Nexteer Automotive Group Limited (1316) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Nexteer Automotive Group Limited 2019 Annual Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Investor Relations Director, Mr. Cameron Wang. Please go ahead.

Thanks, Elisa. Good day. Welcome, everyone, and thank you for joining us. Nexteer Automotive released the 2019 annual results Hong Kong time this morning. As you noticed, we moved our results announcement date from the middle of March to today as our originally considered travel plan. We thank you for your accommodation to the time change. Today, together with our 2019 annual results announcement, we also announced the appointment of Mr. Tao Liu, our company's Chief Operating Officer, as our company's President and Chief Operating Officer. Many of you have been very familiar with Tao as he had been with us and meeting with investors for quite a long time. Also joining us and presenting today will be our Senior Vice President, CTO and Chief Operating Officer, Robin Milavec; and Senior Vice President and CFO, Bill Quigley. Given the current COVID-19 situation in the U.S., specifically, Michigan state, today, we are all individually remotely connected from phone. We would like to have Bill first give us introduction of the new team, and then Robin and Bill will give the updates of business, financial and technology development of the company during the year 2019. After the presentation, we will remain available to answer your questions. Before I turn it over to Bill, there are 2 more reminders: one, today's presentation slides are available on our company's website under Investors folder, you may download it from there. Second, please be mindful of the safe harbor statement governing today's communication. Welcome, Bill.

Great. Thanks, Cameron, and welcome, everybody, today. Robin Milavec and I will be providing the review today. Obviously, our new President will be with us as well for Q&A at the end of our narrative. So just some quick background on Robin, as many of you have yet to meet him in person. Robin has been with Nexteer for 30 years and has significant experience, including positions in product engineering, manufacturing engineering, operations and quality. Robin was appointed as Senior Vice President, CTO and CSO in July of 2019, and is responsible for our engineering effort, product and process innovation, technology development and other R&D advancement initiatives. And Robin will be supporting us moving forward in our communications with external constituents. So for today, our review is segmented into 3 sections. Robin will first provide our 2019 business highlights, and I'll follow with a review of our 2019 financial results as well as the current year environment. Robin will then wrap up the review, sharing with you our view on -- perspectives on the future of mobility and the technologies and capabilities that Nexteer is focused on to drive further -- future opportunity and growth. So with that, I'll hand the call over to Robin.

