Nexteer Automotive Group Ltd

HKEX:1316

Earnings Call Transcript 2021-Q3

[Operator]

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

[Cameron Wang, executive]

Thanks, Jason. Good day and welcome, everyone, on the phone to Nexteer Automotive 2021 Third Quarter Global Investor Call. Today, we have our Executive Board Director, President, CTO and Chief Strategy Officer, Robin Milavec; Senior Vice President and CFO, Michael Bierlein; Senior Vice President and COO, Hervé Boyer, on the call. First, we will have Robin and Mike give an update of the business highlights and operating environment status of the company.

After their presentation, we will move to the Q&A session. Today's call will take around 30 minutes. The presentation package has been posted on our company's website. Before I hand over to Robin, I would remind everyone of the safe harbor statement governing today's communication. Welcome, Robin.

[Robin Milavec, executive]

Thank you, Cameron, and good day to everyone on the call with us today. First, I'd like to provide some business updates for the third quarter But before I get to that, I want to start by thanking our team, our supply chain, sales, engineering in each region for their diligent and tireless efforts every hour and every day to minimize the semiconductor shortage and other supply chain constraints that had the potential to impact our customers.

We're very proud of what has been accomplished so far, and we realize that this shortage will likely continue to challenge the industry into 2022. Later, Mike will spend more time to explain the evolution of the operating environment the company is working through and how we view that trend going forward.

Turning to the business highlights for the third quarter. I'll cover 3 main topics today. First is program launches, then we'll move into new business bookings. And then finally, industry recognition as we formally received 2 industry recognitions on a couple of technologies that I'll highlight. First is launch. So we successfully launched 6 new major programs in the third quarter following 16 launches during the first half of the year.

Out of the 6, 2 are in EMEASA and 4 in Asia Pacific. As in the past, this chart shows the new business products in red font. So you can see that 5 out of the 6 are new business wins compared to 1 incumbent win that is shown in black font. I'd also note that the industry-wide supply constraints did impact some customers' production launches. Despite this, we're still projecting to launch a total of about 40 new programs by the end of the year as some of the planned Q3 launches were retimed into Q4.

In addition to the BMW iX electric vehicle launch in the third quarter, there will be a few more key EV programs that will be launched in the fourth quarter, which include the GMC Hummer EV and BrightDrop Electric Delivery Van. Our full product portfolio, Rack EPS, Column and Driveline will be featured on these flagship EVs.

We're very excited about supporting our OEM customers with some of our latest technologies in these new launches. Our next slide from our Q1 conference call, we started providing our quarterly bookings update. The middle of this chart indicates our quarterly bookings followed by our forecasted order bookings for the rest of the year. We booked $1.72 billion year-to-date with $378 million booked in Q3. As we previously mentioned, we expect significantly more bookings to occur in the second half of this year based on the OEM's award cadence.

However, the supply chain constraints did delay some of the customers' nomination processes. As a result of these delays, our previously projected $6.4 billion for 2021 has been slightly decreased due to the nominating retiming. We continue to expect a significant booking period in Q4 and project that we'll end the year at around $6 billion in new business bookings. On the right-hand side of this slide shows the year-to-date bookings composition. You can see within the year-to-date customer bookings, electric power steering accounted for 72%, our Column business accounted for 12% and the Driveline business accounted for 16%. The new programs booked year-to-date are mainly from North America and our APAC divisions. Most bookings are Conquest wins, which account for 73% of the total. And finally, 30% of the total bookings are related to electric vehicles. On the left side of the slide, I want to highlight 3 most notable accomplishments. As I mentioned in the interim results call, we grew beyond our current foundational customers and secured our first Rack EPS Conquest booking with a major Japanese OEM in the second quarter.

In the third quarter, we broke into the adjacent market of North America powersports vehicles and won our first steering program with the segment leader in the utility and all-terrain vehicle field. And finally, I'd like to highlight that in the third quarter, we achieved a significant milestone with a major global EV leader and expect to have the first steering business signed and booked in the fourth quarter. Although I'm not going to reveal the OEM names of these significant new business wins, we are proud to add them to our growing portfolio of customers and look forward to announcing our partnerships with them as we support their respective launches in the next couple of years.

Finally, we're excited to share with you that Nexteer is honored to be recognized by Automotive News as a 2021 PACEpilot innovation to watch for our innovative Steering-by-Wire with Stowable Steering Column solution. And Nexteer's joint venture with Continental CNXMotion was also recognized as a 2021 PACEpilot innovation to watch for Brake-to-Steer. As we introduced to you earlier, we were nominated as a PACEpilot finalist among 23 other submissions from 20 different companies.

