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Veoneer, Inc.  (NYSE:VNE)
Q1 2019 Earnings Call
April 29, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to today's Q1 2019 Earnings Release. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, 29th of April, 2019.

And without any further delay, I would now like to turn the conference over to your presenter today, Thomas Jonsson. Please go ahead, sir.

Thomas Jonsson -- Executive Vice President Communications and Investor Relations

Thank you very much, Petra. And welcome everyone to our first quarter 2019 earnings call presentation. Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; our new Chief Financial Officer, Mats Backman; and myself, Thomas Jonsson, Communication and IR.

During today's earnings call, our CEO will comment on our current business situation and the progress we are making at Veoneer, in particular, about market adjustment initiatives now under way, some of which were announced already in Q4. Then Mats Backman will walk you through our financial results, our efficiency programs and provide some commentary on the 2019 outlook. After this, we will remain on the line for the Q&A session. And, of course, slides are available through a link on the home page of our corporate website.

Turning the page. Here we have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows here today. During the presentation, we will reference some non-U. S. GAAP measures, where the reconciliations of these figures are disclosed in the quarterly press release and the 10-K that will be filed with the SEC. We intend to conclude the call at 3:00 p.m. CET. So when you ask questions, we would ask you to limit yourself to a maximum of two questions each.

And with that, I will now turn it over to our CEO, Jan Carlson.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Thank you, Thomas, and welcome everyone to today's earnings call. I will start out today's call by extending a sincere thank you to the entire Veoneer team for their continued quality focus, as we navigate through this transition period and prepare for future our growth.

Our Company through the record order intake over the last three years has built an exceptional order book of more than $19 billion to be delivered to our customers in the near future. These measures indicate that we are on track to deliver on our future growth and market share gains. To support this order book, we have assembled one of the strongest talent pools in the industry, developing cutting-edge technology, supporting one of the most important secular trends in our industry, the trend toward autonomous vehicles. However, we are currently in the middle of some short-term challenges in our rapidly changing market, including lower light vehicle production, a negative model mix due to our current high content per vehicle on premium models and higher development cost due to increased program complexity. We, as many others in our industry have probably underestimated the extent and impact of these challenges on our company.

As announced during our last earnings call in February, we have several ongoing initiatives to address our cost situation, where we expect to see the benefits during the second half of this year and into 2020. Some of these include capping our R&D cost at $600 million for 2019, reviewing our development priorities for our Zenuity and VNBS joint ventures, and developing a scalable product architecture. I will expand on the -- this later on in the presentation.

As a consequence of all of these developments, the Company has decided to consider alternatives for approaching the capital markets for a capital raise of up to $500 million in order to maintain our strong balance sheet through this transition period. We believe that by taking these decisive actions, we are strategically on track to be one of the leaders in Active Safety and the development toward self-driving cars.

Now, moving on to the next page. Our growth platform will only become a reality by solidifying the right talent and mix of hardware and software engineers. As illustrated by the graph on the bottom of this slide, our engineering associate base has almost tripled from approximately 1,800 in 2015 to around 5,200 in the first quarter this year, where approximately 70% are working in the product area of software. This ramp-up of engineering has been required to not only support the increasing program complexity from our customers, but also to expanding our product portfolio and customer presence, which is the basis for our expected strong order intake of approximately $1.2 billion in 2019 and to expand our order book even further in the future.

Now looking on some of our development programs on the next page. Over the last several years, we have been providing regular updates on our product portfolio and customer progress. As illustrated, we have been gaining traction since the launch of the Mercedes-Benz E-Class, where we launched our four key technologies, all at the same time in early 2016. Since then, we have rapidly expanded our customer wins across all regions and expanded the product portfolio into technologies such as LiDAR, and of course, our sensor fusion software stacked through our Zenuity joint venture.

As a consequence, we are now developing Active Safety technologies for 12 customers, and in many cases, multiple products at subsystem or system level. This has added a diversity to our product portfolio and many of these systems are much more complex than our -- than both ourselves and our customers originally anticipated. In some cases, we are even integrating our competitor's products into the systems. These near-term product development challenges will put Veoneer in a stronger position for the long-term. However, our cost base is currently elevated to ensure quality and delivery of new programs.

Now looking to the next page. We have illustrated how the light vehicle production forecast for 2019, 2020 and 2021 have deteriorated globally and in all our major markets since the spin-off of Veoneer of -- spin-off of Veoneer from Autoliv in June last year. Overall, this represents approximately 24 million fewer vehicles for the time period 2019 through 2022. This of course has had an impact on our business targets that were communicated at our Analyst Days in June of last year prior to the spin-off.

In addition, as I mentioned last quarter, over the last several months, the industry seems to have come to the realization that Level 4, Level 5 autonomous vehicles will take longer and cost much more than originally expected. And we see a shift and focus in the industry toward Level 2+ driver support system based on conversations with our customers. This development should ultimately play into Veoneer's strength and the focus of our product portfolio. However, it's too early to know the impact on our business target.

