Nexteer Automotive Group Ltd

HKEX:1316

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, welcome to Nexteer Automotive Group Limited 2021 First Quarter Investor Communication Call. [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, Sara, and good day. Welcome, everyone, on the phone, to Nexteer Automotive's 2021 First Quarter Global Investor Call. On the call today, we have our President and COO, Tao Liu; Senior Vice President and CFO, Bill Quigley; Executive Board Director, Senior Vice President, CTO and Chief Strategy Officer; Robin Milavec.

About 40 days ago, we reported our 2020 annual results and made a virtual NDR with many of you. Today's call will be relatively quick, taking around 40 minutes covering a few latest updates of the company for Q1. Bill will first give an introduction of the latest operating environment, and then Robin will provide an update of the company's business development. After Bill and Robin's notes, we will take some questions. Before I hand over to Bill, I will remind you today's communicating package as well as our 2020 annual report are available on our company's website and will also remind you of the safe harbor statement governing today's communication. Welcome, Bill.

[William Quigley, executive]

Great, Cameron, and thanks, everyone, for joining us today for the call. I'll begin our update, as Cameron stated by providing a review of the operating environment for the first quarter as well as current full year expectations, and then again turn the call over to Rob for a discussion of achievements from the first quarter. So turning to the first quarter. This slide highlights OEM production as reported by IHS in April. And as we discussed during our year-end 2020 review a little over a month ago, global OEM production continued to rise during the first quarter when compared with 2020, ending the quarter at 20.3 million units produced, 14% higher than the first quarter of 2020.

As noted on the bar chart, the March comparison against 2020 is represented by the green bar, was higher by 35%, representing the impact of mandated business shutdowns in both America, Europe and South America commencing around mid-March last year. While the industry has certainly experienced a recovering demand environment coming off the lows of the first half of 2020, 2021 first quarter OEM production was still lower than 2019 by about 2.6 million units or 11%. And you'll note here with all markets lower. At the bottom of the slide, you can see that the increase in OEM production in the quarter was led by China and Asia Pac broadly, increasing 77% and 33%, respectively, with Europe and South America production about equal to a year ago and North America down by 4% compared with 2020, largely reflecting the impact of weather events in North America and electronic component supply shortages and logistics constraints in all regions, which hampered OEM production in the first quarter.

As we reviewed during our 2020 annual results update, Nexteer's revenue will outpace the change in OEM production during a very difficult year, and that trend has continued through the first quarter of 2021, principally again led by our Asia Pac and EMEASA operations. We've also continued to work diligently with our customers and supply base to minimize the impact of the electronic component shortages we and the industry are experiencing to mitigate wherever possible the impact to our customers' production schedules. These efforts include continued balancing of supply allocations throughout our manufacturing network, component substitutions and alternatives, alternative supply arrangements and other levers within our control. Given these supply constraints as well as a rising cost of logistics in general, we continue to work to mitigate incremental friction costs we are experiencing in the first quarter. With our top priority still being the health and safety of our employees as many regions of the world continue to experience increasing COVID infections.

So we've been closely monitoring and coordinating with our customers across all regions as a result of the ongoing chip shortage, with many OEMs announcing additional assembly plant downtime as we move through April or move through March and now into April. IHS has continued to adjust full year 2021 OEM production forecasts, lowering 2021 by 1.2 million units or 1.4% as of their April update when compared to the January 2021 forecast, largely reflecting the current expected impact of the chip shortage. So at this time, North America and Europe and South America are forecasted to be the most impacted, lower by 3.7% and 2.1%, respectively, compared with expectations just at the beginning of this year. As highlighted in the bottom of this slide, the second quarter reflects the largest adjustment as of now, 1.2 million units lower than January or 6%, with the third quarter about equal and a slight recovery in the fourth quarter of about 400,000 units or about 1.6%.

While many OEMs continue to really take their intention to recover any loss production in the first half of this year in the second half, it's becoming more evident that the chip shortage is likely to extend into the second half of 2021, given the time and investment needed for additional capacity in light of the economic rebound that many regions and sectors are experiencing. Although the industry will need to continue to aggressively navigate through this current period of constraint, we certainly remain optimistic that underlying vehicle demand remains supported by a number of factors, including continued central bank and government monetary and fiscal measures, the continued pace of COVID treatments, evident economic growth in many regions and certainly strong consumer demand, resulting in lower vehicle inventories, which will ultimately require replenishment. So I'll now hand the call over to Robin.

