Full Year 2018 Nexteer Automotive Group Ltd Earnings Call

THOMSON REUTERS STREETEVENTS EDITED TRANSCRIPT 1316.HK - Full Year 2018 Nexteer Automotive Group Ltd Earnings Call

EVENT DATE/TIME: MARCH 12, 2019 / 12:00PM GMT

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CORPORATE PARTICIPANTS Cameron Wang Nexteer Automotive Group Limited - IR Director Michael Paul Richardson Nexteer Automotive Group Limited - President & Executive Director Steve Spicer Nexteer Automotive Group Limited - VP of Global Electric Power Steering Tao Liu Nexteer Automotive Group Limited - Senior VP & Global COO William G. Quigley Nexteer Automotive Group Limited - Senior VP & CFO

CONFERENCE CALL PARTICIPANTS Janet Lewis Macquarie Research - Head of Industrials, Asia Rebecca Y. Wen JP Morgan Chase & Co, Research Division - Analyst Robin Zhu Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst Tim Hsiao Morgan Stanley, Research Division - VP Yizhe Wang UBS Investment Bank, Research Division - Analyst

PRESENTATION Operator Ladies and gentlemen, welcome to the Nexteer 2017 (sic) [2018] Annual Results Announcement Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to Investor Relations Director, Mr. Cameron Wang. Please go ahead.

Cameron Wang - Nexteer Automotive Group Limited - IR Director Thanks, Keith. Good day, everyone, and thanks for joining us for Nexteer 2018 Annual Results Conference Call. Hong Kong time this evening, we published our 2018 annual results. The filing documents are now available at the Hong Kong Exchange and our company's website. The presentation material for this conference call is also available at Investor Relations folder on our company's website. Joining me and presenting today will be our Executive Board Director, President, Mike Richardson; Senior Vice President, CFO, Bill Quigley; and Senior Vice President, Global COO, Tao Liu. Michael will first give us an update of company's business developments for 2018 and enterprise priorities for 2019. Then Bill will walk us through the detailed financials. After Bill's report, we will open the line for Q&A. Before I turn over to Mike, I'd remind you of the safe harbor statement for today's communication. Welcome, Mike.

Michael Paul Richardson - Nexteer Automotive Group Limited - President & Executive Director Cameron, thank you, and thanks, everybody, on the phone for joining us today. While we're together, let me just mention that we'll spend the next few days [around] India, Hong Kong and Singapore. Monday, we will be in London. And our Q1 call is currently scheduled for Monday, April 15. We've covered our 6 strategies for profitable growth many times. I'm not going read through it again today. But for those who have followed us for some time, I'll briefly mention that this modified graphic reflects the fact that our internal discussion continues to focus on the need for and importance of expanding and diversifying our revenue base.

We begin with highlighting the successful launch of 22 new major programs across multiple product lines, regions, and customers. And I'd say as a historical reference, 22 major launches is not a big number for us, it's a function of the OEM product cycle. Typically, we'll launch in a given year 33 or 34 majors. In 2017, we did 32. What's significant about 2018 is that 18 of the 22 major launches were conquests, meaning business taken from our competitive peers, is to restate more than 80% of the launches we accomplished last year were programs taken from our competitors.

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Looking ahead to this year, 2019, there are 54 launches planned, 2/3 of them will be in the Asia Pacific region. Slide 7 shows some added details. I won't dwell on it. I'll just highlight that all vehicle segments were represented across these launches both global and region nameplates, a fairly orderly cadence through the year. We increased our order-to-delivery backlog to USD 25.2 billion. So we're up about $1.3 billion or 5%. There's a walk here, I'll take you through quickly. $3.9 billion came out of the backlog as that product was shipped to the street. We added $6.1 billion in new business, booked again, lifetime revenue order launch. We made an adjustment per our policy subtracting nearly $1 billion for 2 reasons, FX true up, generally accounting for FX expectations across RMB dollar and we made a volume adjustment as we comprehend IHS forecast changes to be sure the backlog remains accurate and a useful tool for all of us.

Let me give you another relevant number. 47% of new business booked in 2018 is [a gain] conquest, that means on a dollar-weighted basis, 47% of wins represented business we, again, took away from our competitive peers. Total absolute performance is certainly important. We're also conscious of our relative performance measured against the competitors we meet in customer lobbies around the world. When it comes to product line rotation, we finished 2018 with 65% of total revenue derived from EPS. You can see on this graphic that 70% of year-end backlog are EPS wins, showing again that we will continue our rotation to EPS, on a product line basis, are most profitable. There is also a regional rotation to consider. We finished 2018 with Asia-Pacific region representing 19% of total revenue. I'll highlight that, over the last 3 years, so 2016, '17 and '18, our Asia Pacific region has contributed on average 40% of new business bookings. So while you cannot see the impact yet, our geographic rotation will soon move this more fully into the Asia Pacific region as we digest the wins and put them into production.

One final measure of backlog is exposure to 2 industry trends that are important to us, ADAS and new energy vehicles. We are, again, using a limited definition for ADAS in this assessment across the SAE scale defining ADAS Levels 1 through 5, we don't consider Levels 1 and 2 relevant in differentiating vehicles or differentiating the enabling steering systems. We consider Level 3 and higher to be relevant. Level 3 is where the driver is legitimately out of the loop while in autonomous mode, this changes the safety case. It represents significant vehicle level capability and quite significantly changes the composition of the steering system.

We shared this with you for the first time in the first half of '18 when we judged that our exposure to Level 3 and higher ADAS capability had finally become material. So this is an update, we changed the format slightly to acknowledge the fact that the denominators are different when we think about ADAS versus NAV. More specifically, our ADAS exposure is based uniquely on electric power steering. NAV exposure comprehends multiple product lines, EPS steering columns and the driveline product line.

