Veoneer's (VNE) CEO Jan Carlson on Q3 2018 Results - Earnings Call Transcript

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About: Veoneer, Inc. (VNE)
by: SA Transcripts

Veoneer, Inc. (NYSE:VNE) Q3 2018 Earnings Conference Call October 25, 2018 9:00 AM ET

Executives

Thomas Jönsson – Executive Vice President of Communications and Investor Relations

Jan Carlson – Chairman, President and Chief Executive Officer

Mathias Hermansson – Chief Financial Officer

Analysts

David Leiker – Robert W. Baird

Andreas Åkerlund – Handelsbanken

Vijay Rakesh – Mizuho Securities

Joe Hyatt – RBC Capital Markets

Eric Golrang – SEB

Victoria Greer – Morgan Stanley

Ashik Kurian – Jefferies

Brian Johnson – Barclays

Agnieszka Vilela – Nordea Markets

Chris McNally – Evercore ISI

Dan Galves – Wolfe Research

Operator

Good day, and welcome to the Veoneer Q3 2018 Earnings Presentation. Today's conference is being recorded.

At this time I would like to turn the conference over to Thomas Jönsson. Please go ahead, sir.

Thomas Jönsson

Thank you very much Odra, and welcome everyone to our third quarter 2018 earnings presentation. Here in Stockholm we have our Chairman, President and CEO, Jan Carlson; our Chief Financial Officer, Mathias Hermansson; and myself, Thomas Jönsson, Communications and IR.

During today's earnings call, our CEO will comment on the third quarter results, the progress we are making in Veoneer particularly around order intake and also some commentary on our progress towards our mid and long-term targets. After this, our CFO will look on our financial results and provide some commentary on the short-term. Then we will remain on line for Q&A session, and of course slides are available through a link on the homepage of our corporate Web site.

So if we turn the page, we have the Safe Harbor Statement, which is an integrated part of this presentation, includes Q&A that follows. During the presentation, we will reference some non-U. S. GAAP measures. Reconciliations of these figures are disclosed in quarterly press release and the 10-Q that will be filed with the SEC. We intend to conclude this call at 4:00 PM. So I would ask kindly everybody to limit themselves to two questions.

And with that, I now turn the microphone over to our CEO, Jan Carlson. Jan, please?

Jan Carlson

Thank you, Thomas. Welcome everybody to today's call. Before we get started today I would like to thank the entire Veoneer team for great support and dedication during the third quarter to get our company up and running, while we at the same time significant progress with our customers and order intake.

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

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

Looking now to our customer progress on the next slide, we're very pleased with our customer progress since our Investor Day at the end of May and beginning of June. Our strong order intake through the end of the third quarter is roughly 1.1 billion on the tailing 12-month average sales basis. This is equivalent to around $5.5 billion in lifetime contracts over the last 12 months. As illustrated by the written text on the table, over the last four months, we have increased our customer penetration significantly in all product areas with an exception of LiDAR.

In summary, we have added nine new customers to the bid list. Three additional customers have become technically qualified and taking orders with three new customers, including the two we mentioned on our last earnings call. These pursuit activities have resulted in our 2nd Driver Monitoring customers, our 6th Vision customers, and our 4th ADAS ECU customers, which in this instance includes a Robo-taxi application. And lastly, we are very satisfied to now secured our third brake system contracts with the Detroit based OEM. These all seem to point to a strong relevant and competitive product portfolio.

Looking now on the next page, our order intake momentum has continued into October at a strong pace. During the first three weeks of October, our order intake has stepped up to more than $1.3 billion average annual sales over the last 12 months. This is a result of additional business wins with existing customers in both Mono and Stereo vision, Radar, RoadScape, ADAS ECUs and Restraint Controlled Systems. And additionally, we are satisfied to have secured our Feature First Software only award with the premium OEM, which reinforces that the Zenuity software stack is not only scaleable, but capable of supplying important features that OEMs maybe lacking. We should keep in mind that as we have mentioned before, order intake fluctuates month-to-month and quarter-to-quarter and they did have end of 2017 on a very high record level for the quarter and full-year.