We're grateful that our 2 nominations were selected as winners. Nexteer's award-winning combination of Steering-by-Wire with Stowable Steering Column reinvents the behind-the-wheel experience and opens an untapped frontier of advanced safety and performance features for autonomous and traditional driving. Together, these game-changing technologies are poised to transform the future of mobility by supporting OEM needs across the industry megatrends of electrification, autonomy, shared mobility and connectivity.

With this, I'll hand it over to our Chief Financial Officer, Mike Bierlein, to provide an update on the operating environment for Q3 and how we view its evolution going forward. Mike, please take it away.

[Michael Bierlein, executive]

Thanks, Robin, and good day to everyone. I will be giving an update on our Q3 operating environment and business outlook for the remainder of the year. The third quarter was more challenging than we previously expected as the semiconductor shortage and other supply chain constraints accelerated, which significantly impacted our customers' vehicle production schedules.

As shown on the right side of the chart, on a sequential basis, global light vehicle production was lower than the second quarter by 12% or 2.2 million units. This volume reduction was primarily due to semiconductor shortages, including impacts caused by increased COVID cases in South Asia. On a year-over-year basis, third quarter 2021 production was lower by 20% or 4 million units, with the month of September reflecting the deepest reduction of 29%.

The frequency and duration of our customers' production shutdowns continue to negatively impact our efficiency objectives during the quarter as well as our supply chain partners. Additionally, as already referenced by suppliers just closing out the third quarter, other commodity and transportation and logistics costs remain significantly elevated, providing a further headwind to our operational and financial performance in the period.

As recently discussed during our interim results call, we continue to closely coordinate with our customers and suppliers across all regions to manage the semiconductor chip shortage and other supply shortages to minimize the direct impact to our customers.

We are proud of the efforts of our team as to date. We have not significantly disrupted any of our customer production schedules resulting from these supply constraints. OEMs have been reducing production schedules throughout 2021 as component supply shortages have accelerated. The October IHS production forecast for the full year of 2021 is 74.8 million units, which represents a 9.9 million units or 12% reduction compared to their forecast at the beginning of the year.

2021 OEM production is now expected to be about even to 2020 with the year-over-year volume recovery of 8.9 million units or 29% for the first half of 2021, nearly fully offset by the expected volume decrease in the second half of 2021. While all served markets are expected to be lower in the second half, Europe, South America and North America are the most impacted with volume decreases of 24% and 21%, respectively.

On a regional basis, these segments comprise 78% of our first half 2021 actual revenue. Yet positive progress for the auto industry has been made since October with COVID rates in South Asia significantly improving and semiconductor supply gradually ramping back up. This is helping the global semiconductor supply back toward a recovery path, although the journey is still long. While this is a positive development, we estimate the tightness of chip supply will continue well into 2022. The Nexteer team continues to diligently work with our customers and suppliers to minimize the impact of supply shortages to our customers through our manufacturing network, component substitutions, alternative supply arrangements, and other levers within our control.

We are also continuing cost reduction efforts and customer recovery discussions to partially mitigate the inefficiencies from frequent OEM schedule changes and rising direct input costs such as logistics. While the near-term operating environment remains quite challenged, we are optimistic looking forward as macro fundamentals remain robust, including strong consumer demand, replenishment needs given historically low vehicle inventories, and continued economic recovery. This concludes our formal remarks. Now I'll return the call back to Jason for a Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Bin Wang from Credit Suisse.

[Bin Wang, analyst]

Firstly, my question is all about the margin change in the second half of this year and 2022. We guess the margin may decline quite substantially due to the first half factors to continue. So can I know the magnitude in the auto for next year?

[Michael Bierlein, executive]

So thinking about our second half, we have limited visibility on our customer production schedules as the supply constraints continue to challenge our OEM schedules. So as I mentioned, the revenue or the production units in the second half of 2021 are down year-over-year about 20%. At the same time, we do have, as we noted in our first half, that we grew above market by 730 basis points. So that will offset some of the year-over-year volume reduction that we're seeing. Now on the cost side, inflationary pressures remain with us and logistics costs are high. So in the first half, we noted that commodity cost net impacted us by about 60 basis points; freight costs impacted us by about 120 basis points, and we see those continuing in the second half. So those, in addition to lower revenue, will put further margin pressure on our second half results as compared to the first half.

[Operator]

Our next question comes from Xinchi Yin from CITIC Securities.

[Xinchi Yin, analyst]

Sorry, I was on mute. My question is about our new business with a major global EV leader in quarter 4. So I was wondering, can you give us more details about this order backlog, for example, what is the average price per unit for this new business and can you tell us what exact model in quarter 4. Is that an SUV or a pickup truck or sedan? That's question from me.

