Nexteer Automotive Group Ltd

HKEX:1316

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Nexteer Automotive 2018 Third Quarter (sic) [ 2019 First Quarter ] Investor Communication. [Operator Instructions]

I would now like to turn the conference over to Investor Relations Director, Mr. Cameron Wang. Please go ahead.

[Cameron Wang, executive]

Thanks, Keith. Good day. Welcome everyone to Nexteer Automotive 2019 First Quarter Global Investor Conference Call. On March 12, a month ago, we announced our 2018 annual results, followed by a post-earning road show in multiple cities and had meetings with many investors. Today, we meet to provide a regular, but a brief update for the first quarter 2019.

Joining me and presenting today will be our Executive Board Director, President Mike Richardson; Senior Vice President, Global COO, Tao Liu; Vice President, Global Engineering, Robin Milavec; and Vice President, Global EPS product line, Steve Spicer. Our CFO, Bill Quigley is on medical leave for a few days, so won't present today.

Mike will first give us business update for Q1, then we'll remain available to respond to your questions.

As a brief update, today's meeting will take around 30 minutes. Today's presentation slides are available on company's website on the Investor Relations.

Before I turn over to Mike, I'd remind you of the safe harbor statement for today's communication.

Welcome, Mike.

[Michael Richardson, executive]

Thank you, Cameron, and thanks to everyone on the phone for joining today. Cam highlighted those in attendance from Nexteer, we're actually connecting from 2 different collections, most of the team are together in the U.S. I'm in Shanghai tonight with Tony Wang and Steve Spicer. We'll be attending the auto show and spend time in Suzhou this week.

There are planned OEM level announcements on new vehicle introductions from the 3Gs. Great Wall, Geely, GAC will be present at these media events. And just a word on Bill Quigley, he had eye surgery last week. He is recovering at home. So he is listening in to this call, but he won't have a speaking role.

The Q1 call is traditionally qualitative. We returned from the full year NDR about 3 weeks ago. So, as you might expect, not much has changed. The next major update will be at the interim results call scheduled August 12.

We use this time tonight to provide a brief update on a few business topics. And I'll just briefly point to the 6 strategies for profitable growth, they remain unchanged. They lead with our recognition of the need to grow the top line.

As discussed in past sessions, the conversion of conventional vehicle market to engine-independent steering is largely complete. Vehicle autonomy and new energy vehicles represent new and unique market channels for us. As you know, we now assess our exposure to them separately. That said, we're very conscious of the fact that business expansion requires conquest bookings. And we continue to have success in displacing our competitors.

I'm going to tell you a little bit more about that shortly, but let me recap a couple of items that we talked about during the NDR. In 2018, 80% of our major launches were conquest programs taken from competitors. This represents business booked in prior periods. In 2018, we also secured $6.1 billion lifetime revenue in new business bookings representing 47% conquest. That work is done. That business has been secured.

Looking ahead to '19, what I would add is, our booking plan, again, defines about 50% of pursuits that should be conquest. Now just to add that this work is not done, this is our challenge for '19 and it's currently underway.

Second, business rotation is the fundamental tenet of our corporate strategy and it'll be important to our continued success. When it comes to customer diversity, we highlighted 5 new EPS customers secured in the past 2 years. Looking ahead to 2019, our plan is to target 2 additional new customers.

In terms of product mix, our backlog would indicate that undercurrent IHS forecast revenue derived from EPS should increase by about 5 percentage points in the global mix within the next 3 years.

In terms of geographies served, backlog indicates that revenue derived from the Asia-Pacific region should increase significantly in our global mix within the next 3 years. And in our projection, this really begins in earnest in 2020.

Looking ahead to '19, we've got more than 50 launches planned, 2/3 of them in the Asia-Pacific region.

And finally, when it comes to operational efficiencies, there are many things we could talk about. I would just highlight, again, for tonight work that began in 2018 transforming U.S. driveline operations to the new standard we've already adopted in every region of the operation outside of the U.S., nothing to invent, we're just bringing North America up-to-date.

Backlog at the end of Q1 stands at USD 25.3 billion. This is a slight increase from 2018 year-end. It's a USD 1.3 billion increase from 1 year ago Q1. On a product line basis, I'd mention that EPS remains at 70%.

Regional distribution largely unchanged. We've added customer distribution in this graphic to summarize our top 8 customers. I'm going to just highlight a couple of things from this. GM stands at 34% of the global backlog versus 35% a year ago. What's more significant there is, we finished 2018 with GM representing 42% of global revenue. So, again, the backlog reflects a much lower number.

