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

Ladies and gentlemen, welcome to Nexteer Automotive Group Limited 2020 Interim Results Conference Call. [Operator Instructions] Please note today's call is being recorded. I would now like to turn the conference over to Investor Relations Director, Mr. Cameron Wang. Please go ahead.

Thanks, Rocco. Good day. Welcome, everyone, and thank you for joining us, Nexteer Automotive reporting final 2020 interim results, Hong Kong time this evening. On today's call, we have our President and COO, Tao Liu; Senior Vice President and CFO, Bill Quigley; Executive Board Director, Senior Vice President, CTO and the Strategy Officer, Robin Milavec. During today's earnings call, first, our CFO, Bill Quigley, will provide an update of the company's latest operating status under this unprecedented environment. Following Bill, our CTO and the CSO, Robin Milavec, will provide an update of the company's business focus and the way forward. Then Bill will, from the financial perspective, give us a detailed commentary about the first half results as well as the company's consideration for the second half year. At the end of the presentation, we will remain available to answer your questions. Before I turn it over to Bill, there are 2 reminders. Today's presentation slides are available on our company's website on the Investor Relations folder. Second, please be mindful of the safe harbor statement governing today's communication. Welcome, Bill.

Thank you, Cam. Good day everyone on the phone, and we appreciate all the attendance and certainly looking forward to have a good dialogue today. So if we move to Page 3. Extremely challenged, dramatic pullback, extraordinary and, of course, unprecedented are all recent narratives describing the macro environment that we've been moving through since the start of the year with the onset and spread of the COVID-19 health crisis. The automotive industry has certainly been adversely impacted across every region of the world as governments implemented broad-based nonessential business restrictions to stem the spread of the disease, resulting in production shutdowns across Nexteer's entire manufacturing and operating footprint at some point in time during the first 6 months of 2020. For the first half of 2020, global OEM vehicle production fell by 15 million units to 30.1 million or a 33% decline compared with 2019, peaking at 61% lower in April as OEM vehicle production in North America and Europe and South America fell by 99% and 94%, respectively, resulting effectively in a 0 revenue environment for our impacted operations in April and May. While all of our manufacturing facilities have resumed production with OEM demand in phases of gradual recovery from the April low point, like others in the industry, this unprecedented environment had a significant negative impact on our first half 2020 financial results. Although we did and continue to see an upswing in demand in June as well as July, and we remain cautiously optimistic as we progress the rest of the year. Given the continued market uncertainty, both near term as well as longer term, we have continued to suspend the update of our backlog, and we'll resume when we have a longer track record of stability. Faced with this sudden and sharp decline, our teams around the world responded quickly and tirelessly to ensure an orderly suspension of production at our impacted operations and the efficient restart of manufacturing and related activities once shutdown mandates were lifted. We executed cost and cash flow actions across the entire organization to mitigate the financial impact of the significant loss in revenue as well as the shutdown of our operations. As we discussed during our first quarter update in mid-April, while all of our North America, EMEASA and India operations had been in full shutdown for more than a month and significant uncertainty existed as to when restriction would be lifted, we are already looking forward to restart our production and adjusting our already strong employee health and safety protocols and operating procedures to ensure the well-being of all of our colleagues no matter where they work. All of our operations have implemented our safe restart and safe work playbook, and we continue to refine our practices and procedures with people and safety first as our #1 priority. During this period of extreme turbulence, our global supply chain and production control and logistics teams also maintained close communication and coordination with our supply partners to ensure the most efficient and effective flow of material into our manufacturing facilities upon restart of production. And all these efforts served us well, with the successful restart of our North America and EMEASA operations in mid- to late May. We cannot be more proud of the efforts of our global Nexteer team and remain grateful for their commitment and diligence during this trying time. So where do we stand currently? This slide provides a quick snapshot of our operational status at the end of June across our global footprint. However, many times, a picture is worth a thousand words, which is illustrated by our monthly revenue progression for the first half of 2020 presented at the bottom of this slide. Coming off a strong January and February, even with our Asia Pac operations navigating through the initial outbreak, our revenue began to slide in March as we shut down operations in North America and EMEASA. During the low point of April, with all of our manufacturing operations in shutdown, other than our China facilities, our revenue for the month totaled approximately $40 million, rising to approximately $80 million in May with the restart of production in North America and EMEASA during the course of the month. In June, however, our revenue reached a little over 90% of our February performance, with all segments experiencing a recovery in OEM demand. So just a quick summary by segment. Our North American facilities are fully operational. Coming off the lows in April and May, in June, North America revenue recovered to plus 85% of February levels, reflecting the steady rise in OEM production demand, especially in full-size truck and related SUV platforms. Our Asia Pac operation, specifically our China operations, have been 0 production since mid-February, with stable to improving demand from our domestic OEM customers, although export revenue has remained significantly tempered. While our India operations are in current production, they are operating at about 60% of capacity given OEM demand as well as manning constraints. For EMEASA, our European plants restarted operation in mid-May with our Brazil operations currently operating at about 50% capacity. In the month of June, EMEASA revenue approached almost 80% of February levels, although Brazil is still operating under restrictions and low demand. And again, we're certainly thankful for the efforts of our people around the world in ensuring a safe restart of our manufacturing and supporting operations and the continued focus on service to our customers. We also successfully launched 19 customer programs, 4 in North America, 4 in EMEASA and 11 in Asia Pac during the first half of 2020. Each of our product lines participated in new -- in these new launches, and the vehicle platforms represented a broad cross-section of segments, from commercial van and large SUV to subcompact and supermini B segment. Even during these challenging times, with remote virtual support and production interruptions, we maintained our strong product quality performance and did not experience any significant customer impacts. This is further testament to the capability, resourcefulness and dedication of our program launch and manufacturing teams around the world. We currently have scheduled plus 25 major launches during the second half of this year as well. And while we experienced delays in expected 2020 launches due to the suspension of OEM production, most have really moved by only several months. I'll now hand the call over to Robin for a business update, and then I'll end on a more detailed review of our financial performance.

