Good day, welcome to the Autoliv, Inc. First Quarter Financial Results 2018 conference call. Today's conference is being recorded and limited to one hour in length. At this time, I would like to turn the conference over to Anders Trapp. Please go ahead.
Thank you. Welcome, everyone, to our first quarter 2018 earnings presentation. Here in Stockholm, we have our Chairman, President, and CEO, Jan Carlson. We have our Chief Financial Officer, Mats Backman. We also have our incoming CEO and President of RemainCo Autoliv, Mikael Bratt, and our recently appointed CFO of Veoneer, Mathias Hermansson, and myself, Anders Trapp, Vice President of Investor Relations. During today's earnings call, our CEO will comment on our first quarter results and general market conditions. After this, we will look upon our segments and financial results of the Autoliv group for the quarter. Lastly, before the Q&A session, we will provide some commentary around the recent Form 10 filing by Veoneer and the next steps related to our planned spinoff of Veoneer. As usual, the slides are available through a link on the homepage of our corporate website.
Turning the page, we have the safe harbor statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference some non-U.S. GAAP measures, where the reconciliations of these figures are disclosed in our quarterly press release, the 10-Q that will be filed with the SEC, or the Form 10 already filed with the SEC related to the spinoff of Veoneer. Since we are providing 2017 pro forma financials for RemainCo Autoliv at a later date, we are unable to answer questions today regarding the two standalone businesses. The carve-out adjustments made to create the historical financial statements of Veoneer follows financial reporting guidelines related to carve-out accounting and are not relevant for any other purpose and should not be used for conclusions regarding Autoliv's historical financials as a standalone company excluding electronics.
As you have likely already noticed in the Q report, with the planned spinoff of the electronics business, with trading in Veoneer expected to begin early in the third quarter of 2018, we have made some changes in our guidance and full-year indications. We will not provide quarterly guidance. We will not provide full-year indications for Autoliv Inc. Rather provide a full year 2018 indication for our segment. At some point after the completion of the spinoff, the companies will communicate their respective updated guidance and indication principles. We will also hold analyst days and road shows in late May and early June, where we will be able to answer your questions on the standalone companies. As usual, this call is intended to conclude at 3:00 P.M. CET, so please limit yourself to two questions per person. I will now turn it over to our CEO, Jan Carlson.
Thank you, Anders. Turning the page. Before we go into today's presentation, I would also like to welcome everyone to this earnings call. As we are making good progress in our separation process into Veoneer and Autoliv, I have invited an extended team to support today's call, as Anders just presented. We are off to a solid start in 2018, where our sales increased year-over-year by close to 8% to $2.8 billion, a new record quarter for our company. Our slightly positive organic sales growth was approximately one percentage point better than the light vehicle production and was driven by the ramp-up of our new programs in Passive Safety, mainly in North America, along with growth in Japan, rest of Asia, and South America.
Our adjusted operated margin of 8.8% was in line with our guidance, despite slightly lower organic sales growth, mainly due to softer light vehicle production in North America. We are pleased with this 40 basis points margin improvement for the quarter, as we ramp up capacity for our planned step-up in organic growth this year in Passive Safety, along with continued RD&E investments to support future growth. Our adjusted earnings per share of $1.66 increased slightly year-over-year, even after the impact from our 50% share of Zenuity and a temporarily higher tax rate. Our operating cash flow for the seasonally low first quarter was also impacted by temporary negative timing effects in working capital, while during the quarter, we returned $52 million to shareholders through dividends. Our leverage ratio of 0.7 times for the quarter remains at the low end of our long-term targeted range.
Lastly, we continued to experience strong order intake with both segments during the quarter and are proud to have been awarded our first ADAS system business, including the Zenuity software stack. Looking to our underlying market conditions on the next page, our major light vehicle markets remain mixed and uncertain, in particular China, where IHS has increased their latest full-year forecast, and in North America, where the light vehicle production demand softened during the quarter. During quarter one, the inventory levels declined year-over-year in China and the U.S. due to relatively strong sales with what seems to be disciplined volume and productions. During the quarter, the light vehicle production in Europe was relatively flat year-over-year, while the vehicle registrations seems to be flattening on a last 12-month basis, albeit near record levels.
