Nexteer Automotive Group Ltd

HKEX:1316

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to Nexteer Automotive Group Limited 2022 Third Quarter Investor Communication Call.

[Operator Instructions] I would now like to turn the conference over to Investor Relations Director, Mr. Tony Wang. Please go ahead.

[Tony Wang, executive]

Thank you, Jason. Good day, everyone. Welcome to Nexteer Automotive 2022 Third Quarter Global Investor Call. On the call today, we have our Executive Board Director, President, CTO and Chief Strategy Officer, Robin Milavec; Senior Vice President and COO, Herve Boyer; Senior Vice President and CFO, Mike Bierlein.

Today's call will be relatively quick, taking around 30 minutes covering a few latest updates from the company for Q3. First, we will have Robin provide an update of the company's business development and then Mike will give an introduction of the latest operating environment status. Beyond that, we will take some questions. I will remind you of today's communication package has been posted on our company's website and the safe harbor statement governs today's communication.

Now I will hand over to Robin.

[Robin Milavec, executive]

Okay. Very good. Thank you, Tony, and good day to everyone on the call. So this morning, I'd like to provide some business updates for the third quarter. And as Tony mentioned, after that, Mike will spend some more time to explain the evolution of the operating environment the company is going through and how we view the trend moving forward.

So we'll move to our next slide here, and this is the business highlights for the third quarter, and I'll talk about our new business booking progress first. So the middle of this slide shows our quarterly bookings, followed by our forecasted new business bookings for the balance of the year. Through the third quarter, we booked $5.4 billion year-to-date with nearly $1 billion booked in Q3. And as I previously mentioned, 2022 will be another strong booking year driven by new technology that we have aligned with the industry megatrends, especially electrification. We're very confident we'll surpass our $6 billion full year target for new business bookings by the end of the fourth quarter.

The right-hand side of this chart shows our year-to-date booking composition. From a product line standpoint, you can see electric power steering accounted for about 80%, column business for 10% and our driveline business accounted for 11% of the bookings. From a regional standpoint, our EMEASA division booked over 40% of the total, followed by North America with 34% and APAC at 25%. Most of the bookings are Conquest wins, which account for 78% of the total. And finally, 84% of the total bookings are with the electric vehicles, which is driven by all 3 divisions. The strong EV booking exposure is really a good indication that we're fully consistent with the company's commitment toward electrification.

Now on the left-hand side of the slide, I want to highlight 3 most notable accomplishments. As I mentioned in the interim results call, we have secured the industry's first high-volume Steer-by-Wire program, and it's one of the largest revenue contracts in our history. This project is now in the development stage, and we're working closely with the OEM on the steering integration and system development. In addition, we're accelerating to bring more premium products with Chinese customers, especially for EV models. And I've got a separate slide coming up with more information on that topic.

And finally, in the third quarter, our leadership position of North America truck and SUV market was further strengthened by securing a brand-new BEV platform from a North America customer. This booking completes our strategy to remain -- to retain our incumbency on the IC engine platform of these vehicles and also secure the future BEV version for each.

Moving to the next slide, I'll give a summary of our launches. We successfully launched 14 new major programs in the third quarter, followed by 17 during the first half of the year. Out of the 14, 3 are in EMEASA and 11 are in APAC. And as we've shown in the past, the new business products are marked in red font, and you can see that most of the Q3 launch programs are new business wins Conquest from our perspective compared to one incumbent win that's shown in black font.

I'm very proud of our team as they did an excellent job to launch these products on time and with high quality against the backdrop of supply chain instability, COVID disruption and macroeconomic uncertainty. Let me also note the APAC team led the program launch in Q3 with many new nameplates made by local OEMs, including both incumbent and new EV customers.

We're very dedicated to building a broad and strong business relationship with these local China OEMs based on foundational work we've done over the past 2 years, and we will see resulting launches to come in the near future. We also expect current launch momentum will be continued in the fourth quarter with 40 to 45 total new program launches for the full year.

On the next slide, this chart is a high-level summary of the book of business we're building with the China local OEMs. The OEMs are rising quickly and are leveraging the electrification megatrend to support their growth expansion. For Nexteer, these customers represent a significant opportunity in both electrification and ADAS technologies and our premium product portfolio is well-positioned to support this growth.

Nexteer is currently #1 in the Rack EPS market in North America, with a history of innovation that began back in 2010. This has now resulted in a market share of 90% of North America's full-size truck market. And now it's the right timing to introduce Rack EPS technology into the China market to support the higher front axle steering loads and optimized packaging space for these mid-to-large sized vehicles and battery electric vehicles.

We've identified unprecedented opportunities from local customers for our Rack EPS technology, and we see the market experiencing a shift from traditional column EPS products that have dominated the market in the past. On the left-hand side of this chart, we successfully secured Rack EPS programs with 9 Chinese customers, which have or will launch in the next 2 years, including traditional and NEV customers.

Most of our premium reps products will be equipped in electric vehicle models and all will support ADAS Level 3 and 4 functions. We're very excited to seize this unique opportunity with the market conversion to Rack EPS products for strong EV growth in the China market. The trend is deepening our partnership with incumbency OEMs while allowing us to expand to new local customers by providing industry-leading technology.