I will go through now on the next page a little bit more in detail on our market adjustment initiatives that we have started to implement during first quarter. These initiatives focus on three primary areas, efficiency improvements, investment priorities and product portfolio optimization. Within efficiencies, which Mats will elaborate on shortly. We focus on margin improvements, customer and product focus along with balance sheet and cash flow efficiency.

Within investment priorities, we are currently reviewing and evaluating the scope and development priorities and the funding of all joint ventures. As a part of these reviews, we have resolved the short-term funding situation of VNBS with an MOU where we are now working toward a definitive settlement and agreement. With Zenuity, we are currently in discussions to see how we can better utilize these resources toward the market shifting toward L2+ systems. And, lastly, to solidify our leadership position in Active Safety in both hardware and software, we intend to remain focused on our core product offering, while evolving toward a more product -- modular product architecture to drive scale and cost efficiencies, while we are adapting to customer needs.

As a result of these markets initiatives currently under way, we intend to revisit our short- and long-term targets. Through the successful execution of these initiatives, we will create the financial stability necessary to be a winner in the long-term and to be the preferred choice of our -- for our customers, employees and other stakeholders, as we consider the alternatives for approaching the capital markets for funding.

I will now turn the word over to our CFO, Mats Backman to further elaborate on the quarter. Mats?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Thank you, Jan. If we turn to the next slide, as Jan mentioned earlier, thee macro environment in LVP is adversely affecting our operating results for the near-term. Our overall net consolidated sales in the third quarter came in at $494 million, roughly $25 million lower than expected. This was due to a weak LVP in Europe and North America than we saw in our customer call-off at the beginning of the quarter. As a consequence, our operating loss of $128 million was close to $10 million worse than expected due to the organic sales effect, while our cash flow was in line with our internal planning.

As Jan mentioned earlier, our Company continues to be in the middle of a tremendous investment period to support the ramp-up of our future sales growth and record order book. As a consequence, our investment in RD&E net have increased to $156 million in the third quarter, which is an annual run rate of around $625 million. In addition, our investment on capacity increases mainly in Active Safety and Brake Control Systems resulted in a CapEx of close to $59 million in the quarter. This level of expenditure is quite a bit higher than previous quarter. However, we now expect the full year 2019 CapEx to be about 10% of sales.

Looking now into some further details for the quarter on the next slide. Our sales decline of $100 million as compared to the same quarter last year were compromised by a negative currency development of $28 million and then organic sales decrease of 12% or $72 million, which was mainly driven by Restraint Control System of $42 million and Brake Systems of $23 million. In the Restraint Control, this decline was mainly due to the phase out of certain vehicle models in most regions. While lower volumes in certain Honda models in China and Japan drove the decline in Brake Control System.

The Active Safety organic sales decline of 3% or $7 million was mainly due to a negative model mix with premium brand OEMs where we have a high content per vehicle in our major market. The gross profit decline of $27 million year-over-year was mainly due to the volume and product mix impact caused by the organic sales decrease and negative currency effect of $11 million.

As mentioned earlier, RD&E net of $156 million increased $50 million during the quarter as compared to 2018. And this is due to the steep ramp-up of engineering hiring of approximately 1,300 associates during the last 12 months. The SG&A increase of $21 million versus prior year was mainly due to the additional costs associated with being a stand-alone listed Company and approximately $4 million of one-time professional services costs. Lastly, other income was $50 million lower as compared to 2018 and that was due to the reversal of the MACOM earn-out provision last year.

Looking now to our launches on the next slide. We have summarized some of the key new program launches and model facelifts, which will drive the step up in our organic growth in the later part of 2019 and into 2020. The strong line up of launches is mitigated by the negative impact from the mono-vision business ramp down at BMW and the temporary negative mix from 24-gigahertz to 77-gigahertz radar technology. Combined, these launches and facelifts represent between 10% to 15% of our annual sales, depending, of course, on take rates and LVP. The average content per vehicle of all these models is $135. However, the content range is between $40 and $800 per vehicle.

Looking now for efficiency improvement program on the next slide. As Jan mentioned earlier, as a part of our overall market adjustment initiatives, we are implementing an efficiency improvement program which includes three primary focus areas, customer and product, margin improvement and balance sheet and cash flow efficiency. Within products and customers, we will focus on bringing orders within our core products and have ongoing discussions with our customers and suppliers on the scope of current and future business. Within margin improvement, we have identified a number of opportunities including, but not limited to RD&E efficiency and cost sharing, footprint optimization, decentralizing P&L accountability in our new business unit and product and organization, and lastly, tight cost control and discretionary spending throughout the organization.

