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

Ladies and gentlemen, welcome to Nexteer Automotive Group Limited 2021 Interim Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Investor Relations Director, Mr. Cameron Wang. Please go ahead.

Thanks, Matt. Good day and welcome, everyone, to Nexteer's 2021 interim results call. We made the announcement of our interim results with our announcement of a senior leadership change this evening Hong Kong Time. Today, we have our Executive Board Director, President, CTO and Chief Strategy Officer, Robin Milavec; Senior Vice President and CFO, Will Quigley; and the Senior Financial Executive, Mike Bierlein, who has been appointed by the Board to assume the future CFO role on the call. Starting the presentation, we will have Robin give an introduction of the senior leadership change and then provide an update of the company's business development for the first half of 2021. After that, Bill will lead us dive into the financial details and the wrap up with the company's considerations about the second half year and beyond. Following the presentation, we will have -- be available for your questions. The slides accompany today's call are available at our company's website, please be remindful of the harbor statement governing today's communication in the second page of the presentation package. Now I turn it over to Robin.

Thanks, Cameron, and good day to everyone. We appreciate you joining us on this call for our 2021 interim results update. I'll lead off by providing a business update, and then I'll turn it over to Bill to provide our financial highlights for the first half of the year. But before I get into that, I'd like to share some new executive leadership changes with you that Cameron just mentioned. So following the return announcement of Tao Liu, our President and Global Chief Operating Officer; and Bill Quigley, our Chief Financial Officer, the following changes will take place. I've been appointed Nexteer's President in addition to my current role of Chief Technology Officer, Chief Strategy Officer and Executive Board Director. In my combined responsibilities, I will facilitate global alignment and teamwork while spearheading the strategic direction of Nexteer. My primary goal is to ensure that our leadership road map is aligned with the industry megatrends, thereby strengthening our ability to capitalize on growth opportunities. Herve Boer, currently Nexteer's Development President of Europe, Middle East, Africa and South America, will be relocating to Auburn Hills, Michigan, where he will assume the role of Senior Vice President, Global Chief Operating Officer and North America division President. In this role, Herve will lead all efforts to enhance operational efficiencies and profitability, positioning Nexteer to successfully navigate the challenging pandemic recovery environment and beyond. Mike Bierlein, currently Nexteer's CFO of North America will assume the role of Chief Financial Officer on September 1, 2021. These leadership changes are part of our succession planning and demonstrate how we're driving leadership focus between 2 key areas: First, the long-term strategic direction to strengthen our ability to capitalize on growth opportunities aligned with the evolving megatrends in mobility. I will lead this forward-looking activity. And second, our global operational efficiencies and profitability, which is critical as we navigate the pandemic recovery phase and well beyond. This activity will be led by Herve. Tao and Bill have played important roles in Nexteer's growth and success in recent years, and the entire Nexteer team thanks them for their leadership and wishes them well on their new adventures. We're pleased to welcome Herve and Mike to their new roles. They each bring extensive strengths and experiences to these positions that will offer a natural progression and succession for our leadership team while continuing to advance Nexteer into the future. So let's start off by quickly referencing our strategy for profitable growth, which has not changed. We continue to drive initiatives to expand and diversify our revenue base, strengthen our technology leadership, optimize our cost structure and advance the other 3 elements of our strategy. Moving into our business highlights for the first half, I plan to cover 4 major topics: launches, new business bookings, strategic product and technology development and industry recognition. So first is launches. So I'm pleased to report that the company has launched 16 major programs across multiple product lines, regions and customers. You can see a significant number of representing new businesses that are highlighted in red on this slide. They include the Ford Bronco, one of the most anticipated vehicles to hit the North American market this year, and I'll talk a little bit more about in the next slide. We also have significant driveline breakthroughs in mainstream models of Japanese and German customers. You can also notice the electric vehicle launches supported by our products that are indicated by the green EV charging symbol. We had a total of 5 launches in the first half, supporting EVs. And looking forward into the second half, we expect a strong launch season to continue, including multiple new EV models as the trend towards EVs only accelerates. So as mentioned previously, the Ford Bronco features some of Nexteer's latest steering innovations. Starting with the power pack, it's a compact design that's enabled by the first of its kind, a double folded circuit card. The folded board not only improves packaging but also reduces the cost due to the elimination of traditional interconnects between individual stacked boards. It also features a 10 FIT fail-safe design to enhance safety by utilizing backup redundancies in the controller circuits, sensors and software. The Ford Bronco 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. And a final note on software. We have worked very closely with Ford on developing an optimum software package to customize steering performance for an off-road usage profile. The software-driven steering performance complements the personality of the Bronco's off-road character. Next, we'll look at the first half business bookings. From our Q1 conference call, we started providing our quarterly bookings update. The middle of this chart indicates our quarterly bookings, followed by our forecasted order bookings for the balance of the year. We booked $1.34 billion for the first half of 2021, with $697 million booked in Q2. As we previously mentioned, significantly more bookings are expected to occur in the second half of this year based on the OEM's award cadence. The yearly booking target of $6.4 billion for 2021 remains unchanged and it supports our company's midterm growth projections when you compare it with our current annual revenue level. On the right-hand side of the slide, you can see that within the first half business bookings, EPS accounted for 71%. The Column business accounted for 16% and the Driveline business accounted for 13%. These new programs booked in the first half are mainly from North America and our APAC divisions. Most bookings are Conquest wins, which account for 89% of the total and 42% of the total bookings in the first half are electric vehicles. Our products across the board are participating very successfully in this electrification trend. On the left side of this chart, I want to highlight the 2 most notable accomplishments in the first half of 2021 relative to bookings. We're very much focused on expanding and diversifying our revenue base, expanding our sights beyond our current foundational customers by targeting growth with additional global OEMs to expand our market position and revenue growth with our core products. We secured our first Rack EPS Conquest booking with a major Japanese OEM in the first half of this year. This award further strengthens our technology and global market leadership for the Rack EPS product line broadly, and specifically opens opportunities to increase scale and for cross-selling of other product line offerings to this Japanese OEM. Finally, I'd highlight that during the first half, we continued to successfully defend 100% of our incumbent business. This is key to maintaining a solid foundation on which we will build and continue to grow. With the first half year booking of $1.3 billion, we closed the half year with an order-to-delivery backlog of $24.5 billion after adjusting for revenue for the first half and the industry volume forecast change. The result is about the same backlog balance as we ended 2021. The backlog composition now reflects 66% EPS product line exposure and 58% of North America regional exposure. We do expect the backlog by the end of the year will be increased due to the significant additional bookings that are expected in the second half of this year. Next, I'd like to highlight some strategic product technology that's driving our market leadership. This slide shows a few specific examples of how our product lines are using new technology to protect and grow our market share. For the electric power steering market, there are 3 new product offerings that are all global in nature. First, the high-output Rack EPS. 