For the second quarter, the overall light vehicle production is expected to be quite strong, with an increase year-over-year of around 5%, according to the latest IHS forecast figures. This assumes light vehicle production will increase year-over-year in China by approximately 9% and rest of Asia by approximately 5%, while Japan is expected to decline by approximately 1% for the second quarter. In North America, the light vehicle production is expected to increase year-over-year 1%, while South America is expected to remain strong and increase 24% approximately for the quarter. In Europe, the light vehicle production is expected to increase year-over-year by approximately 5%. This is comprised of increases in Western Europe and Eastern Europe of around 6% and 3% respectively.
Looking at the full year 2018 global light vehicle production, the latest projection according to IHS is for a year-over-year increase of 2.6%. This is primarily driven by an increase in China of approximately half a million vehicles. Moving now to our segment reporting on the next page. For the first quarter, our electronic sales were slightly better than expected. The organic sales decline of 4% was approximately two percentage points better than our expectations at the beginning of the quarter, mainly due to take rates on certain radar programs. Our organic growth for our core active safety products was close to 10%. This is offset by the temporary effect in restraint controls and brake systems, where new programs are expected to ramp up in 2019 and 2020.
The approximately 6% currency translation tailwind for the quarter evolved as expected, while the currency transaction effects were slightly positive for the segment. We are pleased to see another quarter of strong order intake in both active safety and restraint controls. Most notably, Geely awarded Veoneer its first conditional automation ADAS contract, which includes our core hardware product and Zenuity software. Looking to the remainder of this year, we intend to continue the ramp-up of RD&E to further develop our product roadmap while securing orders to support our future sales targets and prepare for an upcoming heavy launch period in 2019 and 2020. With that, I would now like to turn it over to Mikael Bratt, President of Passive Safety segment. Please go ahead.
Thank you, Jan. Let's turn the page and take a look at Passive Safety starting on page six. For the first quarter, Passive Safety organic sales growth of 1.4% was slightly lower than expected. However, two percentage points better than the global LVP. The slower volume ramp-up on certain new programs was essentially offset by a positive mix towards active seat belts and better than expected currency translation tailwind of around 8%. The segment operating margin improved slightly versus prior year, as lower RD&E net was mostly offset by an unfavorable currency transaction mix and commodity costs. Lastly, for the quarter, we are pleased to see that our order intake remains at high levels.
Our sales outlook for the full year 2018 indicates a strong outperformance versus the LVP for the upcoming quarters and implies an organic sales growth of more than 10% for Passive Safety during the second half of this year. With a sharp focus on flawless execution of launches while maintaining flexibility to adapt to changes in the underlying market, we aim to deliver operating leverage on our organic sales growth to support the profitability improvements in our business. Looking further into the Passive Safety launches on the next slide on page seven, we have identified some of the models in our Passive Safety segment which have ramped up or will launch during the remainder of this year. We estimate that these models contribute around four percentage points towards our Passive Safety organic sales growth during Q1 2018.
This growth was slightly below our earlier indications due to slower ramp-up of volumes on certain models, such as the Ram truck, the Tesla Model 3, and Nissan Rogue platform. We anticipate these 13 models identified will contribute around half a billion dollars of organic sales growth to the Passive Safety segments for the full year 2018. Annually, these models represent more than 10% of the Passive Safety sales, where our content per vehicle is in the range of $100 to more than $400. By that, I will now turn it over to our CFO, Mats Backman, to speak on the financials.
Thank you, Mikael. Looking now to our financials on the next page, where we have our key figures for the first quarter. Including positive currency translation effects of around $200 million, our consolidated net sales reach a new record for any quarter of $2.8 billion. Our organic sales growth within Passive Safety of around $30 million, mainly from China, Japan, rest of Asia, and South America, was mostly offset by the expected organic sales decline in Electronics. Our gross margin decline year-over-year is mainly due to higher commodity costs and net currency transaction effects. Our record gross profit for any quarter was driven by the net sales increase. Our adjusted operating margin of 8.8% increased 40 basis points year-over-year, mainly due to a net operating leverage, which was partly offset by planned higher RD&E.
Our adjusted EPS of $1.66 improved year-over-year, that is despite a $0.16 per share impact from Zenuity and $0.13 per share headwind due to the temporary higher tax rate, excluding discrete. Our adjusted return on capital employed and return on equity were essentially unchanged year-over-year. Looking now on the next slide. Our adjusted operating margin of 8.8% was 40 basis points better year-over-year. As illustrated by the chart, operating leverage from the organic sales growth in Passive Safety and improving operating efficiencies, including vertical integration, contributed to the margin improvements. This improvement more than offset the planned higher investments in RD&E of about 30 basis points, higher raw material costs of about 10 basis points, and a net currency headwind of about 50 basis points. We expect an unfavorable currency transaction headwind to continue throughout 2018.