Looking now to the balance sheet and cash flow. Our key focus areas will be restrictions on CapEx and specific operating working capital optimization initiative. Unfortunately, since none of these initiatives have been initiated during the first quarter of 2019, it will take until the third, and in many cases, fourth quarter into 2020 before we see the tangible benefit.

Looking now for outlook for 2019. Based on our current customer call-offs and deliveries, we see a continued weak demand situation in China, Western Europe and to a lesser extent North America. This leads us to anticipate a slightly sequential decline in organic sales during the second quarter from the third quarter this year. In addition, we see a sequential increase in RD&E for the second quarter, which we expect to be a high point for 2019. As a consequence, we expect the operating loss to be higher in the second quarter than during the first quarter 2019. Cash flow is also expected to be worse due to the funding of Zenuity and higher CapEx than in the previous quarter.

At this time, we expect the vehicle demand to stabilize and return to growth during the second half of 2019, resulting in an estimated full year LVP being down in the low single-digit in 2019 as compared to 2018. Our sales during the second half of 2019 are expected to improve sequentially from the first half of 2019 and return to year-over-year organic growth in the fourth quarter of 2019. These sales assumptions are expected to result in organic sales decline in 2019 in the mid-single digits with a net currency translation in impact of approximately minus 2% as compared to full year 2018.

Coming back to RD&E. Due to our market adjustment initiative program, we have set a cap on engineering net cost of $600 million for 2019. Based on these assumptions, we expect the operating margin and operating cash flow to substantially improve sequentially in the second half of 2019 from the first quarter of this year. Based on the developments mentioned earlier, the Company is considering alternatives to approaching the capital market for funding of up to $500 million.

I will now turn the call back over to you, Jan.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Thank you, Mats. By moving the page, we would like to conclude our formal comments for today's earnings call. But before we open up for Q&A, I would like to add some commentary around our acknowledgement that we are considering alternatives for a capital markets raise.

Earlier in the Q4 earnings release and 10-K report, it was our assessment that the capital we had would have been sufficient. Since then conditions and circumstances have changed. The light vehicle production for our planning period has deteriorated further. The results from our market adjustment initiatives program will take longer time to materialize than we originally expected and the order intake has been strong and continued strong. And we also to continue to spend high amount of money in the R&D.

As it became clear that our cash will not be sufficient, we also concluded that the fact relevant to this had to be communicated before we can bring in more capital. However, we are still evaluating how we will address this capital need and will come back when we have a clear decisions. Also we know that under the U.S. Securities Law, we are more limited as to what we can speak about than a Swedish listed Company would have been.

So, with that addition, I would now like to turn it back to our operator, Petra, for managing our Q&A session. Petra, please.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Hampus Engellau. Your line is now open.

Hampus Engellau -- Handelsbanken Capital Markets AB -- Analyst

Thank you very much. I will limit myself to two questions. Could you perhaps talk a little bit about the second half year? I guess, what I'm looking for is that how much is the improved organic growth in, let's say, Q4 that are indicating related to light vehicle production being better and how much is related to you seeing your order backlog starting to invoice i.e increasing market shares? That's my first question.

Second question is more digital question. If you can maybe highlight how big the MACOM effect was on this reversal of the provision? Thanks.

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Hi, Hampus. This is Mat. The first question when it comes to the second half and organic growth and the kind of the recovery. Most important is related to the LVP pick up in the second half. And please remember that the comps so much is in the second half as well than as we saw the downturn to some extent already in the second half last year. But it's also -- to some extent related to launches that we will see it start coming in the fourth quarter but then more pronounced into 2020. So, it's a mix but the biggest impact is actually coming from the underlying LVP. Can you please repeat the second question?

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Hampus, you are on mute maybe. Can you hear us? Petra, can you hear us?

Hampus Engellau -- Handelsbanken Capital Markets AB -- Analyst

Yes. Hello.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Now we can hear you. You went on mute. Could you repeat the second question please, Hampus?

Hampus Engellau -- Handelsbanken Capital Markets AB -- Analyst

Of course. The question on the MACOM, you said that you had reversed an earn-not provision and I was just asking how big that impact was?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

I mean, it's about the full amount that you can see on the other, around $15 million.

Hampus Engellau -- Handelsbanken Capital Markets AB -- Analyst

Okay.

Mats Backman -- CFO and Executive Vice President of Financial Affairs

And that was the reversal we did in the first quarter last year. So it's nothing in this quarter, just a comparable.

Hampus Engellau -- Handelsbanken Capital Markets AB -- Analyst

Okay.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Just a color to Mats' first answer here. If you look to the IHS numbers for first half, they are for first quarter down almost 7% year-over-year, second quarter down 3.5% and in third quarter up 4.5% and in fourth quarter up almost 3%. So you can see that light vehicle production looks to bounce back, but it's not silhouetted to comparables are easier also (ph).