Thanks, Bill, and good day to our investor community. As you all know and as Bill just summarized, these have been very challenging times for us all. And as we focus our attention on this current environment, it's also equally important to focus on the way forward and those opportunities that are emerging. For this first half update, I'm going to primarily concentrate on 2 areas: first, our strategy for profitable growth; and second, on megatrend alignment, specifically electrification and its intersection with other trends. As I get started, I want to reinforce that we remain committed to our 6-point strategy for profitable growth that has proven to drive shareholder value. It has been our guidepost through these unprecedented times during the first half of the year, and will continue to guide our decision-making as we move through the rest of 2020 and beyond. This new normal requires us to be agile and take decisive actions to align with the changing conditions of our global industry. The current environment requires focused execution, and we are especially focused in the following areas. Expand and diversify revenue base. We continue to have an outstanding track record of defending current business while we conquest new business from our competitors. We're expanding our sights beyond our current foundational customers and targeting growth with 2 global OEMs over the next few years to expand the top line revenue with our core products. We also continue to magnify our in-house competencies to expand our portfolio. This includes extension of our core products into dual pinion EPS, high-output rack EPS as well as leveraging our capabilities in software, electronics and motors into the adjacent market space. Secondly, we're focused on optimizing our cost structure, realigning that structure with the new revenue environment. In this area, we've taken a series of actions which ensure we are lean and agile and able to effectively compete in a lower-revenue market. Efficiency with engineering and capital. Some examples of this include our drive for local engineering capability led by our tech centers in China and Poland and the ramp-up of our software center in India that is now providing strong support to our global customer teams. Additionally, we're exercising discipline and diligence on new capital investment in driving capacity optimization in all areas that we operate. As Bill will discuss more in a minute, we have had a very strong focus on global cash management and liquidity to maintain our financial flexibility. Finally, strengthening technology leadership, aligning with the megatrends, especially electrification and driver-assist technologies, and accelerating the new product development cycle by leveraging IT tools along with simulation and modeling technologies. The future, especially in terms of megatrends, has been evolving in direct response to COVID-19 and how OEMs are prioritizing investment and timing for advanced technologies. For example, we see OEMs remaining committed to electrification, software-centric vehicle solutions and advanced safety features related to ADAS Levels 2 and 3. However, in response to COVID's financial and even social impact, we see some OEMs pushing out project time lines related to fully autonomous people movers for mass transit while interest in automated goods delivery vehicles are bolstered by increasing online retail. As these megatrends evolve, Nexteer is well-positioned to support OEMs' shifting priorities during and post COVID-19. And it's thanks to our product portfolio that is well-aligned with the electrification, advanced safety performance, software, Mobility-as-a-Service and connectivity. It's also important to note that while we have listed these individual megatrends, each trend is also interrelated and influence one another. For the purposes of this update, we'll focus mostly on the megatrend of electrification and briefly touch on this trend's intersection with Level 4 and 5 ADAS, Mobility-as-a-Service, connectivity and even the full-size truck market. As a proof point of Nexteer's capitalizing on electrification megatrend, here are the top 5 customer programs for EV-related content by product line. It's important to note 2 additional influences on electrification as a megatrend. First, as the global industry recovers from COVID-19, governments in Europe and China continue to bolster their economies and commitment to electrification through various forms of policy stimulus. Secondly, there is an abundance of competition and market interest in battery electric vehicles, and nearly every OEM is moving forward with their EV product plans with a high sense of urgency. Now the intersection of electrification with the full-size truck market is offering some unique growth opportunities for Nexteer, especially when we consider that the North America full-size truck market has had relatively stable consumer demand throughout the pandemic, couple this with Nexteer's dominance in this segment. When it comes to full-size truck electrification, Nexteer has been sourced with all of our product lines, including rack EPS, Column, I-shaft and halfshafts. This merging of trends also enables Nexteer to protect its dominance in the rack EPS and full-size truck markets by helping our customers differentiate themselves in a competitive truck market utilizing new technologies, features and value. This trend also establishes Nexteer's advanced technologies into the marketplace, which, in turn, paves the way for future increased adoption of these premium products that bring improved revenue opportunity. Now let's quickly overview some of Nexteer's advanced technologies that are getting pulled ahead, thanks to these trends. The truck BEV trend is pulling ahead Nexteer's high-output rack EPS due to the load requirements driven mostly by the heavy vehicle battery weight. The high-output REPS technology nearly doubles the steering load capability compared to the standard rack EPS. By solving the truck EV application, we will also capitalize on a whole new segment of vehicles, heavy-duty trucks and light-commercial vehicles that can now be converted from hydraulic to electric power steering due to this increased steering load capability. High-output EPS solves a longstanding consumer pain point for OEMs, whereas, the less-expensive light-duty trucks with EPS offered more safety and comfort features compared to the more expensive heavy-duty trucks that utilized hydraulic steering. Now that HD trucks and LCVs can be steered with high-output EPS, these drivers can also experience improved fuel economy, enhanced steering feel and advanced safety features that were traditionally only found in the light-duty truck segment. OEMs will have an additional incentive to apply high-output EPS because the truck market is extremely competitive, and this technology will help them differentiate their trucks and LCVs in this very crowded marketplace. The BEV truck trend is also pulling technologies in our Driveline & Columns product lines. On the Driveline front, we expect the EV trend to drive demand for high-efficiency joints, lower mass and premium NVH halfshaft designs. A great example of this is Nexteer's ball spline axle bar that solves the EV's strict NVH requirements, made even more challenging by the large driveline running angles associated with high-ground clearance vehicles such as trucks and SUVs. Our column technology also offer truck BEV solutions with a new column position module and actuator assembly that are smarter, quieter and more cost-effective than their predecessors. Just as with high-output EPS, the truck BEV programs are pulling ahead these technologies, which, in turn, should encourage broader market adoption of premium features, driving incremental revenue in the future. We also see the technology development in one category such as high-output REPS for BEV trucks can also be applied to another category such as ADAS Level 5, further driving efficiencies and market diversification. Let me give you a specific example of this. Fully automated people movers are a perfect example of Nexteer's repurposing technologies for different applications as well as an overlap across many megatrends such as electrification, Mobility-as-a-Service, ADAS Level 5 and connectivity. A recent OEM unveiling showcased a fully autonomous people mover that is self-driven, all-electric and is developed as a shared mobility platform. This vehicle will not have a steering wheel, steering column or steering shaft, but will feature Nexteer's rack EPS autonomous rack actuator. Our REPS solution for people-mover applications is very similar to our high-output system used in the BEV truck application that I just reviewed. In summary, these are just a few examples that demonstrate how these megatrends are evolving and intersecting and how Nexteer is well-aligned to these trends and positioned to capitalize on in-house technology efficiencies to support OEMs' shifting priorities. Relative to new technology introductions, let's take a look at our introduction of an innovative powerpack technology featured on the new Ford Bronco. This will be next year's first production launch with a nearly cylindrical 10 FIT folded circuit board powerpack. The primary benefit of this powerpack innovation is the compact design that fits nearly into the motor's cylindrical diameter. Our folded circuit board approach also reduces cost compared to the mainstream of separate interconnected boards. In addition to packaging, space and cost savings, the 10 FIT fail-safe design also enhances safety based on backup redundancies in the controller circuits and connections. Ford Bronco also features Nexteer's rack EPS system that enables driver-assist features like lane keeping and auto park assist and also enables over-the-air software flash updates. It's important to note that the Bronco shares common EPS software with the 2021 Ford F-150 pickup, which could allow Ford to activate additional steering-assist features in the future over the air. This also speaks to Nexteer's strategy in driving software engineering efficiencies by maintaining common software systems across customer platforms. A final note on software. Nexteer is working very closely with Ford on developing an optimum software system performance for an off-road usage profile such as this Bronco. As you can see, our technology development in one category can also be applied to others. Leveraging and standardizing technology across multiple platforms further drives efficiencies while maintaining flexibility to support OEM market diversification needs. And finally, speaking of supporting our OEMs, Nexteer's efforts have not gone unnoticed by the industry and our customers. While the first half has been extremely challenging for the entire automotive industry, it is very telling that Nexteer continues to be recognized as a supplier partner of choice based on our innovation, quality, manufacturing and cultural leadership. With that, I'll hand it back over to Bill for the financial review.