We estimate the full year 2018 effect remains unchanged from the beginning of the year at about 30 basis points. From a net earnings perspective for the quarter, the negative currency transaction effect was essentially offset by the favorable currency translation effect. Looking now to our production volumes on the next slide, where we have summarized our delivery quantity for the first quarter. In Passive Safety, our seatbelt volumes continues to have a favorable mix towards advanced high-value added products such as pretensioners and active seatbelts. Our airbag and steering wheel products overall performed better than the global LVP due to our strong volume growth in Asia, South America, which was partly offset by a decline in Europe. Within Electronics, our active safety volumes increased by 6%, mainly due to our core products, radar, camera systems, and ADAS ECUs.
Our restraint controls and underlying brake system unit volumes declined, mainly due to the timing effects of the phase-out of certain programs where the new customer program launches ramp up in 2019. Looking to our cash flow on the next slide. As mentioned earlier, our operating cash flow was impacted by temporary timing effects in working capital. Our CapEx of 4.9% of sales for the first quarter was within our long-term range of 4%-5% of sales. However, for full year 2018, as indicated earlier, we expect CapEx to remain at slightly higher levels similar to full year 2017. For full year 2018, excluding separation effects and any discrete items, we expect our operating cash flow to be on the same level as for 2017. The year-over-year commodity cost increase was about $4 million for the first quarter.
We now expect the full year 2018 commodity cost increase to be about $16 million. This is a $12 million increase from what we indicated at the beginning of the quarter and is mainly due to steel and non-ferrous metals. Our 34% tax rate, excluding discrete items for the first quarter, was higher than our earlier indication, that is mainly due to the timing of losses with no benefits and the timing of internal withholding taxes. Looking now to our financial outlook on the next slide, where we have summarized our full year indications for Passive Safety and electronic segment, which assumes reported U.S. GAAP figures and assumes mid-April currency rates prevail. Our full year 2018 indication for Passive Safety is for an organic sales growth of more than 10%, with a positive currency translation effect of 4%, resulting in a consolidated net sales growth of about 14%.
The net operating leverage on this strong sales growth is expected to drive an improvement in operating margin versus 2017 and shows a solid trajectory towards our 2020 targets in Passive Safety. For the electronic segment, sales and profitability outlook remained unchanged. Our full year 2018 indication remains unchanged from the beginning of this year, where we estimate an organic sales decline of about 3%. That is offset by a positive currency translation effect of about 3%, resulting in a flat consolidated sales growth for 2018.
Based on these sales assumptions and the $70 million increase in RD&E to support future organic sales growth, we expect the underlying profitability of the electronic segment to decline for full year 2018 versus 2017. This is when we are excluding the goodwill impairment charge last year. I will now turn it over to Mathias regarding the Form 10 and the carve-out of Veoneer.
Thank you, Mats. If we turn to page two, slide 13, we have there summarized the key P&L figures for 2017 from the Form 10 filing. We have also, as you can see, excluded the one-time non-cash goodwill impairment charge for both the carve-outs and segment figures. When we are comparing the electronics segment's operating margin of 2.3%, the Veoneer carve-out standalone operating margin of -2.1%, the four percentage points difference is explained by two main reasons. First, the R&D costs are fully attributed to Veoneer in the standalone case. Secondly, the corporate cost and other incremental costs are redistributed to Veoneer in the standalone case. Combined, the 2017 operating income for Veoneer is then negatively impacted by around $100 million. As mentioned during our last earnings call, we expect RD&E net to increase in 2018 by around $70 million, or around three percentage points of sales.
Looking now to the capital structure of Veoneer, the capital injection of up to $1.2 billion from Autoliv ahead of the spin is to provide funding for our increased investments in RD&E, as we discussed, and also in CapEx to support our previously communicated long-term targets, as well as our ongoing investments in our joint ventures, and also, of course, looking at future M&A opportunities. Looking now to an overall update of the spin-off of Veoneer, I will turn the talk back to Jan.
Thank you, Matthias. If we turn the page again to page 14, as illustrated on this slide, we are taking the necessary steps and are well on our way to completing the spin-off of our electronics business. Our intention is to keep up the pace during the second quarter with the remaining milestones, as summarized on the page, and expect the Veoneer spin-off to be completed in time for trading of Veoneer shares to begin early in the third quarter of 2018. Before opening up for Q&A, I would like to make a few additional comments. First and foremost, I would like to extend my sincere thank you to the Autoliv team for their great support and dedication over the years, and their great relentless focus on quality and execution to help make Autoliv a great company.
