, I guess the thing is Qualcomm has an extensive contact and an extensive network through its telematics activities in vehicle infotainment activities. So they have a substantial contact surface to the automotive industry today.

They are not active in the area of ADAS and by taking this step they can use their existing network to Also broaden their product portfolio into ADAS and into thereby also level 3 and level 4. And they will be the party that will address the other tier 1s.

And we will sell our software through Qualcomm and that will be a part of their product offering.

Okay. And then final question on, in terms of having a system on a chip you talked about launches in 2024 but is there a chip design when does the having followed Mobileye they had a team who have worked with their fab to take the algorithms and design the chip.

What's the timetable for that kind of work.

Well as we said this is ready to start production in 2024 and there is a family under its way and that is now in discussions with Veoneer how to really optimize that family and to tailor make that to get the best out of it from a performance standpoint from a power consumption standpoint to fit the requirements and to bring to market a state of the art product in the state of the art combination. I think also here from a market perspective just the fact that we have I would say already in weeks after the announcement it was done in late August, August 27.

Already been able to have initial discussions with a handful of OEMs and a handful of Tier 1s really points to that having a challenger in this market is wanted by many players. And here comes Qualcomm Veoneer as a real challenger to what's there already today and to bring also a high performing product into the market.

Hi. Thank you.

Just two please. One is just trying to get a sense on how we perceive some of the financial metrics as we go now into the ramp up of the of the new models and the revenue coming with that?

One -- just when we try to look at the gross margin, which it's low at 14.6% there is some fixed costs in there. But when you think about the active safety, can you give us a sense as to how we should think about gross margins now they're going to have multiple model launches?

And associated with that also when you look at operating working capital it's about $140 million at the moment about 38% of sales. Is this representative of the working capital requirement as you grow?

If we start with the working capital quite -- and I mean as you have seen in terms of the working capital in relation to sales if you're looking at the third quarter that's a negative minus $117 million. And when you are getting into a growth phase I mean that is not sustainable.

And if you're looking at the historical numbers as well, you are rather on a slightly positive maybe 1% to 2% or something like that if you are looking at the kind of a more of a long-term development of the working capital. But saying that what we also need to remember is that we have improved our kind of underlying processes and if you are looking at the different key ratios in terms of working capital DSOs, DIOs, DPOs and so forth.

So in terms of inventory days, receivable days, or payable days we are on a very good level right now that we will continue to have them in terms of efficiencies. But you cannot kind of assume this level of negative working capital in the long term.

Looking at the development of the gross profit and more kind of operational performance, I mean when you all in a launch phase that we are right now with I would say huge number of big launches you will have volatility between quarters when it comes to the gross profit driven by additional launch costs and lower volumes initially. And I think we will see that coming quarters as well done in terms of maybe limited leverage depending on where we are in terms of the launches.

But looking at mid to long term, we are expecting that kind of leverage on the volumes that are coming through now. But the full impact will not be there until we have had the ramp up of the volumes.

So it will be a big volatility. If you are just looking overall to have some kind of a baseline if you are looking at the operational leverage sequentially from the second quarter into the third quarter.

I think we had some 30% in terms of the leverage on the growth in between quarters. Just to give a kind of a sense of the performance right now.

And just to clarify on the working capital, I was looking at receivables plus inventory minus accounts payable operating working capital which is a positive number. Is that sort of ratio something that's representative or not?

No I mean if you're putting it in relation to say. I think it's better than the average that you can see going forward.

And then the other question was just looking at the slide 5, the top 50 models, so I just wanted to clarify you mentioned that the top 50 models represent when fully ramped about $300 million of sales. Is that right and are those models all represented on this slide or which models are they also representing other models to be launched in 2021?

No. These are the ones that are representing an average annual sales of $300 million.

Okay. Then what we see on the screen.

Okay.

Yes.

All right. Thank you.

Thanks very much.

Thank you very much. So if we go back a bit, I mean already before COVID the orders for 2019 was in the range of $600 million.

So can you just elaborate a bit on what - what's driving the weak that’s already have the COVID if they way I'm sorry increasingly taking a break from this, and I'm giving the quoting activity that you alluded to earlier? Are there say orders left to win to sustain high medium-term growth as well for Veoneer say 2024 and beyond if we don't include the Qualcomm deal?

Yeah. What we are talking about here is not including the Qualcomm deal.

So the Qualcomm deal is coming on top of the demand. We're seeing increased activities here and talking about how your movement from OEMs, that is excluding the Qualcomm deal.

The Qualcomm are in an initial discussions here. We haven't yet signed the definitive agreement with Qualcomm.

We expect to do that here during the fourth quarter. So these are - and this is an increased activity that we see.

And we take that as a sign of that OEMs or moving more efforts into the future orders here post-COVID.

All right. Thank you, Jan, and perhaps a follow-up on that now that we have been a couple of quarters into COVID-19 uncertainty, there have been some OEMs have dissolved their autonomous driving partnership.

And if we assume down into ADAS if this in anyway say benefiting your efforts and are you seeing any trends here where OEMs increasingly yeah you stop doing ADAS in-house and instead outsource it.

I think that we see a lot of trends here. We see a different type of partnerships and collaboration and our collaboration with Qualcomm is another thing you see some OEMs with capabilities that may do more in-house.

So I see yeah I think you see a variety of activities going on. But many of the activities are focused toward scalable architecture central compute and driving preparations for L2+ but that also maybe having in mind the higher level of autonomy down the road.

Our opinion is that it will take time and we'll have to see an architecture to mature and being proven and tested before you switch on more advanced software stacks and the different advanced features enabling level 4 or level advanced level of autonomy into it.

Thank you. Just a follow up on Qualcomm I just was hoping you can just confirm or clarify.