Looking now to engineering and technology on the next page, investing in engineering is an important differentiator for Veoneer in the marketplace. During the third quarter, we hired around 370 engineers, which means we have now hired approximately 1,000 engineers, where 70% are software skilled over the last 12 months. We indicated during our last earnings call that our RD&E expense would increase this year by around $80 million as compared to 2017. We believe that this year-over-year increase will now be 90 million by the time we conclude 2018.

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

Based on all of these developments, I will now provide a progress update to our previously-announced targets on the next page. As I mentioned in my introductory comments, in the short-term we see some delays in the start of production and slower ramp-ups of certain customer models, along with some slight delays in expected business wins. These developments result in a downside risk to our 2020 sales target, and we are therefore likely to reach the $3 billion in total sales slightly later than previously anticipated. Despite this, active safety remains on track to exceed $1 billion in sales in 2020.

Based on the attractiveness of our active safety portfolio, strong customer relationships and strong order intake, we see a potential upside to our $4 billion 2022 total sales target, particularly for the $2 billion active safety sales. While these signs are encouraging, we know that order intake can deviate significantly from quarter-to-quarter making the exact timing of the future sales growth difficult to forecast. To support the continued higher order intake, to advanced system business, and further investments for long-term leadership in active safety, we intend to further increase our investments in RD&E. This investment decision for future growth means that we now anticipate reaching our zero to 5% operating income target between one and two years later than previously communicated.

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

Mathias Hermansson

Thank you, Jan, and if we can move to the next slide for the quarter highlights. As Jan mentioned earlier the near-term macro environment is adversely affecting our short-term performance where for the third quarter our operating results was slightly than we anticipated.

Overall net consolidated sales declined by around 7% as compared to the same quarter in 2017. However, this sales result of $526 million was roughly $50 million lower than the expected in the beginning of the quarter. At the consequence of the lower sales our $58 million operating loss was slightly higher than our internal expectations.

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

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

RD&E developed largely as expected in the quarter with a $19 million increase to $109 million from last year was largely in line with our own expectations.

The SG&A cost increase was $60 million year-over-year and $7 million higher than in Q2 and this increase is mainly related to the additional costs associated with being a standalone listed company of course.

If you look at operating cash flow we ended the quarter with minus $17 million and this was slightly better than expected. A tiny difference is in particularly working capital gave a positive impact for the quarter.

The CapEx level was in the high single-digit percentage of revenues, which was in line with our previous communication.

Looking now to the full-year 2018 on the following slides, based on the weaker market conditions in the second half of 2018, we have now updated our full-year 2018 indications.

Consolidated net sales are now expected to be lower than our previous indication due to the declining LVP in our major markets and the continued strengthening of the U.S. dollar during the second half of 2018.

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

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

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

Lastly, a few words on liquidity, we are well-financed of course, with $920 million cash and we aim to continue to have a conservative solid financial position over the long-term in order to be able to take full advantage of this attractive opportunity that we have ahead of us. And to be clear, we see no need to raise any additional capital today even given the updated investments as we have outlined.

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

So I will now turn back to Jan for some closing comments.

Jan Carlson

Thank you, Matthias. By turning the page I just wanted to give you an update on the press release that we sent out yesterday regarding a refinement of our organization. We announced yesterday as many as you probably have seen that we are taking the next step as a standalone company by refining our organizational structure within our electronic segments.

The major drivers for this change are to create an organization with a stronger [technical difficulty] live product development and product roadmaps and equally important simplify our organization to improve speed and transparency and cost efficiency. This refinement to the organization will not affect the reporting of our company into product segments, electronics and brake systems.

So, with this remarks, I would say that this concludes the formal presentation for today's call and that we would now like to open up for Q and A. And by turning the page, I leave the word back to you, Odra, to guide us through the instructions for the Q and A session, thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll go first to David Leiker at Baird.