Great. Thanks, Robin. As with the entire automotive industry, the impact on Nexteer's financial results as a result of the COVID-19 impact was severe, with the most significant impact from mid-March to late May as the majority of our operating footprint was shut down in compliance with government mandates. Yet, we did experience a turnaround in OEM demand, or green shoots in June as we close the first half of 2020. And these green shoots have continued through July and at the current time into August, and we remain cautiously optimistic that the second half of 2020 will provide a much improved operating environment. We implemented across-the-board cost actions to mitigate the sudden decline in revenue and facility shutdowns, limiting the EBITDA impact to about 26% of the drop in revenue. Our first half results also include noncash impairments of previously capitalized product development costs principally arising from customer program cancellations as a result of the pandemic. As an offset to the negative impact of the operating environment, we recognized a significant income tax benefit as a result of the U.S. CARES Act, which was passed in March, which provides for the carryback of U.S. net operating losses to prior tax periods at a 35% corporate tax rate. Finally, we took actions to limit the cash impact of production shutdowns with aggressive working capital management and capital investment controls. Certainly, the financial performance of the business was significantly impacted by the operating environment that unfolded during the period, and we all work together as one Nexteer to successfully navigate this difficult environment. This slide provides a summary comparison of our first half 2020 key financial metrics compared with 2019. And as evidenced here, the falloff from the COVID-19 health crisis severely impacted our 2020 financial performance. We posted revenue of $1.211 billion compared with $1.832 billion in 2019, lower by $622 million or 34%, directly as a result of the sharp decline in OEM production. I'd further note that the vast majority of the decline in revenue occurred quickly from mid-March through May. However, we did outperform the market across each of our regional segments, which I'll highlight in the coming slide. EBITDA was $116 million for the first half of 2020, a decline of $161 million compared with 2019, driven by both lower revenue and the impact of the shutdown of our operations across every region during the period. We posted a net profit of $1 million for the period compared with $131 million last year. And while depreciation and amortization expense of $113 million for the first half of 2020 was about equal to last year, noncash impairments of $32 million for previously capitalized product development costs further impacted our pretax earnings in the first half of 2020. In our tax front, we recognized an income tax benefit of $34 million in the first half of 2020 compared with income tax expense of $23 million in the same period last year. Free cash flow was a use of $190 million for the first half of 2020, a direct result of lower EBITDA as well as unfavorable working capital when compared with 2019. On the revenue front, the key drivers of our year-over-year performance are highlighted here. Volume/price was, of course, the most significant headwind, totaling $580 million in the period or 32% compared with 2019. And given relative size, our North America segment was most impacted, representing about $425 million or plus 70% of the comparison. As we've previously discussed with all of you, the GM K2XX to T1XX platform transition did impact our Columns product line revenue comparison, resulting in a revenue reduction of about $55 million during 2020 compared with last year. GM did complete this platform transition in March of 2020. Our Morocco operation, which commenced production in the second half of 2019, with PSA program launches, provided an increase in revenue of $30 million in the first half of 2020. Foreign currency was a slight headwind of $16 million given the strength of the U.S. dollar compared with both the RMB and euro. So we'll turn to the next slide for a review of our regional segment revenue comparisons. Our segment revenue comparisons are presented on the left with relative performance versus the market highlighted to the right. North America posted revenue of $794 million, $480 million or 38% lower than 2019, with a steep decline in OEM production and customer pricing driving $425 million of the comparison with the Columns program transition contributing to the remaining $55 million. Yet, our North America segment outperformed the market by 200 basis points as OEM production declined by 40% during this period. Asia Pac posted revenue of $231 million, $75 million or 24% lower than last year. Unfavorable currency was a headwind of about $8 million, with lower volume and customer pricing of $67 million rounding out the comparison. And similar to North America, our Asia Pac segment outperformed the market by 200 basis points compared to the 26% decline in OEM production during the period. EMEASA posted revenue of $186 million, $67 million or 26% lower than 2019. And similar to Asia Pac, unfavorable currency was a headwind of about $8 million. Revenue from our Morocco operation of $30 million partially mitigated lower revenue of $89 million driven by a substantial decline in Europe and South America production. Our EMEASA segment outperformed the market as OEM production declined across Europe and South America by 41% during the first half of 2020. The drastic decline in production demand certainly had a significant adverse impact across all of our segments, yet each segment outperformed the market, benefiting from program launches, both carryover as well as current as well as favorable platform positions. Given the steep decline in the operating environment across all markets served, all of our product line revenue comparisons were negatively impacted as highlighted on this slide. And just a couple of observations to be made here. Our EPS product line is the most regionally distributed and represented across all markets served. While lower than last year by 33%, revenue derived from our Morocco operation of $30 million, representing the launch of the PSA CMP single pinion platform in the second half of 2019 provided a partial offset to the overall decline in the market. Our Columns product line comparison was impacted by the K2XX-T1XX transition. And adjusting for that transition, revenue would