As some of you may have considered, this could likely be the last earnings call for Autoliv Inc. as we now know the company, and I am very proud to be part of Autoliv family and part of the journey since 1999, and look forward to starting the next chapter. A future where one great company becomes two great companies, both with very bright futures. Perhaps not so much different from when, back in 1994, Electrolux spun off Autoliv as a publicly listed company, which was an important enabler for where we are today. Turning the page again, this concludes our prepared comments for today, and I will now turn it back to our moderator, Paul, and open up for Q&A. Go ahead, Paul.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to ask a question. Our first question comes from Hampus Engellau from Handelsbanken.
Thank you very much. Two questions. Very interesting to hear that your orders are continuing to trend very strongly. Could you perhaps maybe talk a little bit about market share in Passive Safety? I know you touched on that before, and also maybe also talk about that in active safety. Second question is on Geely and the ADAS contract. If you perhaps also could maybe add some more flavor here. Are we talking AEB systems or are we talking level 3 systems? Those are my two questions. Thank you. Hello?
Oh, sorry. If we start with the first one here, the order intake and market shares. We have seen three years of strong order intake of 50% or more, and we have seen a continued strong order intake also here in first quarter without quantifying it. We have mentioned that we would be on a market share of around 45% or more for Passive Safety in 2020 and beyond. Beyond that, we have not made any further calculations on market share development and not also provided any other number than the market share number we have in our annual report. When it comes to market shares for active safety, we are seeing a declining market share here within the very short term because of the relatively low order intake in 2015 that we have communicated.
We are seeing market share there again to pick up, not any different than what we also communicated at the Capital Markets Day. When it comes to the Geely program, it is a program that consists of our products together with Zenuity products. It is including (mono stereo vision cameras), it is including radar components, it is including system support from Veoneer, and it is also including decision-making software from Zenuity. Their aim here to start with is a lower level of automation. Not talking about level 4, level 5, but a lower level of automation in addition to what Veoneer is supporting. We are very proud of getting this first order, as we also have communicated, we are also looking to maybe book another new customer here during the year.
Thank you very much.
Thank you.
Our next question comes from Victoria Sgarro from Morgan Stanley.
Hi there. Yes, two please. I understand the restrictions that you have around quarterly guidance with the spin-off, but I am just wondering really if you can help us for phasing for organic growth through the year, particularly in the Passive Safety business. Or maybe put another way, the $500 million contribution from new models for the full year, how much of that have you had in Q1, and how much of that is still to come? Secondly, on Veoneer, what are the drivers behind the different decisions on R&D cost allocation? What was wrapped into Passive Safety before and has come out? And on Veoneer, is there anything materially different from the group trends on working capital to think about for that business? Thanks.
If we start with, maybe you can add more color, Mats, but I can start with the order intake or the order here, not order intake, but the order of $ 500 million. As you can see from the results from quarter one and what we communicated, that 4% is contributed to the organic growth in Passive Safety in quarter one, and we are talking about 7% or more contribution for the year coming from the wave. You can see that the lion part of this, or the major part of this, is coming in the remaining three quarters. That's that. Then reallocation, Mats.
Can you repeat the second question when it comes to Veoneer and the allocations there?
What has changed about the R&D cost allocation? What elements of R&D specifically were not allocated before, and what's the reason for the change?
You're basically talking about the Form 10 filings and the numbers we have out there. Basically, what I think we need to understand looking on the RD&E and the allocated RD&E, the starting point is that this is a net between the paid royalties for each segment and the group-allocated R&D. If you're looking at Veoneer to start with, this business is not that mature, meaning that we haven't built that much IP in Veoneer, meaning that we are paying less royalty to the group for utilizing IP, but we are contributing quite a lot when it comes to new R&D where we are building IP. For Passive Safety, you can see the opposite, really. We're being much more mature when we are now kind of harvesting from IP that has been previously built by group-funded R&D.
Now we are kind of spending less in relation to royalties on the pulse side, and that gives a negative net when we are reallocating. That goes to Veoneer and a positive net that goes into Passive Safety.
Great. That's clear. Thank you. Then on working capital, for Veoneer standalone, should we think about anything different in terms of trends for cash versus the group?
I think it's too early to start getting into that kind of detailed analysis when it comes to the working capital for Veoneer.
Okay, that's great. Then on the quarterly phasing, should we just think of that as you said, it's clearly an incremental contribution from Q1. Should we think of that in terms of project starts quite smooth from Q2 onwards or more back-end loaded?