Next, let me highlight some of the milestones in manufacturing achievement so far for the year. On the left-hand side of this chart, you can see a couple of big red fonts that say 1 million. We just celebrated in Q3 1 million column EPS systems and 1 million drivelines produced in Kenitra, Morocco, which is even more impressive considering it was a greenfield just a few years ago.

Our Brazil team takes a huge step forward this year and surpasses 1 million column EPS systems produced at our Porto Alegre. And in addition, Nexteer, India team has achieved their latest production milestone, surpassing 1 million driveline systems produced at our Chennai plant.

Moving to the right part of this slide. Nexteer has cumulatively produced over 90 million EPS systems globally. It's an impressive milestone for us and indicates a commitment and dedication of our team members in providing best-in-class technology, quality and value. And I sincerely appreciate the Nexteer global team as they have worked tirelessly to support our customers with outstanding products despite the recent disruptions experienced in the industry.

With that, I'll pause and hand it over to Mike to walk you through our assessment of the production outlook and operating environment.

[Michael Bierlein, executive]

Thanks, Robin, and good day to everyone. I'll be giving an update on the third quarter and second half production volume outlook, followed by a review of the current operating environment that we are experiencing. As shown on the upper right side of the chart, OEM production volumes have increased in the third quarter as consumer demand remains strong, and component supply shortages have gradually improved. The production volumes for Q3 is 21.5 million units, which represents a 4.9 million unit or 29% increase compared with Q3 of 2021, which was a low volume quarter due to the semiconductor shortages. From a sequential comparison, Q3 increased by 13% compared to Q2, which was driven by increases in China.

Moving to the lower right side, IHS now expects second half 2022 global OEM production to increase 4 million units or 10% compared with the first half of 2022. The second half increase raises the full year production volume forecast to 82 million units, which is 6% higher than 2021. 2 of the 3 key regions are forecasted to have increased production volumes year-over-year. North America shows the largest increase at 9%, followed by Asia Pacific at 8%. EMEASA is forecasted to have a slight reduction in production volumes impacted by the energy crisis and geopolitical conflict.

The current operating environment remains challenging. Inflationary pressures impacting material costs, energy and other input costs continue to impact our profit margins. Some of these costs are automatically passed through to customers with existing escalation agreements. And we have ongoing negotiations with our customers to pass on a portion of these inflationary costs that aren't already covered. The semiconductor shortages continue to show some signs of improvement. However, supply remains tight and is likely to continue to remain tight through 2023. We are closely watching for potential impacts to consumer demand relative to Central Bank's monetary policies, which are increasing interest rates.

On the tailwind side, production volumes are trending higher in the second half of 2022 compared to the first half. We also continue to outperform the market in revenue growth as we launch new programs driven by our strong bookings of new and Conquest business over the past few years. We expect positive free cash flow in the second half, driven by our disciplined approach to capital spending and effective inventory management.

While the environment remains challenging, our team is well positioned for success as we continue to execute on our strategy to achieve above-market profitable revenue growth.

Thank you for joining us on the call today. Operator, Jason, please open the line for questions.

[Operator]

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

[Rebecca Wen, analyst]

Robin and Mike, so congratulations for a very good booking in the 9 months of the year, and I see that we have lots of booking in the EV exposure. So my question, I want to focus on the potential opportunities from the IRA in U.S. market. Have we seen any changes post the IRA announcement from our customers in the U.S.? Like i.e., are our customers being more aggressive in launching their EV models post the IRA policy? And do we have any rough estimate of the potential sales volume or production volume in the North American market next year for the EVs?

[Michael Bierlein, executive]

Rebecca, thanks for the question. So on a global basis as well as in the U.S., we are seeing this trend of shifting the powertrain from internal combustion engine to electric vehicles. And as Robin mentioned, we are in North America, also being very successful in securing our current incumbent platforms on both the internal combustion and electric vehicle platforms. So our products tend to be powertrain-agnostic, but we are certainly seeing this shift from our customers from the internal combustion to the electric powertrains.

[Rebecca Wen, analyst]

If I may follow-up on that, do we have a forecast of the potential EV volume next year, and if you have a breakdown of passenger vehicle versus commercial vehicle? Because I noticed that for commercial vehicle, there is no sourcing requirements and the potential tax incentive is a lot higher for commercial vehicles. So if we have a breakdown of the market forecast and potentially what that implies or mean to Nexteer? Do we have a higher exposure in the commercial vehicle for instance?

[Robin Milavec, executive]

Yes. So the content per vehicle relative to EVs is higher, certainly as we are launching our new platforms. We are seeing -- our truck platforms in North America are just starting to begin to launch this year and then into next year. So we do see some revenue progression as we move, an increase in revenue progression as we move from this year to next year, which will begin to expand our content on these large truck platforms.

[Operator]

There are no more questions in the queue. Thank you so much for all the questions in 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.

[Robin Milavec, executive]

Thank you, Jason.

