Good day, and welcome to the Autoliv Incorporated First Quarter Financial Results 2018 Conference Call. Today's conference is being recorded and limited to 1 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 Q1 2018 earnings presentation. Here in Stockholm, we have our Chairman, President and CEO, Jan Karlsson. We have our Chief Financial Officer, Mats Backman. We also have our incoming CEO and President of RemainCo AltaLive, Michael Brett and our recently appointed CFO of Veoneer, Matthias Hermanson 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. Then lastly, before the Q and A session, we will provide some commentary around the recent Form 10 filing by Veoneer and the next steps related to our planned spin off of Veoneer. And as usual, the slides are available through a link on the homepage of our corporate website. Turning to page, we have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q and 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 spin off of the Unilever. Since we are providing 2017 pro form a financials for Remainco Autoliv at a later date, we are unable to answer questions today regarding the 2 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 spin off of the Electronics business with trading in Veoneer expected to begin early in Q3 of 2018, we have made some changes in our guidance of full year indications. We will not provide quarterly guidance. We will not provide full year indications for Autoliv Inc, but rather provide a full year 2018 indication for our segment. At some point after the completion of the spin off, the companies will communicate their respective updated guidance and indication principles. We will also hold Analyst Days and Roadshows in late May early June, where we will be able to answer your questions on the standalone companies.
And as usual, this call is intended to conclude at 3 pm CET. So please limit yourself to 2 questions per person. I will now turn it over to our CEO, Jan Karlsson.
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 $2,800,000,000 a new record quarter for our company.
Our slightly positive organic sales growth was approximately 1 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 operating margin of 8.8% was in line with our guidance despite slightly lower organic sales growth mainly due to software 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 and 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 temporary higher tax rate. Our operating cash flow for the seasonally low Q1 was also impacted by temporary negative timing effects in working capital, while during the quarter we returned $52,000,000 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. And lastly, we continue to experience strong order intake with both segments during the quarter and are proud to have been awarded our 1st 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 in and in North America where the light vehicle production demand softened during the quarter. During quarter 1, 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 Q2, 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 2nd 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 percent 3% respectively. Looking at the full year 2018 global light vehicle the latest projection according to IHS is for an year over year increase of 2.6%. This is primarily driven by an increase in China of approximately 500,000 vehicles. Moving now to our segment reporting on the next page.
For the Q1, our electronic sales were slightly better than expected. The organic sales decline of 4% was approximately 2 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 2020. Approximately 6% currency translation tailwind for the quarter evolved as expected, while the currency transaction effects were slightly positive for the segment.
We're pleased to see another quarter of strong order intake in both active safety and restraint controls. Most notably, Geely awarded Veoneer its 1st conditional automation ADAS contract, which includes our core hardware products and Zenuity software. Looking to the remainder of this year, we intend to continue the ramp up of RD and E to further develop our product roadmap, while securing orders to support our future sales target and prepare for an upcoming heavy launch period in 2019 2020. With that, I would now like to turn it over to Michael 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 6. For the Q1, Passive Safety organic sales growth of 1.4% was slightly lower than expected. However, 2 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 seatbelts and better than expected currency translation tailwind of around 8%.
The segment operating margin improved slightly versus prior year as lower RD and 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 7, 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 4 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 $500,000,000 of organic sales growth to the passive safety segments for the full year 2018. Annually, these models represent more than 10 percent of the passive safety sales where our content per vehicle is in the range of $100 to more than $400 And 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 Q1, Including positive currency translation effects of around $200,000,000 our consolidated net sales reached a new record for any quarter of $2,800,000,000 dollars Our organic sales growth with impressive safety of around $30,000,000 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, while 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 and E. Our adjusted EPS of $1.66 improved year over year and that is despite a $0.16 per share impact from Zenuity and $0.13 per share had been 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 percent 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 planned higher investments in RD and E of about 30 bps, higher raw material costs of about 10 bps and a net currency headwind of about 50 bps. We expect an unfavorable currency transaction headwind to continue throughout 2018.
However, 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 Q1. In passive safety, our seat belt volumes continues to have a favorable mix towards advanced high value added products such as pretensioners and active seat belts. Our airbag and steering wheel products overall performed better than the global LVP due to a 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 Q1 was within our long term range of 4% to 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 $4,000,000 for the Q1. We now expect the full year 2018 commodity cost increase to be about $16,000,000 This is $12,000,000 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 Q1 was higher than our earlier indication and 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 Electronics segment, which assumes reported U. S. GAAP figures and assumes mid April currency rates prevail. Our full year 2018 indication for Passive safety is from organic sales growth of more than 10% within 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 Electronics 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 $70,000,000 increase in RD and E to support future organic sales growth, we expect the underlying profitability of the Electronics segment to decline for full year 2018 versus 2017. And this is when we're excluding the goodwill impairment charge last year. I will now turn it over to Matthias regarding the Form 10 and the carve out of Veoneer.