Hampus Engellau -- Handelsbanken Capital Markets AB -- Analyst

Yeah. I guess, that is specifically in Europe, I guess, and maybe some instances in China if that materialize?

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Yeah.

Hampus Engellau -- Handelsbanken Capital Markets AB -- Analyst

Fair enough. Thank you.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Thank you.

Operator

Thank you. And the next question comes from the line of Brian Johnson. Your line is open.

Brian Arthur Johnson -- Barclays Bank PLC -- Analyst

Yeah. A couple of things. Can you give us any sense of the timing of the various improvement activities, especially around the engineering cost reduction and kind of when those might actually lead to a decline in the structural cost base?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Yeah. And as we indicated for the second quarter, that's -- I mean, the run rate now that we're getting into the second quarter is higher, so we are anticipating to see the peak when it comes to the net RD&E in the second quarter and then gradual improvement throughout the third and fourth quarter. And this is built on a number of different activities in order to get the efficiency in RD&E, but the first signs in the third quarter and then into fourth quarter.

Brian Arthur Johnson -- Barclays Bank PLC -- Analyst

And in terms of manufacturing costs, is there any possibility for improvement in this year? Or is it more likely next year?

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

You're right. We're standing in front of a quite heavy launch period here with a lot of engineering activities now, first half, second half of this year and then launch activities in our plans starting in the second half of this year and into 2020. The gross margin activities that we are undertaking we believe will start to give an effect in 2020 and onwards.

Brian Arthur Johnson -- Barclays Bank PLC -- Analyst

Okay. And final question, I recognize you're limited in talking about fundraising. But can you give us any sense of debt versus equity, public markets versus strategic investment and kind of size that you would be looking for?

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

We communicated here in the earnings release of up to $500 million. It will -- probably, what we are investigating is a combination of different things. But beyond that, we have no comments. We are not today able to comment further on that.

Brian Arthur Johnson -- Barclays Bank PLC -- Analyst

Okay. Thank you.

Operator

Thank you. The next question comes from the line from Erik Golrang. Your line is open.

Erik Golrang -- SEB Enskilda -- Analyst

Thank you. I have three questions. The first one is, Mats, you talked about you had discussions with clients on the scope of current business. Could you clarify a bit what that means?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Yeah. That's when we're talking about the efficiency improvement program, but also connected to what Jan said, in terms of -- the project being more kind of all the complex and more change requests from customers. So the discussion we need to have is about change requests and what we're doing in the different project when it comes to engineering with a higher complexity in the project.

Erik Golrang -- SEB Enskilda -- Analyst

Okay. And second question is on the order intake, same level on a 12-month rolling basis as last year. But could you highlight anything particular of notice in Q1?

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Well, the majority of the order intake we saw in Q1 was related to -- absolute majority was related to Active Safety. So that was the run rate equal here but majority on Active Safety.

Erik Golrang -- SEB Enskilda -- Analyst

Okay. And then the final question on cash flow. You stated that operating -- in spite of a weaker profit, your operating cash flow was in line. Was that then because of temporary sort of working capital related factors? Since, I guess, if cash flow was in line, you wouldn't have needed more money than you previously thought?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Yeah. I mean, if we're talking about the outcome for the first quarter, I think, we've been quite successful when it comes to the net working capital, because you see it from a timing and a seasonality, you normally see a quite positive effects in the fourth quarter when it comes to the networking capital and we saw it in this quarter -- in this first quarter as well then. But we also talked about a lot of timing issue. We have been able to mitigate some of those kind of timing issues and are pretty flat when it comes to working capital in the first quarter. But still we have some timing and working positive in the first quarter than that we need to consider that out. So a better than normal first quarter for sure.

Erik Golrang -- SEB Enskilda -- Analyst

Okay. Thank you. That's it.

Operator

Thank you. The next question comes from the line from James Picariello. Your line is open.

James Picariello -- KeyBanc Capital Markets -- Analyst

Hey, guys. So just one clarification for the second quarter guidance. Is core sales expected to be down sequentially or just the absolute revenue? Because FX should be less of a headwind, so I'm just trying to capture the magnitude of the 2Q guide for sales?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Yeah. It's organically down in the second quarter. That's what we're indicating as well though. Right...

James Picariello -- KeyBanc Capital Markets -- Analyst

Okay. And...

Mats Backman -- CFO and Executive Vice President of Financial Affairs

...so partially down organically.

