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

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

Thanks, Kate. Good day. Welcome, everyone, to Nexteer's 2020 Annual Results Call. On the call today, we have our President and COO, Tao Liu; Senior Vice President and CFO, Bill Quigley; Executive Board Director, Senior Vice President, CTO and Chief Strategic Officer, Robin Milavec. Starting with the presentation, we will first have Bill provide an overview of the company's operation for 2020. Then Robin will provide an update of company's business development, and Bill will lead us diving into the financial details and then ramp up with 2021 company's considerations. We will be available for questions following the presentation. The slides accompanying today's call are available at the company's website. Please be mindful of the safe harbor statement governing today's communication in the second page of the presentation slides. Now I turn over to Bill.

Great. Thanks, Cameron, and good day to everyone. We certainly appreciate you all joining us on this call for Nexteer's 2020 annual results update. So before proceeding with the business update that Robin will provide, I just wanted to share some brief observations and perspectives regarding the environment that 2020 brought to us all and how Nexteer navigated through that unprecedented time. 2020 was certainly a story of 2 halves, evidenced by this slide which summarizes the change in OEM production volume for each key market served for 2020 compared with 2019 based on IHS' January 2021 production update. You'll note on the upper left global OEM unit production for the full year 2020 was lower by 16% compared with 2019, with the first half lower by 32% given the operating impacts of mandated industry shutdowns as a result of the COVID-19 pandemic; with March, April and May representing the deepest reductions, lower by 33%, 61% and 50%, respectively. The second half of 2020 provided a significant rebound in OEM production with production about even to 2019. Each region was similarly impacted; North America, Europe and South America being the most impacted, with the second quarter of 2020 being the low point of OEM production volume as a result of mandated shutdowns. The Asia Pac region was also impacted but of shorter duration with the onset of the health crisis in early January. Full year production was lower than 2019 by 11%, with the second half rising above 2019 by 2%. We and every industry participant experienced an unprecedented environment in 2020, which significantly impacted the financial performance of all participants. And given the environment presented by 2020, we believe that the sequential financial performance of the business within the year clearly demonstrated the financial resiliency of Nexteer. While I'll provide a more detailed view of our financial performance later in this update, this slide provides a summary snapshot of Nexteer's financial performance in the second half of 2020 -- I'm sorry, in the second half of 2020, OEM production rebounded by 44% on a sequential basis when compared with the first half of the year, with all markets served participating in a strong recovery, as noted on the left of this slide. So this performance reflected the green shoots we spoke of when we discussed with you the operating environment we were experiencing during our October 2020 third quarter update. Coming off the first half lows, the Nexteer team remains focused on driving favorable earnings on incremental demand; ongoing and close coordination with our supply base to ensure the most efficient flow of materials to our manufacturing operations; maintaining a key focus on disciplined cash flow management; and always, our top priority being the health and well-being of our employees around the world with the ongoing execution of our safe work book. While we'll provide a more detailed view of our financial performance later on this update, this slide provides a summary snapshot of Nexteer's financial performance in the second half of 2020 compared with the first half. On the left, we compare the change in our revenue performance for the full year, first half and second half compared to 2019 relative to the change in OEM production volume for the same periods. For the full year 2020, global OEM production was lower by 16%, with Nexteer's revenue lower by about 50%, generating a favorable comparison of about 100 basis points. Now looking to the second half of 2020. Global OEM production was about flat to 2019 while Nexteer's revenue was 4% higher than 2019 even with the transition of the GM K2XX program, which provided about a $45 million revenue headwind to our 2020 comparison. You'll note on the right of the slide for EBITDA and free cash flow, comparing our third quarter performance to the second quarter, our EBITDA rose to $134 million in Q3 compared with $11 million in the second quarter, a change of plus $120 million. Free cash flow rose to $137 million in the third quarter, representing a swing of almost $300 million compared with the use in the second quarter of $162 million. So this snapshot clearly demonstrates the financial resiliency of the business and I believe, is a testament to our Nexteer colleagues successfully navigating through the volatility and uncertainty that, again, 2020 brought forward to us all. So I'll now turn the call over to Robin for our 2020 business update.