Thank you, Mats. And if we then turn to Page 2, Slide 13, we have summarized the key P and L figures for 2017 from the Form 10 filing. And 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're comparing the Electronics segment's operating margin of 2.3%, to the Veoneer carve out stand alone operating margin of minus 2.1%, the 4 percentage points difference is explained by 2 main reasons. First, the R and D costs are fully attributed to Veoneer in the standalone case.
And 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 US100 $1,000,000 As mentioned during our last earnings call, we expect RD and E net to increase in 2018 by around $70,000,000 or around 3 percentage points of sales. Looking now to the capital structure of Veoneer. The capital injection of up to $1,200,000,000 from Autoliv ahead of this bill is to provide funding for our increased investments in RD and 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 and A opportunities. Looking now to an overall update of the spin off of Veoneer, I will turn the call back to Jan.
Thank you, Matthias. If we turn the page again, Page 14. As illustrated on this slide, we're 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 Q2 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 Q3 of 2018. Before opening up for Q and 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 calls for Autoliv Inc. As we now know the company. And I'm 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 2 great companies, both with very bright futures.
Perhaps not so much different from when back in 1994 Electrolux, Banoff Waterliev as a publicly listed company, which was an important enabler for where we are today. By 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 and A. Go ahead, Paul.
Thank you. 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 that 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 2 questions. Thank you.
Hello?
Sorry. So if we start with the first one here, the order intake and market shares, we have seen 3 years of strong order intake of 50% or more. And we have seen a continued strong order intake also here in Q1 without quantifying it. We have mentioned that we would be on a market share of around 45% or more for passive safety in 2020 beyond. Beyond that, we have not made any further calculations on market share development and not also provided any other numbers and 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. But we are seeing market share there again to pick up, not any different than what we also communicated at the Capital Marketing. 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's also including decision making software for from Zenuity. And their aim here to start with is a lower level of automation. So 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.
And as we also have communicated, we are also looking to maybe book another new customer here during the year.
Thanks very much.
Our next question comes from Victoria Guerra from Morgan Stanley.
Hi there. Yes, 2 please. I understand that the restrictions that you have around quarterly guidance with the spin off. But I'm just wondering really if you can help us for phasing for organic growth through the year, particularly in the passive business? Or maybe put another way, the $500,000,000 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 and D cost allocation? What was wrapped into passive 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 if we start with I can start with the order intake or the order here, not order intake, but the order of €500,000,000 As you can see from the results from quarter 1 and what we communicated that 4% is contributed to the organic growth in passive safety in quarter 1 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 a major part of this is coming in the remaining 3 quarters. So that's is that. And then relocation, Mats?
Can you repeat the second question when it comes to Veoneer and the allocations there?
Yes. So I'm what has changed about the R and D cost allocation? What elements of R and D specifically were not allocated before? And what's the reason for the change?
Yes. We are basically talking about the Form 10 filings and the numbers we have out there. I mean basically what I think we need to understand looking on the RD and E and the allocated RD and starting point is that this is a net between the paid royalties for each segments and the group allocated R and D. And if you're looking at Veoneer to start with, this is the kind of this business is not that mature, meaning that we don't haven't built that much IP 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 and D while 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 and D. And now we are kind of spending less in relation to royalties on the Pall 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. And then on working capital, for Veoneer stand alone, 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. And then on the quarterly phasing, should we just think of that as 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. So 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 sort of the size of the capital injection initially, dollars 1,200,000,000 My understanding up until now was maybe Veoneer sort of like burns $100,000,000 or $150,000,000 of cash a year. And so that within I guess the next few years would not have required that much cash injection. So can you maybe comment a little better on what the thinking is?
And then maybe anything can sound like 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. And we have looked into the current business plan as we have communicated to execute on our targets towards 2020 2022. We have also used looked into opportunities for other potential M and A activities going forward. The important part is for us to have a strong balance sheet as Veoneer is facing and a great opportunity and a great future here with a growing market and to be able to act if and when there is an opportunity. Both when it comes and 1st and foremost when it comes to investing in our new in our own technology, but then maybe also looking on it from an M and A perspective.
And maybe maybe some comments on the Autoliv RemainCo side as well when it comes to capital structure and the cash injection. I think we are very proud and looking on a strong balance sheet that we are able to retain the A- credit rate thing while we're making this 1.2 cash injection into Veoneer. And I guess you maybe you saw the press release on Standard and Poor's as well affirming the A- but changing the outlook, however, to a negative outlook, but still retaining the strong investment grade. And I think that's also important in this equation.