The bottom line is, today's update puts us at 21% ADAS exposure in the current EPS backlog, up from 16% mid-year '18. NAV exposure is up 1% to 9%.

Beyond the quantitative assessment of backlog, I want to share what's happened in terms of customer diversity. We talked in previous sessions about the fact that continued growth requires us to expand our portfolio and value customer relationships.

2018 was a record year for the company in breaking into new customers. We added 3 new EPS, customers bringing the total number of 5 new customers added over the last 2 years. And again, when I say breakthrough customers, I mean, that all 5 wins are conquests where we took programs away from competitive peers who were incumbent.

We've also expanded our global footprint. There are 5 new sites currently under construction. By Q3 of this year, all will be operational, putting us at 28 global manufacturing sites.

And just to briefly highlight 3 examples. Wuhan, China will be home to the JV we formed with Dongfeng for the manufacture of steering products. Our initial product launch is planned for Q2 of this year. We'll then have a new product launch sequentially through the next 2 years.

We have been in Bangalore, a wholly owned manufacturing site for about 30 years, primarily focused on driveline product for the local market. In 2018, we opened a wholly owned software development center in recognition of the importance of software as a product differentiator. We finished 2018 with 100 engineers on board, and we began the year with 0.

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In Suzhou, China we're completing a substantial technical center that will serve the Asia Pacific region and be the global technical lead for the common EPS product line.

Under the heading of engineering capabilities, every enterprise must understand the value proposition so that they can understand our constraint to growth. While constraints evolve with time, our constraint is not currently lack of commercial opportunities, it's our technical bandwidth. We design, develop, validate and manufacture increasingly complex safety critical vehicle systems. And we think it's important to speak about it openly within the company, recognizing that once the constraint is identified, everybody can contribute. And anything we can do to improve throughput in the engineering factory benefits the whole enterprise. That mindset has led us to purposely equip and empower each region to operate at a higher level of local autonomy. We see great benefit in being able to understand customer questions, for example, where local staff will speak the customers' first language and understand best local customer needs.

You can see substantial growth in engineering bandwidth over the last 5 years. And with that, normalization and alignment with regional commercial opportunity. Our software capability is growing in all 3 regions, but I'd highlight, again, the importance of Asia Pacific as a region with the new India software center being a hub designed to provide global support.

We've also continued with new steering product commercialization with technology leadership, and you've seen this graphic before. As a quick reminder, our focus on advanced safety and system performance begins at Level 3. This is where we can technically and commercially differentiate ourselves. Foundational consideration [for] higher levels of autonomy require increased system reliability that we classify as the industry does under FIT, failures in time, a statistical prediction of failures forecasted with billion hours of exposure.

The industry generally runs at about 700 FIT today. We're shipping product at reliability levels across the spectrum from 700 FIT down to 10 FIT. The development effort is increasingly focused on delivering 10 FIT product as enabler for vehicle autonomy.

The next slide shows how our products fit within this industry landscape. As we began and engaged in Level 1 performance, we focused on software that would differentiate Nexteer value proposition through product performance, things that a driver could detect.

Level 2 took us to high-availability EPS to prepare for a future state-of-vehicle autonomy and as an enabler for steer-by-wire.

Level 3 requires the industry to jump a significant technical hurdle as we take the driver out of the loop. And it enables product features that we offer and demo today, such as Quiet Wheel, a highly stowable column and steering-on-demand, all desirable products that fill future needs in the next long season of mixed mode operation.

Levels 4 and 5 take us to full autonomy. Last year, you recall, we were named Supplier of the Year at GM for our work on a Level 5 fully autonomous demo that had no steering wheel or pedals. That work has progressed since then to the point of low volume, serial production in 2019.

Let me give you some examples. We're seeing higher levels of vehicle autonomy, Level 3 plus, on production time lines. In 2019, Waymo was continuing to accumulate significant miles in real world experience. Middle of '18, they announced 5 billion miles in simulations and 8 million real-world miles that they continue to accumulate at the rate of 25,000 miles a day. They also contracted another 62,000 Pacifica minivans. We are on every Pacifica minivan, no matter what the configuration, including Waymo. Every vehicle you see on the road being tested on the West Coast is our product and we're learning rapidly with Waymo.

Continuing 2019 at GM, we're on the Autonomous Board for battery electric vehicle. This application is more advanced than Waymo. It is being built with and without steering wheels. And in '19, GM intends to have a captured fleet, shipping 30,000 units, 2,500 of them being Level 5 capable, again, without a steering wheel. We're on all of those.

2020 will take us through expanded volumes in more conventional production programs, Ford T3/T6 that would encompass the F-150 truck, Navigator, Expedition, the T6 is the Ranger and the Bronco. At FCA, we'll be on the WM, the W being the Jeep Grand Cherokee, Dodge Challenger and Charger.

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To add a word on something that's very much related, that being steer-by-wire, early in the industry conversion from hydraulic to electric power steering, we differentiated ourselves through product performance. OEMs didn't always know how to fully articulate their desired outcome in a spec, but we understood this, we had highly capable product and approach that allowed us to fill that void. And as I've said for the last couple of years, that traditional playing field is largely leveled.

Now steer-by-wire and software-enabled features are on the horizon as the next industry milestone and they require different capabilities that we're preparing for. We see steer-by-wires a framework in which new safety functions operate. Things like collision avoidance, advanced stability control, cost reduction at an OEM level that you may not always think about, but steer-by-wire offers them packaging flexibility, the reuse of components and greatly simplified chassis design as we can simulate the kind of chassis response that they would desire.

We're also alert to potential market influences, such as the Euro NCAP 2025 road map, which currently includes automatic emergency steering or AES. I highlight this because steer-by-wire is a key enabler of AES. So I quickly highlight these as trends that are inspired by but not dependent on higher levels of autonomy. There are several market channels that we see a pull for steer-by-wire. And we'll continue to operate as a specialist and link to collaborating peers through alliances as we find value-creation opportunities.