[Robin Milavec, executive]

Yes. Thank you for the question. This is Robin. So at this point, we're not disclosing the OEM that we've secured this business with, but it certainly is a premier global EV manufacturer. And a lot of the details on this will become available once we go into the launch phase with this customer.

But needless to say, we're very excited about breaking into this particular customer. We think it's going to be a very beneficial relationship as we work with them during this development phase and ultimately through the launch. And as I said, I really can't disclose right now who the OEM is, but once it's apparent, I think it will be very exciting for you, as it is to us right now as we begin building this relationship.

[Operator]

[Operator Instructions] Our next question comes from Zhixuan Lin from Huatai Securities.

[Zhixuan Lin, analyst]

This is Zhixuan from Huatai Securities. Actually, I have a question about the cost increase. We all know that the raw material cost increased a lot, especially for aluminum and other metals. My question is do we negotiate with our downstream customers asking them to compensate us above the raw material cost increase or do we reprice our products. How much of the cost can we pass to our downstream customers?

[Michael Bierlein, executive]

Yes. So thanks for the question. In the first half, we had about $21 million worth of commodity price increases. And we recovered $11 million with our customers. So a $10 million net negative impact in the first half. So the recoveries with our customers come in 2 ways. One is contractual escalation agreements and the others rely on customer negotiations. So in the first half, we secured just over 50% recovery. We would expect to do at least that well in the second half, as we work to further recover these types of costs with our customer base.

[Operator]

Our next question comes from Nora Min from UBS.

[Nora Min, analyst]

This is Nora from UBS. I have 2 questions. So the first question is on fourth quarter trend of shipping costs and commodity costs. So because we are at the end of October now, so I'm hoping the management can give us some guidance of the fourth quarter trend.

And my Second question is on Level 2 or Level 3 ADAS-related function. So for this kind of backlog, can the management give us some guidance?

[Michael Bierlein, executive]

Thanks, Nora, for the questions. So I'll take a shot at the commodity and shipping costs, and then maybe Robin can go into your second question. So the commodity costs, as you've seen, have remained elevated, and we'd expect the commodity prices to remain elevated as well in the fourth quarter. Forecasts are out there for commodity prices starting to reduce as we get into 2022.

We continue to also see high shipping costs pretty similar to what we've been experiencing since Q2 and Q3 carrying forward into the fourth quarter. So I mentioned that our year-over-year impact on the first half for commodity prices was a net impact of about 60 basis points and freight was an impact of about 120 basis points in the first half. And I expect those costs to continue to impact our margin in the third and fourth quarters.

[Robin Milavec, executive]

Nora, this is Robin. Regarding the Level 2 to 3 ADAS content in the backlog, I would say that the types of products in the backlog that support Level 2 and 3 tend to be driver-assist features, so features like lane keeping technology, park assist and the like. And about 32% of our backlog would have that sort of content in it. And what that means to our product and most of the technology that supports Level 2 and Level 3 is related to our Powerpack design and now the Powerpack is a combination of our electric motor the controller and the ECU and to achieve some of these advanced autonomous functions, the Powerpack ends up getting some levels of redundancy.

So it could be additional redundancy in terms of the sensing technology, the power supply, the ECUs. And as we progress higher in the autonomous functionality as we get into Levels 4 and 5, for example, we get to our most advanced Powerpack that has a 10 FIT rating, and that would have full redundancy across all of those elements that I mentioned. So in terms of the Level 2 and Level 3, your specific question, about 32% of our backlog, has that kind of content in it and it's included from the technology standpoint and the levels of redundancy in our Powerpack technology.

[Operator]

[Operator Instructions] Our next question comes from Jessie Lo from Bank of America.

[Yu Jie Lo, analyst]

I have 2 questions. The first 1 is about our order backlog. So we are getting very excited about our first steering business with major global EV leader in the fourth quarter. But I was wondering if the expectation of order from this leading EV makers is reflected in our order backlog expectation in the fourth quarter, which is USD 4.3 billion? Or if this USD 4.3 billion is mainly just because most of the auto OEM has been delayed of some nominations and new model planning. So that's why we still are pretty positive on the fourth quarter order backlog.

And my second question is, there has been some debate about the demand. So given that this very tighter supply and also industry condition, in the end kind of impact demand of the U.S. auto market. So what's your view on this?

[Robin Milavec, executive]

Jessie, this is Robin. I'll take the first part of your question, and then I'll ask Mike to jump in on the second part. But I want to understand clearly your first question regarding the booking. As your question, the global EV booking that we're projecting in the fourth quarter, is your question, is that included in our planned bookings for the fourth quarter?

[Yu Jie Lo, analyst]

Is this included, the first steering business with a major global EV leader in fourth quarter, where we mentioned on Page 5. So is it like a massive contribution into the fourth quarter order backlog? Or this is mainly the business that will be kicking off the shipment in the fourth quarter. So this is already considered in backlog in the past?