David Leiker

Hi, good morning, everyone.

Jan Carlson

Hi, good morning to you, David.

David Leiker

Sorry, good afternoon for you, I guess. I just wanted to dig to the comments about pushing out the 2020 targets at 2022, it sounds like there's three things there. There are some delays in the pace of new contract launches, the ramp curve is flatter than what you are expecting and then I think I heard you say there was -- that the win rate -- the timing of wins is slower than you thought. I was wondering if we would just drill down into each of those of -- you know, a little bit more detail of exactly what's happening there.

Jan Carlson

It's essentially two parts. Some of our programs are delayed in ramp, meaning that start of production is essentially at the same time. But the ramp-up on the models are pushed out, meaning that our technology and our product and our launch needs to take place essentially at the same time driving the readiness and the validation and thereby also the cost connected to the program in the original pace. However, sales will come at the slower pace. That is one factor contributing to this.

The other factor is that if you recall at the Investor Day in May we said that the order book for 2020 is nearly booked and when reviewing all strong order intake today, we are concluding that to get orders even if we have a good order intake, to get orders that will generate sales in 2020 already is diminishing for not getting down to zero and that is the other contributing factor to this.

David Leiker

Okay. And then if we look at those delays, you know, this is in the act of safety part of your business, can you characterize whether it is ADAS related, level 2 level 3 or is it level 4 level 5 type projects?

Jan Carlson

It's level 2 level 3 type of projects.

David Leiker

Okay. And then just one last one, it also seemed you're pulling forward or ramping your RD&E more quickly in the face of these slower win rates and slower launches that those seem to -- when we'd seen this happen, the RD&E was going up, because the wins were bigger than people expected. So they need storefront and spend that? This seems a little bit different.

Jan Carlson

Well, I think that we have to be clear that it's not across the board we are seeing slower ramps and lower order intake. I think we are seeing a strong order intake and all essentially -- the launches are according to plan. What we mention here are some models in a few programs that is to be clear here. This is not across the board we are seeing a delay throughout our order book.

David Leiker

Okay.

Jan Carlson

And the increase in the engineering is to support that stronger order intake that we are facing or a strong order intake we are facing, essentially that is the case. But it's also in our complex programs that we have under -- we have one here throughout the year, we have mentioned several of them. Those are also taking somewhat more efforts than originally planned, but it's a mix of both but the strong order intake is a strong driver for this engineering intake.

David Leiker

Okay, great. Thank you very much for your time.

Jan Carlson

Thank you.

Operator

We'll move next to Andreas Åkerlund at Handelsbanken.

Andreas Åkerlund

Thank you so much. I'm saying Handelsbanken. Two questions for me and I noticed that you're talking about the Robo-taxi software and previously with the discus, your wish to send the significant business is still very much geared to passenger cars level four, could you maybe talk a little bit about this opportunity and also if this of change in your development are you using a LiDAR is a primary source for decision making and maybe camera asset redundancy source. That's my first question.

Jan Carlson

Yes, that this is not a change and this is not a software. This is the hardware, this is an ADAS control unit and advance that computer for this application that we are producing, so it's the hardware side on an ADAS control that we are submitted here. There is also a very tight cooperation here with the OEM itself which is doing a majority of that work.

Andreas Åkerlund

So there's no level five software from you guys.

Jan Carlson

No, there is no level five software from our ended case.

Andreas Åkerlund

Thanks. Can I come back to the center and this outlook change and would it be for the future maybe talk a little bit about an how much of this is still to test the safety in electronics and also if you can discuss Restraint Controlled here and maybe also if how much active phase is playing and since to get that made clear understanding on this push out.

Jan Carlson

This push out that we see here is to a large extent related to as I said all models in few program that is pushed out and where models are delayed. That the launch on models on one platform are delayed and that is causing this to happen and so it's essentially on the active take the side that we are seeing this delay, when it comes to Restraint Controlled we have mentioned before that we have a softer period right now due to slower water intake some years ago but order intake in Restraint Control as well as an active safety is very good and very strong. And this will start to ramp in 2020, if you look to then ramp up our Restraint Control and the major ramp ups will happen in 2020 and so that is on its way and order intake on the Restraint Control is this joint from the order side.