Thank you, Bill. Hello, and good day to everyone joining us on the call. So I'm going to spend just a few minutes to discuss our business highlights from last year. This is our tenth year as Nexteer but more than a century as a company. And as we move into 2021, we're remaining consistent with our strategy, but as the industry recovers from this pandemic, we're not just staying on course, we're accelerating actions that align our technology with industry mega trends to ensure we capture the opportunities that are presenting themselves in this new environment. So the business highlights I'm going to cover today will include launches, an update to the backlog, some discussion on our portfolio expansion, investments in technology and then focus on efficiency and execution. First, our launches. So despite the challenges of the COVID-19 pandemic, in 2020, we still managed to launch 47 programs throughout the year, and this compares to 45 launches we had in 2019. For the year, we had 6 launches in North America, 9 in EMEASA and 32 in APAC. The launches represented all regions and vehicle segments from A through full-size truck, along with both global and local nameplates. A couple of notes to highlight. We've included a designation on this chart which is a green dot and reflects those launches that are supporting the electric vehicles. About 20% of our launches in 2020 were in support of EV platforms, and we only expect this number to grow as OEMs accelerate their introduction of electric propulsion technology. The products that are shown in red font are new business wins for Nexteer and launches on those nameplates. Next, we'll go into an update of the backlog. As you all know, we suspended the backlog last year due to the volatility and stability within the industry that was caused by the pandemic. Now we've seen stability return to the market, and we've got an update to the backlog calculation. So the left-hand side of this chart begins with the backlog as of the end of 2019, which stood at $26.4 billion. And the progression of the backlog includes the following factors. So we pulled out our revenue from 2020, which is about $3 billion. We added back in the new bookings for the year, which accounted for about $3.7 billion, and you can see the majority of those bookings happened in Q4. And finally, we did an adjustment for industry volume change, which is driven mainly by the pandemic, resulting in some program cancellations and lower volume, and this was about $2.5 billion in adjustments. So the net result is our backlog settled in at $24.6 billion, which was down 6.5% from 2019. However, over the same period, the industry forecast volume is down by 9.2%. So despite the challenging environment, we still outperformed relative to the market. The upper right-hand side of this chart breaks down the backlog by product line and division. So EPS continues to be the largest product line and accounts for 66% of the backlog, followed by driveline at 20%. From a regional standpoint, America is at 58% of the backlog with APAC at 22% and EMEASA at 20%. Finally, on the bottom of this chart is a view of the backlog by customer. General Motors continues to be our largest customer accounting for 37% of the backlog. Note now that we are reflecting the combination of PSA and FCA under the new customer name of Stellantis, and they now become our second largest customer with 23% of the backlog. In terms of new bookings for the year, 61% of those were incumbent and 39% were Conquest. And I'd also highlight that we continue to retain 100% of our incumbent business for 3 years in a row now. The next chart looks at the backlog in terms of ADAS and electrification mega trends. And you can see that 32% of our backlog is aligned with level 3 through 5 ADAS-enabled vehicles, and 20% of the backlog is aligned with the electrical -- electric vehicle applications. And both of these numbers are growing as OEMs continue to add ADAS and EV content into their vehicle lineup. Next, I'll spend a couple of minutes on strategic portfolio expansion. First slide, there are a few specific examples of how our product lines are using the strategic product expansion to protect and grow our market share. For the electric power steering product line, there are 3 new product offerings that are all global in nature: first, the high-output rack EPS. This work is being led out of our global technical center in Saginaw, Michigan. It expands the breadth of our EPS product line into light commercial vehicles and heavy-duty trucks. It also protects our position with the North American market and the Detroit Big 3 specifically, and it also supports the development of electric trucks as this technology will be featured on the new Hummer EV pickup launch later this year. Next, we have dual-pinion EPS, and this work is being done out of our technical center in Tychy, Poland. Dual pinion allows for improved packaging options and selectable redundancy. It also fills an important technology niche between single-pinion and rack EPS and is a required technology for many of our target growth customers. Finally, modular column EPS, and this work is taking place out of our technical center in Suzhou, China. It's a platform-based design and comprehends anticipated and planned feature diversity. It will be compact and flexible in terms of its packaging and allow us to expand in the market and leverage scale and cost efficiencies. These new technologies position Nexteer to provide a full spectrum of EPS product offerings, allowing us to steer all vehicle types and sizes. For the column product line, this is our new stowable column technology. It allows a steering wheel to be fully retracted and stowed into the dash. With this product launch, Nexteer will be the first in the industry to mass produce a stowable column. The first implementation of this technology will be with a major Nexteer customer and is planned to go in production in mid-2023. The technology also enables OEMs to repurpose and reinvent the vehicle environment with this part. It's also a complementary technology for future Steer by Wire and autonomous driving models. And the growth in the driveline product line is also enabled by the introduction of new technology. On this chart are a few of our newest products that allow us to grow and expand market share, particularly with electric vehicle platforms. The TriGlide Shudderless Tripot achieves industry-leading NVH performance, and the high-efficiency CV joint drives increased efficiency for both IC engines but especially meeting the strict efficiency requirements for EV applications. And then finally, the ball spline axle enables NVH and durability improvements at ultrahigh driveline angles. This technology will also be featured on the upcoming Hummer EV pickup launch later this year. This next chart highlights some of our key programs that will be launched over the next 3 years. It's intended to show how our new products and technology will be rolling out and how they will create growth in the market, in the regions we operate and with the customers served. It also shows which programs are aligned with upcoming electric vehicle launches. It's key to note that this technology expansion not only supports the growth in electric vehicle platforms but it's also driving overall market growth for Nexteer as well as expanding our presence in each of our regions and enabling growth with new OEMs. Next, a little bit on technology leadership and the intersection of mega trends. This slide is a view of the U.S. vehicle market. Of the top 10 bestselling vehicles in the U.S., Nexteer has content on 5, including all of the top 3 which are all full-sized pickup trucks. The big 3 pickup trucks from Ford, Chevy and Ram accounted for 13% of the total U.S. auto market, and Nexteer has significant content on all of those vehicles. You'll see in the next few slides how this market is offering us substantial additional growth opportunities in the very near future as these OEMs roll out electric versions of these trucks. One of the accelerators we're beginning to see is being driven by the intersection of some of the larger mega trends, the products and the markets. Here is an example of the intersection of the electrification mega trend, the REPS product and the full-sized truck market. Where these trends are coming together, it's creating opportunities for new technology, increased value, increased content per vehicle as well as market share. This next slide shows more detail on this intersection trend. Currently, with our REPS product, we support 9 out of 10 full-sized trucks in North America. That's our foundation, and we're recognized as the industry leader in this segment. As these OEMs have been developing their plans to electrify these vehicles, they tend to have higher steering loads which requires a higher output steering system. This led to the development of our high-output REPS technology. But not only does it support the electrification of these trucks, but it also supports converting the heavy-duty full-sized trucks which currently use hydraulic steering. It also allows the conversion of light commercial vehicles and delivery vans which also use hydraulic steering today. So you can see this technology is