Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Q3 dozen 19 earnings release Conference call.
The conference is being recorded today Wednesday the 27.
Thousand 19.
No that kind of cool editorial sets speaking today.
Yes.
Vice President Communications. Please go ahead Sir.
Thank you very much summer and welcome everyone to our third quarter 29 to earnings call presentation. Here, we have our chairman President and CEO you ought to close on our Chief Financial Officer, Mike talked about and myself too much else.
During today's earnings call our C O one comment on our current fiscal situation. The progress, we're making it'd be linear and in particular about the market adjustments initiatives underway in our company.
Then mcpartlin would walk you through our financial results, our efficiency programs and provide some commentary around their outlook for the remainder of something like Jim.
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We'll have the Q1 <unk> session.
It's like that we use our available through link on the homepage or corporate website. So it could looking out to the next page we have the safe Harbor statement.
That's an integral part of this presentation, including documenting all those here today.
During the presentation, we've been reference some non U.S. GAAP measures are where the reconciliations of these figures are disclosed in our quarterly press release and the 10-Q that we'll be talking with you see.
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It's intended to conclude a three P.M.C.T. at the later so please limit yourself to a maximum of two questions each.
With that I'll now turn it over to our Chief Executive Officer Youre close on.
Thank you very much told US I would also like to welcome everyone to our third quarter earnings call here today, and starting all looking into our business highlights by turning the page.
Yeah, I would've thought we'd thanking the entire be linear TV content your dedication and focus on quantity.
While driving so operational improvement.
Looking first to the underlying market conditions. The light vehicle production continues to deteriorate to the point, where the second half of 2019 is now expected to decline by at least 3% from the first half.
It's really fancy deterioration of approximately 4% or 1.7 million vehicles from July .
Vacations and we can also continued to see it further erosion to trend Cdtwenty two.
Looking back.
Our market adjustment initiative, we are pleased that initiatives, we began to undertaking that beginning, albeit here are gaining traction.
Our gross engineering costs continue to decline due to improving resource management and outsourcing activities, particularly with some engineering related activities and active safety.
We also continued to improve our overall cost structure and networking capital to various initiatives and we are making further progress with that strategic reviews, all of our joint ventures.
During the quarter, we're pleased to have expanded or active safety customer pets.
Especially bisha, including thermos dancing radar and or centered compute ADCC use.
Despite seeing some delays in new programs sourcing with certain customers or last 12 month order intake as for the third quarter remained around <unk> billion, daughter future average annual thing.
Heading into the fourth quarter, we see same order intake opportunity as earlier indicated.
Although certain opportunities may be delayed to 2020 .
And lastly, we see from launch delays on certain models and the ramp up of audience is lower than expected while underlying vehicle bought im sorry, somewhat lower as a consequence expected growth from our 2019 losses had not materialize.
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Despite the challenging environments, we remain focused on our north readiness and quality execution had all.
Had been north period in 2020 2020 Wow.
Looking now in the next slide.
At the alluded to earlier, we already in the middle of an industry downturn, where the light vehicle production outlook has the undisputed rating since your life of last year.
Overall this now represents approximately.
6 million to fewer vehicles or close to 12% for the time period 2019 through 2022 and nine the mainly on fewer vehicles that reported yup.
90 days ago.
No. This is not clear when we see that nor in the light vehicle production. The current outlook indicates that both twentynine CNN 2020 will remain around 86 million vehicles.
This level, where last seen in 20, Peafiel and all the peak level of around 9 million vehicles in twin C 17.
The entire ultra industry, it's affected by the limited light vehicle production growth through 2022 and of course continues to have an impact on our business and target.
These near term market uncertainties force us to adapt and prioritize our technology roadmaps and customer opportunities why the having type.
Okay, and strong cash flow management.
Looking now onto our customer development in active safety on the next slide.
We continue to make solid progress in expanding our active safety product portfolio across our customer base.
We are particularly pleased with adding or seven customer business award for best on and also receiving our third thermal sensing award for and Robert tax application, leading global OEM.
In addition, we expanded our radar right and monitoring system and growth get passed us with new customer wins during 2019.
We have also expanded our technical qualification their son radar and Adas easy.
Consequently, we continue to be optimistic about securing business at war with new customers across the portfolio during the fourth quarter and even to 2020 .
Looking now on to our 2019 long shift on the next slide.
We have somewhere like the key new program launches and modern facelift, which will support the improvement organic sales development, especially as we head into 2020 .
Certain cases, we see some launch delays and lower ramp up of audience and I'm, there and lower underlying vehicle volumes.
As is evidenced by the light vehicle production. According to IRI It shifts where the second hall for 29 PM is now expected to sequentially declined 3% from the first half of this year.
It represents as I said.
A shade for more than 4% from earlier this year.