[Robin Milavec, executive]

Okay. Thank you, Bill, and good day to all of you joining us on the call. I'd like to start with our launch performance. For the first quarter, we successfully launched 9 customer programs, 2 in North America, 3 in EMEASA and 4 in APAC. These launches spanned all regions and included both global and local nameplates. As we've done in the past, this slide shows which launches support electric vehicles as noted by the green symbol. And it also shows the launches that represent new business for next year, and those products are shown in red font. So you can see the majority of our launches, in fact, 8 out of 9 represent new business for next year. And despite the industry-wide supply constraints that Bill mentioned, we're still projecting to launch a total of over 40 new programs by the end of this year.

In terms of electrification progress, you'll see a couple of flagship EV models with Nexteer technology that will be launched later this year, and that includes our full steering and driveline package for the GM electric pickup trucks, a power column for a new premium German OEM platform and the steering system for the Geely Zeekr, which was first unveiled at the Shanghai Auto Show this month.

Next slide, please. So we partnered with a company called RH Sheppard to provide our magnetic torque overlay Advanced Driver Assist Steering technology on commercial trucks. Sheppard has an 80-plus year history of providing steering gears for commercial truck applications in their manufacturing site in Hanover, Pennsylvania. From an industry standpoint, Class 7/8 and coach bus vehicle regulations are adding requirements for autonomous safety content such as lane keeping assist in order to help reduce drivers fatigue. The Nexteer and Sheppard MTO system has received very positive reviews from both the commercial truck OEMs and end users. Sheppard testing has logged more than 1 million miles of driving. And necessarily, we've been in production for heavy-duty passenger truck applications with this technology since 2015. This represents our first program where Nexteer has entered the commercial vehicle segment to expand our business.

As previously shown on our launch slide, this product started production in January of this year and is currently in the launch phase after a 4-year development contract.

So now we'll move to new business wins. On a quarterly basis, we plan to provide information on our bookings performance, and we'll update the backlog in our formal interim and full year performance for 2021. The left-hand side of this chart begins with our Q1 order bookings of $646 million, followed by our forecasted order bookings for the rest of the year. We estimate our total bookings for the year will fall in the range of $6.4 billion, with the majority of bookings occurring in the second half of the year based on the OEM's award cadence. The $6.4 billion annual bookings 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 Q1 business wins, EPS or electric power steering accounted for 85% and the column business accounted for 15%. These new programs booked in Q1 are mainly from North America and APAC divisions. I'd highlight 79% of the total bookings in Q1 are electric vehicles, which demonstrate the accelerated EV trend from both the industry and our customers' perspective.

Our products across the board are participating very successfully in this electrification trend. Finally, most bookings in Q1 are Conquest wins, 90% of the total. And I'll highlight that we continue to successfully defend the 100% of our incumbent business now for 3 consecutive years. And in our March call, I mentioned how our product lines are using strategic product expansions to protect and grow market share, particularly in the electric pickup truck segment.

Our high-output Rack EPS in the ball spine axle half shaft are 2 examples, which will be featured on the upcoming Hummer EV pickup launch later this year. And then in April, GM announced another new EV pickup truck, the electric Chevrolet Silverado will launch in 2022. Again, all of our product lines, the EPS, columns and driveline with new technologies will be present on this electric vehicle. Similarly, the EV version of the Ford F150 pickup truck, which will launch early next year, will utilize next year's Rack EPS system with a 10-FIT high availability technology and our power steering car. These are best technologies further strengthen our position in this critical market in North America.

And then also relative to North America, recently the new administration in the U.S. is calling for significant investment into EVs and EV infrastructure. And we see this being reflected in the major OEM strategy, such as GM's target of 0-emission vehicles by 2035.