Thank you very much, Bill. I want to start by saying that as we speak to you today, we find ourselves in a very different world than even just 1 month ago. Our priorities in the near term have very much shifted to protecting our employees and protecting our company. I can assure you our leadership team is focused and working together to address these priorities. With that in mind, I'd like to look back and take you through an overview of full year 2019. Let's begin with a few relevant headlines. We completed 2019 with product quality and reliability at historic highs, thanks to a refinement of our global bill of design and bill of process and, specifically, increased adoption of process traceability in our manufacturing facilities. We secured our full-size truck Rack EPS steering for the third consecutive generation at the U.S. domestic big 3, achieved the #1 global market position in the Rack EPS product line, and extending that segment dominance to electric vehicle trucks and midsized trucks, as we'll see a little bit later. 50% of new business booked was Conquest, meaning that business was taken from global competitors who are already tooled and in production. We also maintained 100% of all incumbent positions globally for the second consecutive year. We'll look at backlog in a moment where we surpassed our previous high to complete the year at $26.4 billion. EPS unit delivery reached 8.5 million units. Column and intermediate shaft breakthrough wins at GM and Ford, with key new business awards in all regions, North America, Europe and Asia Pacific. Driveline secured a key win with a premium European OEM. And finally, we completed our EPS portfolio with our first win with dual pinion EPS products. Overall, it was a very strong year in terms of new business bookings, including product and regional expansion. Our 6 strategies for profitable growth remain unchanged. I'm not going to speak to each of these right now, but I'd like to highlight some of the steps we're taking to strengthen technology leadership later in this call. Full year highlights begin with the successful launch of 45 major new programs across multiple product lines, regions and customers. This next graphic reflects the diversity of launch activity, covering every vehicle segment from A through full-size truck in every region of operation. You'll also note the breakdown of Conquest business, which is shown in red, versus incumbent business shown in green. While many of the Conquest launches in 2019 are smaller-scale programs and Asia Pacific-based, we value the increased customer and regional exposure that it brings with it, longer-term opportunity for our growth. I'd like to highlight that we closed the year with an order-to-delivery backlog of USD 26.4 billion in spite of a significant reduction of industry demand. Q1 2017 was our previous high point for our backlog at $26.2 billion. In 2018, we completed the full year at $25.2 billion. We completed 2019 with a backlog at a slight increase and a new high of $26.4 billion. As you can see, backlog composition now reflects a 69% EPS product line exposure and 54% North America regional exposure. Our top 5 customers account for 88% of the global backlog. The company completed 2019 with 50% of new business booked as Conquest. This is a significant accomplishment that is unique to Nexteer in the global steering industry. The total value of Conquest wins delivered in 2019 exceeds $3.5 billion. This slide shows 9 examples referenced by customers and product types. While each competitive Conquest is unique, I'd highlight 4 dominant reasons for our success: First, we've demonstrated world-class capabilities in product and process technology. Second, product quality and reliability, as measured by our customers, has been excellent and it continues to improve year-over-year. Third, we listen to our customers to understand what each individual customer values. Having been a global OEM ourselves and the only Tier 1 in our space who can say this, we recognize the power of responding to customers' needs with agility and a positive attitude. Fourth and finally is flawless execution in both the development and the launch phase that's valued by all of our customers and is a competitive advantage. As a reoccurring theme, we've continued strategic expansion of our product portfolio and global footprint. Let me highlight 2 examples of product breakthroughs. For some time now, we evaluated the merit of expanding our EPS product portfolio to maximize opportunity for ongoing Conquest success. Last year, we were awarded our first dual pinion product program with a European OEM. We're currently pursuing other opportunities with this portfolio entry in order to build scale and enhance profitability. With the implementation of dual pinion, it will complete our EPS portfolio, adding to the rack-based, column-based and single pinion-based EPS products. Next, I'd like to highlight several breakthroughs in the Driveline product line that have enabled success on multiple fronts. We've shared many new technologies with customers and have seen rapid acceptance, and I'll show you 4 of those examples here in a moment. Our transformation of Saginaw Driveline operations continues to advance, and I'll talk a little bit more about that in detail. The Morocco manufacturing footprint represents a significant change for Driveline as we returned to the European market to support our global customers and pursue additional growth opportunities. Regarding Driveline, electric vehicle architecture is driving changes in that technology. EVs are typically heavier and much quieter than an ICE engine vehicle. These characteristics are requiring lighter, stronger and more durable Driveline components, at the same time, demanding high-efficiency and outstanding NVH performance. This slide shows 4 examples of breakthrough technologies, specifically tailored to the unique demands of electric vehicles. The first is parametric trunnion tripot. This innovation doubles the durability life of the joint, thus allowing the use of smaller and lighter-weight joints. Second, high-efficiency 8-ball fixed center joint. It reduces our mechanical losses by 50% in supporting electric vehicles' requirements for ultrahigh efficiency. Third, CrossGlide 8-ball plunging joint was developed specifically for high torque, rear-drive vehicles. Its outstanding NVH characteristics make it the ideal choice for rear-wheel drive EV applications. And finally, monobloc tubular shafts. Their one-piece hollow axle design make them lightweight and strong. They're an outstanding choice for both front and rear-drive electric vehicles. Our approach to globalization is now evident in a best-cost country footprint that now includes 28 manufacturing locations. The map continues to evolve, and I'd like to highlight some of the changes that we implemented in 2019. Five new sites were completed in 2019, and all are now online. In the interest of time, let me highlight just 2 sites today. Our manufacturing facility in Kenitra, Morocco has come online quickly to capture market opportunities in both steering and driveline. We're thankful for the market acceptance we found from customers and the strong support we've received from local government. Customer programs booked will already fill this 10,000 square meter plant. Our first product launch was delivered in quarter 3 last year, and we will have a new launch every 3 months for the next 18 months. Similarly, we celebrated the opening of a substantial technical center in Suzhou Industrial Park in January. This 33,000 square meter facility houses research and development, laboratories, test tracks, offices and much more. The tech center will support regional growth in Asia Pacific and serve as the global product line center for column-based EPS. The center will enable regional ownership of our comprehensive global engineering processes as well as serve as Nexteer's Asia Pacific division headquarters. Over the years, we've spoken about the way we value our technical capabilities and seek to maximize engineering bandwidth. This facility is an example of the continued globalization of our engineering expertise to capitalize on growth opportunities, enhance customer responsiveness and drive efficiencies. Another reoccurring theme is our continued focus on operational efficiency and execution. In the interest of time, I will highlight just one example: the transformation of driveline operations at the Saginaw, Michigan site. This year will be our third year of transformation on this site. With much of the planned outsourcing now complete, this year, we are transforming machining and assembly operations. Our detailed plan brings the proven bill of design, bill of material and bill of process that has been successful in regional sites back to Saginaw, and requires the relocation of more than 1,100 different machines. Our end game will be to improve operational efficiency to the point that we can consolidate 2 plants down to 1. Ultimately, this project will impact more than 3,900 different part numbers. Throughout the year, Nexteer received a range of recognitions for work completed. Rather than speak to each one, I'd like to highlight 4 general themes. Excellence in manufacturing and product quality, corporate social responsibility, innovation and after sales. Further awards in product quality, multiple recognitions for being a great place to work, recognitions for customer responsiveness and participation with content on the North American Truck of the Year, which was the Jeep Gladiator. I'll also mention we were recently informed that Nexteer will receive the 2019 GM Supplier of the Year award. I'll pause here and invite Bill Quigley, our SVP and CFO, to take us through the details of full year financials. Bill?