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 it supports the development of electric trucks as this technology will be featured on several new EV pickup nameplates. Second, we have Dual Pinion EPS, and this work is being led out of our technical center in Tychy, Poland. Dual Pinion allows for improved packaging options and selectable redundancies. It also fills an important technology niche between single pinion and Rack EPS and as a required technology for many of our target growth customers. The third one is modular Column EPS, and this work is taking place out of our technical center in Suzhou, China. It's a platform-based designed and comprehends the 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. On the bottom of the chart, we envision Steer-by-Wire as a center link across all the chains of mega trends. It's a technology that connects and enables many features and functions across the megatrend spectrum from electrification to autonomous and more. For the Column product line, this is our new Stowable Column technology that we mentioned previously. It allows the steering wheel to be fully retracted and stored 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 Column technology. It's also a complementary technology for future Steer-by-Wire and autonomous driving models. We're excited that our Steer-by-Wire technology and Stowable Steering Column technology were nominated by Automotive News as a 2021 PACEpilot finalist. Finally, we have the Ball Spline Axle, which enables noise, vibration, harshness and durability improvements at ultra-high driveline angles. This technology will be featured on an upcoming new EV pickup truck also including the GMC Hummer later this year. Currently, with our Rack EPS product, we support 9 out of 10 full-size trucks in North America. That is 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 higher output steering systems. This led to the development of our high output Rack EPS technology. But not only does it support the electrification of these trucks, but it also supports converting heavy-duty full-sized trucks, which currently use hydraulic steering, and it 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 cannot be served previously with the Electric Power Steering technology. And as electric vehicles drive higher tire rod loads in all vehicle segments, Nexteer has expanded the output capabilities of our Pinion EPS systems to meet the higher EV loads for B-to-D vehicle segments. New high output options significantly increase the steering capability and gives our customers cost-effective options for steering heavier vehicles. Our strategy in this area is clear, we want to extend the output range and increase the value of our electric steering portfolio and position ourselves as the most competitive, highest-performing steering supplier in the industry. In addition to being aligned with the accelerating electrification trend, we also are actively exploring motion control solutions and collaborations across several other megatrends as well, including mobility, connectivity and advanced safety and performance in various levels of automation. 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 require -- will be required as wet higher durability designs due to the significant increase of driving hours on shared fleet vehicles over shorter time intervals. As we've highlighted previously, we are exploring options for mobility and last mile delivery services through strategic partnerships with GM's Bright Drop, Cruise as well as several others. In the connectivity area, specifically software, we announced this past January, 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 technologies and machine learning. 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 very well for future over-the-air updates and cloud-based connectivity services, leading to even safer and more reliable driving with vehicles that are in tune with their real-time environments. In the area of advanced safety and performance, we have several initiatives, including Break-to-Steer, which we announced in December of last year. This was developed by our joint venture with Continental, and is a technology that provides another safety layer of steering redundancy in highly automated and autonomous vehicles. Just as with our Steer-by-Wire and Stowable Column, the Brake-to-Steer product is yet another automotive PACEpilot award finalist, recognizing transformative innovations in our industry. As these mega trends evolve and converge, one common safety requirement underpins them all, and that's cybersecurity. You may have seen the automotive news article that highlighted Nexteer on the topic of cyber security. As vehicles are fast becoming more software-enabled, cloud-connected devices, we are proactively developing cyber security solutions by partnering with our OEM customers to ensure that the steering system is safe and protected. So in addition to recognition of technologies and their role in the megatrends, Nexteer has also been recognized for operational efficiency and execution. On this next slide, I won't read the entire list to you, but Nexteer has been recognized as a Supplier of the Year for quality excellence, manufacturing leadership and technology innovation by multiple OEMs and industry experts. We continue to be very thankful for the industry acknowledgment of our leadership and our accomplishments. And finally, in addition to our product and technology expertise, Nexteer continues to demonstrate industry leadership as a business partner and employer of choice through our commitment to corporate social responsibility. We highlighted achievements in our 2020 sustainability report that was recently published in July and would like to take this opportunity to share our ESG accomplishments and ongoing efforts. We are proud to receive the recognition by Newsweek as one of America's Most Responsible Companies second year in a row, along with workplace-related awards in multiple regions. Additionally, we continue to promote sustainability efforts as in cyber security and diversity, equity and inclusion. Recognizing these increasingly important sustainability aspects to further enable our business operation excellence. In wave of the global and industry heightened expectations in addressing climate changes, Nexteer continues to coordinate our cross-functional expertise level efforts and climate activities, and as an example, our engagement and collaboration with internal and external subject matter experts to conduct physical and transition climate assessments and to position ourselves to meet relevant stakeholders' expectations. Moving along our journey to advance Nexteer's ESG efforts, we value sustainability as an imperative megatrend and continue to explore alignment opportunities to the company's comprehensive strategy for profitable growth, such as by aligning our innovation and technology with industry megatrends like electrification. With that, I'd like to hand the call over to our Senior Vice President and Chief Financial Officer, Mr. Bill Quigley.