Andreas Åkerlund

So final for me, on the change also in this profitability target for certified profitability which would you say is that a major driver is increasing or into the expansion from the back will get to more business or is it the lower operating leverage or lower of organic sales growth.

Jan Carlson

And we see it's a combination of as you said lower sales, lower gross profits but the majority of it is related to the increased investment.

Andreas Åkerlund

Right and just to clarify one for me on this delay if this any time, any way related to problems that we're seeing especially on the German OEMs.

Jan Carlson

No, it's not related to that. I think it's very hard to see any pattern in light vehicle production to two years out, so this adjustments or what you can say here risk that we are facing here now it's delayed on more launches than strategic matters that we can see our customers talking about not related to the current uncertainty of the market or WLTP is that.

Andreas Åkerlund

Okay, thank you very much.

Jan Carlson

Thank you.

Operator

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

Vijay Rakesh

Yes, I guess just couple of questions. I know you talked about a slower ramp with some of the orders but is it fair to say you have been great and the start up for all the ramps are still on time is just as a validation times are extending and if so can give us some color on what the order intake has been trending year-on-year like did last quarter. Thanks.

Jan Carlson

If you look on the validation and the ongoing it's delays on their model ramp up, so it has nothing to do with or part of this story. This related to the delay and that's there is the situation on the program we're talking about now, when it comes to the order intake we mentioned $1.3 billion on a trailing 12 month as of today, trailing 12 month as of that right now on the quarterly basis we mentioned 1.1, so we are even to a good start of order intake also for quarter four.

Now mentioning that we have to remember that end of last year was a very strong order intake time for us and 2017 ended on a very strong note and LCM basis there can also vary from time-to-time that the important thing is the trend line but all quarters may not on it LCM basis the higher than the previous to remember because that's how it is discreet sometimes very big orders and they've made all of the certain date into another quarter, so $1.3 billion as of today and trailing 12-month.

Vijay Rakesh

Got it and on the WLTP side when do you expect that emission regulation or having to elevate I think lot of the OEMs are still going to recertification but do you see that resolving sooner what would you say on how that plays out?

Jan Carlson

We have very little visibility on this one and two saying to be honest with I am stay out is speculating this when we talk to our customers, some customers say most of their models are through the testing and they are ramping up and some others are intuit right now but I'm certain I don't have a good view of this right now to give you.

Vijay Rakesh

Got it and the last question on the software side you talked about some software vents, can you give us some idea on, how the pipeline looks going forward?

Jan Carlson

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

Vijay Rakesh

Alright, thanks.

Jan Carlson

Thank you.

Operator

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

Joe Hyatt

Yes, thank you. This is Joe Hyatt on for Joe Spak, really quick question just on cash burn in your how to think about the funding requirements moving forward are there any metrics we should be looking for to understand if new capital is new for the business like any sort of sensitivity to sales are, some increased R&D requirements because Mathias I know you're saying that you guys don't see right now that you need to raise new capital however in your release you do kind of warn that additional funding could be required so we'd like to hear some like guidance on that, like how we should think about the cash burn moving forward.

Mathias Hermansson

Right, thanks. I'm getting two things to that point. I think one of them is that when we mentioned that we may look into that, that they also link them to the acquisition on bolt-on acquisition we talked about to remember that as well I think you want to continue to do bolt-on acquisitions if we've done before in history of the company and then obviously we may have to come back and look at something.

When it comes to the cash outflows, I think you saw in third quarter that we're fairly strong in managing the cash flows and you will see probably the fourth quarter capital little bit weaker are we call it. And I think the best way we're probably looking at this is to look at the quarterly cash flows that I think that, on top of the operating capital you almost you had some CapEx as well when we ramp up some of these productions. I think easiest way to follow that is if you actually look at quarterly net cash flows.