have been lower by about 32% compared with 46%. And lastly, on the Driveline front, the carryover benefit from the launch of the Ford CD6 platforms, also partially mitigated the overall decline in OEM production. Our EBITDA bridge is provided on this slide. And again, the steep decline in volume during the first half drove a $192 million earnings headwind, representing an earnings decrement of about 35% and on lower volume of $550 million. As material represents about 60% of our cost of sales, other cost reductions mitigated the margin impact of the demand decline. Net cost performance of $44 million, including net manufacturing efficiencies, material cost reductions and lower structural costs, provided a further offset to the impact of the volume decline. So overall, the actions taken by our operations limited the EBITDA impact to about 26% of the decline in revenue, which is quite an accomplishment given the extreme revenue environment we experienced and that many of our manufacturing facilities were in complete shutdown for some duration during the period. Moving to our EBITDA performance by segment on the next slide. North America EBITDA totaled $72 million, providing a 9.1% margin, compared with $190 million or a 14.8% margin in 2019. Lower revenue of $480 million comprised of volume, customer pricing and the Columns transition lowered EBITDA by $158 million or about 33%, with strong net cost performance of $41 million, providing a partial offset, limiting the earnings impact to 24%. Certainly, very positive as our U.S. and Mexico operations were in complete shutdown for more than 2 months. Asia Pac posted EBITDA of $46 million for the period compared with $60 million last year. And as you know, from our first quarter 2020 update, our China operations were the first to restart 0 production post a shorter duration of shutdown as a result of the initial outbreak of the health crisis in January. Net cost performance of $13 million partially mitigated the impact of lower volume and pricing of $27 million, resulting from the pullback in OEM production, providing an increase in EBITDA margin of 60 basis points to 20.1% for the first half of 2020. EMEA posted an EBITDA loss of about $1 million in the first half, lower than last year's performance of $34 million. And while Morocco provided a revenue upside year-over-year, the operation remains in early stages of launch and manufacturing maturity, incurring incremental supplier and logistics friction costs incurred to support production. Similar to North America, our Europe operations were in shutdown for almost 2 months. And although smaller, our Brazil operations continue to operate under government restrictions and low OEM demand. Our EBITDA to net profit walk for the first half of 2019 -- or 2020 and 2019 is provided on this slide. You'll note here depreciation and amortization expense in 2020 does include an impairment of $32 million in previously capitalized product development costs, principally for customer programs that have now been canceled as a result of our customers' realignment of platforms emerging from the health crisis. On the tax front, we recognized an income tax benefit of $34 million for the first half of 2020 compared with income tax expense of $23 million in 2019. Compared to statutory tax rates, the principal drivers of this benefit in the first half of 2020 included ongoing favorable tax holidays, U.S. R&D tax credits for development work performed in the U.S. as well as a significant benefit under the March 2020 U.S. CARES Act, which provided for the carryback of full year U.S. net operating losses and temporary differences arising in the current year to prior tax years at a federal corporate income tax rate of 35% compared with the current rate of 21%. This carryback provided an incremental net benefit of approximately $18 million in the first half of 2020. Now let's move to cash flow on the next slide. Free cash flow was a use of $190 million in the first half of 2020 compared with the source of $45 million in 2019 with lower cash from operations being the principal driver, reflecting lower EBITDA as well as unfavorable working capital of about $90 million. We worked diligently to limit the impact of the significantly lower demand environment with aggressive working capital management and current period capital investment controls. Investing activities were a use of cash of $162 million in the first half of 2020, better than 2019 by $33 million, largely a result of lower CapEx investment of $23 million as well as capitalized product development costs of about $9 million. At the end of June 2020, our cash balance stood at $375 million, and we ended the first half with a net cash position of $16 million. Availability under existing credit facilities, principally the U.S. ABL, stood at $177 million at the end of June, providing total liquidity of $552 million. We've also taken certain actions to further bolster available liquidity, which we completed post the end of June, including overdraft and factoring facilities in Europe and the addition of certain U.S. machinery and equipment as collateral to our existing U.S. ABL credit facility. The first half of 2020 was a very challenging time as we all faced an unprecedented operating environment, but we are moving forward and remain cautiously optimistic on the demand recovery in the second half of 2020, building on the green shoots we've already experienced in June and July, coming off the lows of April and May. IHS is forecasting global OEM production demand to sequentially improve by 31% compared with the first half of 2020 with all served markets in recovery. Given the distribution of the business weighted towards North America and a forecasted 48% recovery in sequential OEM production, we are expecting a much stronger earnings and cash flow performance in the second half of 2020 led by our North American segment although all segments are expected to contribute. We also remain very mindful, though, that the environment remains volatile and uncertain and certainly subject to risk in the near term, and we are keeping a strict focus on ongoing cost control and cash flow management as we move through the current period. That focus certainly served us well in the first half of 2020, and our team remains committed and focused on favorably converting increased demand as we move through the second half of 2020. So that ends our formal remarks, and I will hand the call back to Rocco for Q&A. Thank you again for your participation.