There are 2 things going on here. One is, we've been consciously working to rotate away from our dominant customer, and we've been successful with many others. But also 2017 and '18 were light booking years at GM, just in terms of the way their programs rolled out. '17 light by plan, '18 light because a number of big programs got moved into '19. They have not been sourced yet, that is still in front of us.

I'll also highlight BMW, they're at 12% of the global backlog, up from 10% a year ago Q1 2018

[Technical Difficulty]

[Operator]

One moment please while we attempt to reestablish the connection.

[Michael Richardson, executive]

We will continue. I apologize. I'll just go back 1 step. BMW stands at 12% of the global backlog now versus 10% a year ago. More significant, we finished 2018 with BMW representing 6% of global revenue. So our exposure to BMW will increase substantially, primarily owed to our winning a significant steering column program on the larger BMW vehicles.

During the NDI (sic) [ NDR ], I shared that our outlook for '19 includes more than 50 major program launches. It's a record year. A-P representing 2/3, 34 launches. This sheet just indicates those launches that we've completed in Q1. 6 done, A, B, C-segment vehicles heavily represented with halfshaft programs, by the way. And I'd also highlight that although one Q1 launch would occur in the Asia-Pacific region, looking ahead to Q2, we have 15 launches queued up and ready to execute.

Further to the NDR discussion, I'd like to ask Steve Spicer who's with me here today to share an example of product evolution in the form of our column-based EPS product. Before we hear from Steve, let me remind you why this is important. In the current environment, each time we mention conquest we're taking share from others. It is only possible through thoughtful, detailed preparation of next-generation products.

OEMs generally don't like to make design changes in the midst of a program. They don't like to make design changes post launch. In the world of automotive steering, changes nearly always require revalidation at a vehicle level. We don't like it either because customers expect suppliers to share the margin gains with them in order to implement change.

Launching a fundamentally new product at the time of vehicle refresh is a very different scenario. New model introduction allows us to substantially reduce our cost base in line with new competitive pricing demands. We need to stay a step ahead of the question. That's why our approach is built upon model-to-model cost reduction through design and process innovation. This model is working.

While I've spoken to you about this conceptually in past sessions, I'd ask Steve to share a specific example. Steve Spicer?

[Steve Spicer, executive]

Thanks, Mike. Good day.

What I'm going to cover with you is an example of our generation-to-generation cost down and performance increase that we're working on across all of our EPS product lines. This example happens to be for the original global product that we first put into mass production back in 1998 and that's the column EPS, or CEPS. Since the initial launch, we've evolved beyond the third generation with phased iterations of validated saleable product, each comprehending significant content increase and cost reduction.

Our success in delivering a significant number of conquest wins has been driven by our ability to stay ahead one step at a time, always ahead on the cost curve versus the competition, and displacing competitors while protecting margin really requires us to be thoughtful and creative in product and process design. In fact, those 2 really have to be always considered together: cost; and product and process.

We're packing more technology and higher performance into a smaller space on this next-generation column EPS that we call Gen 3.5. It's a 30% cost reduction in that smaller space. And that's 30% model-to-model reduction compared to just 5 years ago.

Our latest column EPS has evolved to enable a broader application range of vehicles with added content to deliver increased product reliability, the power output of the system, more software content, processing speed, all the things that global OEM platforms demand.

The slide, for those of you who are following on the graphics, illustrates the evolution of the CEPS, I'll call the CEPS species from Gen 1 to Gen 3.5, and that's the graphic in the upper right-hand corner. More of that will come especially in the European and Asia-Pacific markets. Those are clearly the largest column EPS markets globally.

As you go clockwise around the chart, the next graphic shows the printed circuit board size going from in terms of square centimeters and where we are now compared to where we were is a 60%, 6-0, reduction in printed circuit board area in size and that really equates to improved packaging by the customers, and they get excited about that. It's lower weight, smaller package with more functionality and more processing power.

The next new energy vehicles, in the pictures, you see there's 2 vehicles shown there, those are new energy vehicles, one in Europe and one in China that we will be launching on.

So the column EPS market really is promising for us. We are planning significant future sales backlog for our next-generation design. And as Mike mentioned, we're always working to stay ahead of the curve on our next-gen products. So I wanted to spend a few minutes with you to talk about our column EPS model-to-model innovation, and I'll pass it back to Mike.

[Michael Richardson, executive]

Thanks, Steve. I'd just add that the approach Steve described is really acquired across the complete steering product line portfolio.

But there are many examples, in fact, an example in each lineup within steering.

We will move on to GM for a minute. Even as we rotate the higher levels of customer diversity, GM remains our largest global customer. They also remain a key partner in the development of advanced driver-assist features through and including SAE level 5 ADAS or full autonomy capability. We spoke about that last month.