Our strong line up of launches is however, mitigated by the negative impact from the motivation business ramp up ramped down had to BMW as well as a temporary negative mix from 24 gigahertz to 77 gigahertz radar technology.
Combined these new program launches and facelift represents between 10% to 15% or annual sales.
Yes of course depends on take rates and light vehicle production assumptions.
The current average content per vehicle of these model is approximately $160. However, the content to range between $40 and up to $800 per vehicle.
Now looking on the next slide.
During the quarter, we introduced our scalable open system architecture to our product portfolio.
All right and drive event at the cereal here in Sweden.
In a growth market like active safety a platform approach if necessary for sustainable growth and hence the need for scalable architecture.
Our focus is on system telecom and software or emphasis is to have the fifth system knowledge build for the right selection of hardware with agile software development.
Based on having a central repository, which allows for the reuse and replication or base technology feature integration safety critical signals and mechanical adaptation that system verification.
I mean, that's the only customization that should remain for applications.
Which configure their vehicle interfaces and OEM specific feature set.
In pattern, we intend to stay ahead of the curve with cutting edge is huh.
He is one of the largest cost drivers is validation and verification.
Focused on that we use of software verification.
And lastly, we intend to utilize the technology advancements in both silicone and AI to have the right petitioning cost and performance.
I will now leave it to over four financial highlights it to our CFO Mark backbone. Please.
Thank you for young looking out for a financial highlights on the next slide.
As you alluded to earlier, the macro environment than Alipay situation continues to adversely affect our operating results in the new for our overall Netsols limited sales in the third quarter or 406, maybe there was essentially in line with our expectation White oak breaking lost and operating cash flow was slightly better than expected.
Especially pleased with the sequential developed onto our financial results were in the third quarter or do you need growth and as you may have improved sequentially from the fourth quarter by 25 million combined.
In addition for net working capital in improved.
7 million during that Paul two quarters.
Yes, we had mentioned for several quarters now our company continues to be in EMEA delivered tremendous investment failure to support the ramp up of future sales sales growth and strong order.
As a consequence investments what capacity increases maiden active safety embraces them without cutting capex for the quarter or 59 million or 13% those sales.
Despite the slightly higher run rate clicks, we expect to full year 2019, capex to be approximately 12% some sales roughly in line with the first nine months of this year.
Looking now in terms of in into some further details for the quarter on the next slide.
Our sales decline of 64 million as compared to the same quarter last year was compromised of negative causes the development of 2% 10 million and organic sales decline or 10% or 54 million.
They'll ganic sales decline was mainly driven by restraint control systems, or 29 million and active safety or 15 million, while brake systems declined by 10 million.
Within restraint control of the decline was mainly due to the face also certain vehicle models, mainly in North America, while a negative ray about product mix shift from the 24 through this 77 gigahertz technology, whether main drivers for active safety.
The decline in brake systems was mainly driven by lower volumes or thoughts on the form the models in China.
The gross profit decline of 26 million year over year was mainly due to the volume and product mix impact caused by the organic sales decrease and negative currency effects of 4 million.
All the Indian that's over 144 million increase like 35 million during the quarter as compared to 2018. So the seats ramp up of engineering hiring during the last 12 months, what SDMA remained relatively flat year over year at 45 million due to lower outside services.
As a consequence, although market adjustments in etcetera is there are there any net run rate.
Approximately 580, Amelia and has DNA to around 180 million.
Last played a role taking Tesla for the third quarter drove better than expected cash flow before financing activities. Due to continued strong working capital performance, mainly in receivables and inventory.
Looking now to sequential performance on the next slide.
Oh sales decline of 27 million as compared to the second quarter of a compromise the one organic sales degrees.
Decrease of 26 million, mainly driven by restraints control systems over 60 million active safety of 5 million.
The gross profit decrease of 4 million as compared to the second quarter was mainly due to that volume and product mix impact caused by the organic sales.
Yes.
All the Indian nets, and SDMA decreased 50, and and 5 million, respectively as compared to the second quarter.
Our market adjustments in Egypt.
That's the consequence to lower operating loss and decreasing that's working capital to grow the operating cash flow improvement versus the second quarter.
And as mentioned earlier, the capital expenditure increase for 50 or 59 million in the third.
Yes, it is expected to be at peak levels.
Looking now for 2019 outlook on the next slide.
Based on our column of or based on our current customer calls and deliveries we see a continued challenging demand environment in China North America in Japan.
This leads us to anticipate the further slight sequential decline you know organic sales during the fourth quarter from the third quarter. This year.
We expect operating loss improved from that.
Ethnic consequence.
Ganic sales improvement in the second hall will likely not materialize as we expected in July due to a contingent decelerating market environment and our new program launch headwinds.
And earlier.