Let me highlight a couple other market channels that we've talked about before. The 2 nonconsolidated joint ventures with China domestic OEMs, Changan and Dongfeng, both progressing nicely, both under a similar construct. The Changan JV crossed $100 million revenue in 2018. We finished '18 covering 45% of all Changan domestic [badged] vehicles, quite an accomplishment starting at 0 a very few years ago. This year, we'll cross more than half of all Changan domestic badged vehicles, with the Suzhou source plant, our wholly owned source plant, providing in all $36 million in component sales, largely modular power packs.

The Dongfeng JV, again, similar construct, followed in construction by about 30 months, will launch its first program in Q4 of '19. And then continue their ramp in a similar fashion and slope to the Changan alliance. These 2 domestic OEMs hold about 20% of all China domestic vehicle sales, and we're thankful to be deeply embedded in both OEM level alliances.

The continuation of CNXMotion venture with Continental combines, Nexteer capabilities in lateral directional control with [conti] capabilities in longitudinal control. We're again at Sweden this week. Our second winter continuing testing of latest generation product with broad exposure to industry thought leaders in vehicle handling, steer-by-wire. Our focus this week is on several new features, including road surface friction detection as a means of communicating the vehicle environment to the driver and directly to the vehicle. Higher levels of vehicle autonomy require the vehicle to understand the surroundings and stay well within boundary conditions of the current operating environment. This week, we are demonstrating 3 discrete product features that each deliver tangible product enhancements that can be sold discreetly within traditional products like EPS at Nexteer or EBS, electric braking systems, at Continental. However, most importantly, we're demonstrating that maximum vehicle level impact is a result of allowing subsystems, such as steering and brakes, to work together collaboratively. CNX motion is providing a means of expanding portfolio and capabilities while moving with the agility of a small, focused organization.

We're continuing to advance operational efficiency improvements. We've organized our internal activities around 3 themes: enterprise growth, operational excellence and people. Our approach to continuous improvement has been effective for growing margins on even flat revenue. We employ carefully developed common bill of design, bill of material, bill of process to enable easy read across as soon as we identify opportunity any place in the world. As a specific example of that thought process, we see opportunity for value creation from the driveline product line.

We don't talk a lot about driveline, but let me spend a minute on this. Simply stated, China and India have vibrant profitable driveline businesses. This is a business worth having, but they're small compared to the size of our U.S.-based business, about 70% of the driveline business is centered in the U.S. Much of our success outside the States is due to the fact that we made more recent investment in productive assets, with an enabling in different product design. The U.S. has generally retained legacy processing that is no longer cost-effective, it's highly vertically integrated.

Our investment priorities during the years that I've spoken to you had admittedly been focused on steering. But we began this driveline transformation in 2018 and will continue restructuring this year. This initiative also shifts greater reliance on a strategic supply base as we've successfully done for several years now outside the U.S. I'd add we've already launched our first U.S.-based program that follows this recipe. The GM T1XX full-size truck in the U.S. employs the future state bill of design, bill of material, bill of process and we've confirmed excellent result in this pilot.

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So the good news is, we know exactly what to do. We've done it before. There's no invention required. Bill will highlight the investment made to this business during '18, and I'll just mention this will be about a 30-month product to complete and deliver the most impactful results.

Couple of slides on industry recognition. I won't dwell on award-winning vehicles. We've carefully chosen where we play. Recognition for excellence in manufacturing, collaboration, quality and delivery. Soft side recognition as a great work environment, an attractive destination for new graduates that we attract, develop and retain.

And just a final word on enterprise priorities for '19. We've got a lot to do this year to convert the current backlog to revenue, as we focus on a large number, but a finite number, of well-defined product launches around the world. I mentioned that '19 will be a big launch year, more than 50 major program launches. We don't take these lightly. We'll closely monitor each one with an assigned team. We've made significant progress in taking new business awards from our competitive peers, and now we need to continue our ongoing work on radical generation to generation cost reduction.

I'll highlight success in adding 5 new EPS customers during the past 2 years. Our continued growth will require that we add to our product and process portfolio and move further from traditional markets. We're encouraging our 2 regions, Asia Pacific, EMEA-SA to increase regional capabilities and autonomy. You know we seek for many years now to produce in the region of consumption wherever possible. We also want to perform application engineering in the region of opportunity, a globally consistent bill of design, bill of process enables many good things, such as error proofing and shared lessons learned.

Our read across the best practices covers all product lines, but with a specific focus on driveline in '18. And finally, we're taking a thoughtful approach to new market opportunities in ADAS and electric vehicles. On the one hand, we recognize these as megatrends that cannot be ignored. They demand our attention in carefully ordered step. At the same time, we know these unique markets and opportunities will build slowly and require further work on infrastructure, safety and technical capabilities, so we will retain balance in this area.

And I'll pause there and ask Bill to pick up with a quantitative assessment.

William G. Quigley - Nexteer Automotive Group Limited - Senior VP & CFO Thanks, Mike, and good day to all of you joining us on the call. First, I'd like to provide a quick overview of our 2018 financial performance and then will get into some more details. Nexteer posted record revenue for 2018 with several segments outperforming the market, measured by year-on-year revenue growth, excluding the impact of currency compared to OEM unit production. Certainly, our Asia Pac segment faced market headwinds as a decline in OEM production accelerated in the second half of 2018, given the political and economic uncertainty of trade frictions and the impact of related actions taken by both the U.S. and China.

These factors dampen China automotive demand, with 2018 being the first year in almost 3 decades that annual OEM production was lower than the previous year. This headwind was more than offset by higher revenue growth in North America and EMEA. While currency proved to be a full year tailwind for 2018, the benefit did temper in the second half of 2018 compared to the first half as the U.S. dollar strengthened against both the euro and RMB.