Thanks, Robin. First, I will review with all of you our 2019 reported financial results and then end on the unprecedented current environment we are all witnessing and navigating through as nations around the world take aggressive steps and measures to contain the COVID-19 health crisis. As Robin commented, our first priority has been to make every effort to protect our people, and we trust all of you participating on our call today are safe and healthy as well. Macro factors, including currency and lower global OEM production across all markets served led by the second consecutive year of lower production demand in China provided revenue headwinds during the course of the year. And as we've previously shared with you during our 2019 interim update, the GM platform transition from K2XX to T1XX further impacted our Columns product line revenue comparison. And then finally, the 40-day GM UAW strike in the third quarter and fourth quarter of 2019 had a significant impact on our Saginaw and Mexico operations. So all of these factors combined contributed to a decline in our 2019 revenue compared with the prior year. The lower revenue environment impacted both our absolute earnings and margin performance in 2019 with our net cost savings initiatives only providing a partial offset. Our 2019 financial results also included increased depreciation and amortization expense related to impairments of capitalized product development and related assets of about $26 million associated with several China local OEM programs, which I'll review in further detail. Yet, as Robin highlighted, while we needed to navigate a challenging 2019 environment, we also maintained our eye on the future and ended the year on a strong footing with record customer bookings and a growing backlog. And at the end of 2019, the balance sheet remains strong, one measure being our net cash position of $233 million, which will serve us well in the current environment. This slide provides comparisons of our key financial metrics as reported in our annual accounts. Revenue of $3.576 billion was lower than the prior year by $336 million or 8.6%. EBITDA of $525 million was lower than last year by $95 million, with margins slipping by 110 basis points, reflecting the impact of lower revenue. Net profit attributable to equity holders of $232 million was lower by $148 million, with margins slipping by 320 basis points, a result of lower EBITDA as well as higher D&A in 2019 as well as a nonrecurring income tax expense benefit of $27 million we recognized in 2018. Free cash flow of $118 million was lower than -- for '19 was lower than 2018 by $191 million. Yet, I'd make one observation on our free cash performance here. In our year-end 2018 update, we highlighted an early trade receivable collection from a North American customer of about $53 million, which benefited our 2018 free cash flow performance. This collection was scheduled to be received in January 2019 under normal payment terms. So adjusting for this cash receipt timing between the 2 years, our 2019 free cash flow would have been $171 million compared with $256 million for 2018, providing an adjusted year-to-year comparison of $85 million, largely driven by lower EBITDA performance in 2019. Yet, of course, on a combined basis, our strong cumulative cash flow performance of $427 million would remain unchanged. Our financial performance in both 2019 and 2018 was impacted by several significant and nonrecurring items, which are highlighted on this slide. In 2019, the GM UAW strike negatively impacted our North American revenue and EBITDA performance by $121 million and $39 million, respectively. GM did note in their own commentary that given their own capacity constraints, they were not in a position to recover production loss during the strike period in the remaining months of 2019. And in 2018, our reported net profit included a nonrecurring income tax expense benefit of $27 million resulting from our favorable U.S. R&D tax credit and related deductions initiative we completed at the end of that year. And while this benefit was recognized in 2018, this amount represented the cumulative benefit to tax years prior to 2018. So adjusting for these 2 discrete nonrecurring items, this slide provides a view of Nexteer's comparative financial performance. Adjusted 2019 revenue would be higher by the impact of the GM UAW strike with our year-over-year performance favorably impacted by 310 basis points compared with our reported results. Adjusted 2019 EBITDA would improve to $564 million, reflecting the earnings impact from lost production related to the GM strike, with margin rising by 60 basis points to 15.3%. Moving to our net profit comparison. These 2 discrete factors account for $58 million or almost 40% of the year-over-year comparison. $27 million related to the 2018 nonrecurring income tax expense benefit recognized as well as a tax-effected earnings impact from the GM strike in 2019 of $31 million. And lastly, free cash flow would have been higher adjusting for the earnings impact of the GM strike. So this view is just to share some perspective of the impact of these 2 significant nonrecurring items on our comparative financial performance. This slide highlights the key drivers behind our revenue comparisons. You'll note here, currency accounted for $56 million of the comparison, reflecting the continued strength of the U.S. dollar against both the RMB and euro during the course of the year. The downturn in the China market lowered revenue by about $100 million as China OEM unit production fell a further 8.5% in 2019 compared with the prior year, with several of Nexteer's customers, SGM Wuling, SAIC GM, DPCA, as certain examples, experienced significantly higher declines in production compared with the overall market. The GM K2XX to T1XX platform transition lowered our Columns revenue by $128 million in 2019 as well. The GM strike resulted in loss revenue in North America of $121 million in the second half of 2019. And finally, favorable volume and mix, principally in North America, more than offset customer pricing, providing a $69 million net benefit to revenue. Strong program value in North America with both Ford Ranger and Everest programs, CD6, Explorer, the U22X, U55X platforms, Expedition, Navigator and certain GM platforms, the Acadia and Traverse platforms, in particular, were contributing drivers of that net increase. This slide provides a view of our revenue by region. North America revenue of $2.449 billion was lower than 2018 by $176 million, with the combined impact from the Columns platform transition and GM strike of $249 million, being partially mitigated by stronger volumes across several Ford and certain GM platforms. Asia Pac revenue of $643 million was lower than 2018 by $139 million, with foreign currency accounting for $27 million. Lower industry volumes, including below-market performance across several of Asia Pac's key customers as well as pricing accounted for the remaining comparison. EMEASA revenue of $484 million was slightly lower than 2018 with unfavorable currency, the most significant headwind here, of $29 million. While overall OEM production volumes in both Europe and South America were lower year-over-year by plus 4%, stronger volumes of PSA from new program launches, including an EPS launch in Morocco, more than offset the overall lower demand environment. So let's turn to our product line revenue comparisons. You'll note here, EPS revenue of $2.409 billion was lower than 2018 by $116 million or 4.6%. While North America revenue was slightly higher in 2019, even after taking into account the impact of the GM strike, shortfalls in Asia Pac customer demand was the principal driver of the comparison. Our Columns revenue of $496 million, lower than last year by $150 million with the GM platform transition and the impact from the GM strike being the primary drivers of that comparison. HPS was lower year-on-year by $19 million, reflecting the expected decline in demand given the life cycle maturity of this product line, with GM being the largest customer. And then lastly, Driveline revenue of $533 million was lower than 2018 by $51 million, reflecting lower demand in both North America and Asia Pacific, with North America performance really impacted by the GM strike. This slide provides the drivers of year-over-year EBITDA performance. Currency was unfavorable $15 million, reflecting both