As our advanced engineering team spend time together, our relationship has expanded in other areas. One current initiative represents a tangible response to the GM vision of zero congestion, zero emissions, zero accidents that Mary Barra speak about the zero, zero, zero strategy. That includes design development and serial production of their new E Bike Mid Drive propulsion system, so the role we play is providing the Mid Drive to this foldable electric bicycle. This became visible externally with our first ship date on February of 2019.

Our own development partners tend to work in close collaboration with GM engineering and refining the Mid Drive units in terms of quality, cost and design. It's a first for them, and we've had a lot of experience to share, manage the extended supply base, perform final Mid Drive product assembly function tests. Mid Drive units are produced exclusively in our Saginaw, Michigan site and are currently shipped to Vietnam where assembled into bikes.

GM is going to market first in Europe. The European market boasts the highest unit sales of premium E Bikes, and premium and mid-market segment is defined as both bikes selling for EUR 2,000 to EUR 5,000. Europe represents the market of nearly 2.5 million premium E Bikes per year and that's expected to double to 5 million units premium E Bikes by 2022. U.S. is currently the smallest premium E Bike market at 350,000 units per year, but also projected to double by 2022.

We currently forecast shipping 4,000 units in '19, this is our start-up year, with GM projecting significant volume growth through 2024.

I didn't share this initiative during the full year NDR because it's not a big driver of revenue in the short term. However, I felt that it demonstrates our growing role in GM, another point of deep connection. I would submit that our role in this value stream will increase over time.

New topic. During the most recent NDR, we were asked a number of times about corporate social responsibility, CSR. At Nexteer, we're committed to the principles of sound corporate social responsibility for a sustainable future. While we're together today, I'd like to remind this group for the last 20 years or so, our focus has been on delivery of engine-independent steering systems, specifically targeting reduced emissions and improved fuel economy.

We've talked about the significant impact of regulation driving rapid industry adoption of engine-independent steering. Today, we extend that commitment through a framework that directs our CSR performance and environmental responsibility, health, safety, supply chain excellence, business ethics, community engagement and value creation. CSR is an expectation of our customers and a relevant driver of business success and reputation.

Our efforts are being recognized. For example, EcoVadis is a third-party CSR rating services by European OEMs to assess suppliers' performance and sustainability. And I would add that we hear the most about this from the European OEMs: they want to know our status and direction and commitment.

Nexteer's score in sustainability processes results increased to the highest rating since participating in the assessment 5 years ago, we're just 6 points from gold status, the highest rating available.

Another recognition from CDP, carbon disclosure project, a global environmental disclosure nonprofit organization that reports environmental impact of Nexteer to our key customers.

Our 2018 sustainability report is tentatively planned for publication at the end of June.

And with that, I'll stop our prepared comments and turn it back to the operator.

[Operator]

[Operator Instructions] And the first question comes from Rebecca Wen from JPMorgan.

[Rebecca Wen, analyst]

Can you hear me?

[Michael Richardson, executive]

Yes, very well, Rebecca.

[Rebecca Wen, analyst]

This is Rebecca from JPMorgan. First -- so 3 quick questions. First, congrats on the successful conquest business booking. If you were to summarize, what do you think are the top reasons that we were able to take away business from our competitors? Is it the difference in our product technology, pricing, product offering or any other reasons? Or -- and also, from whom did we took the most shares from?

And second question is, could you elaborate a bit more on the North America driveline focus? And if it's possible, could you share a bit quantitative comments such as how much cost we could save or, et cetera, from this initiative?

And last question on the new business expansion into E Bikes, around how much of the revenue do we expect from this business, say, in 2020 or 2025? And how should we think about the margin profile of this business? That's are my 3 questions. And finally, wish Bill a speedy recovery.

[Michael Richardson, executive]

Thank you, Rebecca. Steve, do you want to speak for the reason behind success in conquesting new business?

[Steve Spicer, executive]

Sure. I'll speak to the EPS wins. They were both Rack-assisted EPS on pickup truck and sports car, and so the award on truck and the sports car we went head-to-head with tough competitors, Europeans and Asian competitors. Obviously, price always comes into play, the commercial offer will have to be competitive. And we did it with the technology offering in our power pack area that is very well viewed in terms of size and weight reduction as well as reliability. We talked to you before about the term FIT, the failures in time with lower FIT numbers, higher reliability. So we offered them some of the state-of-the-art technology that narrowed the field down to a few -- only a few of us that the customers would trust. And then in the end, it came down to relationship, and what really closes a deal for us a lot of times is our flexibility, customer intimacy, the ability to tailor applications as needed. We've talked before about how inflexible Bosch has been, and that allowed us to win on the truck. And Hitachi and Mando were the competition on sports car. And again, they were viewed as unfavorable, inflexible. In fact, the customer is pretty upset with one of those competitors. So we used that as an opportunity to maintain our position on that sports car. So we're very happy about that.