Our 2018 EBITDA ended about even with 2017. Compared to a year ago, Asia Pac EBITDA performance was slightly lower, given the significant fall off in OEM production. And while we benefited from higher revenue in North America, customer pricing and elevated commodity environment and certain program initiatives were only partially mitigated by higher volumes and cost reduction actions.

As Mike highlighted, we did begin work on our North American driveline business during the year to improve the profitability and cost competitiveness of the business for the long term, which did provide a net cost headwind in the current year. These factors result in North America's 2018 EBITDA performance being about 3% lower than a year ago.

Our 2018 net profit was strong though as we benefited from both lower finance costs, given the strength of our cash flow performance, as well as lower income tax expense, driven by both lower tax rates as well as the benefit from a U.S. R&D tax initiative we undertook during the year.

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Nexteer's balance sheet remained strong, given our consistent focus on delivering strong cash flows across all of our segments and our disciplined capital structure approach.

Finally, as Mike highlighted, our backlog increased 5.4% compared with year-end 2017 and stood at $25.2 billion, and we remain focused on continuing this trend into 2019.

So now we'll move into more details of our 2018 financial performance. On this slide, we highlight comparisons for our key financial metrics, revenue, EBITDA, net profit and free cash flow. Nexteer posted revenue of $3.912 billion, an increase of $34 million or about 1% compared with last year. Currency provided a benefit of $26 million, given the comparative strength of both the RMB and euro against the U.S. dollar.

Lower revenue on Asia Pac, driven by slowing OEM production demand in China, which did accelerate in the second half of the year, significantly tempered increased year-on-year revenue growth in both North America and EMEA.

We posted EBITDA of $620 million in 2018, about even with our 2017 performance, and our 2018 margins stood at 15.8%, slightly lower than last year. Net profit though rose by 7.9% to $380 million in 2018 compared with last year with lower tax expense being the principal driver.

Income tax expense in 2018 was $26 million compared with $49 million last year, providing a year-over-year net profit benefit of $23 million. Both 2018 and 2017 reported net profits were impacted by certain nonrecurring tax benefits, which I'll further detail for you in the coming slide.

Free cash flow for 2018 rose to $309 million, an increase of $42 million or almost 16% compared with 2017. Cash from operations and lower investing outflows more than offset cash used to service our capital structure, including dividends paid to our shareholders and drove an increase in our cash balances to $675 million at the end of the year.

Now let's move to our regional revenue comparisons on the next slide. For 2018, we did experience a slight shift in our revenue distribution, with North America increasing to 67% of total 2018 revenue compared with 65% a year ago, while Asia Pac declined to 20% in 2018 compared to 22% in 2017.

EMEA remained on par with 2017 at about 13% of total 2018 revenue. You'll note here North America posted revenue of $2.625 billion in 2018, $91 million or 3.6% higher compared with last year. While in 2018 North America OEM production of about 17 million vehicles was about 1% lower than 2017, full-size truck production of 3.5 million vehicles was slightly higher. Strong demand from GM, Ford and FCA truck and SUV platforms, including the impact of new program launches in 2018 and the carryover impact of 2017 launches, more than offset normal course pricing.

Asia Pacific posted revenue of $782 million in 2018, $72 million lower than last year. While currency did provide a year-to-year benefit of about $14 million, reflecting a stronger RMB, China OEM production fell year-on-year by almost 4%, with a significant deceleration in the second half of 2018 of almost 11% compared with 2017. Certain of our key customers in Asia Pac further underperformed the overall market. Coupled with normal course pricing, the weaker OEM production environment did result in a revenue reduction of $86 million in 2018.

Finally, EMEA posted revenue of $505 million in 2018, an increase of $15 million compared with last year. As noted here, currency was a benefit of $12 million, reflecting a stronger euro. While 2018 OEM unit production in Europe and South America of around $25.3 million units was lower than a year ago by almost 1%, EMEA organic growth net of pricing rose almost 1%, reflecting the continued carryover benefit from programs launched last year with PSA as well as continued strength of BMW platforms.

Turning to our product line revenue performance highlighted on Slide 31. As noted on the left, our 2018 product line revenue profile remained fairly consistent compared with last year. EPS has continued to pace Nexteer's revenue growth, increasing $43 million to $2.525 billion in 2018, 1.7% higher than last year and comprised 65% of our total revenue for the year. Rack-drive EPS volume increases on trucks and SUVs in North America and pinion-drive EPS with BMW and EMEA as well as favorable currency more than offset the weaker demand we experienced in Asia Pacific. Columns posted revenue of $646 million in 2018, about 1.5% higher than a year ago.

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Added GM K2XX production and strong volumes associated with new FCA program launches, including the Jeep Wrangler and Ram Truck, more than offset lower revenue attributable to the GM ramp-up of T1XX production, which commenced mid-year. HPS revenue came in at $157 million in 2018 compared with $177 million last year, largely driven by lower service parts requirements as final builds for Ford and Toyota in Australia were completed during the year as well as the changeover impact from the launch of new GM T1XX heavy duty platform, which is replacing the current K2XX model.

And then finally, driveline revenue increased slightly year-over-year to $584 million in 2018. Strong GM program volume in North America was partially mitigated by lower demand in Asia Pacific from Great Wall and DPCA.

Next, we'll highlight our EBITDA segment comparisons on the next slide. You'll note here, North America posted EBITDA of $403 million in 2018 on revenue of $2.625 billion, $12 million lower than last year, and margin came in at 110 basis points to 15.3% for 2018. While increased revenue did provide a tailwind in 2018, our North American segment was the most impacted by net commodity inflation of about $20 million year-on-year, largely steel and aluminum-related.

Further, during 2018, we did launch an initiative as Mike highlighted to improve the profitability of our North American driveline business and aligning that business to our global bill of design and bill of process similar to our current operations in Asia Pacific and as planned for our new Morocco operation.