opening up new markets that could not be served previously with electric power steering technology. This slide shows some additional highlights of some upcoming vehicle launches featuring Nexteer's latest technology. So there's a company called BrightDrop. It's an electric light commercial vehicle. This vehicle will carry all of Nexteer's product lines on it, including our high-output rack EPS system, a steering column and driveline. Next is the GMC Hummer electric vehicle. Again, it will feature all of Nexteer's product lines, including our steering system, column and driveline. In the lower left-hand corner of this chart, this is the Cruise Origin self-driving all-electric shared vehicle. This is a fully autonomous vehicle and will have no steering wheel. It will feature our high-output rack EPS system, 10 FIT high-availability technology with multiple layers of redundancy. And then finally, the EV version of the F-150 pickup truck. This will also utilize Nexteer's rack EPS system. We continue R&D activities across other major mega trends as well, including safety, connectivity and mobility. In the area of advanced safety and performance, we have several initiatives including brake to steer, which we announced in December of last year. This was developed by our joint venture with Continental, and it's a technology that provides another safety layer of steering redundancy in highly automated and autonomous vehicles. Our high-availability EPS systems ensure the steering safety net is always on, and these systems have layers of redundancy built into the software and hardware components. And they achieve less than 10 FIT reliability ratings. In Steer by Wire, we are poised to capitalize on the next conversion wave to Steer by Wire, with customers targeting to start production mid- to late 2020s. Steer by Wire adoption will also increase Nexteer's content per vehicle as Steer by Wire systems require both a handwheel actuator and a road wheel actuator, each with its own motor, controller and software. And we'll talk about this a little bit more in a minute. In the connectivity area, in software, this January, we announced the expansion of our growing software capabilities with an investment in a company called Tactile Mobility, who is a leading tactile, virtual sensing and data company based in Israel. This partnership will allow Nexteer to expand our road friction capabilities with cloud-based technology and machine learning. It also provides a path to developing software and algorithms for vehicle health monitoring as well as other features. We're accelerating our focus on software development, leveraging the scale and competency at our India software center as well as our other global technical centers. Our efforts in this area will position us well for future over-the-air updates and cloud-based connectivity services leading to even safer and more reliable driving. In the area of mobility, we foresee that shared mobility trends will require advanced solutions from both our steering and driveline product lines as well as our CNXMotion joint venture. As the mobility trend evolves, built-in redundancies will be required as well as higher durability designs due to a significant increase of driving hours on shared fleet of vehicles over shorter time intervals. As we've highlighted previously, Nexteer is exploring solutions for mobility and last-mile delivery services through strategic partnerships with GM's BrightDrop, Cruise as well as several others. We continue to invest in the development of Steer by Wire, and we're working very closely with 2 major global OEMs on this technology. We're targeting our first launches in mid-2020 as OEM production plans are becoming better defined. We envision Steer by Wire as a thinner link across the chain of mega trends. It's a technology that connects and enables many features and functions across this spectrum. So regarding electrification, Steer by Wire provides packaging flexibility. Because there is no steering shaft connecting the steering wheel into the steering gear, it opens up space for large battery packs and other content that traditionally is occupied by the steering system. There are also cost-reduction opportunities that can be realized by OEMs by standardizing more of the steering system content. As one example, right-hand drive and left-hand drive vehicles can share much of the same steering system components without significant redesign as is the case today. Another example of potential savings related to -- is related to the steering gear ratio. Today, different steering ratios within a single vehicle platform require different mechanical rack and pinion designs. With Steer by Wire's inherent variable steering ratio, we can use software code and algorithms to adjust the steering ratio and optimize the performance while utilizing a single mechanical design. On the safety side, Steer by Wire enhances stability control, provides shorter braking distances, collision avoidance through automatic emergency steering and more. Steer by Wire is also a key enabler for stowable columns. On the performance side, our software experts tailor the steering feel and responsiveness anywhere from luxury to sporty and even customizing the steering feel to an OEM's brand. Relative to connectivity, software and mobility trends, we foresee a world that has a mix of vehicles, ranging from conventional hands-on driving to highly automated shuttles and last-mile delivery vehicles. This world is a connected one, whereas vehicles are digitally connected to each other, their surroundings and the cloud. Steer by Wire will be a key technology that can be used for both conventional hands-on driving and highly automated vehicles. And because the road wheels and hand wheels are connected electronically, not mechanically, this opens a whole new world of advanced safety and performance features. And as systems evolve, steering features enabled by software will seamlessly be refreshed with over-the-air updates. Next, a little bit on operational efficiency and execution. I want to give you a brief update on the ramp-up of our Morocco facility. We had a very challenging launch in Morocco in 2020, which was compounded by the pandemic that restricted our travel, and thus, in-person support from many of our experts was limited. But we quickly learned how to work virtually and leverage support from our global teams without our typical physical presence. Despite these challenges, by the end of the year, all customer scorecards were green. EPS had ramped up volume production and was meeting targeted performance objectives. For the driveline, the plant extension to support the business was completed in the second half of 2020, and additional driveline capacity is being installed in the first half of this year to meet increased customer volume. About half our planned driveline launches have already been completed with the balance to come this year. And finally, our Morocco facility was officially certified as a Great Place to Work, making Nexteer the first company to be certified as such in Morocco. We have a slide here that shows a few examples of industry awards given to Nexteer during 2020. We continue to be very thankful and honored by industry recognition. It comes from our customers, from manufacturing associations and other business industries. Although getting the recognition is not our goal, it does reinforce, both internally and externally, the value of Nexteer's work and our products within the industry. Finally, sustainability continues to be a focus not only of our leadership team but also now for our Board of Directors. In the unprecedented year of 2020, sustainability played a pivotal role, enabling us to navigate through the COVID-19 environment with a broader, deeper sense of safety and corporate social responsibility. We developed a safe work playbook that provides an interactive global guide for COVID-19 pandemic preparedness and response, demonstrating our people- and safety-first culture. And during this challenging period, our people came together and proudly engaged with our communities, taking on initiatives such as PPE and mask production as well as flood relief support. We continue to implement our sustainability framework along 5 key focus areas: integrating a sustainability mindset into our global business strategies and operationalizing actions in accordance with our multiyear road map to advance ESG efforts. We also recognize innovation as one of our most important business and sustainability aspects. Our One Nexteer team collaborate to relentlessly innovate and further align our technology road map with the mega trends. A few proof points of this. From an electrification perspective, as I previously highlighted, EV platforms now account for 20% of our backlog, and 32% of our backlog supports ADAS-enabled steering functions. This demonstrates our progress made in enabling future vehicle autonomy. Last but not least, we're honored to receive a manufacturing leadership award from the National Association of Manufacturers for a third year in a row. This again reinforces our confidence and commitment in innovating to drive a more sustainable future. With that, I'll turn it back over to Bill for a financial review.