continued strength of the U.S. dollar during the course of 2019 as well as the nonrecurrence of certain transaction gains we did recognize in 2018. You'll note here the Columns platform transition and GM strike combined further impacted the year-to-year comparison by $72 million. Other volume and mix, including the impact of lower Asia Pac revenue, customer pricing were only partially mitigated by net cost performance savings, including our material and manufacturing efficiencies. So let's turn to our regional EBITDA comparisons. North America EBITDA of $340 million was $63 million lower than 2018, of which $39 million was attributable to the GM strike. Stronger customer schedules and net cost performance partially mitigated the impact of the Columns platform transition as well as customer pricing. Asia Pac EBITDA of $137 million was lower than 2018 by $30 million. Our Asia Pac team did defend the margin profile of the segment with net cost actions achieved partially mitigating the impact of a lower revenue environment, resulting in only a 10 basis point reduction in margin compared with 2018. EMEASA's EBITDA of $56 million, only slightly lower than 2018, with the continued improvement of margin rising by 10 basis points to 11.5%. I'd note the underlying performance of the segment, both in absolute dollars as well as margin, was much stronger, given 2019 bore about $8 million of incremental facility and launch costs associated with the ramp-up of our Morocco operation. This slide provides a bridge of our reported EBITDA to operating profit and net profit for both 2018 and '19. As I noted in my opening comments, in addition to lower EBITDA performance, our operating profit in 2019 was further impacted by an increase in depreciation and amortization expense of $56 million, driven largely by 3 principal factors: the adoption of IFRS 16 lease accounting at the beginning of 2019 increased D&A by about $12 million. We did impair $26 million of capitalized product development costs and capital associated with a number of China local customer programs, where we determined that the associated revenue and earnings to be derived from these programs were not sufficient to recover our capitalized costs, the largest being several programs with GAC that were initially scheduled for export to the U.S., which have either been suspended or canceled in light of the various tariff regimes that had been initiated between the U.S. and China. The remaining increase in D&A of $18 million, I'd characterize as ordinary course, as we continue to launch customer programs and commence amortizing capitalized costs to match the revenue stream. So if we move to net profit, you will note that income tax expense of $29 million was higher than 2018 on lower pretax earnings. That's exclusively a result of the $27 million nonrecurring tax expense benefit we recognized in 2018. So if we were to adjust for this nonrecurring benefit, our effective tax rate for 2019 of 11.1% is below the adjusted rate of 12.9% in 2018, reflecting lower pretax earnings in higher statutory rate jurisdictions. So let's move to cash flow and the balance sheet. This slide highlights our free cash flow performance as well as our key balance sheet metrics. Cash from operating activities of $491 million was lower than last year by $122 million, largely reflecting lower EBITDA as well as the timing of trade receivable collections between the years previously highlighted. Investing activities of $373 million were higher than 2018 by $69 million, reflecting largely the timing of cash settlements for capital purchases of about $42 million as well as increased capitalized product development costs of $23 million. And while free cash flow was lower, you can see from the metrics on the right of this slide that at the end of 2019, the balance sheet remained in great standing. We ended 2019 with a net cash balance of $233 million, and our leverage remains minimal. And given the strength of the balance sheet, in early January, we elected to pay off early the remaining XM acquisition debt of $60 million, using a combination of cash on hand and borrowing from our U.S. ABL credit facility. And all things considered at that time, given interest rate spreads, we had expected this early payoff to lower our interest expense by about [ $1 million ] in 2020. So our engineering and product development and capital spending investment is highlighted on this slide. Year-to-year, we increased our combined investment by about 9.7% compared with 2018, with the increase in spending as a percentage of revenue largely driven by the revenue headwinds we experienced in 2019. On the engineering and product development front, and consistent with prior years, more than 75% of the spend is in support of customer program application development and cost improvement initiatives, with about 72% of the spend in support of furthering our EPS product line. And at the end of 2019, we had approximately 2,400 engineers globally representing an increase of about 11% when compared with 2018, of which about 40% of that increase reflected our continued focus on bringing our Bangalore, India software center fully online. And at the end of 2019, India staffing stood at about 200 software engineers. And Robin will further highlight where we are investing and focusing our engineering resources in his closing review as well. So turning quickly to our capital investment. The increase in 2019 of $20 million is largely a result of incremental investments of about $30 million to support both our new Asia Pac technical center in Suzhou and the buildout and equipping of our Morocco operation. Our capital allocation priorities remain the same highlighted here. We continue to maintain a disciplined approach to investment, optimizing our cash flow performance to service our capital structure and to provide a reasonable and ongoing return to our shareholders, while continuing to scan the landscape for potential inorganic opportunities. At our Board of Directors meeting concluded over this -- just last weekend, the Board has proposed a 2019 dividend of $81 million to be approved by shareholders at our June 2020 Annual General Meeting. This represents a 35% payout ratio of our reported 2019 net profit. So at the onset of the COVID-19 outbreak in China, we immediately organized a global task force to closely monitor the situation and take action, the first priority being accounting for and taking care of our people. We also worked very closely with our customers and our suppliers to ensure a coordinated approach to demand requirements and potential supply chain challenges. Our China operations are back online, our employees are safe, and we have met all customer production needs, albeit demand remains low. We remain thankful to all of our colleagues who worked day in and day out to achieve this outcome. Yet, we are now faced with the same situation across the broader business, with Europe and North America facing similar challenges and taking the necessary actions to contain this pandemic. Many of our OEM customers in Europe, North America and South America have currently suspended vehicle assembly production. Outside of China, many of our facilities have significantly reduced or suspended production in alignment with customer production schedules. And while we are taking cost actions, given the current environment, the company's first half 2020 financial results are expected to be significantly lower compared with the same period in 2019, yet we're still unable at this date to quantify the total financial impact arising from this very clear health crisis. Yet while the environment is very challenging and will continue to be for the near term, history serves as a reminder that this health crisis will ultimately pass. Yet at this juncture, no one can reasonably project a firm exit date, given the fluidity of the situation, nor what the demand environment may provide post. We also recognize the need to keep our eye on the future and place ourselves in the best position possible to participate in the post-crisis recovery. How we intersect with the fast-paced megatrends underway in the automotive industry for the longer term does remain a critical focus for all of us. And I'll turn the call back to Robin to provide a perspective on how we are working to leverage our capabilities and know-how to actively participate and lead in the future of mobility. Robin?