Great. Thanks, Robin, and good day to everyone joining us on the call. As Cameron indicated, we do have Mike Bierlein joining us this morning, and I again want to congratulate Mike on his appointment as Nexteer's Chief Financial Officer effective September 1, and certainly look forward to working with him and the rest of the team in transition. So before we review our first half 2021 financial performance, I did want to share some perspectives on the operating environment we and all automotive industry participants have been moving through during the first half of the year. Coming from the low point in the second quarter of 2020, resulting from actions taken to stem the spread of COVID-19 in the first half of 2021, global light vehicle production increased by plus 29% year-over-year, with all served markets enjoying a rebound. And as we'll discuss in the coming slide, Nexteer's first half 2021 revenue growth outpaced the market, led by our Asia Pac and EMEASA segments, reflecting the benefit from Conquest customer programs launched over these last several years. And a strong demand environment provided a significant uplift across all of Nexteer's earnings metrics in the first half of 2021 compared to a year ago. The strength of our balance sheet provided us the opportunity to early redeem our USD 250 million senior notes in April. And in June, we successfully refinanced our USD 325 million revolving credit facility, extending the maturity to 2026, a lower borrowing rate structure. Yet as we discussed with all of you in our first quarter update, the industry began to experience a broad range of challenges as economies continued to recover. Supply shortages, principally semiconductors, significant increases in logistics and transportation time and cost, net commodity pressures as well as other cost factors. These headwinds accelerated during the second quarter and remain with us today. And in particular, supply shortages have negatively impacted OEM vehicle assembly operations, particularly with our North America and European customers, resulting in volatile production schedules and significant assembly plant downtime due to lack of components, and many times with limited advance notice to the supply base. So certainly, these challenges did temper our financial results in the first half of 2021 as we move forward through the period. So this slide just provides a closer view of OEM light vehicle production volume based on IHS Market's July update. To the left you'll note, first half 2021 global OEM production did rise to 39.4 million units, 29.2% higher than last year. And as you would expect, the second quarter comparison is most pronounced with OEM production rising 48.6%. Given the supply chain challenges faced by the industry in the first half of 2021, coming off a very strong second half 2020 recovery, OEM production fell by 4.7 million units sequentially or about 11%, although consumer demand remained robust. The production demand imbalance has resulted in depleted OEM vehicle inventories in many regions, which should provide a future tailwind as supply chain stabilize. To the right, we have highlighted OEM light vehicle production information for the key markets served by Nexteer. Year-over-year, OEM production increases benefited all regions, especially in comparison to the second quarter of 2020 when our North America, Europe and South America operations were in government-mandated shutdowns from mid-March to the latter part of May. Compared with the second half of 2020, OEM light vehicle production in each market served fell sequentially compared to the first half of 2021 with North America most impacted, lower by about 13.5% when compared to the second half of 2020. So let's turn to our first half 2021 financial results on the next slide. Certainly, the significant rebound in OEM production volumes during the first half of 2021 provided an uplift to Nexteer's financial performance. Revenue rose by almost $524 million or 43.3% to $1.734 billion in the first half of 2021. EBITDA of $213 million in the first half of 2021 rose by 84.1% compared with last year, with margin improving 270 basis points to 12.3%. Net profit of $83 million in the first half improved by a factor of almost 63x compared to 2020, providing a margin of 4.8% and free cash flow, while a use of $44 million in the first half of 2021, improved by $146 million compared to a use of $190 million during 2020. So compared to a year ago, the first half of 2021 provided a markedly improved operating environment for the automotive industry driving a sharp improvement in Nexteer's financial performance. Although new challenges emerged, which tempered our financial performance when compared with the second half of 2020, which we'll review in more detail next. So our segment revenue performance is highlighted on this slide, including the traditional year-over-year comparison represented by the dark blue bar to the left and a sequential view compared with the second half of 2020 represented by the middle light blue bar. These comparisons are relevant to evaluate Nexteer's revenue performance against the market as measured by changes in OEM production during these periods. You'll note here, all segments experienced significantly higher revenue in the first half of 2021 compared to a year ago, given the rebound in OEM production. In the first half of 2021, North America posted revenue of $1.032 billion, higher by $238 million or 30% compared with last year. Asia Pacific posted revenue of $386 million, higher by $156 million or almost 68% compared with last year. And EMEASA posted revenue of $315 million, higher by $130 million or almost 70%, again, compared with last year. You'll note though on a sequential basis, total revenue was lower by about $87 million or about 4.8% reflecting lower OEM production volume, resulting from supply shortages which significantly impacted many of our customers' vehicle assembly operations during the course of the first half of 2021. And our North America segment was the most impacted, lower by about $79 million given our strong position in the Detroit 3 as well as with lower Ford production being the largest driver. So on the next couple of slides, we'll provide the key drivers of the revenue comparisons, we'll start first with a year-over-year comparison. You now here, the largest driver of the year-to-year revenue increase was volume and mix, net of customer pricing which provided an uplift of $463 million or 38-plus percent. The favorable