Great. Thanks, Robin. So as highlighted in my opening remarks, the Nexteer team executed well during the course of 2020, navigating the lows of the first half and capitalizing on the second half volume recovery. The strong recovery in OEM demand in the second half of 2020, coupled with ongoing cost actions, provided strong earnings conversion and margin performance compared with the first half of the year. Also, as we'll review on a coming slide, all of our key financial metrics for the second half of 2020 exceeded the same period in 2019 on effectively flat industry production volumes. Strong EBITDA performance in the second half of the year and ongoing capital investment discipline and working capital control more than offset the free cash flow used in the first half of 2020, providing positive full year free cash flow, which also exceeded our 2019 performance. The balance sheet remains strong, ending 2020 with a net cash position of $247 million. And given this position, we elected to redeem our outstanding $250 million senior unsecured notes, which were scheduled to mature in November 2021. We expect to complete the repayment of these notes in early April using both cash on hand and borrowings under our available credit facilities, which will provide a significant net interest expense savings in the current year as we look opportunistically to the latter part of 2021 for capital structure alternatives. So this slide just provides our traditional full year view of our key financial metrics and comparisons as reported in our annual accounts for 2020 and 2019. So as you would expect, given the volatile operating environment that 2020 presented as a result of the health crisis, on a full year view, all of our key revenue and earnings metrics for 2020 are lower than 2019. But you'll note, to the right, our free cash flow came in at $132 million, almost $14 million higher than 2019, given our continued cash management discipline. Revenue of $3.032 billion was lower than 2019 by $543 million or 15.2%, of which $622 million of the comparison is attributable to the first half of the year. EBITDA of $378 million was lower than 2019 by $147 million, with margins slipping by about 220 basis points to 12.5%, reflecting the steep decline in revenue in the first half of 2020 and the cost of manufacturing shutdowns and certainly reduced operational efficiency as a result of the health crisis. Net profit of $117 million was lower by $116 million compared with last year, with margins slipping by about 260 basis points to 3.9%. Yet, we believe the real story for 2020 is a view of our financial performance within the year, which is presented on the next slide. So this slide presents our key financial metrics for both 2020 and 2019 on a half year basis to highlight, again, what we believe is a real picture of Nexteer's financial performance given the environment we experienced and navigated through during the course of the year. You'll note here to the left, revenue of $1.821 billion for the second half 2020 increased by $611 million or 50.4% compared with the first half of 2020 and $78 million or 4.5% compared with the second half of 2019. All of our earnings and cash flow metrics for the second half of 2020 fully recovered from the first half lows and actually exceeded our second half 2019 performance as well. You'll note here EBITDA of $262 million for the second half of 2020 sequentially improved by 1.3x and was higher by $14 million or 5% -- 5.7% compared with the second half of 2019. EBITDA margin of 14.4% in the second half of 2020 improved both sequentially and compared with the second half of 2019 by 480 basis points and 20 basis points, respectively. Net profit of $115 million for the second half of 2020 significantly improved from the about breakeven result in the first half of the year and was $14 million or 14% higher than the second half of 2019 with the margin profile improving by 50 basis points. Free cash flow of $322 million for the second half of 2020 fully offset the use of $190 million in the first half, driving full year performance to positive $132 million, exceeding 2019, again, by $14 million. So this view reinforces the effort of the Nexteer team and the financial resiliency of the business. We certainly are grateful to all of our colleagues for their diligence and discipline in driving these financial results during a very, very challenging year. And another part -- view of performance is how Nexteer's revenue compared to the market, both year-over-year and sequentially, which is presented here on this slide. On a full year basis, in the upper left, you'll note 2020 OEM production ended at about 74.5 million units, 16% lower than 2019, with every major market served significantly lower. Although Nexteer's revenue did decline year-over-year given the steep decline in the production environment, the change in revenue outpaced the market by about 100 basis points. If we look to the second half of 2020, global OEM production rose to 40 -- rose by 44 million units, 44% higher than the first half. Nexteer's revenue increased by plus 50%, outperforming the market by about 600 basis points. This performance in excess of market is a result of favorable platform positions as well as the benefit from Conquest customer program launches in both 2019 as well as in 2020. This slide provides the bridge behind our revenue comparisons on a full year basis. So as expected, the largest driver of the full year revenue comparison is the market impact experienced in the first half of the year as a result of the pandemic, which lowered revenue, you'll note, by about $558 million. And as expected, the GM K2XX platform transition lowered revenue by about $100 million in 2020, impacting our columns product line. GM did complete this platform transition in the first quarter of 2020, and the comparison will be behind us after the first quarter of 2021. 2020 is the first full year of production for our new Morocco manufacturing facility, which contributed $68 million of incremental revenue compared with 2019, reflecting the benefit of multiple EPS and driveline program launches during the year, as Robin noted in his comments. Favorable volume and mix, net of full year customer pricing of about $42 million, provided a second half tailwind of $45 million, with our Asia Pacific and EMEASA segment significantly outperforming the markets given the favorable impact of program launches. This slide provides us a closer look at our segment revenue performance on a half year basis. You'll note North America full year revenue of $1.905 billion was lower than 2019 by $544 million or about 22.2%. The second half 2020 revenue of $1.111 billion improved sequentially by almost 40%, although lower than the second half of 2019 by about $63 million or 5.4%, principally a result of the remaining impact of the K2XX program transition, which was a headwind of about $46 million during the second half. Asia Pac full year revenue of $641 million was about in line with 2019. Second half revenue of $411 million rose 78% sequentially compared with a rise in OEM production of 43% and was higher than the second half of 2019 by $74 million or about 22%. Over the last 2 years, our Asia Pac segment has executed a heavy customer program launch schedule, which certainly is a significant driver of this favorable performance in excess of market. EMEASA full year revenue of $486 million was also in line with the prior year. Second half 2020 revenue of $300 million was up plus 61% sequentially and higher than the second half of 2019 by $68 million or about 29%. Similar to the Asia Pac segment, while OEM production was lower in the second half of 2020 compared with 2019 by 4%, EMEASA's year-over-year revenue increase of 29% outperformed the market by 33%, largely the benefit from multiple program launches in Morocco, again, in both 2019 as well as in 2020. So we will now turn to our earnings metrics, and again, this is a similar presentation to our full year comparisons. This slide provides that same bridge for EBITDA. 