Okay. Thank you, Bill. I would now like to take a more detailed look at technology leadership at Nexteer. It's this technology that aligns with the automotive industry megatrends that will continue to drive our future growth. This slide summarizes our technical development priorities. On the left-hand side of this chart are the strengths that we strive to deliver and are frequently recognized by our customers. It starts with deep technical competency, rooted in our systems expertise and vehicle integration skills. The fully integrated knowledge of the software, electronics, sensors, motors and mechanical hardware allows us to provide high-value optimum system solutions for our customers. Next, responsiveness, fueled by our culture of customer focus and solution-oriented development processes. And finally, trust and relationships. The strength of our technical culture built on the foundation of trust and highly interactive relationships with our customers. On the right-hand side of the slide are strategic elements we intend to accelerate in order to drive exceptional technical capability and business growth. First, globalization and rotation. We know we are most efficient, most responsive and most effective when we perform our engineering development close to our customers, close to our manufacturing facilities and close to our supply base. As a result of a steady and deliberate strategy to build competency in our global technical centers, you've witnessed our path to globalization. We currently perform 3/4 of all engineering development work within the division that generates the revenue. Our aim is to work locally and coordinate globally. Next, systems and software capacity continues to be a critical area of focus, as the content and requirements for electronics and software within our products grows exponentially. To address this need, we recently opened a software center in Bangalore, India. Today, we have 200 software engineers at this center, supporting our global technical centers with software development and validation. Finally is value through efficiency. In today's competitive landscape, an important advantage that we will leverage is the efficiency of our technical development. We are rapidly employing tools such as modeling, simulation and virtual reality to drive efficiency and speed to our technology development process. At the same time, we're highly focused on our product architecture to standardize elements of our products and processes to drive massive scale and efficiency. In the next decade, the automotive industry will face a magnitude of change that has not been seen in over a century. This change will be driven primarily by 4 mutually reinforcing megatrends: electrification; mobility; software; and connectivity. This industry trend is known by many different names, one being CASE, standing for Connected, Automated, Shared and Electric. BMW simply calls it the software-defined vehicle. We make a point to systematically map Nexteer's product portfolio and technology against the industry megatrends. Starting with Driveline, you can see that even our most mature mechanical product has a significant role to play in the megatrends. Related to electrification, the Driveline focus is on NVH performance and efficiency. In the Column and intermediate shaft product line, they are also covering many of the megatrends and of special note is the development focused on high travel stowable columns and Quiet Wheel technology in support of autonomous driving vehicles. Then, starting with EPS product line, you can see the full alignment of technology development across all relevant megatrends. As you progress down the chart, steer-by-wire, research and development and the joint development work with our JV partner, Continental, all have increasing levels of focus on megatrend technology. Electrification in the auto industry. It's all around us. There are literally hundreds of electric car startups globally with a large portion of that concentrated in China. Electrification is here. It's a challenge for the industry, but also a significant opportunity, especially for companies like Nexteer that have a proven track record of competency in this area. Nexteer's electric power steering product line is a significant player in the electric vehicle market, with its numerous contracts with OEMs globally. Our EPS technology seamlessly integrates with the electric vehicle architecture. We see the trend of heavier vehicles due to the battery weight, which leads to higher steering loads. Nexteer is well positioned with our industry-leading Rack EPS product line to support this developing market. A new frontier in the EV market in North America is the full-size truck segment. As you know, Nexteer is already the dominant provider of EPS solutions to the North America truck market. And as OEMs have announced electric versions of these full-size trucks, we are naturally their partner of choice. There are 3 photos on this slide. One is an example of a future Ford F-150-based EV truck. The next photo is an example of a future Chevy Silverado-based EV truck. And finally, GM recently announced the reintroduction of its nameplate Hummer for another one of its electric vehicle truck brands. We are proud to have the opportunity to work with these and other OEMs on these exciting new electric vehicle platforms. This is an example of our newest power pack design. It's a holistic integration of state-of-the-art brushless motor technology, leading edge cybersecurity, redundant electronics and sensors and safety critical software and hardware components. It's compact, fast and powerful. This new power pack highlights the value of owning the technical competency associated with all the critical elements. It's through this competency and expertise that we are able to integrate all elements into an efficient, high-performance package. This power pack features dual microprocessors, each with an integrated watchdog core. It has leading-edge cybersecurity capable of 256-bit encryptions, very similar to that of an iPhone 11. But unlike an iPhone, this power pack will manage significant power output and thermal load, equivalent to approximately 50% of a typical consumer clothes dryer appliance. There's additional proprietary intellectual property and competitive advantages associated with this power pack. I'll be able to disclose more of this once this product launches in the fourth quarter of this year. Next is steer-by-wire. It's an important future technology that spans across numerous megatrends. We view steer-by-wire as a technology that supports advanced vehicle safety and performance. Relative to vehicle safety, automatic emergency steering is becoming more desired and perhaps even required in the future, especially since it's called out in the Euro NCAP 2025 safety rating standards. Steer-by-wire technology eliminates the mechanical connection between the road wheels and the handwheel, thus allowing seamless and safe execution of emergency steering maneuvers. Steer-by-wire also integrates ideally with ADAS Level 5 technology and with other chassis systems, such as brake-by-wire. The technical demands of vehicle autonomy grow exponentially with increasing capability. When it comes to ADAS Level 4 and Level 5 technology, Nexteer has partnered with North America's leading OEMs where we remain the #1 steering supplier. These vehicles demonstrate full autonomous operation and some don't even have a steering wheel or pedals. Our elite supplier status with GM and Ford allow us to partner with them on the newest technology introductions. Our electric power steering solutions provide these vehicles with the safety, performance and reliability necessary for such demanding applications. In addition to the automotive ADAS market, Nexteer is paying close attention to other developing markets for this technology, namely autonomous people and goods mobility vehicles. These types of vehicles will likely lead the early adoption of Level 5 ADAS technology due to their lower speeds, reduced regulatory demands and highly controlled and managed travel routes. Nexteer will be showcasing our partnership with CNXMotion, Continental and others on an automotive, autonomous people mover project. Nexteer will be providing the steering actuators, software and integration of steering systems for these shuttles, and CNXMotion will be performing the steering and braking functional integration. The other non-automotive ADAS market is the goods delivery market. These are also fully autonomous driverless vehicles. It's an opportunity for early introduction of Level 5 electric power steering systems that are foundational and scalable for the more stringent automotive use cases of the future. The market segmentation is driven by retail goods distribution, think of companies such as Amazon and very large grocery chains. This market segment is focused on last-mile delivery. The second largest segment will be food and beverage delivery, which include companies involved in processing raw food materials, packaging and delivering them to retail outlets. We consider this market segment middle-mile delivery. There are also several vehicle segments to consider based on the payload capacity of the vehicle. By far, the largest segment are the larger vehicles capable of delivering cargo in excess of 50 kilograms. Much of our development work in this area has been in partnership with Nuro, who is targeting both the retail market category as well as the greater-than-50 kilogram payload market. This intersection provides the best opportunity for larger volume programs in this market. While we continue to develop product solutions for the conventional automotive market, we see opportunity here for product synergies and early introduction. This industry is projected to grow by nearly 10x over the period between 2017 and 2024. To put all this technology in terms that might be a little more tangible, let's look at it in context of our backlog. 28% of the EPS backlog is a result of products that have ADAS Level 3 through 5 technology. Think of this as EPS content that enables features such as lane keeping assist, parking assist and other functions. Looking at Nexteer's complete backlog, including all product lines, 17% is related to product technology that supports the electric vehicle applications. This is solid evidence that the alignment of our technology to the industry megatrends is resulting in future revenue streams associated with ADAS and electrification. One of the megatrends that cuts across all others and is a driving force behind autonomous, connected, electric and shared vehicles is software. According to a recent study by Accenture, by 2030, software will account for 40% of the value of an automobile. That compares to just 10% in 2015. This trend is fully represented in the steering system as we see the demand for increased safety, performance and new autonomous features such as lane keeping, auto-park, et cetera. In fact, our next-generation steering system will carry over 10 million lines of software code, making them safer, more efficient, more connected and higher-performing than ever imagined. These next charts show how Nexteer has evolved its technical talent to differentiate ourselves through product capability and capitalize on these megatrend opportunities. Only 10 years ago, Nexteer was primarily a mechanical company, with most of our revenue generated from mechanical products such as Driveline, Columns and Hydraulic Steering. At that time, only 21% of our engineering competency was dedicated to systems, software and electronics. Today, we've gone through a transformation and continue to advance. In 2020, nearly half our technical talent is focused on systems, software and electronics. In fact, in the past decade, we've tripled our engineering budget and increased technical capacity by 700% in this critical area. This expansion is evident in the new software center in Bangalore, India. It's also evident in our technical centers in Poland, China and the United States. We've built a solid foundation that will allow us to meet the technology challenges and opportunities that lie ahead of us. In summary, I've described how the advanced technology being developed by our highly skilled team is aligned to the industry megatrends of electrification, ADAS, software and others. By keeping a close eye on the industry trends and aligning the technology development within our core competencies, we're able to generate significant innovation and value. This is a key factor that allows us to compete and conquest new business within this rapidly evolving market. To wrap it up, our 6 strategies for profitable growth remain unchanged. Technology leadership continues to be the focus of Nexteer. As we align our core competencies, our culture and customer service with emerging megatrends in the industry, we find numerous opportunities to drive and enhance stakeholder value. With that, I want to thank you for joining us today, and I'll turn it back over to Cameron.