Consequently, organic sales for the full year 2019 are now expected to decline in the low low double digits compared to 2018, rather than the high single digits as communicated in July .
We expect the currency translation impact to the negative 3% as compared to full year 2018. This is one percentage point lower than communicated in July .
As we indicated last quarter, we expect to see a continued sequential improvement in all the Indian that's in the second half of this year from the first so and we remain committed to engineering net cost of less than 600 million.
Based on these assumptions, we expect growth taking lots to improve sequentially in the fourth quarter from the third quarter, while a cash flow before financing activities is expected to remain at approximately the same level at the first off of this year due to our exceptionally strong working capital performance in the third quarter.
With that that turned back to close to or feel as though.
Thank you Mark.
Turning to page I would like to thank everybody for listening to our form and part of the presentation. We would now like to open up for you and I and I turn the call it back to our operators summers. Please.
Thank you ladies and gentlemen, so now begin the question answer session if you'd like to ask your question. Please press star and one on your telephone keypad I'm just makes your name spin out if you wish to concert. The question. Please press the hash key once again, it's on one.
Our first question comes from the line of Joseph.
Please go ahead. Your line is now open.
Good morning, good afternoon areas. Thanks, Thanks for taking my question.
I guess just.
Maybe a couple points and the letter.
It looks like you expressed some caution on take rates in China can you just to elaborate on that and sort of what you're seeing there.
We're seeing some caution on that take rates in China and its related to some traction were seeing on the overall markets in China and.
China is Oems efforts to.
Two.
Get cars sold out in a tough environment that they may. He then that take that weapon of the content thing in place that we have seen some let some of that happening.
Something.
Okay.
And then just a second question on on the order intake delays and I know that this can be lumpy, but.
Do you would you attribute more to volume and market uncertainty or is there or is there no greater technical due diligence going on and I guess, just bigger picture I mean, what you've talked about delays for a few quarters now and then on slide four you showed the meaningful volume revisions since the spin you know I think you said tall per se.
So at what point is sort of the recent order intake level just become.
The new normal on it with a realization at the market is actually different.
Lease in part because of volume.
As it looks today, the underlying demand for for business and pursuits that we are working on the hasn't changed we all of the same amount and there is the and the same it's some common sina sample itself, but that's the northern pass and but overall, it's the same volume at the same numbers, if we're talking to pursuing.
But what is causing delays and taking more time, it's a to be certain on the right taught us that primarily we don't think it's the only ever related.
The overall evaluation of the technology assists stops and also the.
Hey, there overall market situation that is making it.
And then longer and a little bit more cautious.
Hi, Thanks, I'll get back in Q.
Thank you.
Thank you and our next question comes from the line of just Anglo from Handelsbanken. Please ask your question.
Thank you very much.
My first question is on mission.
So you're launching three or four generational mission.
Interesting to know knowing that you're starting to see more of them.
Modular side how.
I'll just split this between mono and stereo and also how far you would come on mono or are we talking level to soften Mona system still.
My first question.
If your cost too.
Monovision.
Okay coming into more of a southern were 11 to fluff capabilities unless you have seen we have taken our seven.
Customer order the customer win here during the quarter.
Which is including a fairly advanced software features also facility and today.
Yeah, we see various and need for stereo vision and primarily demanding applications to the motivation is the time.
In the general markets and the Prime technology into your general market remains to be seen when we kind of further down the road towards selling four and more and more involved and high 11 system said, what the choice is gonna be and we believe scenario as it looks today, it's a superior technology, but multi source of very good.
Thanks.
Turner measures.
And those options et cetera.
<unk> spend little nice on this if this is related to like reducing headcount or is it. It's just more manichean or other type of closer I know you mentioned for instance that you or increase in collaboration so doing some things the in house could you maybe talk a little bit about just doesn't lifetime.
It's playing out.
Yeah, hi emphasis as much.
It's a little bit different if you're looking at the different items, but starting off with the R&D and here we have that their headcount increase if you are comparing the second quarter on the and the third quarter. So so it's it's related to being cautious when it comes to it. So has accounts in order to get yes on the run rate in terms of of course.
That is in combination with different efficiency measures is what's going on within within or the any I know, we see further opportunities for that as well as you know sticking with it.
To to make these said below six on that for the for the full year that you can also see from a sequential point of view that reality decreasing when it comes that DNA that that is that more that we are cutting down on on the external services and consultants I'm not doing more and more in house actually building the organization now on a stand alone.
Basis.
And then on top of data and what I would like so highlighted in terms. So that it was I think cash flow that's the ongoing working capital.
NHS is that we have would have improved quite a bit social and accounts receivables and inventories, but this is an ongoing they.
Continuous improvements now going forward with them.
Thank you.