Earlier this morning, we issued a press release announcing an organizational structure change related to our software activities. We know that vehicles are fast becoming more software-enabled and cloud-connected devices. OEMs needs are growing exponentially in a software-enabled screen feature area as well as other software-centric motion control applications. Because of this, we're elevating our global software engineering organization to meet these expanding software needs of our customer base. In the past, our software engineering expertise was spread among various teams throughout the company and reported separately through our EPS product lines and our R&D staff. This new org structure enhancement creates a single strategic software team across 4 global locations within next year. They include our global technical center in Saginaw, Michigan, the regional technical centers in Tychy Poland and Suzhou, China as well as our software center in Bengaluru, India. This structure will report directly to me as the CTO.

Our new software structure will accelerate our ambition to production time lines as we drive tighter connections between our software teams throughout the development process. This will position us to meet the expanding software demands, shorten our lead times, maximize our value proposition and capitalize on new and emerging software product opportunities. This new software structure also aligns our software R&D collaborations with 2 of our critical partners, CNXMotion and Tactile Mobility. We can all see the role that automotive software will play in enabling autonomous vehicles as well as advanced safety and performance features. That's why it's so important for us to maintain focus and support for our software development activities as we move forward.

Finally, we're very excited to share with you new technologies, which we introduced to you in 2020 and have since been nominated by Automotive News as 2021 PACEpilot finalists. The first one is Steer-by-Wire with stowable steering column. This technology was developed by Nexteer and Brake-to-Steer technology, which was developed by CNXMotion, which again is our joint venture with Continental. There were 23 finalists from 20 companies named for the PACEPilot Award this year, and the winners will be announced in September. As a background, the Automotive News PACE award is now in its 27th year, and it's a recognition of a technological innovation that's in production or a process that has reached production status by automotive suppliers. This high-profile PACEpilot award shown here is only in its second year, and it recognizes game-changing innovations that have reached a working pilot demonstration phase but are yet -- not yet commercialized in the automotive space.

With that, I'll turn it back over to Cameron for some Q&A. Thank you.

[Cameron Wang, executive]

Sharon, can you start the Q&A. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Nick Li with Crédit Suisse.

[Nick Li, analyst]

So I have 3 questions. First, over the night actually, Ford, provided very weak guidance on the -- mainly due to the auto chip shortage. So they basically, they cut 50% of the production for second quarter of this year. So I think this is a very direct view. So may I get a sense from the management on their production cuts and whether we are still carried to our previous full year guidance that the revenue can come back even higher than 2019 level. And this is the first question. And second question is on the COVID-10 situations in India. So this is -- India, currently suffer from COVID-19. So how is our plant there, especially for the software center and also the 2 plants, I think in India?

And last question is about the -- more like a more long-term question. So do we see any like a content per vehicle upgrade, especially in dollar amount in transition from ICE cars to EVs. So whether -- so I actually look at some weight of the vehicles, actually, EV is much heavier. So whether there is a need to upgrade the steering systems for the EV?

[William Quigley, executive]

Great. Thanks, Nick. Appreciate the question, and I'll take a couple of those, and Robin and obviously Tao can chime in as well. You're correct. Ford did announce their earnings yesterday, very strong for the first quarter, obviously, but they are taking a hard view with respect to second quarter performance. No, obviously, they have been adjusting their plant schedules. You've probably seen that in the headlines with respect to a number of assembly plants being in downtime. And we're certainly obviously impacted by that, but we're also adjusting our production as well. Is it a bearish view? Difficult to say at this point in time, but I do believe coming from just our recent update 40 days ago or so, this chip shortage is going to extend probably further than the second quarter. We're working very closely with our suppliers, and also with our customers.

We're seeing a lot of volatility with respect to OEM production assembly plants in general and their schedules, not only in North America, but I think broadly in Europe as well as well as in South America. So we'll continue to monitor that situation. We're not impacting forward specifically with respect to their own production downtime. But again, we have to continue to navigate the environment to the best of our ability. And I think our supply chain folks, coupled with our engineering people, our commercial people, coordinating supply base on the customers. To date, we've been successful and not interrupting our production, if you will, from our customers' perspective.