OEM production environment benefited again each of our segments with North America higher by $227 million, Asia Pacific higher by $129 million and EMEASA higher by $107 million. Favorable foreign currency provided a further benefit of $45 million, reflecting the strength of the RMB and euro against the U.S. dollar, of which Asia Pacific and EMEASA benefited by $27 million and $18 million, respectively. And finally, recoveries and other items principally reflecting contractual and negotiated commodity recoveries rounded out the comparison. So we'll move to the next slide for the sequential view. So when comparing our first half 2021 performance on a sequential basis, revenue was lower by $87 million with lower OEM production volume being the largest contributor as highlighted in the middle of the slide. Volume and mix, net of customer pricing lowered revenue by $123 million, reflecting the impact of supply shortages, principally semiconductor constraints that emerged and accelerated during the first half of 2021, which significantly impacted our customers' vehicle assembly operations. Of this amount, our North America segment was most impacted by about $92 million given the sequential reduction in OEM production volume of 13.5%. Again, favorable currency provided a partial offset of $25 million benefiting our Asia Pacific and EMEASA segments by $17 million 18 -- or $8 million, respectively, and recoveries of $11 million rounded out the comparison. So on the next slide, we provide a comparison of our revenue performance compared with the market as measured by the weighted change in OEM production in our served markets. You'll note to the left of this slide, we've highlighted the change in OEM light vehicle production for the markets we principally serve, comparing OEM production in the first half of 2021 to the first half of 2020 as well as a sequential comparison with the second half of 2020. We have weighted OEM production volume changes based on Nexteer's regional revenue distribution. So you'll note here, on a revenue-weighted basis, OEM light vehicle production for the first half of 2021 rose by 31.1% compared with the same period last year and sequentially was lower by 12.1%. So you'll note on the right of this slide, we've also adjusted our 2021 reported revenue for both foreign currency and customer recoveries, specifically related to commodities for these comparisons. Excluding FX and commodity recoveries totaling $58 million, Nexteer's adjusted revenue of $1.676 billion rose by 38.4% compared to our first half 2020 revenue of $1.211 billion, outperforming light vehicle production for served markets by 730 basis points. While the increase in North America adjusted revenue of 28.6% was slightly lower than the increase in OEM production of 32%, both our Asia Pac and EMEASA's segments significantly outperformed the market, reflecting the continued benefit of new customer program launches in China as well as India and the ongoing ramp-up of our Morocco operation servicing PSA and R&M. The same holds true for the sequential comparison. While OEM light vehicle production was lower in the first half of 2021 compared to the second half by 12.1%, Nexteer's adjusted revenue, excluding FX and commodity recoveries of $38 million, outperformed the market by 520 basis points with all segments exceeding the market. So as Robin commented in his opening, we have maintained a strong pipeline of customer program launches, certainly weighted towards new and Conquest business, which is fueling our revenue performance in excess of the market. So I'll now turn to our EBITDA bridges on the next 2 slides with the first being our year-over-year comparison. EBITDA for the first half of 2021 rose to $213 million or an increase of 84.1% compared with the same period last year, again, with margin improving by 270 basis points to 12.3%. You'll note, as highlighted on the bridge, favorable volume and mix, net of pricing of $129 million on incremental revenue of $463 million provided the largest benefit. But certainly, headwinds on the cost front, particularly significant increases in logistics and transportation costs, including the higher use of premium modes to expedite supplier components to meet our customers' production demand of $21 million and commodity inflation, net of customer recoveries of $10 million did lower our EBITDA margin performance in the period by about 180 basis points. And certainly, our commercial organizations continue to actively engage our customers as well as suppliers in offsetting these inflationary pressures. Our remaining net cost equation did reduce EBITDA by $14 million, driven by a number of factors, including: one, lower manufacturing and material savings given the volatility of our customers' production schedules, income and supply constraints and cost pressures experienced by our own supply chain partners. Number two, cost increases related to employee performance compensation programs, reflecting our improved financial performance, higher health and welfare costs, principally in the U.S. as well as several other inflationary factors compared to the same period last year. So if we turn to the sequential comparison on this slide, our first half 2021 EBITDA was lower than the second half of 2020 by about $49 million, with margin lower by 210 basis points. You'll note here, volume and mix, net of customer pricing, did lower our first half 2021 EBITDA performance by $58 million, resulting from lower OEM production volume as well as customer pricing. Increases in logistics and commodities net of recoveries, which did accelerate in the first half of 2021, contributed to a further reduction of $25 million, representing about 140 basis points of the comparison. Our net cost equation of plus $20 million, however, did provide a partial offset, reflecting net achieved manufacturing efficiencies and material savings sequentially as well as tempered employee benefit-related costs and other factors. So this slide highlights our EBITDA and margin profile for each of our segments, providing both the comparison of our first half 2021 performance on a year-over-year basis as well as a sequential view. North America posted EBITDA of $110 million, $37 million higher than the same period a year ago, with a margin improvement of 150 basis points to 10.7%. Favorable volume net of pricing provided a benefit of $62 million. This was tempered though by significant cost increases related to logistics and net commodities totaling about $18 million as well as other factors, including employee-related cost increases of about $7 million. Sequentially, lower volumes and customer pricing did impact EBITDA by about $41 million again, with logistics and net commodity increases of $14 million, rounding out that comparison, driving a margin reduction of 390 basis points. Asia Pacific maintained a strong margin profile with EBITDA rising to $79 million for the first half of 2020, an increase of $33 million compared with the same period last year, with margin improving by 50 basis points to 20.6%. Favorable volume net of customer pricing and ongoing net material, manufacturing efficiencies and other cost actions were the largest contributors to the segment's performance. On a sequential basis, lower volume and pricing provided a headwind of $11 million, although favorable currency as well as other cost actions provided an offset, driving a margin improvement of 40 basis points. You'll note here, EMEASA posted EBITDA of $20 million for the first half of 2021, providing a margin of 6.4% compared with a slight loss in the first half of 2021 or first half of 2020. Favorable volume, net of customer pricing of about $23 million was the largest contributor of the improved year-over-year performance, reflecting continued customer program launches and serial production in Morocco. Significant increases in logistics costs and net commodity increases of about $10 million were only partially offset by net manufacturing and material cost reductions. On a sequential basis, lower volume and customer pricing were about $6 million, again, as well as logistics and commodity increases of about $10 million were only partially mitigated by other cost actions, lowering margin by 240 basis points. So this slide provides our traditional EBITDA to net profit bridge for each of the periods presented. And I'd like to just highlight a couple of items here. So you'll note here, our first half 2021 depreciation and amortization expense of $119 million increased by about $4 million on a sequential basis, reflecting the expected increase in amortization largely of capitalized product development costs given our customer program launch activity, although this was partially offset by a customer recovery in the amount of about $5 million that we successfully negotiated in the current period relating to a program cancellation and impairment we recognized in the first half of 2020. On a year-over-year basis, depreciation and amortization expense was lower by $26 million largely resulting from the nonrecurrence of customer program impairments of $32 million that we recognized in the first half of 2020. You'll note on the income tax line, recall that we recognized a significant income tax benefit in the first half of 2020, resulting from the U.S. CARES Act, which provided for the carryback and of U.S. generated NOLs to prior years at a federal corporate tax rate of 35% compared with the current rate of 21%, which provided a nonrecurring tax benefit of $18 million in that period. However, during the first half of 2021, we also implemented further tax planning strategies and recognized an additional tax benefit of about $7 million, which was provided for under the CARES Act. So now let's move to cash flow and our balance sheet metrics on the next slide. So to the left of the slide, our free cash flow performance for the first half of 2021 and 2020 is presented and our balance sheet metrics to the right. So you'll note here, cash from operating activities of $95 million in the current half rose by $123 million compared with a year ago, principally a result of the significant improvement in earnings, which was partially offset by working capital investment. Cash used in investing activities of $139 million comprised of capital investment and capitalized engineering and product development costs of $73 million and $65 million, respectively, in the first half of 2021 was lower by $23 million compared with the same period last year. Free cash flow was a slight use of $44 million in the current period, reflecting though an improvement of $146 million compared with the first half of 2020, and we ended the first half of 2021, you'll note to the right, in a net cash position of $147 million. So as commented in my earlier remarks, given the strength of Nexteer's capital structure, we did execute the early redemption of our USD 250 million senior notes in April using both cash on hand as well as lower cost of borrowing availability under our USD 325 million revolving credit facility. You'll note here as well, liquidity stood at $585 million at the end of the first half of 2021, which includes committed borrowing capacity under credit facilities of $258 million. So balance sheet certainly remains strong, and we remain focused on maintaining our capital structure discipline as we move through 2021 and beyond. So just wrapping up our formal presentation. The automotive industry is navigating certainly another challenging period with limited visibility to the duration of supply chain strengths an elevated cost environment on a number of fronts, driven by the continued sharp rebound in economic activity from the low point in the first half of 2020. OEM production demand continues to remain volatile as we speak with you today, with many of our customers continuing to announce assembly plant production adjustments due to the lack of components. This volatility in demand continues to impact our operating efficiency objectives. We are also mindful of the continuing emergence and spread of COVID-19 variants around the world and remain focused on ensuring the health and safety of our employees as continues to advance treatments. We almost do our part to stem this health crisis, yet we will move through this environment. And we remain very optimistic looking forward given the constructive economic backdrop as well as demand trends as well as specific Nexteer initiatives, including another period of heavy customer program launches and a clearer view to customer bookings to secure the remainder of the year. Successful execution of these initiatives now and into the future, we believe continues to position Nexteer in the marketplace with all of our constituents, our employees, our customers, our suppliers and our external stakeholders as a leader in intuitive motion control. So that concludes our formal remarks. Yet before we take questions, I would like to provide Mike Bierlein the opportunity to introduce himself to all of you. Mike?