James Picariello -- KeyBanc Capital Markets -- Analyst

Got it. And then, since the first quarter wasn't that far off from your own expectations, right, just $10 million as you state in the release. Can you provide some greater context for what your expectations are in fact for the sequential EBIT decline in the second quarter? Because, I mean, honestly, I think, that would be to the benefit of us all in terms of calibrating the right trajectory for the year here?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Yeah. But I mean it's not the only one. When we're talking about the second quarter and when it comes to the sequential development. I mean, first of all, we're continuing to see that the lower top-line, being hit by the lower top-line and also the under absorption effect that we saw in the first quarter. But on top of that, what I also said when it comes to the run rate in terms of RD&E, we will peak in terms of net RD&E in the second quarter, meaning that, that will also have adverse effects on the EBIT. If we summarize the different effects and making some kind of an assumption when it comes to the cash flow in the second quarter, we would estimate that, if that would be around $200 million, that's the number we are forecasting.

James Picariello -- KeyBanc Capital Markets -- Analyst

Okay. That's helpful. And if I just slip one more. The U.S. recently expanded its probe of ZF's airbag control unit to 12.3 million vehicles. So, I mean, do you view this as an opportunity for the RCS business? Do you have any -- since for the timing of a decision based on your past experience. If a ruling is made, what would be a realistic timeframe for that potential recall to take effect and begin shipping? Thanks.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

We are monitoring this. I think it's early for us to have any definitive comment on it. We are following the probe and seeing the outcome of it. We will have continuous discussions with our customers and see what the -- what measures will be taken and how this will be. If it will be a change of unit or reflash or whatever type of measures that we will take. And then thereby act accordingly. But nothing we can comment on today.

James Picariello -- KeyBanc Capital Markets -- Analyst

Thanks.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Thank you.

Operator

Thank you. The next question comes from the line from Agnieszka Vilela. Your line is open.

Agnieszka Vilela -- Nordea Equity Research -- Analyst

Thank you. I have two questions. The first one is on your CapEx need. You are now raising CapEx in absolute figures in 2019 despite the fact that sales are going down. Now imagining that you will be delivering to your order book later on, do you foresee that CapEx will increase in absolute terms in the coming years and by how much? Thanks.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

We are increasing the CapEx here because we are seeing the need for the launches that we are seeing in end of 2019 and into 2020 that I talked about and that we had on some of the pages here earlier. We don't see that continuing going forward as it looks today, if not order intake would go even up further, but that -- otherwise we don't see that need for an increase.

Agnieszka Vilela -- Nordea Equity Research -- Analyst

Perfect. Thank you. And then my second question is on Brake Systems. What are your expectations for both the kind of sales and EBIT progression for that business. And also, if you could share any information about dispute with Nissin Kogyo that would be helpful? Thank you.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

We don't guide per se on the different product areas. So, I don't have any specific number to give you on the Break business. But when it comes to the discussions we had with Nissin, we are under the MOU resolving the situation we mentioned in the K and we are now progressing into a definitive agreement with Nissin Kogyo. We will then also look through the Break Control business overall and evaluate how we prioritize our money and our investments going forward as a consolidated product portfolio. If you look to the Brake Control business overall, it is gaining better momentum in second half as the rest of what we have been talking about, second half being a better half year than first half.

Agnieszka Vilela -- Nordea Equity Research -- Analyst

Thank you.

Operator

Thank you. The next question comes from the line from Vijay Rakesh. Your line is open.

Vijay Raghavan Rakesh -- Mizuho Securities USA LLC -- Analyst

Yeah. Hi, guys. I saw you guys talked about RD&E at $600 million flat for the year. But if you look at the SG&A, you have a lot of temporary and contract workers. Do you see any flexibility there in the back half in reducing that and drive some leverage on the model?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Yeah. I mean, we are addressing this SG&A as well in the same way. And I think we have quite a lot of potential when it comes to reducing on the consultants and temp sides. And I think it's natural when you're building up a new organization that we have utilized some professional services in order to get started. Now, when we are building the organization gradually, I can see that we can reduce the cost. We're getting our own organization up and running better. So it's definitely a potential on the SG&A side. Yes.

Vijay Raghavan Rakesh -- Mizuho Securities USA LLC -- Analyst

And you talked about order intake, I knew the same levels, but near-term with some of the LVP numbers coming in, have you seen any change in content like are there OEMs reducing content at even L0, L1, L2 in the cars? Or is it just more of a SAAR LVP impact? Thanks.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

No. We have not seen any behavioural change or directional change from the customers due to the current market situation. We are seeing the trend shift of a more driver support Level 2+ in general from the industry and Level 4 and a higher level of autonomy being pushed out in time, but driving content it's not the case. It's rather the opposite when you look to the support from Euro NCAP and regulatory environment, this will emphasize the need of our products.

Vijay Raghavan Rakesh -- Mizuho Securities USA LLC -- Analyst

Thanks.

Operator

Thank you. Your next question comes from the line from Joseph Spak. Your line is now open.