Thank you and our next question comes from the line of Brian Johnson from Barclays Capital. Please ask your question.
Yeah, a couple of issues both relating to margin. So the first is.
You looked inside our DNA and tracks and 600 million for next year any sense of where it could go.
Next year, given the progress you superior to abate in the scalable architecture, and IP sharing across products and clients.
No I think when it comes to numbers on and giving guidance I mean that this is something that we will that gave you won't really since the fourth quarter. When we're looking at this when its landscape looks as it is right now we're very committed to this 600 that that's ramping been talking about and that's what's working it's over.
But then we can see further opportunities, but it's too early to start crying quantifying anything that's it just takes on that is what we communicate to like all of them.
Okay, and maybe not quantifying for 2020.
But if you just think about where operating margin could see you guided to just below breakeven back in 2017, obviously, both volumes and other things have changed since then.
Any sense of what a path in terms of when breakeven could be head and then what that might imply for 2020.
No I will not get bad or any kind of indication. So all of that breakeven in terms of oh that widened.
But if you look at it from a from a kind of a structural point of view I mean, what we need in order to improve and especially on the gross profit that volume. So now we are as you know dependent on there will be feeding animals can see now in 2019 is rather negative on WP inside but looking into 2020, there with all the new ownership, we have coming up.
Yeah, we what we can foresee is the growth that will be more driven by new business and launches all other than the underlying as the team, but saying that the knowing how complicated the with launches that you and I didn't know if you'll have the kind of launch costs and other issues. When you see the launches coming through its very difficult from a timing point of view.
To to give an indication but for sure its volume in order to.
We improved the gross profit on the volumes, we'd come with a girlfriend and the launches.
So that's on gross profit level when it comes to as DNA and or the and he will lead to to continue to get efficiencies on on that side that will bring leverage as well.
But to give that kind of the over from year to date says that we cannot stand today, but that's a directional at least.
Okay. Thank you.
Thank you and our next question comes from the line of Yung Kim Gunnoe from Dnbi markets. Please ask your question.
Thanks, Good afternoon, so in a with touched upon shy or not.
But from a regional perspective here.
Where is it does adoption in growing the fastest for do say on the with the cycle continuing today so I.
I mean are there any changes in terms of interest from customers and we mentioned de converting here relative to exercise.
No I think we have a global in interest on the 11, two plus and the move from the level for.
Focus to more level, two Clos focus if not.
More outspoken for any of the out for the other region that is across the globe, you'll see an hiring to support this coming from the Oems.
And actually across the board so scalable architecture, focusing on L. Two clos or is there.
The biggest into what we see around the globe.
Understood. Thank you.
Thank you kind of next question comes the line of James take advantage of Keybanc capital. Please ask your question.
Hey, guys.
Just wondering I mean would you be willing to quantify the CIMB strike impact what what's factored in within your full year guidance.
Yeah.
Maybe a million or a couple of million on the topline.
For the full year.
For the fourth quarter.
Got it okay.
And then just within the quarters is solid cost controls can you help us understand would attribute to maybe lower launch volumes as opposed to.
Just sustainable or structural cost out improvement I mean, when when volumes a new launches to eventually return you I'm just trying to get a sense for the cost structure.
That environment.
It's launches.
Asked another way of launches were stronger this quarter would there been any material changes to your reported as cheniere or ardine.
No I would say its book, we see an always structure because as you remember that in terms of loans should the big preparations for loan ship sets that for its kind of before the actual launches. So at that kind of compania. So you don't see any kind of all that nowhere close.
From from alone perspective in the quarter.
So its structural savings that you see.
Got it and then just some brake systems can you remind US you obviously have a sizable North America order that starts to ship next year can you just.
Provide an update on maybe just the timing of when that significant order does start to.
Start to hit.
Yeah, maybe to second half of the year.
Okay.
Thank you appreciate it.
Thank you. Thank you and our next question comes from the line of Eric Colson from perimeter security. Please ask your question.
Yes, Hello there.
Regarding capex and going forward, we had quite a high number here in Q3 at certain sites of service sales.
Can we expect now for the Q4 and going into 2020 will remain up those quite high levels or even go up further.
No what do they put a full year 2019 were estimating that too.
Approximately 12.
Meaning that we can foresee that fit a third quarter is probably the peak when it comes to capital expenditure.
Okay. Thank you very much.
Thank you on a next question comes from the line it take Michelli from Citigroup. Please ask [laughter].
Great. Thank you good afternoon.
First question going back to the China take rate issue are you able to quantify what that impact was and then just to clarify was it in the third quarter fourth quarter or both.
We have seen it and the third quarter I don't think we have any good way all the quantifying it that it has since being materially in that way, but we have seen signs. So there are happening.
Out there as I don't think we should draw too much so conclusion thought of it but.