The North American driveline business, particularly in the U.S., has since inception been highly vertically integrated. And to improve the profit profile of the business, we are shifting more and more of our current in-house component manufacturing to our supply base. In 2018, this initiative did drive an incremental cost increase of about $9 million compared with last year as we continue to balance out our manufacturing activities. We are, however, quite confident this initiative will drive a much more cost competitive profile in North America and will further position us to take advantage of customer program opportunities we see in the current market. These factors, as well as normal course customer pricing and economics, were only partially offset by material and net manufacturing efficiencies, including lower quality and warranty costs achieved in 2018.

Asia Pacific posted EBITDA of $167 million in 2018, only slightly lower than 2017, although revenue was lower by $72 million. This drove a 150 basis point margin improvement to 21.4%. Similar to our first half results, despite lower customer demand schedules, our Asia Pacific team continued to implement manufacturing, material and other cost and recovery measures to mitigate the lower demand environment to maintain a strong margin profile.

EMEA EBITDA performance continued to improve in 2018, both in absolute dollars as well as margin, with EBITDA rising $16 million or 38% to $58 million compared with 2017. 2018 margin rose 270 basis points to 11.4%. Our EMEA team continues to action the cost base, driving material and manufacturing efficiencies as well as other cost recovery actions. And certainly, these actions more than offset customer pricing in the year, driving the improvement and the profit profile of the segment.

Slide 33 provides a walk of our reported EBITDA to net profit for both 2018 and 2017, and I'll just make a couple of observations, a number of significant items in comparisons highlighted here. You'll note net finance costs in 2018 of $9 million were lower by $12 million compared to last year, largely attributable to our continued strong cash flows, ongoing debt amortization, which did include early payoff of our outstanding U.S. term loan in February of 2018 as well as interest income earned on increasing cash balances compared with last year. Income tax expense for 2018, as I stated previously, was $26 million lower than last year by $23 million. And on a reported basis, our effective tax rate for 2018 was 6.3% compared to 12.1% a year ago. However, both 2018 and 2017 results were impacted by certain nonrecurring income tax benefits, which I've highlighted on the next slide.

At the end of 2017, we recognized a nonrecurring income tax benefit of $39 million arising from the remeasurement of our deferred tax positions in connection with the January 1, 2018 enactment of U.S. tax reform legislation, which did lower the federal corporate income tax rate from 35% to 21%. In light of U.S. tax reform, in early 2018, we undertook a comprehensive review of all of our U.S. tax positions as provided for under the various tax rules and regulations and did identify further opportunity in the scope classification and treatment of research and development costs and related investments we had incurred in prior tax periods as provided for under the noted provisions of the Internal Revenue Code.

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Upon concluding this comprehensive review, at the end of the year, we recognized an incremental income tax benefit of $27 million in our 2018 results to reflect additional credits and deductions allowed under the U.S. tax code compared to our prior year tax positions. The chart in the right of the slide provides a side-by-side comparison of our reported net profit for both 2018 and '17 and highlights the nonrecurring income tax benefits recognized in both years.

While our reported net profit increased year-to-year by $28 million, or almost 8%, if we were to adjust for these nonrecurring benefits in both years, our 2018 net profit increased by $40 million, or 12.8%, compared with a year ago, reflecting lower net finance costs, jurisdictional profitability and tax rate differentials.

We've also provided the impact of these income tax benefits on our effective tax rate in both years as highlighted at the bottom of the slide.

Nexteer continues to receive customer rewards and recognition related to the engineering competencies and innovations we bring to our customers. Our global product development capabilities provide us a competitive advantage, and we continue to expand these capabilities across the globe, including localizing and aligning resources close to our served customers with the expansion of both our Suzhou, China and Tychy, Poland technical centers.

As Mike highlighted, in 2018 as well, we also announced the establishment of our India software center in Bangalore, and at the end of the year, we had 100 software engineers in place with the objective to further grow this capability in 2019. Overall, we've increased our engineering team by almost 12% during the course of 2018, with almost 2,300 engineers on staff at the end of the year.

Our engineering and product development spend on the left of the slide reflects this focus on effort, with an increase in total spending of $30 million to $279 million in 2018. And as Mike noted here , 2019 represents a heavy customer program launch year and our related engineering resources remain keenly focused on supporting the organization to ensure we meet our customer commitments as efficiently as possible.

Turning to the right of the slide. Our capital investment additions during the year totaled $181 million, slightly down from a year ago. And consistent with previous years, over 70% of our capital investment is in support of customer programs with timing aligned to customer launch dates.

Now I'll highlight our free cash flow performance and balance sheet on the next slide. For 2018, we generated free cash flow of $309 million, $42 million higher than last year. You'll note to the left of the slide cash from operations decreased slightly by about $12 million in the year. Yet, cash used in investing activities in 2018 was lower by $53 million, principally driven by lower cash payments for capital investment of around $80 million, which was largely due to the timing of capital commitments in 2016, which were settled in early 2017. This gain, if you will, was partially offset by increased intangibles, principally capitalized product application engineering in support of awarded customer programs yet to launch of about $30 million.

Cash balances at the end of 2018 rose to $675 million, $74 million higher than last year, driven by free cash flow in excess of cash used to service our capital structure of around $212 million for the year. Capital structure serviced in 2018 included debt repayments of $112 million, net interest of about $28 million and dividends paid to our shareholders of $70 million.

We certainly remain focused on maintaining a strong balance sheet, which provides us the flexibility to continue to invest in the business as well as to provide return of capital to our shareholders. And as highlighted here, at the end of the year, we ended up in a net cash position of $293 million with minimal leverage.

Our capital allocation priorities provide an underlying foundation for our strategy for profitable growth that Mike started our update today with. We believe the actions and initiatives we have taken over the last several years, which have driven our strong financial performance, certainly affirm our discipline to capital allocation approach and annually we reflect in how we are performing to each of these priorities, which we have summarized on the next slide.