Go ahead, Elisa.

[Operator Instructions] The first question today comes from Rebecca Wen of JPMorgan.

This is Rebecca from JPMorgan. And I hope you are all safe and well. So also congratulate to Mr. Liu on the new role. A few questions from me. First is that IHS recently cut its global production forecast to minus 12% this year, which is worse than the decline during the 2008 great financial crisis. First of all, what's our view on this latest forecast from IHS? Do you think it's potentially too bearish? And hypothetically, if this year really ends up at minus 12% globally, which means North America at minus 14% as IHS forecast, how should we think about our sales and margin in such a scenario? And secondly, it's about potential M&A opportunity. I believe this is definitely our strength with ample net cash on hand in the difficult environment. Do we have any early evidences that any of our competitors may be facing cash flow issue and potentially could be an acquisition target? And lastly, on the dividend policy. It is encouraging to see that we have lifted our dividend payout from previous 20% to now 35%. Can we expect similar level of payout going forward, if there is no major M&A?

Thanks, Rebecca. It's Bill. I appreciate all the questions and the commentary on health and safety, and we hope it finds you the same. With respect to IHS forecast, you're right, they're doing forecast now, I think, every 2 weeks, given the fluidity of the situation. And to your point, obviously, globally, taking down from their prior forecast about 12.3% -- or to the prior year, about 12.3%. You'll note the pressure point really is largely in Q1, which is somewhat going to be behind us very quickly here, but into Q2. And then you see kind of a gradual downdrift, if you will, in Q3 and Q4. I guess, just a couple of perspectives. It's difficult to really say with any certainty what a full year is going to look like with respect to vehicle demand, not only in North America but around the world. Certainly, in first 2 months of 2019 (sic) [ 2020 ], we saw a fairly significant pullback, if you will, in our Asia Pac business, obviously, in January and February. In March, we've seen some uplift, but I would say demand still remains pretty low. So we've got to get the consumer, at least in China, kind of back on track, if you will, with respect to demand over time. I think if you go to the North American business as well as Europe right now, I'll start with Europe first. I mean countries are in containment across Europe. Our customers obviously are complying with those mandates and measures as well as what we're doing here in North America. So I think it's difficult for us to assess what the full year may look like. We're managing through the weeks, the days, the weeks, given production suspension, if you will. So I think it remains to see what happens from an IHS perspective or ultimately just from a demand perspective. Second question, M&A opportunities. I think we've been focused more on, we're ensuring that our supply chain stays warm, that our employees are safe. Many of them, from a salary perspective, are working from home. Certainly, we've had to take manning actions with respect to our manufacturing facilities. And so obviously, those actions continue to go underway. Will there be M&A post this? I think that remains to be seen. And again, we'll monitor that. But again, our first priority is managing through a pretty significant environment. And we'll keep focused on that, but today is today, and we're working through what we see in the near term. Last but not least, dividend policy. We had a good discussion over the weekend. You can see what the Board has proposed to take forward to our AGM. I would suggest probably that level of payout ratio may be the ratio we set moving forward, but that will also be dependent, to your point, on whether there are other investment opportunities that we see in the marketplace which may adjust that accordingly. Thanks, Rebecca.