Joseph Robert Spak -- RBC Capital Markets, LLC -- Analyst

Thank you, everyone. So pretty much every time you have -- we've gone on this calls, you've talked about increasing RD&E to support intake or launches and this time, a little more complexity. In light of that, is the business in that -- in your order intake, do you think you that was priced correctly or do you need to back and try to get some recovery from your customers?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

We will do whatever we can do to improve our pricing as we always do. You know how that is, that is not so easy in the automotive industry. We are increasing the RD&E numbers because we are seeing a stronger order intake and strong ordering intake continuing into 2019. We are now capping this. So maybe that is the change. From this earnings call, we are talking about the capping of the RD&E than to previous earnings calls.

I think also we have to admit that we are seeing more complexity and a more work to be done in these programs than we have originally anticipated. And those are the actions that Mats alluded to in the present -- slide presentation here. We will go back and talk to customers about change requests and also how we can deal with that going forward. So it's a moving...

Joseph Robert Spak -- RBC Capital Markets, LLC -- Analyst

So just...

Mats Backman -- CFO and Executive Vice President of Financial Affairs

It's a moving target. You start the program, you get an award in 2016 that is going to launch in maybe 2020 or something. During that timeframe, there is a lot of things happening that the customers want to have included in their vehicles and that will cause us more jobs, more work, increasing the efforts. And then we have to also discuss the commercial terms of that with our customers.

Joseph Robert Spak -- RBC Capital Markets, LLC -- Analyst

Okay. And then just a follow-up, I guess, on the capping of the RD&E and the restricting of the CapEx. Is -- does that implicitly mean you're capping your order intake at around this 1.1 level 1.2 level that you've been at the past couple of quarters?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Not necessarily. We are not talking about headcount capping here. We're talking about the cost capping. And we are also looking to the efficiency enhancements of the organization. We have an enormous talented engineering pool here in Veoneer. But we have to remember that 3,500 of these people have been brought on Board over the last three years. We started with 1,700 people some years ago and worth -- we are now worth over 5,000. And it will be too much to ask for everyone to be 100% up and running with the full efficiency when you are on boarded so many people in such a relatively short period of time. So efficiency gains is one thing and also reviewing the footprint and how to utilize the resources more efficiently is another thing.

Joseph Robert Spak -- RBC Capital Markets, LLC -- Analyst

Okay. That's helpful. I guess -- the last question I had is, I just was wondering if you could shed a little bit more light on this line you had in the report about the speed of transition in Active Safety proven to be more difficult than you predicted. Do you mean customers are expecting more of you and want more advanced product than you anticipated? Or maybe you can just expand upon that statement a little bit.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Yeah. I think that is the case. I think that customers, as I alluded to just in the previous question here, customers are expecting more to be included in the current ongoing program because the industry and technology is evolving fast. And customer sees more opportunities and opportunity to squeeze in more for a specific car line to a specific start-up production. So we have seen that for a period of time.

We are also having quite complex programs here and there. We spoke that about also to the -- in the slideshow or Geely program here for instance where we are system integrator -- integrating several more components, several of -- or even have competitors' components and also a decision-making software from Zenuity. And these are complex programs and is that a program that we should point to that we are getting more complex. I wouldn't do that specifically on the programs, but in general, the complexity of the programs are somewhat better than originally anticipated.

Joseph Robert Spak -- RBC Capital Markets, LLC -- Analyst

Okay. Thank you very much.

Operator

Thank you. And the next question comes from the line from Steven Fox. Your line is up.

Steven Bryant Fox -- Cross Research -- Analyst

Thanks. Good morning. Just a follow-up on that last comment about the complexity of integrating your own and others' technology. You made a comment earlier in the prepared remarks about also investing in other new technologies and becoming more modular. Can you just sort of give us a hint as to whether that means that there is bigger adjustments coming to your technology road map in the future? Or whether you need to add core technologies, or in other ways, I would love some comments on that given everything else you talked about. Thanks.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

What we meant with that was that we're looking to a scalable architecture. When we see the industry trending more toward L2+ in a bigger scale, in a bigger volume, it is important for us and for everybody to have a scalable technology. Many of our programs that we are running today are directionally different, meaning that there are different product types that are including different architectural structure. And what we're aiming to do here is to define a better scalable architecture to gain better momentum, both of our engineering resources, but also financially, out of our technology. So that's what we've been with the changes of the technology and architecture.

Steven Bryant Fox -- Cross Research -- Analyst

And does that imply that you see a path to doing that with the current footprint you've mentioned on the R&D side? Or are there other things that you need to do?

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

No. I think that is -- what we can do that with the current footprint and we're doing that at the same time as we're going through the initiatives that we have been speaking about today. It will be also a corporation with our supply partners here that we will align on providing the different chip sets and the different drive chip sets into our technology. And of course, as always, a discussion very integrated with customers. So this will be what will take place now during 2019 and we will see the effect of that thereafter.

Steven Bryant Fox -- Cross Research -- Analyst

Great. Thank you for the color.

Operator

Thank you. The next question comes from the line from Adam Hurwich. Your line is open.