You'll note here we continue to invest in the business to expand our market presence and portfolio of customers served, deploying plus $1.3 billion in engineering and capital investment over the last 3 years. We've continuing to expand both our technical and manufacturing footprint around

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Our efforts and discipline have been recognized by both Moody's and S&P, who currently maintain an investment grade rating on our outstanding debt. We remain intent on seeking out opportunities that will further benefit our portfolio of capabilities and do remain focused on ensuring we have the necessary resources and flexibility to execute against opportunities, such as alliances and other ventures and relationships. Finally, we're also focused on providing a return to our shareholders. And at our recent Board of Directors meeting, the Board proposed a dividend of about $78 million, reflecting a 20% payout ratio of our 2018 net profit performance. Including this proposed dividend, over the last few years, we'll have provided our shareholders a dividend return of $200-plus million based on our strong financial performance.

As we turn to 2019, we continue to closely monitor the near-term markets with our current OEM production estimates highlighted on this slide. As you all know, we use IHS, the principal source of OEM production forecast for our internal planning and resource allocation and taking into account these forecasts as well as our own assessments. We do expect a somewhat tempered production environment for this year. Overall, while there is an expectation for the full year 2019 that China OEM unit production will increase slightly by about 2%-or-so from 2018, through February, OEM production has remained fairly weak and we continue to adjust the business to the current environment.

Given that 2019 represents a heavy customer program launch year, driving efficiencies and resource allocation and prioritization remain a top focus across our entire organization to ensure that we meet customer timing and quality expectations in the most cost-effective manner possible.

Lastly, as Mike spoke of in his comments, we remain laser-focused on securing incremental customer business opportunities that will further bolster and grow our backlog of book to business in 2019. Everyone at Nexteer understands the important of -- importance of this priority, and we continue and pursue opportunities with both existing and new customers in markets around the world.

One example of this success is our Morocco footprint, which we are bringing online mid-year of this year. We have already secured a book of new steering and driveline business, which fully utilizes the capacity of this plant.

So in conclusion, 2018 was another year of strong financial performance for Nexteer, and we certainly remain thankful for all of our colleagues who serve as one Nexteer in support of our strategy for profitable growth and further fortifying our position as a leader in intuitive motion control.

So this concludes our formal presentation. And we'll now hand it back over to Keith for any questions. But again, we want to thank all of you for participating in our call today as well as your continued support of and interest in Nexteer.

Thanks much.

QUESTIONS AND ANSWERS Operator (Operator Instructions) And the first question comes from Rebecca Wen with JPMorgan.

Rebecca Y. Wen - JP Morgan Chase & Co, Research Division - Analyst This is Rebecca from JPMorgan. Three quick questions from me, if I may. First, given that we have penetrated into the Chinese OEM such as Geely, GAC and BYD, et cetera, in recent years and we all know that Chinese OEMs are more aggressive in asking pricing cuts from component makers. So what's our strategy to mitigate the effects from higher price cuts in Asia? And what does that mean to our margins in Asia Pacific region going forward? And the second question is, it is quite encouraging to see we have an increasing ADAS-enabled EPS backlog order. If it is not too early to tell, could you share with us the likely range of GP margin for ADAS products after it's been ramped up compared with the existing EPS products?

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And what year do we expect this happening? And lastly, on tax credit, are we expecting any additional tax credits this year? And what's the normalized effective tax rate we should be expecting from this year onwards?

William G. Quigley - Nexteer Automotive Group Limited - Senior VP & CFO Rebecca, it's Bill Quigley. Let me take a shot at a couple of these. With respect to your first question, certainly, we're pretty proud of having recently conquested business with GAC and Geely; and to your observation, obviously I think not only local OEMs in China certainly are focused on cost, but I think the globals are as well. So from a pricing perspective, we obviously closely work with the customers on our value proposition vis-à-vis our competitors. And certainly, as we move forward, we've been able, to date, offset from a margin perspective any pricing that we provided customers via material, manufacturing, efficiencies and other cost actions. With respect to -- I think your question on our Asia Pac margin performance in general, it rose to 21-plus percent in 2018 in a very weak demand environment. And that is -- I think that really speaks to the management team we have placed and the focus that they have on ensuring that they maintain a strong margin profile. But I do want to point out that from an ongoing basis, we would not expect that margin profile to continue to rise in a weak demand environment. I'll take the third one, and I'll let one of my colleagues handle the ADAS discussion. From the tax credit perspective, I think we'll disclose obviously the market that, I would say, normalized effective tax rate for the company in 2019 and forward is going to range between 16% to 19%. Certainly, we had benefits in both 2018 and 2017 with respect to one, U.S. tax reform. I think more importantly, the benefit we derived in 2018 was our own initiative to fully take advantage of opportunities in the tax code from previous tax years taken. There will be a tagalong benefit to that in forward years, given our R&D spend and obviously our growing investment in application engineering. But again, I think the effective tax rate is going to move around, but I think it ranges 16% to 19%, depending on jurisdictional profitability, is a good ETR range.

Michael Paul Richardson - Nexteer Automotive Group Limited - President & Executive Director Just thinking about the ADAS question. Clearly, over the last 6 months in particular, our exposure to ADAS opportunities has increased. And with the production programs at Ford and FCA, we're driving some pretty big numbers in the backlog, finally. As a fact, you can see that we've got significant electronic content here, like double the electronic content, I would say, with dual-wound motors and sensors and so forth. 3 years ago, I really thought they would be driving a much higher CPV. In fact, 2 things have happened. We found ways through generation to generation cost down to take cost out of the mechanicals, allowing us to put more electronics in the product. We have not modified our hurdle rate through this period. So it's not as big of a transition as I would have expected a few years ago. And we're finding that we're able to absorb these opportunities in the backlog as we've done for many years without not a big change. Let me just ask, would anybody add to that? That pretty much captures -- all right.