It has happened and we Havent seen that if you go back a year ago. This was not visible but now he has been seen out there.
Okay, Great and then just to clarify how are you seeing what are you seeing in terms of take rates, particularly active safety in some of your other regions.
Typically at a stable lower cost associated with regard to our equipment revenue and with all the extent by the you rank cap requirements and legacy NHS.
So take rate has been if you look to the market decline that light vehicle production and then market addressable market.
It has.
Up until now you can say being there recently compensating the decline the take rates have been recently compensating the decline. So it has being at going up for being Sadiola offices.
That's helpful and just lastly on the thermal award I was hoping you could just comment on.
Hey, how many sensors per per vehicle I Wonder if you can comment on the content per vehicle and whether you're seeing other similar opportunities within the robow taxi space for these sensors.
Well. This is our first before again for a terminal passing in their rather cap application. It said one sensor per vehicle.
If I'm correct informed and.
More than that I would say out all the details say onto it too.
To to wait on $10 or custom here is that even more information about it.
Great. That's very helpful. Thank you.
Thank you.
Thank you and our next question comes from the line is done Webby from Credit Suisse. Please ask your question.
Hi.
Good afternoon. Thank you for taking the questions just wanted to start by asking into Tony plan, I know, you're not giving guidance, but you know there a number of a one off items that you've called out that are impacting revenue in terms of program roll offs, BMW Mano program and the the radar shift.
Here.
Could you just give us a rough sense because we've now seen a number of quarters of this just into 2020 ballpark. How much is is left of these program roll off.
Could impact gross.
If you look and how much more has to roll off.
If you looked at it BMW that hey, less continuing into attractive for antibody seven buying their portion of that BMW motivation program that is left there, but it's having an impact that's not that big one metrics will continue into first half if you look to the shift.
24 to seven to seven day effect out of that will continue you could say into mid 2020 ballpark.
Okay. So.
It is so at X X these items, though and setting aside.
You know whatever the underlying light vehicle markets will be.
That that would say there's no other sorted and then there was currency, but there's no other.
You know unexpected headwinds that we should be thinking about or any other headwinds we should be thinking about in the model on top line correct. We have yes, we have all this on the Rts side. It continued change of model mix, which is.
Which is affecting us so.
If you do you have to look back to the order intake for up to 2016, you can say over lower Billboard rain take that is now facing out and the new programs are facing in and the shift so that it's unfortunate thing happening and both of our main areas in active safety on the shift of radar 20.
Fourth is having a second 77, which you said technology shift the ramp up of mission that deferred lost in 26 units.
A follow on all fall on or what are some that's one is starting to launch right now as we speak.
Okay, and then you have the shift also all Rcs program.
That's why we are talking a lot about launches here in that 20, 2020 2020 , one and we have also some launches here in on the Rcs side in 20.
Nine team that is says ramping into the fancy fancy. So we are in it means so that very has the development phase.
With the new technologies, new product portfolios and launches.
On both sides.
Okay, Great and then just.
Thank you very very small follow ups on the order intake.
One if you could just give us a ballpark sense of the regional composition of your order intake is obviously the light vehicle markets have varied.
Quite drastically between the regions and then second.
Our all programs from your order intact, what your order intake still intact I mean, we understand that they're obviously delays and lower launch following its but has anything been any purpose have been outright cancelled.
And no there are very few that has this out like cash.
All right the I've been talking a lot about our major launches and big programs in order intake at some of them here and there, but not any major ones have been outside CASMED actually had been awarded though.
We have seen as tendencies or delays.
On that bigger programs.
I want to warm or major programs, you know our launch a fast here.
So that we should not exclude if you look to their major ordered volumes and took the world. In these geographies you can't say Asia and North America last follow on orders in a in Europe .
We are back with a bigger volumes already today in Europe , and when you look on the order intake and their customers he has it.
Yeah.
More focus towards North America and Asia.
Okay understood. Thank you.
Thank you next question comes from the line of David Kelley from Jefferies.
Your line is now is.
Good afternoon, a couple of follow ups from my end than I guess starting with.
The earlier thermal question I I think there's a recent study pointing to some active safety bano issues at night I guess, what what are you seeing as customer reception so far on your risk.
<unk> reference to Thomas application do you think theres opportunity and advanced aid us as well going forward.
But we think that there is a lot of interest so maybe because what you already indentifying here and some of the issue in the darker conditions or or or at night here.
It's a making a problem for the Avi develop and said that there is a increase the threat from there. So thats why we see this now first order, but in general you can say that the.
Maybe.
A lot of has gotten their eyes of the opportunity of thermal sensing here being a technology that is very complimentary worked out there as the main sensor environment today.
Okay, but do you see I mean is there.
This bleed into level to aid us as well, where we have some thermal camera.