Adam Gabriel Hurwich -- Ulysses Management LLC -- Analyst

Good morning. Just a follow-up, and I don't want you to comment really on the capital rates. I just want to understand how we're thinking about it much more broadly. Clearly, when we spun out, we had different assumptions as to what the market will give us. Right now, the capital market seems to indicate that if we were to raise equity capital, it might be under punishing valuations. Should we assume that you're looking very broadly at the issue of capital? And if you are, and it's just doesn't work to access the markets, we can reconsider the corporate structure of the Company and open it up to all possibilities or options? Thanks.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Well, I don't think we are not yet at that juncture yet. We -- this is a question that could come at the very much later stage, we don't think so, we are now working along the lines of approaching the capital market for funding here. And we are aiming to do that as soon as possible, but apart from that, I don't have any other comments around it and I don't think that question that you have now is something we would like to do it.

Adam Gabriel Hurwich -- Ulysses Management LLC -- Analyst

Okay. Thank you.

Operator

Thank you. And the next question comes from the line from Chris McNally. Your line is now open.

Christopher Patrick McNally -- Evercore ISI Institutional Equities -- Analyst

Thank you, team. Two quick questions. And it's really around the thinking about the how to model the magnitude of the change on revenue and EBIT. So, I think, what we're all trying to figure out is, when we look at something like Q2, that the delta, the $15 million delta that you're talking about, it just seems more than sort of the shortfall in light vehicle production even considering mix, premium worsen in Europe. So could -- can you just talk about specifically where the delta versus expectations is coming from? Is it a specific platform? Is it take rates within some of the ADAS programs?

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

No. Mats can maybe fill -- as far as fill me in on details here, but it is mix changes. We're over represented on premium cars. You are seeing a decline from premium cars over the period of time behind us and we're seeing this continuing. We are seeing also that we are rolling off from certain platforms with certain of our products and it takes time before the new products are coming in. So it is following the same pattern as we have been talking about. And we are over represented on the platforms that are not performing well in this environment and that is hitting us more than the light vehicle production decline. I don't know if you have any other color, Mats?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

No. I think that covers it pretty much.

Christopher Patrick McNally -- Evercore ISI Institutional Equities -- Analyst

Okay. That's helpful. And then the second is, as we think about incremental, decremental margins, I think, one of the surprises when we look at the first half is that if you just even look at the change in revenue to the change in EBIT, it's almost 100%, and obviously, some is the ramping up of the R&D. But can you just talk to how we could think about the flow through? Do you have under capacity issues when -- specifically to ADAS, because even if things are better in the second half, what's the run rate loss that we could start to expect, meaning is there something other than volume that's running through sort of the $90 million loss and something that's bigger than that in Q2 for electronics?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Yeah. I would say, in general, we're talking about the two components and especially looking at the first half. I mean, if the volume that Jan elaborated on the background for the lower volumes in the first and into the second quarter, and I mean, that's creating the under absorption and we can see a gross profit effect from that as well. And I mean, also combined, if you're looking at the first quarter and so as I was touching a little bit on the working capital, for an instance, as we have been quite successful given seasonality in the first quarter when it comes to working capital. And one of the success factors is to manage our inventories. And if you are destocking in an environment like this it will also create some under absorption in this environment. So I think that's one point that needs also to be built in to this, the kind of the negative leverage on the volumes.

Secondly -- and the second item that you also need to remember, that's -- I'm coming back to the RD&E when we're talking about the higher rates. And if we're looking at net R&D in the first quarter $156 million and that's about $25 million higher and in the fourth quarter we will see a further increase in net RD&E in the second quarter before we can see that the run rate is going down so to speak into the third and fourth quarter. So that is also contributing together with the volume through the ADAS effects. So those are the two ones that I think you need to kind of consider.

Christopher Patrick McNally -- Evercore ISI Institutional Equities -- Analyst

And then is it fair to think about we -- when we get through this sort of as we -- business ramps, I think, you mentioned, 2019 -- second half of 2019 to 2021, can we think about the sort of an incremental margin that's sort of above traditional are because you have this RD&E level to start so call 30% to 40% of incremental revenue drops to the bottom-line, just thinking about how that EBIT loss progresses a year or two years out?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

I think it's very, very difficult to talk about the normalized incremental margin in this environment and you need to have the stabilization when it comes to the growth and also the capacity we are building. So I wouldn't get into that to give you any number here, because the volatility will be high when you have a ramp-up like we see today. And in -- during good times it will be at a high volatility in one direction and when we have some issues it will be in the other direction. So we need to come back with the kind of a normalized incremental margin when we see a stabilization. It's too early to talk about that now.

Christopher Patrick McNally -- Evercore ISI Institutional Equities -- Analyst

Okay. Great. Thank you, sir, very much.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Thank you.

Operator

Thank you. And the next question comes from the line from Joachim Gunell. Your line is open.