[Operator Instructions] Today's first question comes from Tim Hsiao with Morgan Stanley.

Two quick questions from me. My first question is that we noticed that the carmakers, the OEMs are rushing to restart production, especially in the U.S., where the demand stayed resilient. But we also heard that the supply chain is stretched by tight workforce, social distancing protocols, quarantines, et cetera. So do we face similar challenges at the moment or production has been back to the normal level? And I think during the presentation, Bill, you also mentioned how the June production has been improving substantially. Can you roughly quantify the production of operations data at the moment in third quarter like July or August versus pre-outbreak level? So that's my first question. And second question is that we understood that Nexteer now stopped sharing older backlog given the lingering uncertainty. But as a company, how do we do the preparation, say, for projects set to kick-start for the next 6 months? Will we cut back the investment and assume a certain level of the project will be further delayed or massively [ strolled ] back? Or do we just basically apply greater discount with the customer and provide earlier forecast in upcoming months? So those are my 2 questions.

Great, Tim. Appreciate the questions. I'll take a shot at the first couple. Rushing to restart production, I think, is the statement you made. We've certainly seen an upswing in demand in June as well as now into July. And again, we're looking, from a North American perspective, very strong schedules currently in place from the OEMs in August. So there certainly has been a rush to demand or rush to production. But I think also as well, all of us in the supply chain, including the OEMs, continue to have to work to ensure the safety of our people. There are manning constraints. Certainly, the pandemic is still amongst us here, if you will, in the United States. And there certainly are some impacts to employees. So again, we're working through that very diligently with our employees. But again, we are seeing a rising tide with respect to demand, and I'd note, much of that coming on the full-size truck part of the house. So if you think about where July inventories ended up in the United States with respect to full-size truck on dealer lots, days of supply was about 54 days in total and the average 5-year days of supply at about 66 days, so down by about 17%. And if you look at our significant customers, GM, Ford, FCA, they're actually down by about 20%. So certainly, those OEMs are rushing to get those platforms back into the dealer because, certainly, demand seems to be quite stable actually from a consumer perspective. With respect to the supply chain, we're -- we've been working very closely with our supply chain partners. They are obviously of high priority to us with respect to ensuring that we have the most effective and efficient component supply into our manufacturing facilities. We spent a lot of time in March, in April as well as in May coordinating with those supply partners. And to date, while we've had some movements that we've had to make, I think our supply base has responded very well. And I think part of that puzzle, quite frankly, was during the course of EV shutdowns, we made a conscious decision to ensure that we paid all of our suppliers on time and within contractual arrangement. Because without them, it's difficult for us to operate. So we made sure that our suppliers were being paid in accordance with terms. Now with respect to maybe July, July ended up being a strong month for us, almost reaching $300 million in revenue. We turned the corner on free cash flow, positive by about $30-plus million. So again, we're seeing those green shoots. And again, August seems to be a strong demand as well. With respect to programs, I'll take a shot, but I'll let Robin kind of clean it up. We're very closely monitoring programs with our customers. We've had a number of cancellations -- notified of cancellations, which has resulted in a $32 million impairment. And certainly, we're working with customers on recovery -- commercial recovery given those cancellation notices. But again, we're working very closely with customers. There are movements in program launches. But certainly, what we're seeing is programs that were originally scheduled to be launched in 2020 largely are still on schedule, but largely just pushed around by 2 to 3 months, just given the shutdown of the industry. So again, we're working very closely monitoring that, working with our customers. We have not constrained investment, if you will, around those launches because a flawless launch is still our top priority. And we'll continue to ensure that we're supporting our customers to the best of our ability. I think longer term, we're starting to see some platform shifts, but I think that still remains to be played out. One last comment I'd make on the backlog, program shifts, platform shifts, Robin's comments with respect to where the market may be going. We felt, just given still the level of uncertainty in the market while we're seeing stability maybe near term, June, maybe July, there still remains a cloud, if you will, around the forward years on what the production environment is going to look like. So we need to get some track record of stability over the next coming 6 months, let's say, before we update that backlog. But certainly, production volumes, as you look out over 2026, from even IHS' recent forecast update, there's been a significant retracement in an expected production volume versus what that expectation was even in December of 2019. So again, I think a period of stability is going to be very important for the entire industry as well as us as we look to reintroduce, if you will, an update to the backlog. Robin, any questions on investment around programs or...