In the house with whether its mano or more advanced vision camera as well or are we solely talking semi autonomous.
So rowboats I don't know.
I don't know way to speculate on that we have been out there for some years with our third but it sounds thing cameras and technology as it might be the case it might be so that went to college is available and price coming down.
It could be a even more interesting technology. So it's too early to speculate we're very proud and looking for a very much to this first application and the interest from the high end and that may spread the down at some point in time.
Okay, great. Thanks, and then maybe switching gears a quick question then looking at slide four I think the $86 million LPP you referenced in 2019 and 2020 I guess can you talk about it I mean, I know, we're not guiding to next year, but just visibility into production into next year. We're we're just trying to gauge confidence given some of this.
Sustained China weakness.
Regulatory changes coming down the pipe in Europe .
I think it's very hard to speculate beyond quarter for.
We alluded to in our earnings release here that we are somewhat more negative than I chess on that production numbers for the fourth quarter.
So right here in our outlook that we have seen seinfeld plant shutdowns or ready for a quarter for asset or release it looks like today.
But this is subject to change very very quickly and can go in either direction and to speculate.
On the fourth quarter, I think would be no through I think the do it assays.
Okay, great. Thank you appreciate it.
Thank you.
Thank you next question comes from the line VJ brackish from Mizuho. Please ask your question.
Hey on and much this should look at 29 pretty quickly in the year after.
This year was pretty brutal from an NBP decline standpoint, but if next year NBP establishes to flat to down one and let's say, we see it rebounded in 21 and you have your order backlog and starting to convert.
Fewer it look what would be no growth that we should kind of expect over the next two three years.
How I would I mean, we're getting back to that to the guidance when it comes to find it from there.
But as we have said on workforce, but continuing to say that.
Well, we are expecting is a more launch.
Growth going forward that will gradually come in 20 frames.
I guess, that's it that's what do you need for use on a mobile it.
But I will not see in kind of specific numbers, but launch driven growth that will gradually come into planning for him.
Got it and just just to clarify you are starting to see some other conversions from the backlog growth that you saw three years four years back on that commission cycle also right and as.
As you look at next year.
Toxin.
Leverage on the Opex side, that's it thanks.
What do you mean leverage on the Opex, you mean from value from the volumes coming through or yeah.
Yes that that's the tweak it falls on you're getting into I mean, what you need to remember that we have several major launches coming through next year that will gradually supposed to go.
And you can I mean, the risk is always that you'll have some fine tuning issues in the beginning when youre in need of launches and so forth. So.
The goal set as thought coming I would say I mean, an enormous situation at the leverage will gradually.
Improve over time done with that with the low interest on the north from day number the number one if you're looking at the gross profit level, though if they're looking at the leverage below.
Gross profit there more into or the any and as you know that is what we are but we can control and that's what we have started to do it on to take 'em pay down the cost structure in order to to make sure that you're getting the leverage we need done when we are getting into so getting discipline on the volume so.
Got it okay. Thank you.
Thank you next question comes from the line of Mr. Villa from Nordea. Please ask your question.
Thank you. So my first question is some and your comments on the order intake opportunities I assume that choose first of all of the markets. When you say into some of this puts and takes could be July two 2020 and then also MTS orders still not realized in Q4.
How sure can you be that they will come in saying Q1 or Q2.
Right.
Many of these orders or big programs for Big customer service.
Very major Carlyn said that we have very hard to see that.
I would be cancelled or or a board it in a way but.
You can never guarantee anything and how it goes as we have not been awarded the business. It could go to competition et cetera, We don't think this will disappear.
I think this might be or could be or.
Potentially be delayed it's hard to know we don't we we reserve our rights and little bit here, saying that this same underlying demand is there, but given the volatility in the market it could be delayed into.
20.
So so we havent seen anything owning all of the.
As normal some something fall off at some things come in addition that order. It has happened, but if it's something that is meaningful we haven't seen changed.
Recently.
Okay and then my next question asked on your working capital management, we have seen quite good performance.
The last year I would say.
You have reduced their inventories and receivables and all my question is when you prepare to hurt the product launches in 2020 should we assume that you would start to build up a working capital gang and well that's happened already in Q4. Thank you yeah, Yeah, Yeah, I mean advance.
When we are all gearing up for big launches it will be a certain feel taco when it comes to inventories in order to be prepared for launches on than you will see the growth that start taking off with increasing accounts receivables as while down. So you have that kind of natural.
Development that you will see with that with higher volumes, yeah, I can not foresee any material change in the fourth quarter. When it comes to those items given that they kind of the indication wrapping given when it comes with the topline and organic growth in the fourth quarter.
And I mean, that's also I mean, youre right and when counts accounts receivables some of the improvements that he is also due to lower organic growth and we're really seeing accounts receivables, but that's only a small part of the total improvements so.