[Michael Richardson, executive]

Thank you, Steve. North America driveline remains important. If I could back up in time, we would have started this initiative earlier. But frankly, the growth engine for the company has been EPS, and that's where we have spent our time and spent our engineering bandwidth. But at this point, we felt that driveline has more opportunity than we historically had largely due to the fact that GKN is held by a private equity concern. They've got 52% of the global market, and we're finding increasingly customers wanting to hedge their bet on GKN, and they're giving us opportunities that we have not historically had. So opportunity to grow. They've done extremely well in booking new business. They -- driveline product line represented 13% of global revenue at the end of '18. They had deposited about 20% of all new business bookings in the backlog for the last 3 years, '16, '17, '18. So we know revenue derived from driveline will grow, and it's time for us to deal with North America. North America is 70% of global revenue on the driveline revenue, and it's an area that we had not invested in. We moved our investment to other priorities. But we know exactly how to bring them up to state-of-the-art of our regional operations that are all thriving and profitable, and we began that work in 2018. We will see the fruits of that effort in 2020. So we're in the midst of it right now, and it's money well spent with a good payback. It will make the company healthier in every way.

E Bikes, I've mentioned it on this call for the first time because it's, frankly, new to us and new to GM. It's not a product where we've got an IHS reference number. We're doing 2 things: we're studying the market ourselves directly, and we're listening to GM's projections of what they think they can do. I'll just tell you we're planning to ship about 4,000 units this year and that's if the GM numbers come through the way they indicate. This Mid Drive unit ships at over $1,000. At volume, it likely will be under $1,000. But just for talking purposes, that's about where we are today. So again, not big driving revenue, but we've been very conscious to preserve our margin. If we're going to play in this market, we'll do it because we can make money, and we're following it very closely, looking for greater opportunities in the future. And as I mentioned, with the size of the market and the rate of growth of the market, it's a terrific opportunity, and I think it's a timely product entry for both GM and for Nexteer.

[Operator]

Due to limited time, we'll take one last question and that comes from Robin Zhu with Bernstein.

[Robin Zhu, analyst]

This is Robin from Bernstein. Just 2 quick questions, please. One, on these E Bikes, I mean, it's the first time that we've heard of this from you and the team. If you could just step back for a second and discuss what you think of this business longer term, how big do you think it can eventually become for next year as a percentage of the overall business? Whether you guys are in discussions with non-GM customers, Bird, Lime and whoever else is in the space? And then yes, just the -- at what point do you think this might actually become a meaningful profit contributor for the overall business?

Second question, I think it's -- especially in North America, I think it may be fair to say that Q1 production trends have been slightly weaker than certainly I expected, we'll be keen to hear you talk about where you think that's headed, how that influences your thinking in terms of full year revenue profit guidance, and yes, any changes on North America front would be useful?

[Michael Richardson, executive]

Thank you, Robin. E Bike, it's, frankly, too early for me to speak with conviction. I'll just frame it this way. I think the Mid Drive unit represents the real value to content of any E Bike, and that's where we are. An analog here we've talked about prior is our unconsolidated JVs in China. When they make the global exportable product, which is a brushless motor-based unit, they source that from our wholly-owned plant. That unit is the heart of an electric power steering system. That's where the margin lies. That's where we differentiate ourselves. I see a similar opportunity in Mid Drive units. What is required here is something that's very power dense, low lash, low friction, quiet, with excellent NVH characteristics. That is at the heart of what we do, and we've made tremendous progress quickly, and this has been very positively received by GM for the moment. But I see no reason to think there aren't expanded market opportunities for a device like this, and we'll have our eyes open for that. But I'd say let's talk in a year when we've got some experience and some tangible data, and we'll know a bit more about market growth. But the North American and European market that I mentioned are both projected to double in the next few years. So I think there's plenty of opportunity for a premium-featured E Bike, and that is the place we would like to play.

In terms of volume, 2019 is off to a slow start as we highlighted in the NDR. Asia-Pacific demand is weak, both sequentially and compared to a year ago, we're off on low double digits at this point Q1. North America remained stable. The market favors SUV, CUV and trucks. And we just have to remember we are very favorably positioned in the market segment that is flourishing, and we're ever so grateful for that. When GM made big headlines end of the year and ceased the production of several passenger cars and closed several North America production plants, it really had very little impact on us. About $0.1 billion total came out of the backlog. What they intend to continue to produce as what we supply. And again, we're thankful to be there on those vehicles.

[Operator]

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