Joachim Gunell -- DNB Markets -- Analyst

Thank you. So just a follow-up question here. As you mentioned, Level 3 to Level 5 will take longer and costs more than originally anticipated. What implications in terms of industry interest has that for the Zenuity software perhaps? And with -- well -- and with that said in relation to the customer, you hope to land for being fully systems? Thank you.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

I think it is more of a priority question with Zenuity and how we prioritize the resources. Zenuity has around 650 people working for them with some 70 consultants including in that number. All of them extremely talented for both the way forward in L4 technology but equally also applicable for L2+. This is more about the priorities. We don't see any changes on customer interest or customer implications on this one. It's more like the industry is reprioritizing and redirecting its efforts now for driver support, advanced driver support that are to a much higher extent supervised by the driver rather than unsupervised in the long-term. We will unsupervised functions, but in a lower scale, in a lower level and those features will improve over time. And by doing so, you will create data and you will create good quality and robustness in the products.

Joachim Gunell -- DNB Markets -- Analyst

Okay. Final question then. I'm curious to hear your view. I mean, as your tech capabilities grow, how has that now changed your relationships with the OEMs in terms of how you work with them? Are you seeing any trends where, perhaps, OEMs are developing in-house solutions, for instance, for your Active Safety products?

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

I think it varies from OEM to OEM. You have OEMs today that have a lot of capabilities in-house and you have other OEMs with more limited capabilities in-house. So, it is as it has been in the past, with many technologies, there are differences on different levels of OEMs or different types of OEMs. We are working integrated, and I think, the whole industry, if you look to the environment, you see more integrated and more collaborations and integrated activities between OEMs -- between OEMs and Tier 1s, in particular, in the area of autonomous drive.

Joachim Gunell -- DNB Markets -- Analyst

Okay. Thank you.

Operator

Thank you. And the next question comes from the line from Erik Paulsson. Your line is open.

Erik Paulsson -- Pareto Securities -- Analyst

Yes. Hello. I was wondering about the current run rate for Zenuity. You've currently indicated it's around $15 million per quarter. What will it be during the remainder of 2019 and then can you say anything about 2020?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

I will not go into 2020. But looking at 2019 we are forecasting about $75 million.

Erik Paulsson -- Pareto Securities -- Analyst

Okay. For the full year then?

Mats Backman -- CFO and Executive Vice President of Financial Affairs

For the full year...

Erik Paulsson -- Pareto Securities -- Analyst

Great.

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Yeah.

Erik Paulsson -- Pareto Securities -- Analyst

Great. Thank you.

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

To be clear.

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Yeah.

Erik Paulsson -- Pareto Securities -- Analyst

Okay. Great.

Mats Backman -- CFO and Executive Vice President of Financial Affairs

But...

Operator

Thank you.

Thomas Jonsson -- Executive Vice President Communications and Investor Relations

Okay. As we have...

Operator

We have no further questions at the moment.

Thomas Jonsson -- Executive Vice President Communications and Investor Relations

As I can see we have no further questions on the line at the moment.

Operator

That's correct.

Thomas Jonsson -- Executive Vice President Communications and Investor Relations

All right. Then...

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Okay. Very good. I would then like to thank everyone for participating today in today's call and all for the very interesting questions. We will work full force ahead according to the strategy and the initiatives that we have outlined here in our earnings release. And we are looking forward to seeing you at conferences and road shows during the second quarter, and of course, in our next quarterly earnings call, that's tentatively planned for Friday, July 26th. Until then I wish you all a very good time. Thank you very much for today and participating. Thank you.

Operator

And that does conclude the conference for today. Thank you all for participating. You may now disconnect. Speakers, please stay on the line.

Duration: 54 minutes

Call participants:

Thomas Jonsson -- Executive Vice President Communications and Investor Relations

Jan Carlson -- Chairman, President, CEO and Acting Head of Business Unit Europe

Mats Backman -- CFO and Executive Vice President of Financial Affairs

Hampus Engellau -- Handelsbanken Capital Markets AB -- Analyst

Brian Arthur Johnson -- Barclays Bank PLC -- Analyst

Erik Golrang -- SEB Enskilda -- Analyst

James Picariello -- KeyBanc Capital Markets -- Analyst

Agnieszka Vilela -- Nordea Equity Research -- Analyst

Vijay Raghavan Rakesh -- Mizuho Securities USA LLC -- Analyst

Joseph Robert Spak -- RBC Capital Markets, LLC -- Analyst

Steven Bryant Fox -- Cross Research -- Analyst

Adam Gabriel Hurwich -- Ulysses Management LLC -- Analyst

Christopher Patrick McNally -- Evercore ISI Institutional Equities -- Analyst

Joachim Gunell -- DNB Markets -- Analyst

Erik Paulsson -- Pareto Securities -- Analyst

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