You're saying that there are other active safety suppliers that do not have their own perceptions software that could use yours and if that's correct I presume that these are adjacent hardware companies that are interested in becoming more full stack ADAS suppliers is that may I hearing you correctly.

No. What we are saying is that there are other Tier 1s that can use the combination of Qualcomm SoC in our hardware stack.

So you could have other Tier 1s being an integrated of the combination of Qualcomm’s SoC in our drive policy and perception stack. And that is then handled through Qualcomm as a marketing channel as a market channel.

Okay. So they would use your hardware and then certain parts of your software along with the -- along with that that chip.

No. It would be the Qualcomm chip, the Qualcomm SoC together with our hardware.

And then of course they would then do the integration of it using their own hardware.

Okay. And then secondly look your R&D headcount is down pretty meaningfully versus this time last year, it was over 5,000 people now it's a little bit over 4,000 or 4,400.

Should we think about the personnel or your head count having to increase as you launch more business in 2021 or 2022 and that you may be able to mitigate that through other measures like more low cost countries and can you give us an update on how you're thinking about the level of revenue just based on your current cost structure, level of revenue that would support the breakeven EBIT?

We are using partnerships and a lot of the things that you see here is that we have for instance sanitation et cetera is used through partnerships. We have used also partners for other type of work like base tech et cetera in our company.

And we are focusing a lot of our activities on their core business and that is why you can see a head count reduction. We are depending on the order intake and the level of order intake we believe that we are finding a good number of head counts here right now.

We will do more in terms of, of course efficiency gains through our market adjustment initiatives on the R&D side, but not in a substantial way. And I also think you need to remember when it comes to the application engineering we have had I mean looking at the kind of launches and the launch period we are going through right now that will naturally kind of ramp down when it comes to application engineering you need to remember that one as well.

Okay.

We would have people ready to take on board new business new activities when all current programs here are going into production.

Okay. That’s helpful.

And any thoughts on just the targeted level of revenue that would be required to achieve a breakeven EBIT?

No, we haven't discussed that. There is a lot of things happening in the industry and with us at the time for the time being we are doing a lot of activities here.

We are significantly improving our cost structure, our activities and our processes inside Veoneer. So let us come back to that one at a later stage.

Okay. All right.

Thank you.

Just mentioned that we have about four minutes left. So one or potentially two questions more.

Thank you.

I have one question at the time. I would be interested to get a little bit, if you could specify on the Qualcomm chip if you would kind of diversify your product offers which means that you might sell just the object identification software on the chip and then do total solution.

And if that is the case also will that mean that you will stop developing your own ADAS ECU that you are currently applying it to Daimler. Thank you.

No we would not stop ADAS ECU. We would continue to use that as the vehicle for the vehicle integration or for the integration job of course.

But you would be able to then sell a separate feature and that has not yet been - not being discussed in depth with Qualcomm how they feature selling. As you know we are selling features and parts of the software or sold separately as a feature.

And we have talked about that at the earnings release when we are seeing that to be an option and to be continued. But the main focus right now is to develop the stack the complete stack and integrate that into the Qualcomm SoC of course but they are the one that could definitely continue.

Thanks so much gentlemen. Just a quick one you mentioned from the implied guidance that Q4 would be a better revenue quarter maybe I missed it in the prepared comments but did you say anything whether the EBIT loss will improve sequentially on the better revenue.

No we - I mean we have the full year kind of outlook when it comes to the improved operating income year-over-year on a like-for-like basis. So that’s what you have in terms of the outlook in EBIT.

But again from a seasonality point of view, if you're looking at the Veoneer and the development over the quarters, traditionally the fourth quarter is always the stronger quarter supported by high engineering income or reimbursements of engineering to customers. And we cannot see any kind of difference to a normal seasonality this year.

Okay. Great.

And then just a follow-on to what Rod asked, I mean, if you don't want to give me a hard number about a breakeven, could you just at least discuss you know when you may have positive incremental margins and what potential range that may be as we think about at least 2021, you should have some visibility that is going to grow again?

It's somewhat premature to start giving the kind of the 2021 outlook when it comes to development. But I mean naturally what we need first of all the leverage on the volumes.

But we will come back as usual with kind of a full year 2021 outlook when we released the fourth quarter down, but I would kind of hesitate to give anything now.

Okay. So no rains for the lease incremental margin would be positive on positive sales growth?

Yeah. I mean, you should expect kind of leverage when we see the volumes ramping up.

Yes.

Okay. Thank you.

And of course as we alluded to on this page in our prepared remarks here, we have a two quarters ahead of us of 10 major launches coming out. We are returning to growth here now 10 major launches coming out.

We are returning to growth here now in Veoneer during fourth quarter as we expect. And then we said that this is accelerating into 2021 and during the year.

So of course that will give a positive contribution. We expect that to give a positive contribution to it.

So clearly.

All right. So we are actually slightly passed the 4 o'clock.

We have run - our time has run up. So we are ready to conclude the call.

And I hand the call back to Jan for any final comments here.

Thank you, Thomas. I would like to thank everybody for your participation and your questions.

And we here in Veoneer are committed to continue to develop the company to drive both the technology the collaboration with Qualcomm and to drive our launches to drive our execution in our market adjustment initiatives to further improve our performance. But we also look forward to talk to you about that and also more color on 2021 at our fourth quarter earnings release that is now tentatively planned to be at February 3 next year.

So February 3 is our tentative planning for the fourth quarter earnings release. Of course we’ll meet many of you also in virtual investor events during the quarter and before that.

So until then I hope you stay safe. You have a relaxing upcoming holiday season and first and foremost prioritize your health and stay safe.

Thank you very much for now and good-bye.