Joe Hyatt

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

Jan Carlson

I think it's way too early to talk about this right now we're just three months into this business right now and I think it's a little bit early to talk about but right now we don't see any need for it.

Joe Hyatt

Okay, thank you. That's helpful.

Jan Carlson

Thanks.

Operator

We'll go next Eric Golrang at SEB.

Eric Golrang

Thank you. First on there with some clarity there on, you talk about the first software only with a major global OEM except on the Zenuity side.

Jan Carlson

Yes.

Eric Golrang

Sort of that means that one of the two.

Jan Carlson

No, it's feature software that is beyond the one of the two that we're talking about, so this is a feature software that we have saw that not like a system, like an L3 program where we take a bigger part of the software set.

Eric Golrang

I see, so one of the two potential bigger ones will sourced then you're still open for the one.

Jan Carlson

I didn't take was lost but I say that we're working with one with the aim for this year.

Eric Golrang

Okay, and then on the second question, you in terms of trying to sort out when you could turn the business around into actually growing organically teams now as we could even have to wait until 2020 before that happens even though I mean these 16 order pickup should with anecdotes coming in at some point doing 2019 but is there now that we will have to wait until 2020?

Jan Carlson

We have said that you recall in the Investor Day that the ramp will come towards end of 2019 and 2020 and coming predominantly in 2020 that was our statement in yesterday and with this change is probably now going to come in 2020 that essentially they affect out of this.

Eric Golrang

Okay, thank you.

Operator

We'll go next to Victoria Greer at Morgan Stanley.

Victoria Greer

Good afternoon. Couple please and when you talk about slightly later your expectations to achieve the 2020 sales target, you want to fill an exact time on that but should we think about that as a quarter two or a year roughly what will be the magnitude of the change and secondly just on the balance sheet talking about no need to raise additional capital but if I think about free cash flow, at say negative 2.5% margin, you've got a pretty significant negative free cash flow say $250 million at breakeven on EBIT maybe that's negative $150 million of free cash to those about the right numbers because if I'm calculating that correctly and you're then delaying the EBIT breakeven point and for another one or two years, it's pretty significant on the cash side, so if you could help us to think through that, that would be great?

Jan Carlson

If you look to a downside risk of 2020 target and then upside risk of 2022 or upside opportunity rather than the risk on the 22 target. Those numbers have moved closer to each other meaning that there are four billion mark will be have earlier if we have the opportunity is coming through. That we see now earlier than 22 and 2020 is coming later than 20, so fair to get some times during 21.

Victoria Greer

So sometimes during 21 for the $3 billion, okay.

Mathias Hermansson

Hi, to your second question, it is Mathias, I think the way to think about it obviously is that what I mentioned earlier that, we had the things in buffer when we started the project and now we're using that mainly at the onset for increasing the audience. And when you model that out you will probably end up in a decent estimate on how much incremental or we are standing, so I think that kind of gives you mostly confident and we what we've given the indication here well in our statement in my remarks as well is that liquidity buffer is coming down. But obviously there's a lot of uncertainty for the up and down up and down and we still have not paid or made our full plans yet for 2019 and 2020 as of now. So, I could see a lot of changes.

Victoria Greer

But just to give us a sort of some numbers around that if I started by let's say I thought about it zero EBIT margin would have the right that's maybe a $150 million negative free cash flow roughly?

Mathias Hermansson

I think if you look at I mean the two things you should think about it I that the Zenuity funding is outside of its and then we also have CapEx. I think if you look back to our capital markets there I think we have given some specifics on how we see long term those development I don't think that's change material.

Victoria Greer

Okay, All right. Thank you.

Mathias Hermansson

Thanks.

Operator

We'll go next to Ashik Kurian at Jefferies.