2020 EBITDA was lower than 2019 by $147 million, of which $170 million was a result of a dramatically lower revenue environment and the impact of broad manufacturing production shutdowns we experienced in the first half of 2020 as a result of the health crisis. And again, as expected, the North American columns program transition impacted the comparison by about $24 million. Volume mix and pricing lowered EBITDA by $24 million year-over-year, with higher volumes in the second half of 2020, partially mitigating customer pricing of about $42 million. Net performance for the full year totaled $71 million, comprised principally of material and manufacturing efficiencies and provided a partial offset to the significant headwinds we experienced in the first half of 2020. So our segment EBITDA performance and margin profile is presented on the next slide. You'll note here North American EBITDA of $235 million was $107 million lower than 2019, reflecting lower revenue of $544 million. Yet, the second half 2020 performance of $162 million sequentially improved by $88 million and was $8 million higher than 2019, driving year-over-year margin improvement of about 150 basis points. Strong recovery in customer production schedules and net cost performance offset the impact of the columns platform transition as well as customer pricing. Asia Pac EBITDA of $125 million was lower than 2019 by about $12 million, with transactional FX accounting for about 50% of that comparison. Yet, despite the decline in the demand environment in the first half of 2020, our Asia Pac team defended the margin profile of the segment with net cost actions to maintain the EBITDA margin above 19% for the full year 2020. EMEASA's EBITDA of $26 million was $30 million lower than 2019, reflecting, again, the impact of the significant reduction in revenue in the first half of 2020 and the cost impact of manufacturing shutdowns and restarts. In the second half of 2020, EMEASA generated EBITDA of about $26 million, $4 million higher than 2019, with the margin profile recovering to about 8.8%. Incremental launch costs supporting the ramp-up of our Morocco operation in the second half of 2020 did temper the margin profile of this segment compared with 2019. So this slide just provides a traditional bridge of our reported EBITDA to net profit for both 2019 and 2020. You'll note here depreciation and amortization expense of about $259 million was slightly higher than 2019, largely a result of increasing amortization of capitalized engineering as well as depreciation of in-service property, plant and equipment to support program launches. You'll note here earnings from our joint ventures totaled $1 million for 2020 compared to a loss of $4 million in 2019, principally reflecting improved earnings from our Chongqing joint venture and lower losses from our CNXMotion and Dongfeng joint ventures resulting from cost controls, which lowered spending during the course of the year. And as we discussed during our first half 2020 update, tax expense was favorably impacted principally from benefits we derived from the U.S. CARES Act, which provided the ability to carry back U.S. tax losses to prior periods at a rate of 35% compared with the current statutory corporate tax rate of 21%. This 14% rate differential alone provided a net permanent tax benefit of nearly $10 million for 2020. So this slide highlights our free cash flow performance on the left and our key balance sheet metrics on the right. So again, in my opening comments for the full year 2020, we generated positive free cash flow of $132 million, higher than 2019 by $14 million, with lower investing activities of about $86 million for capital investment and capitalized product development offsetting lower cash from operations of $71 million. Focusing on 2020 and our performance in the first and second half of the year. Note that the net cash used from operating activities in the first half of the year of $28 million, again, principally a result of lower earnings given the sudden and steep decline in revenue, was quickly recovered in the second half with a net cash inflow of $448 million, reflecting both higher earnings and continued working capital controls. Investment activity has also provided a first to second half tailwind of about $37 million, again a result of our ongoing investment discipline. You'll note, as highlighted on the right, we did end 2020 with a net cash balance of $247 million, which includes capitalized lease obligations and certainly minimal leverage. And given the strength of the balance sheet and favorable interest rate spreads, as highlighted in my opening comments, in early 2021, we did elect to redeem our outstanding $250 million senior unsecured notes, which were scheduled to mature in November of this year. And again, we expect to settle this maturity in early April using both cash on hand and borrowings under our available credit facilities. So that wraps up the review of our 2020 financial performance. So I'd just like to take a moment to provide our current perspectives on 2021. So while we are still early in the year, there are certainly supportive factors as well as near-term challenges that we're working through. So on the positive front, we believe that the economic environment provides a favorable backdrop with accommodative monetary and fiscal policies in place across a broad number of countries intended to spur economic recovery and ultimately, growth. A path towards the end of the health crisis seems now in sight with the accelerated rollout of vaccination and related treatments. Global OEM production is expected to further increase in 2021 by about 14%, higher than 2020, with all served markets enjoying recovery, driven by continued inventory replenishments as well as strong consumer demand. Coming off another strong year of customer program launches in 2020, we expect to launch over 40 customer programs in 2021 across all regions. However, the industry is also facing serious supply chain constraints, as you're well aware of, particularly around the industry-wide semiconductor chip shortage that all participants, OEMs and suppliers, are dealing with today. In the near term, OEMs are adjusting production schedules quickly in response to the availability of inbound components impacted by the current chip shortages. Many OEMS though have also indicated that they do expect to recover any lost vehicle production in the first half of 2021 as a result of supply shortages in the second half of the year. Also, logistics remains extremely constrained as well and costs have risen quickly, especially ocean transportation, given port congestion and container availability. So while we are currently expecting some impact to our cost levers in the first half of 2021 as the industry works through these challenges, we remain focused on navigating the near-term environment, much like we did throughout 2020. So with that, again, I'd like to thank you for joining us today, and I'll turn the call back over to Kate for questions. Thank you again.