Certainly, India, I'll let Robin speak to the activity going on in our operations in the software center. But certainly, India is a very, very hot spot and an unfortunate high spot with respect to COVID spread. Certainly, our operations continue on. And I'll let Robin speak to the software center. But with respect to our plants in India, we continue to operate and produce out of those plants, certainly be very diligent and diligent with respect to the health and safety of our employees. Robin, maybe on the software center.

[Robin Milavec, executive]

Yes, sure, Bill. So I would just echo what Bill said about the health and safety of our employees. That continues to be our primary concern, making sure that we have safe work practices in place at our factories. Relative to our software center, which we now have more than like 200 employees there. We're in a full work remote situation. So all of our software engineers in Bengaluru are working remotely. And actually, the productivity coming from our software center continues to be very strong in that type of work condition due to the work that they do and their ability to do that remotely. So we continue to monitor the situation, again, focusing on health and safety of our employees. But at the same time, we're able to continue with the productivity and the work that's needed out of that critical area for us. And then I can take a shot at the third question that CPV related to the industry transforms from ICE engines to EVs. And you're right, we see the trend with the new EV vehicles typically having heavier front-end loads, which tend to drive more premium steering system development.

So you might move from a column EPS-type system into the more premium, which would be dual pinion and Rack EPS. And as you get into the heavier vehicles that utilize Rack EPS that certainly plays into our strong suit as that is our strength in terms of steering which is the #1 steering supplier with Rack EPS technology. So that really bodes well to the strength and the scale that we have built with that product line. And just as one example we can point to, I highlighted the full-sized trucks that are converting to electric platforms. There certainly is more content per vehicle on those trucks, looking at the steering system as well as the driveline system. It's a high output Rack EPS system. So just looking at what we call our BOM costs, our bill of material that there's about 50% increment and the bill of material that goes into a high output Rack EPS system just due to the added complexities and the added performance and load requirements for that steering system. So you get added CPV coming from that content.

And then looking at the driveline, we have the new feature called a ball spline axle half shaft that is additional content within the half shaft itself. But then looking at some vehicles like the Hummer that takes 4 of our half shafts, whereas the ICE engine vehicle that would typically replace that would only have 2. So you're driving not only additional content per vehicle within the half shaft itself, but then doubling the number of half shafts used in the vehicle from 2 to 4. So we see a very positive impact as the industry transitions into EV and the utilization of our products and the CPV of our products in that segment as it grows.

[William Quigley, executive]

Thank you, Robin. And let me just wrap it up with asking or responding to your first question as well with respect to what we're seeing on revenue trend and how that looks vis-à-vis in comparison to prior years. As we discussed in our March update, we saw a path forward with respect from the revenue level to actually have an opportunity to be at 2019 levels that was about 3.5%, $7 billion to $6 billion or so. Certainly, that's going to be dependent on OEM production, but also the performance we had in the second half outpacing the market by about 4%. That's been driven by, obviously, a very heavy launch schedule over the last several years, 2 years 2019, 2020, almost 100 program launches. And again, as Robin highlighted in his commentary this morning another 40 launches this coming year. So we believe that target is still an opportunity for us, but it's going to be dependent on how OEM production ultimately plays out during the course of 2021.

Certainly, the chip impact is having a demonstrable impact on Q2. That looks to be temporary in Q3, maybe some upside recovery, if you will, in Q4. But I think it's early days, and we're still in early days with respect to the ultimate impact from an OEM production perspective. So we just got to continue to navigate and work with our customers and work with our suppliers to get through this period of volatility. But I would just reinforce again, the underlying fundamentals are intact, economic fundamentals, consumer sentiment, consumer demand. Certainly, I would say the interest and the escalating interest in ICE to EV. All those bode well for, I think, the automotive industry in general. And certainly, a background economic recovery will only further those fundamentals moving forward.

[Operator]

Our next question comes from Rebecca Wen with JPMorgan.

[Rebecca Wen, analyst]

I just have one quick question. So I noticed you've disclosed our new order win outlook for this year, which is $6.4 billion for the full year 2021. I think we haven't disclosed this expectation or this number in the past -- in the recent years. So could you give us a bit of background or maybe the data for last year just for comparison?