Yes. I mean, just quickly -- Tim, thanks for the questions. This is Robin. Maybe going back to the social distancing question as well. I mean that has impacted the whole industry, and it's impacted us at Nexteer. For the people that work in the office, for the most part, what that has meant is that there's a lot more people working remotely than did in the past. So we've had to leverage IT tools and other technology in order to enable people to work remotely, which is going to be a new normal going forward for us as well. But then you get into our manufacturing plants, and you look at the way the jobs are designed on the factory floor, the social distancing, the spacing between operations, that is certainly looked at very carefully. The cleaning of the workstations is done very diligently. And those operations where you can't have the social distancing, there have been barriers put in place to protect the employees, but there's been a very high level of focus in both the office and the manufacturing environment to protect our employees and to follow all the protocols that the industry and the various countries are putting forward. I think Bill covered the program delays pretty well. We did see some cancellations. We also saw a handful of delays, and I would say that's typically between 9 and 12 months that we saw a lot of these programs delayed. And I think that was in part due -- the OEMs were shut down for a couple of months as well. So even a lot of their engineering activities got postponed that is resulting in some of these delays. But every program is unique, and we have to look at the investments associated with those because even though they might delay the start of production by 9 months, in some cases, these programs, what we target our investment on is their PPAP date or the date that we have to be production-ready. And in a lot of cases, those PPAP dates remain fixed, even though they've extended the start of production date. So I think every one of those is a unique case that we look at, and we certainly try and delay the expense appropriately based on the customers, retiming those programs.

And our next question today comes from Longjin Li with Goldman Sachs.

I have 3 questions. First, how should we think of the potential asset impairments and the intangible assets in the future given that further customer program cancellations are also likely on a going-forward basis? And second question is that during such a challenging environment, Nexteer still invested heavily in aggregates, R&D expenditure in the first half. Shall we assume that the total R&D as a percentage of revenues to continue to rise or at least remain stable in the future? And third, in the APAC region, most of our new programs were with the traditional OEMs in the first half. As known, the EV start-ups in China such as Nio, Li Auto are ramping up quite well. I'm just wondering how is our positioning among those EV start-ups.

Great, great questions. I'll take the first couple, and I'll let Robin talk about our Asia Pac programs. With respect to asset impairments, certainly coming off the shutdown of operations, I think many of the OEs made a number of quick calls on the programs they were going to focus on and certainly what programs they could wait and/or defer and certainly delay or cancel. With respect to asset impairments, that's an evaluation that we do ongoing with respect to working with our customers closely and coordinating program launches, as Robin spoke of, but also taking a look at what production volumes may look like in the foreseeable future. So I don't expect just asset impairments every half. I think the first half was an unusual time for all of us in the industry. And I think the OEMs made the decisions they needed to make with respect to where they're going to put their precious investment moving forward, again, after a very long duration of shutdown as well as at least forecasted pullback in demand. I think everybody needs to see that stability as we move forward, which will really drive, I would say, additional platform opportunities or synergies by the OEs. With respect to the second question, R&D or our engineering spend rising in the future. I mean, certainly, I think if you look at the spend through the first half, whilst down compared to a year ago, as a percent of revenue, obviously, much higher, but that revenue in a very volatile and low environment. So I think it's kind of a false output, if you will, with respect to that kind of a run rate. 10-plus percent is not a target that we certainly have internally. And I'll let Robin talk to the efforts that we're doing there. We'll see a rise in engineering over time. But again, we're working on how do we become more efficient in our engineering spend as well as the work we do by how we look at commonizing platform opportunities, be it in EPS and even in Driveline, right, where we can reuse capabilities, specifications, designs currently in place for new programs. So that's just ongoing work that Robin and his team do on a global basis. And probably the last piece of that puzzle is just we're working continuously on localizing engineering to where programs are. That's an important piece of the puzzle with respect to ensuring that we have the right resources in the right regions around the world. Many times, those resources can be of different cost bases, but it also places us nearer to the customer that ultimately will benefit from the products that we provide them. With respect to programs in Asia Pac, traditional versus new?