Thanks, Bill. And congratulations again on your retirement. With your leadership, Nexteer is well positioned for continued success, and you leave behind a strong finance team. Thank you for all of your contributions to Nexteer and your support over the past 5 years. I'm excited for the opportunity to partner with the senior leadership team as we move forward. My work experience includes 23 years in finance and accounting for Tier 1 auto suppliers. I spent the past 6 years working as a finance executive at Nexteer with my latest position being the CFO of our North America division. Prior to joining Nexteer, I worked at Delphi and held leadership positions in various corporate and divisional roles. I have an MBA and master's degree in finance for Michigan State University, and I am a certified public accountant. I look forward to meeting with you in our upcoming investor meetings and events.

Great. Thanks, Mike. And now, Cam, I think we'll hand the call back to Matt for Q&A. Thank you.

[Operator Instructions] Our first question will come from Jesse Lo with Bank of America.

So first, regarding the supply chain condition. It looks still to be very fluid now no matter in North America and also the APAC market. So could you give us some guidance towards second half this year, preferably by region?

Sure. This is Bill. Jesse, it's a pleasure to hear your voice. Certainly, the supply chain environment remains constrained, particularly on semiconductor, but as well as other materials. But certainly, semiconductors being the top priority, I think, of every supplier around the world as well as OEM. I agree with you, and we agree with you that in the current environment, it continues to be kind of a deep value that everyone is working out of. We are working very closely with our suppliers as well as our Tier 2 suppliers that actually being the chip manufacturers day in and day out, not only with allocations of product, but also with the opportunity for substitutions, so on and so forth. We're doing that collectively with our OEM customers. To your point, North America, really every region around the world has been impacted by this. But I think what we're seeing now is Asia Pacific as well now seeing the impact, at least in our operations. And that was largely a result of Nexteer being in a position to reallocate ship inventory to Asia Pac given what we were seeing on the demand front from our own OEM customers, both in North America as well as in Europe and South America. And that being demand being impacted by planned downtimes or very sudden downtimes on vehicle assembly manufacturing. So again, we're working through this process. I think the third quarter is going to continue to be a difficult quarter. There's some suggestion that the fourth quarter, we might see some tempering. But at this time, we are planning on a continued volatile environment with respect to semiconductor issues. Does it spill into 2022? I think there's more likelihood than not that it will. But you've seen the headlines, wafer capacity is coming online, semiconductor capacity is coming online, but it's a time factor. So again, we're working very diligently with our suppliers as well as our customers to move through this environment. But certainly, it's a constrained environment. And I do believe it will continue to be constrained as we exit 2021.

Jesse, this is Robin. Just to add to what Bill was saying, I think the underlying industry demand from a consumer standpoint continues to be very high. Along with very low inventory levels on dealer lots, the demand is there. But I think the build schedule for the OEMs for the second half is going to continue to be choppy. I mean they're just -- the supply chain just isn't at a level of robustness yet. We continue to see challenges with kind of resurgence of COVID in some areas, the most recently being Malaysia, that's impacting the industry. So it's going to be choppy for the rest of the year, strong demand. So as the OEMs have the supply of chips, they're going to build everything they can, but we don't see it becoming stable for the rest of this year.

Our next question will come from Rebecca Wen with JPMorgan.

So I actually have three questions. First is that of last Monday, our share price rally a lot on back of some market chatter about potentially we may penetrate into Tesla's Cybertruck units. I know we cannot comment anything that I'm not confirm at the moment. But any color that you can share with us would be great. And then second question on the margin impact. How can we think about the margin in the second half and going forward? Maybe if possible, if you could specifically comment on 2 factors. One is the raw material impact. I see that our revenue increased also due to the raw material hikes, but that also offset by the cost -- additional cost. So what's the net impact on the raw material inflation in terms of margin? And then secondly, the impact on the logistics. Is that something that we may continue to see in the second half or going forward? What's the potential level of the logistic -- additional logistic costs in the second half, for instance? And then the last question from me is, we happen to have 2 senior management changes this first half of the year. Of course, I understand that there can be some personal reasons. But anything that as a minority shareholder or also us that we need to be mindful, maybe any major changes on the top level, et cetera, that you may share with us? That would be great. And lastly, my wishes for Bill for your future endeavors.