Understood. And 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?
Yes. We have a one time or an adjustment in the quarter of approximately $14,000,000 so equal to 50 basis points for the group then. But I would like if you are from that kind of point of view looking on the leverage or the development of the margin year over year, also want to point out that we have a negative currency effect year over year of about 50 bps as well now.
Our next question comes from Kai Molla from Bank of America Merrill Lynch.
Thank you very much for your time. I have 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. But then I think I understand that's not on a fully loaded independent structure basis. Can you give us some color sort of towards what sort of level an additional cost and independent structure would mean to the carve outs that you have shown us in the 10 ks?
And the second point would be on the R and D costs within Veoneer. I understand now, obviously, from questions earlier that you've reallocated some costs between 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 and D costs between the subdivisions within Vieneo? Understanding, obviously, having the electronics business as well as active safety and braking business in there.
Hi, guys. It's Matthias here. I think on your first question there on fully loaded as you expressed it, I think what we have 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. But as you pointed out, there will be some additional exercises being done here in order to arrive to that.
Okay. And you don't have an indication to what we get to? You'll come back to
this stage.
Not at this stage. But we will come back to you, Tore. Okay. Thanks.
And then the second this is Matt. And the second question when it comes to the R and D and the allocation on how transplant will be with that on Veoneer, That boils down to the segment reporting, I would say. And I would imagine that you will not be able to see the RD and E on such a granular level for the different kind of product areas.
Okay, understand. But 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.
Looking at Slide 7 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. But there are definitely some key models there also. As you know, it's varying a bit here because we have had some weaker order intake for a while. But when it's ramping up, you could probably draw the same type of picture.
Okay. Nothing to highlight at the moment on the electronic side though?
Not that I can give you as of today. We'll be back to that.
Okay, thanks. And then the second item here is the funding at BNDA, the 1,200,000,000 dollars 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 and A and what's used to fund the R and 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. And we have taken opportunities for that. But I think the first part is to continue to execute on our investment programs in engineering and technology that we have.
Then other opportunities may arise for business combinations or M and A activities.
When do you think operationally being near reaches positive cash flow?
We haven't indicated that Specifically, we have said that positive EBIT in 2020 and then because of depreciations, etcetera, 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 margin guidance that you gave it. So it sounds like you guys are reiterating the margin guidance other than the incremental $12,000,000 of raw materials or the roughly 10 basis points, if you wouldn't mind just confirming that?
Yes. I mean, overall, if you're looking on that kind of external factors, it's only the kind of the raw material that is different, dollars 12,000,000 more than previously anticipated at the 16. So you're right, yes.
Perfect. And then the second question on the ramp in new programs and the R and D associated with it. Is it fair to say that the R and 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, but that would make sense if what you're saying is a sort of growing cadence of new products that launched throughout the year. So just anything that you can give on the R and D?
Yes. I mean, looking on the RD and E in relative terms, we actually talked about the peak year already in 2017. But then 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. But in terms of the relative number, we have said that we have peaked and it's more of a kind of a plateauing until we see the real benefits from the organic growth and 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. So and sort of the buckets it's coming from. So you're going to say R and D costs are fully attributed from here in that $70,000,000 So part of that is coming from there should be a corresponding offset to to the passive safety business and part of that R and D was also in corporate.
Is that correct?
Yes, that is correct. But as we have stated in several different locations in this document, it's impossible to make the kind of the reverse engineering coming from Veoneer and kind of figuring out how the RemainCo should look, because we have kind of allocations and other adjustments that is not kind of adding together to 100%, so to speak, to 100%. So I would kind of stay away from drawing too much kind of conclusions on the Opelio RemainCo side in detail looking on the Veoneer numbers in terms of the carve out.
Okay. So then same on like this 30 from corporate and cost and other that like I think in 2017 you had a total corporate of about 48. So this is not just simply 30 of that 48?
No, it's not. And that is important to recognize down because you cannot get the kind of total together with us.
And you can't help us with like the corresponding offsets to RemainCo?
No, we will get back with the carve out financials and the performance for Remainco, but we haven't presented that yet.
Okay. And 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?
No, it's simply that we are not guiding now as usual for the Q2 to start with for the group as such. So 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 kind of a normal report. So it's not getting into the kind of bits and pieces in the guidance as such.
Okay. And then just maybe on the capital structure, well, two things. One, is it 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? And then 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 and A for Veoneer?
Thanks.
I think if you take the second 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. And sorry, and the first question was
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.