The next question today comes from Tim Hsiao of Morgan Stanley.

Congratulations on the new appointment and also the record order backlog. Just 2 quick questions. The first one is, just a quick follow-up question regarding the impact from the COVID-19. I know there are still a lot of uncertainty. But what kind of production suspension do you think is manageable by just simply reducing the shifts or shutting down the lines temporarily? And what length or scale of the shutdown period, for example, like a 2-month or 3 months, which requires Nexteer to seriously consider potential adjustment to the head count, CapEx or more proactive cost control measures? So that's the first question. And my second question is about the order backlog. I think we just shared a very strong order backlog. But do we need to mark-to-market? I mean do we need to adjust the backlog a month due to the current market dynamic in the following quarters? And do we see any potential risk regarding the potential pushback of the new model launches? Because we saw that already happening in China, but just not sure if that could be a key challenge or a problem throughout the whole world.

All right, Tim, thanks. It's good to hear your voice. With respect to your first question, I think depth and duration is always the 2 points that you need to monitor in these types of environments. Certainly, in April, we're going to see a depth both in Europe and North America, just given what's happening on the national side of the house, if you will. So we're working closely with both North American customers as well as European customers on those production plans, so on and so forth. We've been modeling a number of different scenarios, just like everyone is, and it's not necessarily to share with this group, but a significant downturn of multiple months puts everything in a different light. I think in the nearer term, we are already, Tim, deferring capital. We're cutting discretionary spending. We're -- again, we've had to take manning actions in our plants. For example, in the U.S., unfortunately, our hourly employees are on temporary layoff. As an example, we do that around the world, working with, I'd say, the various countries' requirements with respect to pay and benefits. So we're taking all of those actions and, quite frankly, have been taking those for the last couple of weeks. So we'll continue to push forward on that. But again, duration is important. As duration goes on, with respect to maybe no production or very limited production, we'll continue to have to take opportunity, I don't say opportunities, that's a bad word actually, to take additional levers moving forward. But at this point in time, we're monitoring very closely all of our teams around the world, very focused on the current spend levels, again, deferring capital, deferring other discretionary investment, really kind of keeping it very tight to the vest with respect to what we need in the current environment to spend to just, I would say, keep our operations warm. With respect to the backlog, you're exactly right. We certainly have not taken any time to assess what the backlog might look like from a production perspective. As you know, Tim, this backlog goes out many, many years, depending on the platform -- or the customer and the platform within the customer. I think in the coming quarters, we believe there are going to be program deferrals. There may be cancellations. So that's going to be a natural outcome moving forward with respect to dealing with this significant dislocation. But to date, we don't really know of many that impact us currently. But it would just be hard to imagine, depending on, again, duration that some programs that might slip into 2021 that may have been scheduled, for example, even near term for launch in 2020. But it remains to be seen, Tim, and I would just be providing conjecture versus a educated opinion with respect to what OEMs may or may not do in the coming months. Thanks.

The next question comes from Longjin Li of Goldman Sachs.

So first, is it possible to give us a bit more details on your key customers' latest status and production plans in North America such as GM, Ford, FCA, et cetera? And also regarding the situation in China, the demand recovery now seems quite encouraging domestically. So can you please comment on the orders trends domestically in China? And second, in China, what points would revenue grow, I think, flat and go positive? Can you briefly talk about the progress and contribution expectations by major customers in China? And third, how should we understand the EBITDA margin divergence between Asia and EMEASA in the second half 2019? Seems the Asia is -- was doing quite well despite the revenue weakness while the EMEASA margin declined a bit. And how should we expect that trend in the future? And finally, Nexteer has made meaningful progress in the EV-related technology and products. Are there margin expansion opportunity -- are there ASP or margin expansion opportunities from the EV products?

Great. Thanks. I'll take a couple of -- I'll take the first 2, try to provide you some perspective there, and I'll let Robin address on the EV front, if you will. So from a North American perspective, obviously, we have daily interaction with what's referred to as effectively command centers within both General Motors, Ford and FCA with the communications about a week ago or so, guys, with respect to their planned shutdowns. I think at most we're targeting, obviously, today to start back up, that is not going to occur. So again, we've been monitoring this very closely. I believe this morning, you may see this, General Motors has announced likely no production in North America for the month of April. So again, it's very fluid. And we're just continuing to stay connected to those 3 customers as we move forward here in the coming days and weeks. With respect to China demand, we did see a snapback actually from a very low February. We're trying to get our plants back up. Our plants are up, meeting production. So we have seen a -- I would say, a recovery from a very low February. As all of you know, I mean, February's retail sales down 80-plus percent, production down 80-plus percent. So obviously, we would have expected some uptick in March, and we have actually experienced that. But I think as we move forward, I think there's also export considerations that need to be reflected given what's happening around the world as well that may impact our revenue slightly, as we also export to global customers out of our China operations. So right now, we're hoping for a better demand environment. I think it will take a couple of months to, I don't say, heal, but to maybe recover to a level that it would be more, I would say, subject to further forecasting or understanding the demand. But again, a snapback but not to the level of a prior year 2018. Last but not least, sequentially, you did see a drawback a bit on EMEASA margins. That's largely around the ramp-up of Morocco. So Morocco started production for PSA in the second half of the year, late third quarter or so. So we were obviously ensuring that, that facility was up and running, ready to go with staffing, so on and so forth. So that's part of the margin impact first to second half on the EMEASA business. I would suggest in a different time as well, we have very high, I would say, objectives, not even aspirations, but expectations for the EMEASA business coming into 2020 as well as 2021, given the book-to-business in Morocco, as well as the customers being serviced there. So again, history tells us we'll get through this crisis, don't necessarily have a firm exit date. But we're very proud of what the Moroccan team has really accomplished in a very quick environment. And we've got multiple program launches this coming year, at least scheduled currently, really around our Driveline business. So there will still be a year of just sustaining launch, sustaining projects, sustaining the business in Morocco, and then we'll start to see the benefits from all the hard work done by that team probably in 2021 or so from an earnings perspective. Robin, I want to hand over the EV discussion to you.