Thank you.
Thank you next question comes from the line of Jeff Osborne from Kevin Company. Your line is now itself.
Yeah. Good afternoon, just two quick questions on my end on the delays on orders just a follow up on that is there any notable differences in terms of regions are you seeing more delays in China for example in Europe .
We're talking about discrete orders and they can be.
North America, they can be and.
They can also be in your opinion.
In Asia so.
It's across the board we're talking about.
Maybe a.
From a handful or orders like the like that so it's not like a monumental big amount to smaller business. We're talking about a significant businesses here that may be push to over the the new year, but we'll see.
Got it that's helpful. And then the second question I had or the last one was just around.
The pricing environment are you seeing you mentioned that part of the delays just technology evaluation and the macro but are you seeing anything.
Major changes for pricing for any of the major programs like you have.
Yeah, we haven't seen anything on major price pressure or increased safety ours I think the one that we are seeing as a consequence of the market situation. It's in China.
Courseware that pressure is high and of course that also transfers to.
Hi base.
Otherwise it has not any bigger changed on the pricing pressure side.
Excellent. Thank you appreciate it.
Thank you and our next question comes from the line of Chris Mcnally from Evercore. Please ask your question.
Thank you and good afternoon team wanted to just to ask a couple of questions on the scalable or the open system architecture. They did you described could you maybe just described.
What do you actually did to make that that changes I guess, you called it out as sort of a an issue that needed to be addressed earlier in the in the year end I, specifically that the change is it two existing orders or essentially to the new orders that you go out for up to bid for.
No basis.
Related to new beds and pursuits that we are doing and.
The reason why we're seeing business that application engineering in North, Texas, taking it on proportionally big.
Two of engineering work that is affecting our resource that says that it's affecting ultimately the cost situation and it's not efficient. It's also not efficient when it comes to validation. When you have to do a lot of the work all the time and it's not if it's just when it comes to reuse of data and reuse of experiences from bought in order to the other and.
It's not efficient when it works, where the scale about going from a lower 11 to a higher level, but this is a different way of thinking because it involves an ecosystem consisting of silicon suppliers of software houses the in house.
Resources, and it's a lot about capturing the system aspect of this being in short Shaw.
That system going forward, but we believe that we have a good architecture here, we believe that our collaboration where we do that perception software and where it's anywhere to do that decision, making software very good combination and waking up making this system architecture very powerful.
So I guess you wanted my follow up question would be if if this sort of makes sense from a cost structure and I completely understand you know from a the ability to take one system to go to another to increase to the overall margin, but it sounds like this won't be a large portion of sort of the 2022.
Eight OS book that you booked orders for already so does that mean that you're sort of finding out that the margin profile of the orders that you booked over the last couple of years are inherently going to be lower than what youve previously thought hence the change and it becomes more profitable business as the open architecture.
That's the roll through on current orders for you know what's called 2025 revenue.
I think its cost issue when it comes to reuse of resources and reinventing the wheel every time efficient use of resources and by.
Using collaborations with outsourcing firms for more standardized job at having re use all the parts of that al. This software that we can take from one project to the other is taking down cost all ready now on the development side and you can see some sign so it's already where we are.
Outsourcing the annotation here in partnership and thereby and being able to.
Increased efficiency of our own resources and you should look at pointed on that to start with then you should look upon it from and reliability aspect and the.
Quality aspect, where you have an architecture to be able to reuse data and experience from debit to plots into level three and then also into 11 for.
Yeah, but as I said this requires a tight collaboration with silicone houses. So that you have Watson architecture on the sale it going on there so we'll see.
Being and partition in a way that you can take.
Pieces from one level into the other I think here, we haven't done a great job and or engineering team has done an awesome job in defining this presenting it to customers and customers or I would say almost 300 about the opportunity to see new ways of doing this dealing with.
New partners dealing with new parts of the system that maybe you know tapping into it.
Yeah.
Sure.
So I think that this this bear in on the shorter term side more cost effect on the development side and then longer term on the product side, but that is not to your point in 2020 to that is maybe 2020 three and beyond.
Okay. Thank you very much.
Thank you.
One comes from the line Onyx on the gravity from Kepler. Please ask your question.
Hi, good afternoon. Thank you for taking my questions.
The first one on the growth next year, so I understand growth should gradually come back, but assuming slots markets for next year, which level of market performance do you expect just an order of magnitude.
No I.
We wouldn't give any numbers when it comes with outperformance on in relation to the P. I mean that what we what we are saying is that are expecting growth next year, and we're expecting that growth to be driven by the new business by the new launches and not the underlying alipay.
So.
At launch market Shake shack.
In driven driven growth and not tell the fee related that's what's that day.