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 Electronics segment year on 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? And then the second question is, just so I understand you correctly, on the $40,000,000 there in positive earnout, is that included in the adjusted EBIT?
So adjusted for that, it would be a bit weaker?
No, I mean the $14,000,000 is that's a positive included in the adjusted operating margin or operating profit. It 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. And on the first question, the what does the decline year on 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.
Yes. Hi, guys. Just on the Veoneer spin off, I was wondering if you can give just approximately ballpark what the percent of revenues for Veoneer will be from active restraints and active safety driver monitoring, 3 d mapping and Zenuity respectively?
The Zenuity part, if we start with Zenuity part, that's going to start or come out with their products in 2019. So Zenuity revenue stream will be relatively low in the immediate future or very low in the immediate future. And when it comes to the other parts, I can refer to Matthias here.
Thank you. If you look you can find lots of details in the Form 10 as well. But if you look at for 2017, around 1 third is from active safety, around 20% from brake systems and the rest then from restraint control systems.
Great. And on the active safety side, I think you guys have talked about getting to that business getting to $4,000,000,000 over the next 3, 4 years. Is that still the case? And 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% to 15% where the industry is?
Thanks.
We haven't specified more than what we explained in our target at our Capital Market Day and we hold on to those targets $4,000,000,000 by 2022 and improved operating margin compared to 2020. And 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, but can you go over that earn out one more time? I think the release of the earn out, did you say it was $14,000,000 and did that flow through to the adjusted operating income line?
Yes. You have the it's the 14.1.4 and it's included in the adjusted operating margin as well. But as I said, when you're making kind of a year over year comparison and looking on leverage and so forth, I wanted to remind you about the negative currency effect that it's actually equal in terms of 50 bps as you can see from the earnout as well.
Got you. And then when we talk about the M and A opportunities for Veoneer, I know that it's really early on, but what are the areas of technology that Veoneer would be interested in building out that particular technology? And then, 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 the 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 Corporation, we have a good cooperation with Velodyne signed with them.
LiDAR is an important area we think going forward. So there are 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. And it's not totally completed yet and how that pricing model will look like and we will have to look further into this. We have 2 customers to Zenuity. We have Bob on one hand buying the product and we have Veoneer and then Veoneer selling to all other customers. But we will find a pricing agreement between Zenuity and Veoneer that is on a appropriate level.
Yes. I'm just obviously, the Board members, I presume, at Zenuity would be Volvo and Veoneer, so would represent their interests. And I'm just curious if there's 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. And it's 1st and foremost through its product, its competence in its assets, in the people and all the resources that are built up in itself represent we believe a good value for Zenuity. And 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 2 customers. It has Volvo taking apart and Veoneer taking apart. So that is something that is discussed in the Board and will be also further discussed in the Board.
Okay. But 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 a, from the owner's perspective, but a lot of the value would accrue to Veoneer. I guess it's unclear.
No, it's as I said, this is a discussion that we are going through. And 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. But 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
Right. And 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 Market Day, but we are seeing a continued increased interest as we alluded to in our Capital Market Day. We are seeing an increased interest in our products and we're seeing more customers being technically qualified. We are ending up on bid list 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 the level 3 program on the Geely order. But so there is an increased interest generally speaking and then we could elaborate maybe a little bit more on that on the Capital Markets Day.
Great. Okay. Thank you.
Just a reminder, we have only 3 or 4 minutes left of the call.
Our next question comes from Ashik Kurian from Jefferies.
Thanks for taking my question. I just got 2 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. And I think the key is to have the order intake from non captive.
And 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 50?
We don't speak at 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. So but it's a non captive customer.
And then last question is in the details you published for V and E 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 mine. Maybe you can talk about what 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. So that is some Honda business that has disappeared coming going away from AMBS and from the joint venture. That is contributing of course also then so the declining sales line contributing to the declining profit. Then also you have also other factors related to the purchase accounting and to the integration that is affecting it.
Mads, maybe you want to elaborate a little bit more on that or?
No, I know you're right. I mean, if you're looking on the underlying profitability for AMV, and this is where we have been clear on that one as well last year for 2017. The reported is negative and that's not a surprise. But if you adjust for the PPA as well as the integration cost, we are positive for MBS 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.
Yes. I'll be very brief for the 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?
Your question if we think that our call offs 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 notice 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.
And 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 Q2 on Friday, July 27. And you should also follow our corporate website for more information regarding the upcoming Investor Events and Analyst Days here with the roadshows for both companies. And then finally, I sincerely appreciate your continued interest in both our companies, I hope in the future and that you look forward I look forward to see you in future earnings calls. So thank you very much and goodbye for now.
This concludes today's call. Thank you for your participation.
You
may now disconnect.