I think you can see it more as a kind of a gradual build-up throughout the year when it comes to volumes.
Okay. Probably stronger in H2 than in Q2.
Yes.
Great. Thank you.
Our next question comes from Emmanuel Rosner from Guggenheim.
Hi, good morning. My first question is regarding the capital structure for Veoneer. I was a little bit surprised by the size of the capital injection initially, $1.2 billion. My understanding up until now was maybe Veoneer burns $100 million or $150 million of cash a year. That within I guess the next few years would not have required that much cash injection. Can you maybe comment a little better on what the thinking is, then maybe anything concerning the expected cash burn?
If we start with the capital injection, what we have done here is that we have looked through the needs for Veoneer, what we think is there as an opportunity to invest for the future. We have looked into the current business plan, as we have communicated, to execute on our targets towards 2020 and 2022. We have also looked into opportunities for other potential M&A activities going forward. The important part is for us to have a strong balance sheet as Veoneer is facing a great opportunity and a great future here with a growing market, to be able to act if and when there is an opportunity. Both when it comes to, first and foremost, when it comes to investing in our own technology, maybe also looking on it from an M&A perspective. Maybe there's some comments-
That's clear.
Maybe some comments on the Autoliv remaining side as well when it comes to capital structure and the cash injection. I think we are very proud, looking on a strong balance sheet that we are able to retain the A- credit rating while we're making this $1.2 cash injection into Veoneer, I guess maybe you saw the press release from Standard & Poor's as well, affirming the A- changing the outlook, however, to negative outlook, still retaining the strong investment grade. I think that's also important in this equation.
Understood. I guess my follow-up is on the electronics margin in the quarter. You flagged a one-time benefit, I think a release of a liability that helped it. I apologize if I missed it, but can you give us the size of that one-time benefit in the quarter?
Yeah. We have a one-time or an adjustment in the quarter of approximately $14 million, equal to 50 basis points for the group then.
Okay, thank you.
If you are from that kind of point of view looking on the leverage or the development of the margin year-over-year, I also want to point out that we have a negative currency effect year-over-year of about 50 basis points as well, though.
Our next question comes from Kai Mueller from Bank of America Merrill Lynch.
Thank you very much for your time. Two questions, if I may. The first one is, in your statement you showed on Veoneer your current sort of carve-out structure around the 2% negative EBIT margin. I think I understand that's not on a fully loaded independent structure basis. Can you give us some color sort of to what sort of level an additional cost and independent structure would mean to the carve-outs that you have shown us in the 10-K? The second point would be on the R&D cost within Veoneer. I understand now, obviously from questions earlier, that you've reallocated some costs within the group. Can you give us a little bit of a clarification or maybe can you tell us whether you will disclose that, the split on R&D costs between the subdivisions within Veoneer?
Understanding, obviously, having the electronics business as well as active safety and braking business in there.
Hi Kai, Matthias here. I think on your first question there on fully loaded, as you expressed it, I think what we've done now is this accounting exercise on the carve-out, and we will come back to you in a later stage with how a fully loaded would look like. As you pointed out, there will be some additional exercises being done here in order to arrive to that.
Okay, you don't have an indication to what we'd get to? You will come back later on that.
Not at this stage. We will come back to you, I'm sure.
Okay. Thanks.
The second, this is Mats, and the second question when it comes to the R&D and the allocation and how transparent we'll be with that on Veoneer, that boils down to the segment reporting, I would say. I would imagine that you will not be able to see the RD&E on such a granular level for the different kind of product areas.
Okay, understand. At the CMD, I understand we'll probably get some more color on the sub-segment growth outlooks.
Yes.
Okay. Thank you very much.
Thank you.
Our next question comes from David Leiker from Baird.
Hi, good morning, everyone.
Hi, good morning. Morning.
I was looking at slide seven in the slide deck where you list key Passive Safety models. Is there a way to highlight something similar to that of what's driving organic growth on the electronic side?
I guess it is, and I guess we might come back to that at the Capital Markets Day at a later stage. There are definitely some key models there also. As you know, it is varying a bit here because we have had some weaker order intake for a while, but when it is ramping up, you could probably draw the same type of picture.
Okay. Nothing to highlight at the moment on the electronics side, though?
Not that I can give you as of today. We'll be back to that.
Yeah.
Go on.