Operator And the next question comes from Tim Hsiao with Morgan Stanley.

Tim Hsiao - Morgan Stanley, Research Division - VP Just a few quick questions. First question is about U.S. market. Because lately, we noticed that several major (inaudible) announced their restructure plans. So just wondering will that be adverse effect to our monetization of order backlog? Or because you just mentioned that 2019 would be the half year customer program launch year, so just wondering if there will be any further delay in terms of the revenue recognitions with the project launch? Second question, just want to quickly follow up regarding the ADAS order backlog. Because despite the revenue upside and the volume turned, (inaudible) do we need to probably spend (inaudible) on the product development or in the near terms for R&D spending. So will that cause any material change to our cost structure? And lastly, again, could you please provide little bit colors regarding our acquisition, our potential merger plans in the next 12 or 18 months?

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William G. Quigley - Nexteer Automotive Group Limited - Senior VP & CFO Sure, Tim. It's Bill. I'll take a shot at a couple of those. Certainly, I would say the domestic OEMs here in the United States, General Motors in particular, certainly are taking steps with respect to rationalizing, if you will, their product offering to the marketplace. I think Ford previously announced prior to GM, their disposition, if you will, on passenger cars. I think one of the unique positions that we're in from a Nexteer perspective is our stronghold, if you will, on full size truck as well as related SUV platforms, in particular in North America. We will have some content loss on a number of platforms, but in general, it is very small. So for example, with the elimination from the GM perspective of the Cruze or even the Chevy Volt, we do have content on those vehicles, but it's very small. So from a backlog perspective, we've already taken a look at the, if you will, the future revenue streams that we had for those canceled programs or canceled vehicles and really a very, very, very minor impact.

Michael Paul Richardson - Nexteer Automotive Group Limited - President & Executive Director Maybe I'd spend a minute on the R&D spending. Okay. M&A, it's in the headline really night now as we don't have anything to talk about of substance on M&A. We have in the past, but we don't right now. I would just say that we're very aware of the environment. When I talk about measuring our performance on a relative scale, it's recognizing who's to the left and the right of us. We have moved to #3 in the world at this point in terms of unit volume shipped. Bosch is the next one in the lineup. Jtekt is #1, Bosch is #2, Nexteer is #3. So part of our criteria in deciding which opportunities to go after, is not only goodness of fit in engineering and our ability to satisfy that customer in a given region, but who would we be taking out on a competitive basis. Because we had nearly 50% conquest in the new business bookings in '18, that's a big number. That's about as big as it has ever been in the year. And at the same time, we're building a very nice cash position so that we are well placed when there is an opportunity. I just say we don't see that opportunity yet, but I think if we stay the course, we remain on this path that, that opportunity will come.

Operator And the next question comes from Robin Zhu with Bernstein.

Robin Zhu - Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst Just a couple of things. Firstly, on the backlog. Could you elaborate a little bit on the relative size of the FX and volume adjustments? And also how much of the backlog relates to things like Cruise and Waymo? Call it, higher levels, L4, L5 set vehicles? Second question, if I were to look at the guidance for revenues to track level of production in the way that the year has started, I think you've -- it's probably fair to agree that a flat revenue year is fair for 2019 or at least a possibility. In that context, earnings growth will have to come from margin expansion, 2018 was the first year in many that adjusted EBITDA margins have failed to expand. So just wanted to get your thoughts on the likelihood of margin expansion? How much margin headroom do you see given the nature of the businesses that you operate in? And thoughts on the magnitude of earnings growth in 2019?

William G. Quigley - Nexteer Automotive Group Limited - Senior VP & CFO Sure, Rob, let me -- yes, you bet. I'll take -- again, it's Bill. I'll take a couple of shots at your questions, which were all very good. I think with respect to that FX/volume adjustment, the backlog, we do this very periodically. We look at IHS forecast with respect to volumes as well as obviously what rate expectations there are in any particular period. I'd suggest to you much of that impact was really around the RMB. And what we've seen there in movements in the RMB, but also really around Asia Pacific platforms as we've looked out into the future with respect to how various platforms may or may not move. So we've taken a pretty critical view of all of our platforms that remain in the backlog. But I'd say really the outcome from that adjustment was largely around RMB and largely around a number of Asia platforms, not only in current production, but ones to launch in the future. With respect to the revenue environment for 2019, I think your assertion certainly holds some water with respect to what '19 may ultimately look like. As we look at a couple of the key drivers from a revenue perspective, certainly, we've got a heavy launch here in 2019 as Mike highlighted in his comments, but that will be somewhat tempered by the transition in North America from K2XX to T1XX principally impacting our columns business for this (inaudible) kind of even out. If you think about volumes on a full size truck, we've obviously got a large and significant position in North America through -- at least to date, we see that kind of holding in fairly well. And probably last but not least is while everyone -- not everyone, but at least IHS and other prognosticators are forecasting an uptick in China volume. If anything, that's a second half phenomenon. So largely, it

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©2019 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. MARCH 12, 2019 / 12:00PM, 1316.HK - Full Year 2018 Nexteer Automotive Group Ltd Earnings Call could be very much a flat year on revenue '18 versus '19. With respect to your real question on margin, is we're certainly targeting to maintain a stable margin from '18 into '19. A couple of points that I'd make there is certainly as we're aligning our North American business, principally the driveline business, we did a cost increase or incremental investment, if you will, of about $9 million in 2018. And we're going to continue to have incremental investment in the first half of 2019, but kind of with the trigger point of recovery happening in the second half. So we really are confident that this will place us in a very competitive position, if you will, moving into 2020 to take advantage of opportunities we see in the market. But there will be some margin pressure in 2019 along those lines. The other point I would make, and it's really been a consistent theme I think we've brought to the market, is again, our Asia Pacific team has done very good work in a very difficult environment. A 21.4% EBITDA margin on a very significant fall off in revenue is quite an accomplishment. Our expectation is we're not going to continue to drive a margin profile like that in Asia Pacific depending on the tenor, if you will, of the OEM production environment in general. So kind of a long story is, probably a flash environment from a 2019 revenue perspective compared to '18, we're driving for material efficiencies, manufacturing efficiencies, all the cost actions that we can pull on to maintain a margin, if you will, standard equal to 2019 as we move through the year.