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

Congratulations for the very good results for the second half. So I have 3 questions. First, many of our peers in the auto industry have plans to raise capital, either in the H-share or A-share market. Do we have any thoughts or plans on this front? And related to this, I know we have been looking for M&A targets for a few years. Not sure if there are any updates that can be shared with us at this moment and if that will involve capital raising. Second question is -- I believe that IHS is forecasting global light vehicle volume to recover to the 2019 level only in 2022, so next year. I personally believe we can outgrow the industry and potentially recover our revenue to the 2019 level this year, but I would like to hear from -- management team's view on this. And what's our target for this year? How can we potentially outgrow the industry? Last question is if you could share any view on the pickup truck volume in North America given surges in the oil prices. And any views or expectations of the GM and Ford EV truck sales volume that you can share, that would be very much appreciated.

Great. Thanks, Rebecca. This is Bill. It's nice to hear your voice again. I'll answer a couple of these questions. And on the pickup truck market commentary, I'll let Robin take a shot at that. So with respect to capital raises, certainly, given the strength of the balance sheet currently, we did elect to early redeem our 2021 maturity, the $250 million unsecured notes. But that really is just a path or a plan forward to capture the interest savings as we look to the latter part of 2021 with respect to capital market access. With respect to H-shares, that certainly is an opportunity for us. You know we have a 20% general mandate as part of our shareholder approval process, so we also are staying in touch with relationship partners with respect to the opportunities we might see on that front as well. But I think the path forward for us currently is to move forward in, I would say, a more traditional credit market approach with respect to capital raises, again, latter part of 2021 as we go through various approval processes required by the NDRC in China as an example. With respect to M&A targets, certainly, there has been discussion. We've had discussions with a couple of parties of late. Nothing to announce today, but we continue obviously to scan the environment and have reach-outs where appropriate. However, we might see some opportunity, synergy and/or expansion of our product lines with respect to inorganic actions. 2022 -- you're right. If you take a look at 2021 with respect to OEM production volumes, still not expected to achieve 2019 levels, but I think given our performance, in particular in the second half of 2021 with respect to our outperformance in revenue compared to the market, we are targeting to get back to that 2019 revenue level in 2021. We have significant program launches. We're seeing the benefits of those launches. Another heavy year in 2020 with respect to program launches, much of that business being Conquest. We have another heavy launch year in 2021 ahead of us, again, heavy Conquest. And we can start to see the benefits of all that hard work in previous years now coming to the revenue line in the current environment. So again, our target and our objectives internally as we move forward with an eye towards achieving and potentially even overachieving our 2019 revenue level. Robin, maybe on pickup trucks and the impact of oil increases with respect to demand.

Yes. So I'll take that, Bill. Thank you. So I mean if we look at what's happening globally and in the U.S. market in particular, we are seeing pressure on energy costs, with that impacting fuel and oil and gasoline prices going forward. But it's kind of remarkable. The full-size pickup truck segment has been pretty resilient over a number of years now despite changes in gasoline and fuel costs. So it has historically been a very resilient market that's performed well despite some of the fuel costs. And I'd say some of the other things that we look at is this type of pickup trucks are used a lot in the construction industry and as the U.S. government continues to talk about additional stimulus spending targeted at infrastructure that would support and lift the construction industry to some degree as well. But having said all that, all of these OEMs are looking and are rolling out electric versions of their pickup trucks. They're really highlighting the performance of those trucks in terms of horsepower and the torque and the acceleration capabilities, and they seem to be getting a lot of market attention and hype relative to those launches. I think time will tell the acceptance of those within the industry, but indications are looking positive. In fact, if anything, we're seeing some strengthening forecast in terms of the volume projections for these EV trucks. And in terms of the content we have on those trucks, it's pretty significant in terms of CPV increasing as we look at a high-output rack EPS system and the price point of that compared to our standard rack EPS system. And then I'd highlight driveline as well because these trucks -- the Hummer truck that will launch later this year will use our latest technology in driveline, which is a ball spline axle. And that's considerably at a higher price point than what it replaces, and there are 4 of those half shafts in that vehicle. So there's opportunity for us to increase CPV with these applications. But in the end, it's going to come down to what's the volume of those trucks can they capture in the market, but we're optimistic at this point.

The next question is from Tim Hsiao of Morgan Stanley.

Congratulations on the solid results. Just 2 quick questions from me. The first question is about accounting. Because, as highlighted during the presentation, about $2.5 billion order impact from cancellation and project adjustments due to COVID. So may I know if we have, call it, impairments or additional expenses associated with the changes or development costs or the project cancellation due to the aforementioned changes? The second question is about the component supply. Could you please share your assessment of the potential impact of the chip shortage to both the orders and your own component sourcing? Would it be just larger in line with what the market looks for, say, like 5% or so in first half? Or Nexteer could actually rather do better than peers with better sourcing or market share gain?