Great. Thank you, Rebecca. I very much appreciate that. I'll take a couple of these questions, and then I'll have Robin kind of comment as well. With respect to the share price, I think you put it well, Rebecca, highlighting it as market chatter with respect to potential commercial relationships with Tesla. We have nothing to announce today. But of course, we engage with a lot of OEM customers around the world. And certainly, Tesla is one that we would like to continue to engage with showcasing our technology capability, footprint, so on and so forth. But I think you put it exactly what it was, it's market chatter. With respect to the second half from a margin perspective, I think a couple of points to make. On the raw material front, if you look at it on a first -- on a year-over-year basis, we did experience net commodity of about $8 million. We did recover and that's net, so recoveries were about $13 million or so. So you can see the inflationary pressure was about $21 million or so. So to that point in time, and again, we continue to progress this with our customers as well as discussions with our suppliers, we were about 60% covered respect to clauses and/or contractual arrangements or negotiations with our customers on a rising commodity environment. I think into the second half, we've seen some tempering. I think, a bit on scrap steel, for example, but again, we're in an elevated cost environment as manufacturers and suppliers around the world continue to operate in a very strong economic rebound. So again, we're thinking that we'll probably see continued pressures into the second half of 2021 along probably the same lines or so. But I think the positive thing is, we believe at least that these will temper into the future but it's likely probably a 2022 event moving forward. With respect to logistics, a very constrained environment. It just continues to be constrained on ocean freight. We're continuing to use some modes of premium to expedite supply to our own manufacturing facilities. You'll note on a year-over-year basis for the first half, those costs were a headwind to us of about $17 million. While we're hopeful that we see some reductions in that, I think Robin really made an important point, ports remain congested and ports remain subject to continuing COVID-19 impacts, right? We're seeing that in China, for example, with respect to port closures. We've seen that in a number of other regions around the world. The biggest constraint continues to be supply from other regions into, for example, our Morocco operation and/or our Brazil operation. But certainly, North America, given the scale of the business has been impacted pretty negatively as well. Those should temper by year-end from what or intel that we have. But again, we're keeping a very close eye on this, and the bid rates continue to be very high for container shipments using ocean freight anywhere from 8 to 10x, I would say, a normal level of cost. So again, economic rebound, it's great that economies are recovering, obviously, from the health crisis but at the same time, it's put constraints into the system across a broad range of -- broad range of streams of input. So we're continuing to monitor closely working with our logistics providers on securing number one container availability because that's limited. And then number two, there's not much we can do with respect to negotiated price because it can go to another user at will. Robin, maybe I'd let you speak to number three.

Yes. Thanks, Rebecca, for the question. Maybe just -- I'll just follow up a little bit on the margin of the business and the comments that Bill made. Certainly, as a leadership team, we're focused on all the cost elements that we have control over. And there's a lot that we have control over. But there are some things like all the logistics costs and some of the material escalation that we don't have a lot of direct control over. And we're certainly working with our customers. In a lot of cases, we have contractual agreements for material escalation. In some areas, we don't, logistics, specifically, we don't have a lot of coverage with our OEM customers. But that doesn't mean that we can't go to them, not in a confrontational point of view, but more from an assertive standpoint, working with them to help mitigate some of these costs because to their benefit to have us healthy and our whole supply chain healthy in order to have continued supply. So that's something we will continue to do working with our OEM customers to try and mitigate as much of that cost as we can. In terms of the senior management changes, I know on the surface, it looks like a lot of change at one time, and it certainly is. But I can tell you, these changes have been thought out very well. I'll start with Bill. I mean, Bill has been with us for over 5 years now. Had tremendous contributions to us. We're going to miss him and his leadership tremendously. But he's decided to retire and he has earned that right to do something different, and we wish him the best with that. In terms of Tau. Tau has been with Nexteer for 23 years now. And he as well has had a lot of contributions and leadership within our company. But he's just decided that it's time for him to do something different. So again, we thank Tau for his contributions. We wish him the very best going forward. But as I mentioned, these changes were not sudden. It's something that we've known about and been planning for. And one of the things we do internally is we spend a lot of time looking at our progression succession planning process to make sure that we've got leadership available to step up when things like this happen. And you can see from how we approach this, all of these vacancies were filled by promoting from within. So we have a very strong team, a very capable team that's focused on development, stepping up to the new challenges. And the people on the senior leadership team are people that have been within Nexteer for more than 5 years. All of us I personally have been with Nexteer for 32 years. So there's a lot of continuity within the leadership team, a lot of familiarity with the business, and we'll continue on and build upon the legacy that Bill and Tau had set for us.

Our next question will come from Cindy with Morgan Stanley.

Actually, this is Tim from Morgan Stanley. Just two quick questions. The first one is according to the presentation, the company launched 16 programs in first half versus the full year target of 40. So if you think about the lingering chip shortage, could the rest of the 24 programs get delayed for alternatively upfront expenses will actually hurt second half margin with more meaningful revenue contribution from the new project won't kick in until 2022? So that's my first question. And second question, could we have a rough idea whether you utilize this at the Nexteer's major production site at the moment? Should we expect more medical restocking once the chip supply crisis are now or actually OEM have been piling up some semi-finished inventory and by not place that holders to Nexteer, then we can start seeing some improvement in terms of chip.