[William Quigley, executive]

Yes, sure. This is -- Rebecca, this is Bill. Good to hear your voice. Yes, we think -- as we look at the backlog, right, certainly a significant input into the backlog is our awards -- customer awards are what we referred to as bookings in a particular year. So if you think about it in 2019, we did about $7 billion in bookings that was comprised of about 50% Conquest and then 50% incumbent positions. Back to Robin's point, and then we've retained all of our incumbent positions over the last several years. So we thought with respect to showing what is available in the market and how we view the market and how we'll ultimately continue to grow and outpace overall OEM production, this bookings view is an important input. 2019, certainly, or 2020 certainly tempered down with respect to the pandemic. But again, the $6.4 billion is our current expectation with respect to bookings that we'll have in the year of 2021.

I'd also note from a distribution perspective, there are a lot of incumbent opportunities or awards this year that we're working through principally in North America, but the mix is about, again, 40% Conquest, 60% incumbent at least as we see it today. So again, importantly, got input ultimately into the backlog, which, as you know, spans many years, is this, in fact, performance that we see from a bookings perspective.

[Operator]

[Operator Instructions] Our next question comes from KaLeong LO with Harvest Global Limited.

[KaLeong LO, analyst]

I had some questions on margin. Now that we may not have a set number, but would like to have get your sense on your background to understand how the T1XX to impact our margin? Does it cause our steering costs higher, increase our downtime, et cetera, which will have a negative impact on our margin. So just a directional information will be really appreciated. The second one is also related to margins about raw material costs. We see the costs coming up a lot in 1Q. How does it impact our overall operation margin pricing, et cetera?

[William Quigley, executive]

Sure. I'll take a shot at those. And again, we can have Robin or Tao chime in as well. Certainly, the chip impact was largely around expediting costs and scheduling costs. So it has an impact not only on order processing, how we actually get those components into our factories. We're using obviously, many times, airfreight to move chips to where they are needed from a production perspective, that obviously is expensive in general. And then a backdrop on that has been from a friction cost perspective, as we referred to as just, in general, logistics are very constrained. And it's not necessarily a chip issue. It's a broad, I would say, industry and/or a sector issue with respect to congestion we're seeing in ports, the ability and the rise in cost of containers and sea shipping and so on and so forth. So there is certainly friction costs associated with just moving production from, obviously, raw, 2 components and ultimately to our customers.

So again, it's not necessarily a chip component impact when I say that from a cost perspective, the chip itself, it's actually moving those chips to where they are needed. And we are seeing premiums and the opportunity that we may have to buy a lot, lot sizes of chips from alternative suppliers. So again, it's a friction environment with respect to costs largely around the premiums associated with expedition impacts on manufacturing with background of OEM, some client production schedules, which are very volatile. And then obviously, overall, just logistic costs, in general, which are rising significantly.

On the commodity front, you're right. With respect to steel, aluminum and other commodities, we have mechanisms in place with our customers. We have formal mechanisms or certainly negotiated positions with respect to recoveries of those types of commodity costs. And I suggest our recovery position is about in EV, about 80% or so, and there's going be some time lag. So we may incur a cost today with a recovery in another period. But in generally, we work very hard to work with our customers with respect to those commodity price levels.

And again, there are exposures, contractual exposures in many contracts and others are just negotiations that we have with customers on an ongoing basis.

[Robin Milavec, executive]

Yes. I would just kind of add to what Bill said that certainly, the chip shortage continues to be disruptive in the industry. It creates a lot of instability. And it's honestly a very dynamic situation. I mean literally day-to-day basis, things are changing. And so it requires a pretty constant attention from a lot of our leadership team and our technical teams as we try and sort through what are potentially different actions we can take to help mitigate the shortages that we're seeing. And that comes in the form of substitutions or looking at our processes and looking how we can make them more efficient and increase throughput. So it certainly provides an opportunity to -- that requires a lot of oversight and a lot of day-to-day attention. But I would say, I'm very proud of our team. We've managed to come up with solutions, and we haven't been the cause so far of being in disruption to an OEM. But it's such a dynamic situation, and it certainly is causing a lot of focus that we have to apply to this topic day to day.

[Operator]

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

[Robin Milavec, executive]

Thank you.