Ashik Kurian

Thanks for taking my question. I've got two the first one. I'm going to try again what Victoria was asking. I think previously you said the free cash flow breakeven would be achieved one to two years after EBIT breakeven is that still the cases I mean are we looking at you rethink a free cash flow breakeven two years after, revised breakeven target. And also initially when the funding from Veoneer has being decided I think initially we'll said up to $1.2 billion which you revised down to $1 billion if the exercise would be redone now what that number will still have been $1 billion or can you give us some color as to what the adequate funding would have been if you could read on the exercise.

Jan Carlson

I think four questions, I think from on the first question I think was at around one to two. And I think it's largely probably now closer to one but it's helpful. After the second question I think it's little bit strange to speculate backwards but, so I think it's go forward frank from doing that obviously you probably can figure out the answer.

Ashik Kurian

The second questions is more on your ongoing lawsuits and the and R&D and I think you travel that we probably have in terms of further step up in R&D against granted the strong order intake but I would assume that you would have baked and increase in order intake into your 2020 and 2022 targets all ready right but just I mean what is the check or what is the control that you will have on increased R&D because it seems like you're placing the R&D spending even on what I would as you is expected level of order intake. And then following on there for it seems like you probably guiding to flattish revenue growth in 2019 should be then extrapolate the losses you're implying to in the fourth quarter into 2019 or what are the drivers that you have maybe deliver an improvement on the last effective have in 2018?

Jan Carlson

I think if you -- I think almost forgot your first as I think the second one first I think, what you see right now and the really main part is our R&D costs, R&D in the fourth quarter which we should try to extrapolate into that this new stock in running pointing to 2019 I would say. The one thing that you should bear in mind as well that we have that also in May I think that we see increasing and union income coming from over the year, over the next two and years probably as the trend, so that something that will effect probably the next order cost, sorry can you repeat the first question again sorry I got it twice?

Ashik Kurian

No, first question is just more on what is the criteria on which you are increasing the R&D spend or what is the risk that, we could continue to see you coming out with increased losses because your R&D is stepping up because you seem like the order intake is to beyond what you should factored and handed that you have to hit the 2020 and 2022 target, right so just curious to know what are the criteria that you have at least of the internal check to basically control the R&D cost increase.

Mathias Hermansson

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

Jan Carlson

I think in all essence the driver for R&D here is the customer demand and technology innovation and there the speed of innovation that we see in this industry and how fast it's moving. If you look to our track record here during the quarter by being able to hope to book business and advanced computing area we showed now that the first order here for an ADAS controller for robot capture applications. We are demonstrating per our Supercomputer for level four applications. And to be able to be a part of this is requirement requiring the R&D but the basic driver for it is customer demand and orienting.

Ashik Kurian

Yes, thank you.

Operator

We'll go next to Brian Johnson at Barclays.

Brian Johnson

Yes, good afternoon, or it's probably most night time there at this time of year. I want to ask about your winds. Winds, we always invite you to our Florida conference where you can enjoy restock your sunshine and when as you think about the competitive landscape in ADAS and active safety, certainly there's a much the market is dominated by Intel and Mobileye and its related resellers the light Magno active Hyundai, Mobius et cetera, when you're in particularly these vision wins, do you see them as your primary competition or are they with OEMs who are looking for an alternative, so your competition might be more along the lines of Conti, Bosh, Denzel and so forth.

Jan Carlson

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

Brian Johnson

Okay, second question and if you did it early in the collar apologized because rolled over late from another supplier certainly whole world of autonomous driving has been fairly obviously on fire, can you give us an update of just where Zenuity is in terms of fleet on the road which is becoming a metric of how people look at this. Progress and then it is frankly but confusing for us between Volvo, the car company and Volvo the truck company of course two different companies both of them are pursuing autonomous efforts and kind of where obviously the car companies are partner but are there any opportunities over then truck side.