Okay, thanks. The second item here is the funding at Veoneer, the $1.2 billion. I guess a couple of questions. I think I know what the answer is going to be. How would you allocate that across what goes to capital expenditures, what's M&A, and what's used to fund the R&D development, the cash burn here?
What is important is that we continue our own investment in technology and build up our technology here. That is the most important part. As Mats explained here, we have a bigger room probably from Autoliv side than we first anticipated, remaining a strong investment grade here to build up a strong balance sheet in Veoneer. We have taken opportunities for that. I think the first part is to continue to execute on our investment programs in engineering and technology that we have. Other opportunities may arise for business combinations or M&A activities.
When do you think operationally Veoneer reaches positive cash flow?
We haven't indicated that specifically. We have said that positive EBIT in 2020, because of depreciations, et cetera, and CapEx, it may take a slight longer time before you reach positive cash flow.
Okay. Thank you much.
Thank you.
Our next question comes from Chris McNally from Evercore ISI.
Thanks so much. Just to go back on the Passive Safety margin guidance that you gave. It sounds like you guys are reiterating the margin guidance other than the incremental $12 million of raw materials or the roughly 10 basis points. If you wouldn't mind just confirming that.
Yeah, I mean, overall, if you're looking on that kind of external factors, it's only the raw material that is different, $12 million more than previously anticipated at the 16. You are right. Yep.
Perfect. The second question on the ramp in new programs and the R&D associated with it. Is it fair to say that the R&D should probably, as a percentage of sales, peak in Q1? I think when we look year-over-year, it's up 20 basis points, that would make sense if what you're saying is a sort of growing cadence of new products that launch throughout the year. Just anything that you can give on the R&D.
Yeah, looking on the RD&E in relative terms, we actually talked about the peak here already in 2017. You can see more of a kind of a plateau than before we see the big benefit from the organic growth. In absolute number, however, we might still see some increases from time to time, depending on the launches and the phasing of the different launches. In terms of the relative number, we have said that we have peaked, and it's more of a plateauing until we see the real benefits from the organic growth, that will take down the relative number.
Perfect. Thank you guys so much.
Our next question comes from Joseph Spak from RBC Capital Markets. Please go ahead, Mr. Spak, your line is open. Please make sure you're not muted.
Sorry. Thanks for taking the question. I guess I just want to first make sure I understand the bridge on page 13, and the bucket it's coming from. You say R&D costs are fully attributed from Veoneer, that $70 million. There should be a corresponding offset to the Passive Safety business, and part of that R&D was also in Corporate. Is that correct?
Yes, that is correct. As we have stated in several different locations in this document, it's impossible to make the reverse engineering coming from Veoneer and kind of figuring out how the RemainCo should look. We have allocations and other adjustments that is not adding together to 100%. I would stay away from drawing too much conclusions on the Autoliv RemainCo side in detail, looking on the Veoneer numbers in terms of the (core well).
Okay. Same on this $30 from Corporate and cost and other. I think in 2017, you had a total Corporate of about $48. This is not just simply $30 of that $48?
No, it's not. That is important to recognize, because you cannot get the total together with that.
You can't help us with the corresponding offsets to RemainCo?
No, we will get back with the (core world) financials and the pro forma for RemainCo, but we haven't presented that yet.
Okay. I guess maybe this is what this relates to, but can you just explain what you mean by the statement in the release about a change in guidance and indication principles? I mean, is that related to Sort of more color about some of the separation and allocation costs?
It's simply that we are not guiding now as the usual for the second quarter to start with for the group as such. What we are referring to when we're talking about changes in principles is more the kind of the guidance we're giving in this report comparing to a normal report. It's not the getting into the kind of bits or pieces in the guidance as such.
Okay. Just maybe on the capital structure, well, 2 things. 1, can you give us sort of a level of minimum cash that you're comfortable with for Veoneer to run and invest in the business? Also in the Form 10, you mentioned that the 1.2 is also to support planned acquisitions. Is that something that's actually earmarked or is that sort of more a broader comment that you intend to do M&A for Veoneer? Thanks.
I think if you take the 2nd question first, I think we're not going to talk specific really about anything on the horizon, but I think it's important to know that there is a level of firepower there in order if we find something. Sorry, the 1st question was? Can you repeat it?
Sorry, just like the minimum cash you're comfortable with to run and invest in the business.
I think it's a little bit of a hypothetical question because I think what we're trying to do right now is to actually capitalize the new company in a way where we can take all the opportunities we can see in the future and exercise our plans that we already have.
Okay, thanks.
If you find your question has been answered, you may remove yourself from the queue by pressing star two. Our next question comes from Erik Golrang from SEB.