Sure. Thanks, Bill. Thanks, Longjin, for your question. Regarding technology and electric vehicles, I think we're very well positioned. If you start with the steering system as a product, these electric vehicles, as I mentioned earlier, are -- tend to be heavier than internal combustion engine vehicles. They require higher steering loads. And given Nexteer's market leadership in Rack EPS, we have the best capability to steer higher weight vehicles than anybody in the market. And we also announced that we won our first dual pinion EPS business with a European OEM last year as well. So dual pinion is another product technology that sits just below the Rack EPS in terms of its ability to steer heavy vehicles. So we believe with those 2 product lines in our portfolio, we are very well positioned to address the needs of the electric vehicle market. And then it gets back to what type of relationships do we have with the global OEMs to be partnering with them on these EV programs. So in North America, certainly with GM and Ford, we have a very close partnership with them. We're already working actively with them on their truck platforms as they convert those models to electric vehicles. Similarly, in Europe, we have very close relationships with BMW and FCA, as an example, that will give us opportunities with those electric vehicles. And likewise, in China with BYD and Geely as 2 examples that we have good relationships with that we will be on the lean edge as they implement and develop those vehicles. And then if you look at the Driveline product line, as I mentioned before, there's a lot of new technology that's been developed in the Driveline product that prepares us for the EV market as well. And it's centered around high efficiency, lightweight and improved noise, vibration and harshness performance. So those technologies have been developed. They're a perfect fit for the EV market. And the other advantage that we have is, as we launched the Morocco facility in Europe, that gives us broader access to the European market to implement those technologies and service that market as well. So overall, I think we're very well positioned for the EV market as that begins to ramp up.

Due to the limited time, we will take the last question from Tracy Lee of HSBC.

This is Tracy from HSBC. I have 3 questions. The first one is, if we look at the U.S. EBITDA margin, if we exclude the GM strike impact, the U.S. EBITDA margin was almost flat in the second half 2019 from the first half level. So what is the margin for our Driveline business in the U.S. now? Did U.S. Driveline business generate profits in 2019? My second question is that how many new programs do we plan to launch in 2020? I remember in the interim results, management said that we will have a more disciplined R&D expenditure. Do we have any guidance regarding R&D and CapEx in 2020? And my last question is that we noticed that Nexteer has a breakthrough in the Driveline business with Audi and Porsche. Do we have any possibilities to supply EPS or other products within Volkswagen Group in both Europe and China, especially with our launches of DP EPS?

All right, great. Thanks, Tracy, for all the questions. I think with respect -- I'll talk a bit about the North American business and focus a bit on Driveline. This is a multiyear program that we have underway, particularly around our Saginaw and maybe even exclusively around our Saginaw business, largely going from a highly vertically integrated business to more of a make business or a buy business, if you will, in alignment with our bill of process, bill of design. So that's been underway now for about, what, 1.5 years, almost 2 years. That business is slowly getting better. We still have a lot of work to do, though. A lot of machinery needs to be moved, a lot of processes still need to be moved from manufactured into sourced. And I think as highlighted by Robin in his comments, this is going to be a program that extends well into 2021 as we move forward. But we're hopeful that we can get that business back to where we believe it can be. It's going to be a different margin profile than, let's say, an EPS, but certainly, we believe that we should be and have no issue making money in this product line. So there was some pickup. The team has been working week in and week out. They have a timetable, a plan they're executing against it. Tao was actively involved with the senior management team and the division as well in monitoring that Driveline transformation. With respect to program launches. So heading into 2020, I think as we were currently monitoring and working to, we had about plus 45 launches scheduled for -- I'm sorry, for 2021 as well -- or 2020, I'm sorry. We'll see where that goes, and a lot of them are around the Asia Pacific business as well as our EMEASA business, largely around Morocco. But obviously, we're working very closely with all of the customers. I think the focus, again, has been about how to meet their demand or change our demand, our production demand, in light of our customers. But the engineering teams continue to be on reach out with respect to their counterparts at all of our customers on at least scheduled upcoming program launches, but it remains to be seen how that may play out over the course of this coming period, let alone the course of this coming year. With respect to Audi, we certainly had -- and Porsche, we certainly had a nice win there with respect to halfshafts. VW is a very large-scale customer, obviously, or potential client as well. We've done work with them on steer-by-wire. So we've done a lot of engineering interplay with them, interaction with them. So we're keeping our -- I would say, our irons in the fire with respect to opportunities that may arise with respect to other product lines, largely around our steering business, but again, making inroads, continued inroads on the Driveline side of the house. We can never say when or how, but certainly, we continue to be very engaged with VW on multiple projects and opportunities for multiple programs. Thanks, Tracy.

This concludes our question-and-answer session. I would like to turn the conference back over to Cameron Wang for any closing remarks.

Thank you so much for all of the questions. If there are any further queries, please contact us at [email protected]. Again, we wish everyone be safe and healthy during this special time. The conference has now concluded. Thank you, everyone.