[Tony Wang, executive]

Hi, Jason. I think we still have 2 more analyst questions, please, online, sorry. Maybe we can let Lou Jia from BOCI to read the question.

[Operator]

Your next question will come from Lou Jia from BOCI.

[Jia Lou, analyst]

Yes, I just have one question about our Q3. Yes, could you please tell more about the revenue growth trend in Q3 compared with the first half and also the margin trend in Q3?

[Robin Milavec, executive]

Absolutely. So as I mentioned, we are seeing an increase in production volumes on a sequential basis. So looking from Q2 into Q3, we did see a 13% or a 13% quarter-to-quarter sequential improvement in production volumes. So that certainly has increased our revenue base as well as helping to lift our profit margins in Q3 relative to the first half of the year. I will note that though that we are continuing to experience significant inflationary pressures within the business that continue to impact our profit margins, but we have seen a pickup as we've entered into Q3 relative to comparison to the first half of the year.

[Operator]

And our next question comes from Jing Chang from CICC.

[Jing Chang, analyst]

I have 3 questions. So first is, we see that major programs launched in the third quarter includes more Chinese EV brands. So many of which we see are column and halfshaft products. So regarding to the trend of EV brand procurement for EPS system, do you think the OEMs are more inclined to make component procurement and they make the integration themselves? And how do you see the opportunities or difficulties for us to enter the -- our EPS system supply in the future? This is my first question.

[Robin Milavec, executive]

I'll take the first question. So we're finding really significant opportunities in the China market for our Rack EPS technology. And as I mentioned in my opening comments, we've been the leading supplier of Rack EPS technology, really built a strong foundation in North America and now expanding that to the China market. And it's been received with a lot of, I would say, it's been received very well by the China market. They like the technology. They like the proven nature of the technology, and they've been very willing to work with us to take a lot of the technology and leverage Nexteer's expertise in the market.

So they have -- I think they've used Nexteer's experience in the technology and rapidly integrated that technology into the vehicle. And I think one of the things that differentiates Nexteer from some of our competitors is our ability to support the local OEMs in region. We've got a technical center in Suzhou, China, very capable team of engineers there, a full validation lab for our products, the ability to do prototyping. So they have a very high level of customer service and engineering capability in China. That is also something that the local OEMs appreciate and value.

So we're seeing tremendous opportunities to rapidly implement Rack EPS technology and that's very good for Nexteer because it's a premium technology. It comes at a higher content per vehicle. And we think this is the tip of the iceberg and the potential of a significant market shift in the China market to these more premium steering technologies that are aligned with the battery electric vehicle trend that's accelerating so quickly in China.

[Jing Chang, analyst]

Yes. And my second question is, we have emphasized much on our EPS opportunities of Chinese OEMs. And so what are the positive changes have been made in terms of customer acquisition in China compared to before and currently, shall we provide more aggressive price competition when we acquire the customers?

[Michael Bierlein, executive]

I think our customer strategy is we've got a product portfolio that is very robust. And a lot of these new energy vehicle start-up customers in China have looked to us from a leadership standpoint to provide the steering technology to support them. So we've been able to really enter with a lot of these customers very rapidly, as I mentioned before. So I think it's been a very positive relationship so far that we've really laid the foundation as these new OEM startups begin to expand in the market. We will be their supplier of choice going forward and that we're really looking forward to supporting them as -- in their growth opportunities in that market.

[Jing Chang, analyst]

Okay. And my last question, is there -- I'm very glad to see our gross profit margin has already picked up in the third quarter. So what can we see in next year? Do you think that our gross profit margin will further improve back to maybe the same level as the first half of 2021, yes?

[Michael Bierlein, executive]

Thanks for the question. So what we're focused on as a management team, as we've certainly been dealing with these inflationary pressures is to continue to make incremental progress on expanding our profit margins. So we're focused on improving our profit margins here in the second half of this year compared to the first half and then having incremental improvements as we enter into next year. So that's really the focus of the management team to continue to make positive progress on our margins moving forward.

[Robin Milavec, executive]

And I would just add that we're seeing, as Mike mentioned, there's continued pressures in the industry in terms of cost challenges that we need to work on, and we're certainly cooperating with our OEM customers on how we best manage those costs. But if I take a higher-level view at the next several years, the shift we're seeing in the industry to battery electric vehicles and what that drives in terms of our product portfolio moving more towards the premium products, and it's not only just steering kind of shifting more towards Rack EPS. We're also seeing more premium products in our driveline in terms of the need for high-efficiency joints and premium technology. Similarly in our column product line with more power column requirements that we're seeing with these vehicles. I think the portfolio is shifting towards an area that gives us more content per vehicle.

And then looking out even beyond that, the next 3 to 5 years, we're seeing a rapid interest now in Steer-by-Wire technology. And I mentioned we booked our first large Steer-by-Wire platform. But that's the first of many to come. There is a tremendous interest in the industry in general. We expect further bookings with Steer-by-Wire technology, and that also significantly adds to our content per vehicle. And we see this shift as very positive momentum in terms of our portfolio and what that means for our potential margins in the future.

[Operator]

Yes. There are no more questions in the queue. Thank you so much for all your 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.