Thank you. two questions from me. The first one is on guidance for the underlying profitability in the electronic segment year-over-year. Is that still to be seen in relation to the reported operating income from last year or in relative the carve-out standalone basis? The second question is, just so I understand you correctly, on the $14 million there in positive earn-out, is that included in the adjusted EBIT? Adjusted for that, it would be a bit weaker.
I mean, the $14 million, that's a positive included in the adjusted operating margin or operating profit. That is included. What you see, the 8.8% in terms of adjusted operating margin, that's including the positive from the earn-out.
Thank you. On the first question, the decline year-over-year in underlying profitability for electronics, is that relative to the reported or the carve-out standalone operating income?
We are relating this indication, which is not even a guidance formally. It's an indication related to the segment number and not anything related to the carve-out numbers.
Okay. Thank you.
Our next question comes from Vijay Rakesh from Mizuho.
Yeah. Hi, guys. Just on the Veoneer spin-off, I was wondering if you can give just approximately ballpark what the % of revenues for Veoneer will be from active restraints and active safety, driver monitoring, 3D mapping, and Zenuity respectively.
The Zenuity part, if we start with Zenuity part, that's going to start or come out with their product in 2019. Zenuity revenue stream will be relatively low in the immediate future or very low in the immediate future. When it comes to the other parts, I can refer to Mathias here.
Okay. You can find lots of details in the Form 10 as well. If you look at for 2017, around one-third is from active safety, around 20% from brake systems, and the rest then from restraint control systems.
Great. On the active safety side, I think you guys have talked about that business getting to $4 billion over the next three, four years. Is that still the case? Do you see operating margins there? Obviously here you're in investment mode, but you see the operating margins there get to kind of the 10%-15% where the industry is. Thanks.
We haven't specified more than what we explained in our target at our Capital Markets Day, we hold on to those targets, $4 billion by 2022, improved operating margin compared to 2020. Beyond that, we have not set any specific targets.
Great. Thanks.
Our next question comes from David Lim from Wells Fargo.
Hi. Good afternoon. I apologize. Can you go over that earn-out one more time? I think the release of the earn-out, did you say it was $14 million, did that flow through to the adjusted operating income line?
Yes. It's the 14, one, four. It's included in the adjusted operating margin as well. As I said, when you're making a kind of a year-over-year comparison looking on leverage and so forth, I want you to remind you about the negative currency effects that it's actually equal in terms of 50 basis points, as you can see from the earn-out as well, though.
Got you. When we talk about the M&A opportunities for Veoneer, I know that it's really early on. What are the areas of technology that Veoneer would be interested in building out that particular technology? Are there any additional color on how you guys see active safety for 2018 from a revenue or organic growth standpoint? Thank you.
If we start with the last one, we haven't given any detailed numbers on growth or indications for active safety growth for the year, more than we are reiterating the targets for 2020 as our first stepping stone here. When it comes to the technology and appetite for investment, it is the products that we are present in, of course. You have seen us in the radar vision and ADAS controller areas. More of that, or assets that could even boost our business there would be, of course, of interest. LIDAR cooperation, we have a good cooperation with Velodyne signed with them. LIDAR is an important area we think going forward. They're all in the areas of technology you find in the pyramid. There is nothing new to that.
Great. Thank you.
Our next question comes from Rod Lache from Deutsche Bank.
Hi, everybody. I was hoping just to get a little bit more insight into some details on Zenuity. Specifically, how does Zenuity get paid for its software from Veoneer? Maybe in this example with Geely, how does it actually negotiate pricing?
The pricing will be a pricing agreement between Veoneer and Zenuity. It's not totally completed yet on how that pricing model will look like, and we will have to look further into this. We have two customers to Zenuity. We have Volvo on one hand buying a product, then we have Veoneer, and then Veoneer selling to all other customers. We will find a pricing agreement between Zenuity and Veoneer that is on appropriate level.
Yeah. Obviously, the board members, I presume, at Zenuity would be Volvo and Veoneer, would represent their interests. I'm just curious, do you see value actually being created within the Zenuity business with potentially significant profitability down the road, or is that more of a cost center?
Of course, we see a value being created in Zenuity, it's first and foremost through its product, its competence, and its assets in the people and all the resources that are built up in itself represent, we believe, a good value for Zenuity. Also, on the other hand, the business model. As it looks and stands here today, as I said, the business model today is that Zenuity only has two customers. It has Volvo taking a part and Veoneer taking a part. That is something that is discussed in the board and will be also further discussed in the board.