Michael Paul Richardson - Nexteer Automotive Group Limited - President & Executive Director What I might add is, to your question about car companies like Cruise and Waymo, they're really a different profile than the kinds of OEMs we have grown up with. The traditional OEMs talk to us about a 5- or 6-year program with the volumes that are governed or monitored by IHS, we know how to model that. Cruise and Waymo kind of go year-by-year with regular updates, and while we are bullish on their prospects, we're conservative of what we put in the backlog until we're really sure that those vehicles are going to be built. So I would say it's not material yet. Even though we are active, there is not a lot in the backlog yet, but we will keep it up-to-date as they make their plans. Really, we like girthy programs, substantial programs with established OEMs because we know how to plan around that and the engineering spend is efficient. But we also look at the winners in the emerging market that we are very selective with and NEVs, particularly in the China market, because what's happened is the nature of an NEV is less and less 10% of a given platform that they electrify. It is a dedicated platform that's been designed to be electric from the ground up. There is no incumbent supplier because it's new. So it's a level playing field. And they tend to be high or heavy because of the size of the battery and lends itself to our rack base product and we are on our way to be #1 globally in that product soon. So we've got a good cost base, an opportunity to compete there.

Operator And the next question comes from Yizhe Wang with UBS.

Yizhe Wang - UBS Investment Bank, Research Division - Analyst I would like to follow on the 54 new launches this year. Can you give a little bit more bigger breakdown on the region and by product? And what kind of nonorganic revenue growth would you expect that the new launch could drive in this year and in 2020? That's my only question.

Michael Paul Richardson - Nexteer Automotive Group Limited - President & Executive Director 54 launches in '19. You want to take a look at that?

Tao Liu - Nexteer Automotive Group Limited - Senior VP & Global COO This is how -- I wanted to just take a look at that. In the -- 2019 is now a big year in launch for us and the 54 launches largely into the Asia Pacific region and it's about 63% of the launches in Asia Pacific. And it's both in EPS and driveline. And as Mike mentioned, we have the launches on the new energy vehicle with the new customers, the 3Gs and the BYD and -- as well as the driveline product.

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Michael Paul Richardson - Nexteer Automotive Group Limited - President & Executive Director More on the 3Gs.

Tao Liu - Nexteer Automotive Group Limited - Senior VP & Global COO So the 3Gs will be Geely, Great Wall, and GAC. So that 3G, we think they are very strong in the China market, and we have been entered into 3G in the -- 2018.

Michael Paul Richardson - Nexteer Automotive Group Limited - President & Executive Director So about 28% of the new launches in North America; 9% in Europe, Middle East, South America.

Operator And we have time for 1 more question, and it comes from Janet Lewis from Macquarie Capital Securities.

Janet Lewis - Macquarie Research - Head of Industrials, Asia I'm wondering if you look ahead over the next 3 to 5 years, and you had quite a lot of discussion about how you're positioning, how would you expect both your geographic mix to change as well as your product mix in terms of ADAS and NAV as well as other steering products?

Michael Paul Richardson - Nexteer Automotive Group Limited - President & Executive Director Well, let's see. We would say with, as highest certainty as we could have, that we are going to rotate to a richer mix of EPS and right now, given IHS volume, I'd say we are going to move from 65% of global revenue in EPS to 70% because it's already won. It's already booked, it's already in the backlog and on the production time line. So 39 months out is about as far as we could see, but richer mix for EPS and within that EPS, we'll have a richer mix of ADAS capability because more and more of the pursuits that we go after, and Steve, you may have something to add here, more and more of them are moving into higher levels of ADAS capability, which to us mean 10 FIT generally and higher levels of electrical content. We also know, as I indicated, Asia Pacific finished at about 19% of global revenue last year, but have averaged 40% of new business bookings on average over the last 3 years. So we're moving to EPS, which is our highest margin product, and we are moving to Asia Pacific, which is our highest margin region. I'd say, Janet, those 2 trends are the most clear to us. What's a little bit less clear is how quickly the OEMs will go to heavier content to drive to higher levels of ADAS within the EPS product line. Steve, would you add anything to that?

Steve Spicer - Nexteer Automotive Group Limited - VP of Global Electric Power Steering I would just say -- this is Steve Spicer, I'm the Product Line Executive for Global Electric Steering. The ADAS penetration of an overall program, a new business booking, is a small percent, but it really enables us to win the bigger fish, if you will. The new program, maybe 10% of it is the 10 FIT ADAS, 90% is the base. You can't win one without being a leader in the other. So being the ADAS leader positions us to win these big programs that have to carry the weight while preparing for the future of ADAS. And the ADAS programs, although they're low volume, they have obviously high impact, high visibility in the market. The -- one of the earlier first questions, I just wanted to reiterate, the ADAS peak volume, the Level 3, 4, 5 is probably not going to be until 2025 or later. Some of the forecasts I've seen could be as late as 2030, but you got to be relevant, you got to have the technology, you got to have it in production. Otherwise they don't want to talk to you about the other 90% of the volume on any given program that they're going to award. So they come to us for one-stop shopping for all product types, all under hood, column drive, and they also come to us one-stop shop because we can do any level of FIT or ADAS driving.

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Operator Thank you so much for all of the questions and for today's participation. If you have any further queries, please contact us at [email protected]. Conference has now concluded.

Thank you for attending today's presentation. You may now disconnect your lines.

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