Jan Carlson

And we have been total that we communicated over a 100 cars on the road where all thirty of them are directly related to Zenuity and we collect around eight terabytes of data daily for each vehicle as that we are up in running. And we are continuing to hire people in Zenuity. We have by now around 600 people and there we are expected to be around 650 people in Zenuity. So a good attraction to people and of course we work with the Volvo no seek at in that Volvo car corporation in this one and beyond that we stay out of the commenting on our other OEM relationships until we are allowed to do, so that we were with really on the L3 program that we took together with Zenuity. But we have also communicated that we have between five and seven pursuits where we are working with, that is still on the same levels so no change in that where area and then Zenuity is making a lot of good progress according to plan so really no deviations from what we have earlier communicated.

Brian Johnson

Okay, in the quarter corresponded took an equity stake in GMs crews are you open to or talking about equity stakes for many other automakers or any other technology partners?

Jan Carlson

I'll say auto commenting on that one here on an earnings call there of course, any proposals that may or may come be will be evaluated by the board, so we'll see if and when and how it's such a case to happen or if it will.

Brian Johnson

Okay, thank you.

Jan Carlson

Thank you.

Operator

We'll go next [indiscernible].

Unidentified Analyst

Yes, good afternoon, so we touched upon this already in terms of the competitive landscape here but just if you could elaborate a bit on here, I mean given that the Mobileye ecosystem stands for well basically the majority of the vision of the market does as your current vision order intake momentum in that you're actually taking customers from that kind of player.

Jan Carlson

Yes, we may believe, so in some cases that could be the case. We definitely acknowledge that Mobileye in sales area today are a leader because they were much earlier out, they have been around for 10, 15 or more years at the company have been out with their products, so in sales terms their market share is definitely as you say much, much higher. We have been out with our suites since 2016 and I find it very encouraging from our sides to be able to catch up that fast and get into our position today with the strong order intake condition to be able to compete in such relatively short period of time.

Of course, as based on the heavy investments, heavy R&D focus, heavy engineering recoupment and build-up of the resources making this possible, so we see that the investments really payoff, we see that is paying off in order intake. This will materialize in sales later on and there we will see how the difference will look like between us and Mobileye later on. But it might be so that we are taking product from Mobileye maybe so.

Unidentified Analyst

Right, thank you. Just a final question here, if we could have some color here on the first dedicated software feature sale for Thomson, is that something that will change your strategic priorities, I mean going on with the more feature sales rather than the whole level 3 software set?

Jan Carlson

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

Unidentified Analyst

Thank you.

Operator

Next we will move to Agnieszka Vilela at Nordea Markets.

Agnieszka Vilela

Thank you. I have two questions. Number one is regarding your guidance, how the company have confidence that you can see upside through 2020 to guidance given the fact that they kind of face is being lower right now? Thank you.

Jan Carlson

The guidance if you look on the light vehicle production base we have traditionally based the plan on IHS numbers for out year and given the fact that we are that's what we do actually at the baseline to have something to hold on to, if that is varying the whole market, we will vary of course but you have to have some cycle comparable. The fact we are seeing an upside is due to the stronger than anticipated customer interest and order intake for us that give us this opportunity to exceed the 20 targets.

Agnieszka Vilela

Thank you. And then if you can comment on the refinement of your organization, what kind of say cost savings or operational enhancements do you see coming from that and will they be an cost associated with that? Thank you.

Jan Carlson

We cannot comment on the savings as such, this will be much different organization when entrepreneurial customer business units running activities separately for each customer having full responsibility for the activities, strong order intake through application engineering and production as you can call it little bit a company within a company which will drive customer attention even further and customer also the delivery and quality to customers such also of course the financials. There will be a group of people in short and will drive that as their main task.

The other part that will be significant here is we will take a dedicated product development organization led by CPO reporting directly to me that will have time to stand on next generation product. This will give us scale effect, it will give us a better overview of product portfolio from the advantage of seeing different customers demand being consolidated into the product line. So we hope that that would be give us some scale and thereby cost efficiencies matters. So those are the two major things that we're driving with the change.

Agnieszka Vilela

Okay, thanks.

Operator

We will move next to Chris McNally at Evercore.