Mm-hmm. Okay. There's no independent sort of governance of Zenuity. It's possible that a lot of the value would ultimately, I guess it doesn't really matter at the end from the owner's perspective, but a lot of the value would accrue to Veoneer.
As I said.
I guess it's unclear.
No. As I said, this is a discussion that we are going through. Of course, you can look upon it from different level, whether you want to have more profit ending up in Veoneer or more profit ending up in Zenuity. On the other hand, Volvo has also a part of Zenuity or a taker of part of Zenuity products. It has to be a balance between how the pricing model looks between both owners, and that is something that we need to discuss in the board.
Right. Just lastly, could you just give us some thoughts on how you see the market evolving in terms of ADAS as it stands today? What is the size of the bidding opportunities that you're looking at, or any way to bracket that for us?
We will probably talk more about that in detail in the Capital Markets Day, but we are seeing a continued increased interest as we alluded to in our Capital Markets Day. We are seeing an increased interest in our products, and we are seeing more customers being technically qualified. We are ending up on bid lists with more customers, and we are seeing also orders coming our way as we talked about here on the Geely order. By the way, just a correction here when it comes to the level, I think I said Level 2. It is, in fact, a Level 3 program on the Geely order. There is an increased interest, generally speaking, and we could elaborate maybe a little bit more on that on the Capital Markets Day. Great. Okay. Thank you.
Just a reminder, now we have only three or four minutes left of the call.
Our next question comes from Ashik Kurian from Jefferies.
Thanks for taking my question. I've just got two follow-ups. First one is just coming back to the order intake on active safety. The last couple of orders have been with Geely and Volvo. While they're great, they're still what I would call your captive customers. I think the key is to have the order intake from non-captive. You mentioned that you are looking to add another order or another customer by the year-end. Can you confirm by default whether that would be a non-captive customer for active safety?
Generally speaking, we can confirm that's a non-captive customer, the one that we talked about year-end 2017. That's a non-captive customer. Beyond that, we can't comment on it. It's a non-captive customer.
Last question is, in the details you published for Veoneer yesterday, I was a bit surprised to see the negative underlying margins for the brake control systems. I remember when the business was acquired, I think we all probably had a slightly different profitability profile in mind. Maybe you can talk about whether there's something temporary going on right now, or whether this business has been loss-making since the time that you acquired it.
I can start and say there are a few things, and then Mats can add a little bit more color to it. You have, first of all, a declining sales line here that we have seen that was not in our original plans, and that declining sales line is coming from a project that has been moved out from the AMBS from Honda business. That is some Honda business that has disappeared, going away from AMBS and from the joint venture. That is contributing, of course, so the declining sales line contributing to the declining profit. You have other factors related to the purchase accounting and to the integration that is affecting it. Mats, maybe you want to elaborate a little bit more on that or? No, you're right.
If you're looking on the underlying profitability for AMBS, and we have been clear on that one as well last year for 2017, the report there is negative, and that's not a surprise. If you adjust for the PPA as well as the integration cost, we are positive for AMBS looking on the 2017 numbers.
Thank you.
I think we can take the last question now.
Our last question comes from Thomas Besson from Kepler Cheuvreux.
Yeah, I'll be very brief for our last question. Can you give us an idea of what you expect with your customers' orders for Q2 versus what you gave us as a 5% growth indication for IHS? We've heard some of your competitors being a bit skeptical about this growth rate in Q2. Do you share that view, or do you think the 5% is credible?
Is your question if we think that our core ops is matching the IHS growth numbers? Is that your question?
Absolutely.
I don't think we have any bigger deviation as of right now. Not what we are here ready to comment on.
Great. Thank you very much, and good luck for the spin.
Thank you.
This concludes today's question and answer session. I would like to turn the conference back to our speakers for any additional or closing remarks.
Before handing back to Jan, I just want to note a small mistake in the invitation date for Stockholm. It says May 30 in the presentation here, it should say May 31. Otherwise, it's correct. Now handing back to Jan. Well, I don't have so much more to say. I will just mention that we intend, in Autoliv, to publish our earnings report for second quarter on Friday, July 27th. You should also follow our corporate website for more information regarding the upcoming investor events and analyst days here with the road shows for both companies. Finally, I sincerely appreciate your continued interest in both our companies, I hope in the future, and that I look forward to see you in future earnings calls. Thank you very much, and goodbye for now.
This concludes today's call. Thank you for your participation. You may now disconnect.