[Robin Milavec, executive]

Yes. What we currently have in the forecast for the backlog in the fourth quarter as we book new business, the majority of what's in our forecast for the balance of the year is incumbent business and we'll see that as we book that business in the fourth quarter.

This EV global leader that I mentioned that we plan to book in the fourth quarter, we do expect that will book, but it will have a relatively minor contribution to the backlog, considering the other major contributions for our incumbent business in the fourth quarter.

And then, Mike, do you want to take the question about the demand in North America?

[Michael Bierlein, executive]

Yes. So the demand remains very strong in North America. And the issue, of course, is around the supply and our customers being able to make in finished vehicles. So the inventory levels as of the end of September were at historic lows, about 25 days of inventory, for example, for full-size pickups, which typically have over 60 days’ worth of inventory. Certainly, this consumer demand remains strong, and we do expect as well to have tailwinds as supply becomes available to also backfill that low amount of inventory.

[Operator]

Our next question comes from KaLeong LO from Harvest Global Investments Limited.

[KaLeong LO, analyst]

I have 2 questions. The first 1 is regarding the EV global leader. We just secured a departmental contract with them. May I know this is about only 1 single model or multi-model? We are talking about global supply or just regional in U.S. or in Asia? So this is just my first question. I have the second question to follow-up.

[Robin Milavec, executive]

So again, I think I'll avoid getting too specific at this point regarding this booking. But it is a regional booking in Asia Pacific. And although it's a global OEM, our first entry into this will be a regional supply in Asia Pacific.

[KaLeong LO, analyst]

That's very helpful. I have the second question to follow-up. This is more a long-term question. In the past 3 years, we are unlucky to face different headwinds, including strike, COVID, and chip shortage. So our margin has been significantly impacted or diluted. We had planned our top line growth about 50% in 5 years. May I know what is our expectations or normalized long-term EBIT margin. Can you give us some reference? Are we planning to go back to 2017, '18 or '19 levels? Any reference would be really appreciated.

[Michael Bierlein, executive]

Yes. So thanks for the question. As you've noted, we've had several headwinds over the last few years with the GM strike, COVID and now the supply shortage. And all of those have had impacts on our margins, including the inflationary environment that we're experiencing currently. We do anticipate our margins expanding as we move forward. Revenue visibility has been limited certainly, but if you look at IHS forecast for 2022, production units are increasing by an estimation of 10% as we go into 2022. So we feel that, that will be a tailwind for our revenue. And then we continue to work on optimizing our cost structure as well as we're actively in discussions with customers related to recoveries of our inflationary costs. So we see all of those items as tailwinds for our margin as we move forward.

[Robin Milavec, executive]

Thanks, Mike. And I just might add a little bit more color commentary. Your question is very relevant. If we look at the past 3 years, there seems to be each year some event that gave us some challenge, whether it was a GM strike or COVID last year and now the chip shortage, as you mentioned. And I would highlight that one of the significant challenges this year not only is there volume reduction, but the choppiness of the volume in terms of it's very difficult to plan for a steady-state volume level because OEMs have a hard time predicting their availability to build their vehicles.

So there's a very little notice when they decide to shut down an assembly plant for a period of time. And so that choppiness in the demand creates quite a bit of inefficiency, and that's been a challenge for us in addition to just the overall lower volume. But we do see that choppiness hopefully improving, even though the supply chain is going to be challenged for the next year, hopefully, we see more smoothing in the schedules as OEMs have a better ability to plan, and that will certainly help our efficiencies and ability to stabilize the margin.

And looking forward beyond that, we're really excited about some of the new technology that's coming out on some of these electric vehicles. So the GM Hummer EV launch, as I think we've discussed previously, has all of Nexteer's products on it. So it's high output Rack EPS. It's our Power Column. It's our premium ball sliding halfshaft. So all of them I would consider to be premium-level products on this EV, and we're very optimistic as the volumes begin to materialize on those trucks. In other models that would be launched subsequently that we will see some upside in terms of our margin due to that mix change as these EVs become more and more a part of our revenue.

And then finally, I mentioned Steering-by-Wire where we're seeing a lot of industry interest in Steering-by-Wire technology. And we continue to work very closely with a couple of OEMs on finalizing details for production plans on Steering-by-Wire, and we see other OEMs as well beginning to include Steering-by-Wire as a part of their future product portfolio. So that's another future technology that certainly we're optimistic about related to stabilizing and even improving our margins going forward.

[Operator]

There are no more questions in the queue. This concludes our question-and-answer session. 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 concluded. Thank you for attending today's presentation. You may now disconnect.