Yes. Longjin, this is Robin. I can follow up on a couple of these. Regarding the R&D spend, I think Bill was very accurate. There's really interesting industry dynamics going on. When you look at our EPS product line and what we see from our OEMs is just an avalanche of new requirements that come along with all of these driver-assist features and then also the software-enabled features in the vehicle, things like cybersecurity, things like other chassis features to maintain the vehicle stability and then different features like lane keeping. All of these advanced technologies are resulting in a tremendous amount of new requirements from our customers. So when you look at it from a workload standpoint, it's certainly not getting easier. It continues to be a very challenging environment. But to counteract that, we're certainly focused on our efficiency. Bill touched on a couple of those things. One is we're driving very hard to implement a platform strategy that enables us to develop our core products and leverage and reuse those across multiple platforms without reengineering every program in a custom way. We're also leveraging technologies like modeling simulation to improve our efficiency, so we're not in a point where we're manufacturing prototype parts and go through our test for design validation. We're leveraging technologies to do the simulation of that without manufacturing prototype parts. And then Bill touched on our drive to do the engineering locally. In most cases, when we talk about Poland, our tech center in Poland, and in Suzhou, those are lower-cost countries. And we're at a point today where about 80% of the engineering work required for our APAC and EMEASA divisions are done by the local teams. So that's driving some efficiency as well as our India software center that we have more than 200 software engineers out of India today that is supporting our entire global team with a very efficient and effective software strategy. So those are some of the things that we're doing to counteract the trend of increased workload coming from our customers. In terms of the EV start-ups in China, we certainly have our eye on those type of new start-ups. But the electric vehicle trend in general is something we're very optimistic about. And a couple of reasons for that. If you look at these vehicles, they tend to be heavier, and they also tend to drive higher steering loads, which means the technology of choice is going to be rack EPS and, in some cases, dual pinion EPS. And as I think you know, we are the #1 global supplier for rack EPS today. And so this trend is really playing to our strength in terms of that technology, and we're very well-positioned to support these vehicles with our rack EPS technology. Also dual opinion is a new product for us that we'll be launching very soon here in Europe, and that will position us also very well for these smaller electric vehicles that don't require the high-output loads of rack EPS. So we are considered a partner of choice by many EV companies and OEMs around the world. In China, we've got close partnerships with BYD and Geely and supporting their EV platforms very much so today.

And our next question today comes from Rebecca Wen at JPMorgan.

So 3 quick questions from me. First, on -- if you could share your view on the pickup sales in North America. What's our outlook in the second half or going forward? And secondly, on the asset impairment related to the product cancellations, would you be able to share more about this? I mean, i.e., why was there a cancellation? Was it purely due to COVID impact? And -- or was it a loss of contract to competitors or platform switch? Or -- so any -- if possible, a bit of more details there. And also what's the correlation backlog from this cancellation? So -- yes, just the amount of the backlog that we can consider that we might have to take off from the previous backlog order. And the third is on the APAC EBITDA margin. If you could share a bit more details on how we could achieve a higher EBITDA margin in the second -- in the first half despite lower sales volume? And that's all of my questions.

Great. Thanks, Rebecca. I'll take a shot at a couple of those, right? With respect to full-size truck demand in North America, interestingly enough, I think even during shutdown and the pandemic and shelter-at-home and emergency orders issued by states, if you will, in the United States, demand for pickups continued to be pretty strong, actually, which ended up depleting many of the dealer inventories. So certainly, another factor on that was, if you think about the GM UAW strike over a year ago, they never really got the pipeline filled back. And GM even made that point, if you will, in their year-end conference call. So I think demand has been good. And if you think about just days on hand, as I indicated with another question, still at 17% to 20% lows from 5-year averages. So there is a rush to get vehicles back in dealer lots. What we're hearing, at least in our market in August, there's still a good demand at the dealer with respect to consumer purchases really around full-size truck as well as larger SUV. So that all kind of bodes well for us as we move forward, but we certainly have a lot of work ahead of us. And again, mindful that things can change pretty quickly. With respect to the asset impairment, this is not a loss of a contract. These were customer-specific programs that we are working on where the customer has now canceled the platform. So a couple in China, a couple in -- or actually 1 in Europe and then 1 in North America. So again, it was not a loss of the business. It's just simply, I think, the OEMs looking at their platform strategies, looking at the investments they need to make and basically calling out what programs they believe are not a priority to them moving forward, at least in the current environment. So again, not a loss of -- not a loss to a competitor. Now is it an impact on the backlog? And roundabout that we've had these cancellations in the past, we'll provide that information when we update the backlog in the coming months, hopefully, by the end of the year with reinstatement of that, but there certainly is an impact on the backlog, because our revenue, we will pull out of the backlog. But we'll also work with the customers on recovery. That could be commercial. And when I say commercial, it could be dollar recovery and it could also be the opportunity for other platform awards by the OEM that was impacted. So I think more to come on that front. With respect to Asia Pac, certainly, good performance by the business. And I'd look at Asia Pac a little differently than what we experienced in North America and then EMEASA. I mean the shutdown in China was brief in comparison to what we experienced in North America and Europe and South America. So they really had more opportunity from a manufacturing and material efficiency to actually have the ingredients to achieve those, that being called production. And so by default, they had kind of a head start, if you will, or were leading the pack a bit over our other operations who, quite frankly, were in, I would say, loss of production or shutdown for almost 2.5 months. But they continue to work on the material front, working with their supply base on cost reduction, manufacturing. They continue to make inroads with respect to efficiency. But again, I don't think a 20.1% margin has continued upside each and every year. We are really still focused on how do we expand the revenue base there. And I think, quite frankly, the work they did in the first half, very good work. But again, I would not, for any of you on the phone, think that we are trying to maximize and optimize -- maximize the margin profile of Asia Pac. We want to optimize it in lieu of opportunities we see on the revenue front. So that's the balance. But they did great work actually in the first half. But they also have a lot more ingredient to work with versus our other divisions, just given the impact of the health crisis spread.

Our next question today comes from Robin Zhu with Bernstein.