Great. So I'll take the first question again. Good to hear your voice. I think 2 points to make with respect to program cancellations and/or views of forward year expectations. Certainly, in the first half, we did recognize impairments related to cancellations of programs as customers are obviously kind of realigning, if you will, production plans given the current state of affairs at that point in time. Really, as we've moved through the second half, very minimal activity on that front. And I think if you look to the backlog, which probably is the place to start. If you think about the commentary that Robin provided, industry volume, another -- if you take a look at IHS, that was a headwind of about $2.5 billion in total. And of that, I would say about 8-plus percent of it was just strictly due to lower forecasted forward-year volumes coming out of IHS. We use that as a baseline, and we certainly adjust for various program exceptions, if you will, based on customer engagement and understanding where they maybe taking a particular program. There's some slight, I would say, negatives, probably about $300 million net now with respect to certain program cancellations. But the bulk of that headwind, Tim, is really just around forward-year program expectations, again, aligning foundationally with IHS estimates out through the duration of the backlog. Robin, I don't know if you want to take the second question.

Yes, sure. I will, Bill. Thanks for the question, Tim. I would start by saying that chip shortage is really a dynamic environment that we're in. I think Bill mentioned that it's a day-to-day kind of situation. I would say it's an hour-to-hour situation that things are changing that rapidly. We are engaging certainly with our OEM customers, all the way down through our supply chain, to everyone in our supply chain to try and mitigate any shortages that we see. And we're taking lots of actions in terms of our engineering team looking at opportunities for substitutions of certain components for others that requires revalidation in cooperation with the OEMs to get approval for those changes. We're also looking at throughput in the industry, various areas within the value chain of the chip production up into the point that it's into our CCA, but areas that we can improve throughput by minimizing testing and that sort of thing. We're working on those. And then we're certainly leveraging our OEMs to talk to our supply chain to help prioritize their supply. But it's really an hour-to-hour thing. It's got the focus of our entire organization. We're seeing customers begin to pull schedules out in the first half as a result of shortages in certain areas. I would say, in general, in North America, the OEMs continue to prioritize their full-size trucks. And so to the extent that they're able to do that, that would certainly support Nexteer because of our high content on those particular vehicles. And the other thing that Bill mentioned as well is OEMs are saying today that they plan on making up -- any lost volume that they have in the first half, they plan on making that up in the second half. So hopefully, the supply chain gets improved during the first half, and in the second half, there's enough capacity to support the volume that the OEMs will attempt to build to meet the demand.

The next question is from Nick Li of Crédit Suisse.

So basically, I have 3 questions. First one is on the financials. Now I want to ask why actually our North American operation revenue declined by 5%, actually underperforming the overall market. What is the reason behind? And also, on the dividend, I see that we actually cut the dividend back to 20% payout ratio in 2020. I think that this is reasonable, but what can we expect for 2021 and looking forward? This is the first question. And second question is on the technology. I see that we -- I think we are the only one that has such a high-output rack EPS. Is there any possibility that we could gain more market share in the EV pickup trucks? For example, Tesla, right, the company will launch their Cybertruck this year. So is there any possibility -- or the Semi heavy-duty truck. Is there any possibility to get into their supply chain by supplying such a state-of-the-art technology product? And third is on the content per vehicle. I see that we highlighted the content per vehicle for our supply to the Hummer EV will increase. Maybe could you provide some numbers on this, like for the -- for a set of high-output rack EPS and also the stowable column. So what will be the, for example, average selling price in this part? Or is that -- a sense of direction is also appreciated.

Great. Great, Nick. I'll take the first couple of questions, and I'll let Robin address the last 2. And we can all have a good discussion here. Nick, your observation with respect to the North America revenue is correct. If you take a look at second half comparisons, we were certainly down about 5% or so, about $60-some million or so. Part of that obviously is the columns transition, which is impacting this. But I think the other point of the puzzle is if you look deep into kind of the performance from an OEM volume perspective. We saw some lagging on Ford largely around kind of their staggered approach with respect to T3/T6 during the period. That's a new program that's launching -- or programs that are launching. So I don't think they were necessarily keeping pace with the overall volume environment. And if you kind of peel a little deeper into it, if you take a look at some of the other players, Toyota had a very strong showing in the second half with respect to volume uptick. And certainly, from a sequential perspective, we're not as represented with Toyota as we are with, obviously, Ford, General Motors, FCA in the North American market. With respect to the dividend payout ratio, you're correct, we've moved to 20% payout ratio. That's a Board-level discussion that we had even as of last evening. And I think as we move forward, that's an annual event that we look at, Nick, with respect to the payout ratio vis-à-vis, obviously, the earnings generated in the particular period as well as forward-year views on capital allocation. So again, annual event. And I think it's a reasonable payout ratio currently given a number of other suppliers, at least in the Western side of the house, have yet to reinstate dividends as well, given the performance of the business. So I probably would say more to come as we move through 2021. Robin, do you want to take a shot at #3 and #4.

Yes. So in terms of the high-output REPS technology and the rollout, we are the first to the market with this level of output in a steering system. That doesn't mean we'll always remain the only player in that segment, but we certainly are finding advantages to being the first entrant there. So it does support a lot of these trucks and the heavier vehicles that require those type of steering load. It's also -- I think I mentioned in the presentation, it's opening markets that we didn't have on our radar screen before for EPS, vehicles like these light commercial vehicles that have a lot of global volume associated with them as well as heavy-duty pickup trucks that currently use hydraulic steering systems. So we are looking at opportunities to leverage this high-output REPS technology into those other segments that have so far been untapped, and we do see a lot of promise with that high-output technology. In terms of content per vehicle, without getting into the pricing, I think I can directionally kind of give you a sense of what we see there for the high-output rack EPS system. We talk about our BOM costs or bill of material and how much content we have in the system. Think of it as about -- the high-output REPS is about 50% more in terms of the BOM cost compared to the standard-output REPS that it would replace. And then on the driveline side, I think the content per vehicle is even better than that because in a current application, we would have 2 half shafts per vehicle. In the new application, there's 4 half shafts per vehicle. And at the same time, the half shaft -- the BOM content of that half shaft is also increasing by about 50%. So there's kind of a double benefit on the driveline product line as well. So I think directionally, with these high-output systems, heavier vehicles, we are seeing a significant uptick in the content per vehicle. And what we're hoping for is for the volume to increase to a point that it is significant in the future. Thanks for the question, Nick.