Okay. Thank you and maybe the second one so OMA or longer term basis. So we've seen some suppliers being more cautious and agents.
Speaking no recovery in global production before 2025, so I just wanted to have your view on does.
He which now you'll you you adopt it internally, whether it's based on Hs or something else and if we she was the case what does it mean for the timing of operating and free cash flow breakeven also in light of the different markets initiatives that you took.
For the.
Second half for the questions remarks.
But it hurts part of it we don't see any other.
Hi, and beyond.
Fourth quarter than what I have chest tab.
Hi, According to your chest, you're back to 2018 level only in 2020 too.
So were feeling a bit of a bath tub curve here now going forward and we don't know really beyond the 2019 fourth quarter, how it's going to look like it's too early at least for up to have any other opinion that niches.
Okay. Thank you very much.
Thank you and our next question comes from the line of fee to desktop from one investment.
Hi, Hi, Thank you very much. So I was that two questions. Please I was wondering if you could just help us up the tone on the the shift out a bit launches. If you could just maybe give a sense of the breadth of of that activity, but you've seen how you said one or two is a major items that was a small items.
And maybe also the driver or whether it's just you know marketing decide to control content cost versus some.
Other items in the system, maybe not be fully ready for launch, whether it's from yourselves or or.
Other other members of the coalition trying to drive some of these systems and the cars.
I think one race on their value should probably at the Oems about this but I think the complexity of new car models is paying any impact here and Aperek car models that is coming out is getting more and more technology into itself and it.
These launches or more and more complex looking ahead and.
That may be at the important factor and you're bringing in in a relatively short period of time, a lot of new technology, we're not talking about the only Adas system here, we're talking about infotainment were talking about powertrain, we are talking about.
The auto thing coming into the car and having the overall system responsibility here is an increasing challenging task for the OEM.
And that could have an impact here to monitor all the suppliers and getting into all onboard and all right at the end.
And is that a number of programs or just one or so.
You see this no, but if you look too.
And you don't need to look on the highest level of premium cars. You can look on any type of car, it's bringing a lot more technology into the vehicle.
You know in many instances. It's also was first technology in one way or the other is increasing the complexity. So I think that is a part of the situation I would also speculating that they OEM thought then also.
Putting different priorities on the powertrain development electrification overall.
Which also may have an impact on the project is such a car platform being launched to get prioritizing R&D resources in an OEM to get to the yen drug development of powertrain to be.
On top of the development I think is a dynamic for carmakers as of today.
Right and then you mentioned in your statement that.
There was some element of uncertainty around the degree to which you know your customers would be.
Making products standard or options on the right to take up of options can you give some sort of senses to what visibility you have at this point since the degree to ensure.
The product launches are going into optional packages for standard packages.
I think it's very neutral as it is today has seen there.
In the past up until recently it has seen.
Peter question here has been paucity of unhappy and.
Compensating for declining light vehicle production, but as we feel it kind of neutral today and we see that is.
Driven that again here a lot by the regulatory environment, you rank cap that there and also the legislation and you add initiative.
22 that will drive the content.
Coming in Norway, and so so I think that is the underlying driving factors I alluded to that earlier and cap.
Five star requirement testing.
However.
Okay.
Thanks.
Right and then last thing is just you mentioned the press release in early October that the relationship was annuity changed so that the changes the agreement regarding don't compete can you just give a sense pieces to how that changes what to very near can do versus what Volvo GB can do recur in this area.
Well. This this is just a clarification on the an opening for being here to act and for you all go to add.
It gives a freedom for us to do things that we were restricted for in the past and also somewhat footwall what to do things that they were treated for.
It doesn't change the commercial agreement between a and B on year and two new within their agreement between Volvo and you'll hear us annuity.
Here is the sales channel of the see new it is the products.
Yeah, but it gets a little bit better clarification and open that's on the what we can do and what they can do.
It is Volvo less.
Bounces annuity in terms of it solutions as they do a different partners on the does that change anything from that perspective on what they can deal with their vehicles.
Fine. So we don't think so no perfect. Okay. That's great. Thank you very much.
Thank you and the final question comes from the line of Sun and Brian .
Ron Please ask your question.
But in your line is now open.
There's no response from the line.
Okay. If there was.
Final question I would like to thank everyone for your participation on the interesting questions on the into overall interest in there will be on here.
We look forward to seeing you at conferences and road shows during this quarter fourth quarter.
And of course also looking forward to see you at CES in January where we'll be on display.
Again less last year.
We Oh of course also look forward to talking to at our next earnings call.
Third quarter tentatively planned for February that fit in 2020 .
Until then I hope you're going to have a safe and relaxing holiday season in the meantime, and take care out there everyone and thank you and goodbye.
Thank you that does conclude our conference for today, thanks for participating email disconnect.