Three questions from me, please. One is as it pertains to EVs. If you could just share your thoughts on content per vehicle on a like-for-like basis between EVs and gasoline. I think you mentioned that there is more rack EPS. How much pricing uplift per unit do you think there is versus, for example, the equivalent gasoline truck? Or do you think this is mainly a volume opportunity more than a content opportunity per vehicle? Second question, do you guys have a sense of -- of the EV contract wins that are out there that are contestable? What's your sense of Nexteer's share of those wins has been relative to your share of EPS in gasoline? And third question, as it pertains to the Morocco plant, I think you called out that there are still start-up costs associated with that. When do you expect that plant to be -- to turn net positive for earnings, I guess, on an EBITDA basis?

Yes. Robin, I'll take a shot at the third one, and I'll let our Robin take a shot at the first 2. With respect to Morocco, we've been investing in that plant and bringing that plant online now for the last 2 years. It was a very quick greenfield to production. And certainly, we see upside with respect to customer's, quite frankly, appetite for that type of a location and our products. It's interesting, in the launch year, last year, the latter part of 2019, were first launches on EPS. We have a number of Driveline launches in that operation as well. So we've got kind of an immature facility coming online, both with EPS as well as Driveline. And then we end up in a period of time when we can't even travel to the location to support that production and that start-up of the business. So it was a tough, tough first half for the business. They did crank out $30 million in revenue. And we didn't expect much margin and contribution quite frankly to begin with because they are still in multiple launch phases. I believe, as we head and end through 2020 and into 2021, 2021 is the year we'll start to see incremental earnings flow through to our bottom line from the ongoing program launches in Morocco. This year is still a big start-up year, and quite frankly, has been hampered a bit with respect to the environment that not only we've passed through but we're still operating in supporting our colleagues in the Morocco operation. Robin M, CPV EVs, volume opportunity.

Yes. Thanks, Robin. I think in terms of the EV content per vehicle, certainly, there -- as you see heavier vehicles and a shift towards higher-output technologies like rack EPS or dual pinion EPS, there is some incremental price there, but I think the real story is the volume opportunity. And we're just positioned very well in terms of our product portfolio and the scale that we have globally in the rack EPS to compete very effectively in that market space. In terms of our EPS share in EV versus ICE, I don't have that data in front of me, but I can say there are some platforms that are mixed. You've got a combination of ICE engines and full-battery electric vehicles, so there's some mix there. And then you've got some fully EV platforms as well. But again, I would just say we are positioned very well to compete and capture that market given our global scale in these higher-output technologies. So I certainly like our chances, and we see it as a very strong opportunity for us to increase market share and volume as more of these platforms roll out.

Ladies and gentlemen, we have time for 1 final question due to time constraints. And today's final question comes from Paul Gong at UBS.

I have 2 questions. The first one is a little bit follow-up on Robin's question. I guess it's probably a little bit difficult to give the exact percentage contribution of EVs to our revenue at this moment. But if we just look at the EV-dedicated platform or just pure EV platform [ little closely ], sharing platform with ICE or EV, so what is the percentage of revenue and backlog contribution from the dedicated EV platform, if you have this number? I mean, if you can share. The second question is [ what then with ] Tesla building up factories in Asia Pac in Shanghai, in Berlin and another new factory in the U.S., and the products are also different from previous ones, how should we think about the opportunities to penetrate into Tesla supply chain given our strength in the EV-used EPS? If we are not really there yet, what has been the key drag for not really getting these orders?

Thanks, Paul. It's Bill. I'll take a shot at the first one, actually. Again, not updating the backlog. But certainly, as we closed out 2019, we provided some -- I would say, some specification or narrative around what the EV content at the backlog looks like at that point in time. I think, Robin, you have a real good feel for that.

Yes. Roughly, if you look at the old backlog that we had last time we updated, about 17% of that backlog was related to EV vehicles, and that's across all of our product lines, EPS, Driveline & Columns. And that's a trend we would expect to increase as there's more of these platforms that are rolled out from the OEMs.

And with respect to cash flow, entering the supply chain on Tesla?

I'm sorry, sir. Please continue.

No. Just a real quick comment on Tesla. Certainly, from a valuation perspective, quite remarkable. And at the same time, entering a supply chain or supply panel, we continue to stay in contact with Tesla, especially on the engineering front. But certainly, they have their current supply base. And we are obviously working with others as well. So if the opportunity affords itself, we stay in close contact with them, Robin's team does, we'll see. But certainly, it -- I would say there's not a tomorrow opportunity with respect to Tesla in particular. But I think many of the OEMs, especially in China, Robin highlighted a number of them, Geely, BYD, with respect to their aspirations, they have every intent to take Tesla on in the market as well. So you can't serve everyone. And that's something that we're really, really honing in on, at least, even in the near-term environment, because we have precious people, precious resource and investment. And we've got to make sure that we're focused on those customers, one, who are current customers and we want to support them moving forward, but secondly also, adding new customers to the portfolio that we believe will be continuing beneficially in the market moving forward. Tesla is certainly one of them. But quite frankly, I don't see a near-term opportunity entering a supply panel with Tesla. But again, never say never.

Yes. Paul. I think Bill said it well. We do maintain contact with Tesla. And as their volume grows and if they have a desire to bring on another steering supplier, we certainly have the technology that they're looking for in terms of over-the-air flash, cybersecurity, that's technology that we've been developing with other OEMs. It's the same technology that Tesla would require. So we've had those discussions with them. We have good alignment. But at this point, until their volume grows to a point that they're ready to bring on additional steering suppliers, they're not in our focus today as we're looking at a couple of other global OEMs that have more volume potential in the near term.

Thank you so much for all of the questions and today's participation. If there are any further queries, please contact us at [email protected]. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.