The next question is from Xinchi Yin of Citi (sic) [ Citic ].

I have 2 questions today. So the first one is about the tax rate. I noticed that on the second half, actually, the tax rate of Nexteer is 18%, and it seems a little bit normal. Could you give us an explanation on how about the guidance on the tax rate on the upcoming year? And the second question is can you give us some of the updates about Steer by Wire technology? I heard some news that Volkswagen is very interested in Steer by Wire, cooperating with Nexteer. So can you give us some of the updates about Steer by Wire's backlog, Volkswagen and Audi?

Great. Thanks, Xinchi. This is Bill. With respect to the tax rate, you're right, there was a little uplift in the second half versus the first half. Part of that obviously was the environment we encountered in the first half and also taking advantage of the U.S. CARES Act to drive that kind of net benefit of about $10 million for U.S. losses incurred back to prior periods at a 35% rate versus the current statutory rate of 21%. I think it's kind of murky just given the first and second half view. Here's how I would be thinking about the tax rate moving forward. We're looking at probably a tax rate, absent any significant changes with respect to U.S. corporate tax environment under the new administration, that we will probably be in a ballpark of mid- to upper teens. And I think that is still a very efficient approach based on our entity structure. If you think about the various rates, we still operate under a tax holiday in our Polish operation, for example. We've got our high-tech rate designation in China. And still, even given that, the U.S. still at 21% is the highest rate. So again, I think from a modeling perspective, mid- to little lower-level teens is probably the appropriate tax rate in a traditional, more normal and stable earnings environment. Robin, do you want to take a shot at the question regarding SBW and VW?

I will. So thank you for the question. We haven't publicly announced the OEMs that we're working with specifically with Steer by Wire. But I can tell you that we -- our strategy has been pretty focused on 2 OEMS: one, a global OEM based in North America; and another global OEM based out of Europe. And we've selected those 2 OEMs to partner with because we thought they were kind of leading in terms of their technology and their advancement in Steer by Wire technology. So we have worked -- partnered very closely with them for the past 3 years, developing our Steer by Wire system architecture around their requirements to prepare us for a vehicle launch. And we are beginning to see some maturity of these OEMs' plans to roll out the Steer by Wire platforms. The OEM in Europe is -- at the moment has a defined program that will go into production very near, 2025. And that is a program that we are very actively pursuing, and we expect them to actually award this production Steer by Wire program later this year. And as I mentioned, we have been in close cooperation with that OEM, developing our architecture together. So I think that positions us very well to secure that first Steer by Wire technology. So we're very excited about this technology. We do believe it's the future steering system for vehicles. And it's very important to get our architecture correct so that we can capture a lot of this market once it begins to convert. So thank you again for the question.

Due to limited time, we will take the last question from Lou, Jia of BOCI.

I have a follow-up question on Steer by Wire. Just want to now that -- if Steer by Wire is indispensable technology to achieve high-level autonomous driving. Here, I want to make sure that in our current backlog, the EPS that enable level 3 to level 5 AD functions does not include any Steer By wire products, right? And since we are a pioneer in Steer by Wire technology, do we have any -- do we see chances to gain substantial market share from mass production of Steer by Wire around mid-20s? And what is our midterm market share target from the current level of 12%? My second question is can management share with us some quantitative analysis on the benefits we can get from the industry trend of electrification and autonomous driving? For instance, how much higher ASP and profitability of EPS equipped with the EV models, all the ADAS-enabled EPS compare with the current EPS equipped with ICE models?

Okay. You want to take the Steer by Wire?

Yes. I will take a shot at the Steer by Wire. So if you look at our current backlog and the numbers we quoted in terms of the percent of ADAS features that does not include any Steer by Wire at this time, so that is a technology that we have not booked business for today. But we do expect that to begin to change this year and into next, and we do expect OEMs to begin launching Steer by Wire programs kind of mid- 2020s and beyond. And again, I -- we've targeted 2 specific OEMs to do our initial development with, and I believe getting first to market with that technology will bode well for us to capture market share in the future. And that is our strategy, to enter rapidly with those 2 OEMs that we've targeted and then to expand with other OEMs as they begin to formalize their Steer by Wire programs as well. In terms of average selling price related to electrification and ADAS-related technologies, let me take those kind of separately. So with electrification, some of the trends that we are seeing is that these battery vehicles tend to be slightly heavier than the IC engine counterparts that they replace, and that drives us into higher performance of steering requirements. Even if it doesn't get up to the level that the trucks do with high-output rack EPS, it tends to be in the rack EPS product line or the dual-pinion product line, and those tend to be higher prices for those technologies. So in general, with electrification, we see kind of a migration towards the more premium end of the steering technologies. And then if I take ADAS as another topic, certainly, it's a very competitive market in terms of ADAS features. And what ADAS means to a steering system is a lot of the redundancies in terms of the software and the electronics. And so far, we haven't seen the market being able to support a significant price premium for these ADAS features. And although the engineering work involved in the development of these products and in some cases, the BOM cost increases because you have more content and more redundancies, we just haven't seen a significant market support of higher prices. So our strategy on these ADAS-related features has been to drive very aggressively our generation-to-generation cost reduction strategies. So we're very focused on updating our electrical architecture, which affects the electrical components that support that architecture and just driving significant generation-to-generation cost reductions in order to maintain our margins on those products, and we've had significant success in those. I think in the past, we've showed some of the generational cost improvements that happened in the full-size truck market. And I think another piece of evidence you can point to is our ability to conquest business. And the way we can conquest business is having these advanced features in our technology but also providing that at a price that is better than what the competition is. So that's been our strategy on the ADAS-related functions. Again, thank you for the question.

Thank you so much for all of your 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.