Great. It's good to hear your voice, Tim. Bill -- this is Bill. With respect to program launches, I think there's certainly the opportunity as we kind of move through this as Robin put it. I think it's a good word, kind of choppy environment with respect to component availability. There could be movements in program launches from the second half maybe into the first half. But certainly, the customers are very focused on getting new product into the market as well. So I think if you kind of think about where those launches are coming from, Asia Pac will continue to be the leader from a launch perspective for Nexteer in the second half of 2021. About 15 launches or so, followed by EMEASA and North America, with about 11 combined. But certainly, there is the opportunity to that, but we're -- we work day in and day out with our program launch teams with the corresponding counterparts at the OEMs. And to date, we haven't really seen much movement, if you will, in program launches currently. But again, the environment will have a mark on how that ultimately kind of rolls out. With respect to restocking, so there's certainly going to be an opportunity for restocking, particularly in our largest business in North America, as we look to days on hand supply in the marketplace with respect to most notably full-size truck. And I think it's at about 24, 25 days. Normal average maybe 65 to 75 days. So certainly, a significant imbalance. If not, it's not going to be a manufacturing utilization issue for us or a capacity issue. This is a very significant downtrend on those key vehicles for us, and we're well capitalized from a capacity perspective to execute against a pretty significant uptick. Certainly, we've actually been -- and you may see that from a cash flow, we made a comment about some investment in working capital, and that's largely around inventories as well. So again, those inventories being built, but maybe customers did not pick up because of assembly plant downtime. But again, I don't think it's going to be a manufacturing constraint for us. What will be potentially a constraint is the cost to execute that production. So if there's a significant ramp back up, you're into premiums with respect to your production workers, so on and so forth. But make no doubt about it, I think, to Robin's comments, every OEM and in particular, the Detroit 3 are going to want to get that product back in the dealer lots. The demand appears to be there. And even as the United States moves forward, and I've made this comment many times, and I sincerely believe it moves forward with incremental and significant infrastructure build, an investment, I think that only bodes well for the full-size truck market. Those vehicles are used on a commercial basis as much as they used on a personal community basis. So I think that upswing could be significant. I think the timing is a question. And I think you saw, for example, Ford thinking that they might be modernizing their model, right, with respect to maybe they don't need to have that much inventory in the field. but I think that remains to be seen. Certainly, all of those OEMs look to those truck platforms as a significant source of profitability, which is being used to fund their EV initiatives and other mobility initiatives. So I think the opportunity is going to be ahead of us, but I think it's going to be certainly an upside opportunity moving forward.

Yes, Tim, this is Robin. Thanks for the question. I'll just add a little bit to the -- your first question on launches. So obviously, launch is something that we manage very closely, working with our OEM customers. And we haven't seen, for the most part, a pushback on the dates of our launches. I think it's just based on the nature of the launches, they're long in planning, most major global OEMs, it's a 4-year process launching a new vehicle. And it typically starts out very low volume when they launch and it ramps up over a period of 6 months or so to a higher volume. So it seems like we're holding the launch dates for the most part. And I think the question will be how fast do they ramp up once those new vehicles launch. But we're not seeing much of a movement yet in terms of our launch planning.

Our next question will come from Zhixuan Lin with Huatai Securities. Due to the limit of time, this will be the last question.

Gentlemen, this is Zhixuan Lin from Huatai Securities. I just have one question about the on the presentation at Page 28, our revenue outpaced the overall market substantially. May I know what's the driver for our out performance? And it's because of the market share gain or from which competitively take market share? Or it was course mix upgrade or other reasons like the price increase?

Perfect. I'll take a shot at that. Thank you for the question. So on Page 28, that's kind of our revenue growth versus market positions. And I think just broadly stepping back for a moment, if you think about the significant outperformance in Asia Pacific, that has largely been around an onslaught of program launches over the last several years. And many of those, a very high level of those have been Conquest business. So not necessarily to name who they're conquested from. You can see the nameplates. -- you can make a determination on that. But it's coming both out of our steering side of the house, but really significant increases in the Driveline side of the business in China, driven both by our China Driveline operations as well as our India operations. So very good very good progress with respect to market penetration in Asia Pac. If you think about EMEASA, a couple of pieces of rise there. Certainly, our Morocco facility up and running serial production as well as multiple program launches. Those have been to the benefit, obviously, of PSA and R&M. And if you think about the reentry of driveline into Europe for us, that certainly has come at the expense of probably a well-known competitor with 3 initials. So I think we continue to have those benefits in those 2 regions. The comment I'd make on North America is really around our incumbencies and our continued success, and as Robin put it, retaining our foundation. We are very strong in the North American market, in particular, full-size truck, as you all know, and those platforms are very large and very important to the respective OE. And certainly, many competitors would love to have those nameplates as well. So it's more of an incumbent business play in North America. But I think you'll also see that, that incumbency has been buoyed by the confidence that our customers have in us, for example, General Motors, with their EV vehicles that Robin highlighted. The Hummer, for example, may be a niche vehicle, but certainly a vehicle that GM is using as a showcase of technology and capability. You'll see the electrification of other full-size trucks Sierra, the Silverado, the F-150. Our customers are confident that we are going to continue to support them in their change, if you will, or their conversion of those important platforms from ICE to EV. So again, more of a sticky business that we're working through, but really that outpacing the market is around Asia Pac currently and EMEASA. Last point I'd make on it, it's not for the sake of pricing, right? Pricing is pricing in the marketplace. We know how it works in automotive land. This simply is more units in the market given the Conquest capability that we've had over the last several years.

And Zhixuan Lin, this is Robin. I'll just add a little bit more to what Bill said in terms of looking even beyond this year or next year. We just announced that we won a REPS business with a Japanese OEM. And that's part of our strategy to continue to increase our market share is to break into some of these OEMs that we don't currently have business with. So this Japanese OEM is a very significant win for us because it gets us on their supply panel for steering. And then we have the ability to continue to increase our market share within that Japanese OEM. So steps like that, year-by-year, breaking into new OEMs and then continuing to build market share within that OEM, I think we'll continue to see this overperformance to the market.

Thank you so much for all 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.