Chris McNally

Thank you so much guys. Just two question, so that the first on the 2020 to 2022 moving on the profitability targets, I mean you talked a little bit about the factors but could you just reiterate which is more important, is it the higher investment you spoke about for Q4 that debt gets annualized, that moves the target or is it the actual production being slightly lower, I'm pretty sure with the investment but I just wanted to make sure because it's obviously multiple years out to some of the weakness in production should be fixed by then?

Jan Carlson

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

Chris McNally

Okay, that's great, that is really clear. And then the second question as we look at the revenue cadence between 2018 and 2020 where you discussed sort of some downside to the $3 billion level, it sounds like ADAS is going relatively well, so when I think about 2018 you're roughly at I don't know $1.4 billion of non-ADAS, so right just breaking in range and you're talking about the previous target was that 1.4 gross to roughly $2 billion ex the $1 billion of ADAS, if next year is not a lot of growth for the non-ADAS business, could you discuss the timing of when breaking in RCS and Flex because obviously that's a big jump to go from $1.4 billion to $2 billion. So just a little bit of when that inflection, some of it's second half 2019 but may be just your updated thoughts?

Jan Carlson

Well, it's hard to go into all the details, you are onto something here and taking us into the mix of products where we have seen that weaker development of our RCS business temporarily due to weaker order intake and so a decline in RCS business and a continued growth in ADAS could be okay, so I'm not saying it is like that but it's not that easy to describe here that mix between the different product lines for 2019 and then into 2020.

We are seeing a good order intake in both of those areas. We are also mentioning here break control also taking orders during the quarter. So all three areas are in generally on a good trajectory from an order intake point of view, remember though that this is coming beyond 2020 this orders that we're taking now is becoming beyond 2020, so with this upcoming year it's a mix change that we may come back to at our earnings call in January to discuss the leverage there when we leave outlook there but otherwise maybe on the capital market they were sold some time during next year.

Chris McNally

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

Jan Carlson

Yes, that's like right.

Chris McNally

Great, thank you so much.

Operator

Next we will move to Dan Galves at Wolfe Research.

Dan Galves

Hi, thanks guys. Most of my questions have been answered, may be one housekeeping on the SG&A level, do you see more increases for standalone public company costs or we kind of got the right level in Q3?

Jan Carlson

I think you should assume that this is the kind of the normal level moving forward that will go to some wings I think in the quarter not material ones.

Dan Galves

Okay, got it and then more strategically it seems like kind of in the pursuit of future levels of automation and there's a past kind of like consumer owned vehicle path looks to be targeting highway autopilot type of systems to get people more relaxing commute and then the second pass to you know robo-taxi is more targeting dense urban areas so I mean these are very different environments, can you talk about which Zenuity is focused on can they focus on both and just any comments on kind of those two different paths?

Jan Carlson

The highway pilot and then moved from level two, three up through level four and further is the path that Zenuity is on at the major trajectory but if you look to the slides that we presented at the Capital Markets Day by Zenuity there is also a path further on in two level five but that is at the later stage not yet decline.

Dan Galves

Okay, got it. Thanks very much for taking my questions.

Jan Carlson

Of course, okay we're coming up to the hour here, so we will take the last question.

Operator

And that will be Eric Golrang at SEB.

Eric Golrang

It just a quick follow up so you've talked you talk a lot two to three years lead time between order and production start it seems as it's closer to three to four nominally the high end of that does that correct assessment?

Jan Carlson

I think it's between three and four years.

Eric Golrang

Thank you.

Jan Carlson

It depends a little bit on type of programs and type of orders, system order, complex system orders definitely three to four other type of the more component related orders RCS business may be somewhat shorter.

Eric Golrang

Thanks.

Jan Carlson

Thank you.

Operator

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

Jan Carlson

Thank you very much, Odra. I would like to thank everyone for interesting questions and your participation today. We look forward to talk to you again at our next earnings call tentatively planned for January 31, 2019 but also look forward to seeing you on conference in road shows during this quarter here. Thanks. So talk to you at the end of January next year, and in the meantime I wish you a good holiday season. Everybody take care.

Operator

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