Nexteer Automotive Group Ltd

HKEX:1316

Earnings Call Analysis

Company Set for Record Revenue and Margin Growth

The company is on track to achieve a historical high with over $4 billion in revenue for 2023 and anticipates another record year in 2024, driven by exceptional growth in Asia Pacific. Notably, bookings reached $4.3 billion year-to-date, with $1.5 billion in the third quarter alone, dominantly in electric vehicles (EVs), indicating alignment with the EV megatrend. Year-end booking targets are expected to reach $6 billion. Cost improvements are evident as commodity and freight expenses have fallen compared to 2022, alongside fixed cost reduction and initiatives such as an early retirement program, all of which will enhance profit margins. Revenue growth is projected to outpace the market by about 5% as a result of these strong bookings.

Strategic Management Amidst Challenges

Despite facing a complex backdrop marked by a United Auto Workers (UAW) strike and a Tier 2 supplier issue, the company has shown resilience. Their North American operations, imperative to their business, have been significantly impacted by the strike and supplier problems, but dedicated efforts and mitigation strategies have been employed to cushion the financial effects and hasten a return to normal production.

Continued Expansion and Robust Product Launches

With 9 new major programs launched in the third quarter and 41 throughout the year, the company continues to build on its operational momentum. These programs span the automotive market in North America, EMEA (Europe, Middle East, and Africa), and APAC (Asia-Pacific), reinforcing the company's commitment to expanding its global footprint.

Capturing a Slice of the Electric Revolution

A discernible shift towards electric vehicles can be seen, with the company successfully forging new partnerships and securing around $1.5 billion in bookings in the third quarter alone, significantly from an EPS (Electric Power Steering) win with a global electric vehicle leader. With year-to-date bookings of $4.3 billion and an ambitious target of $6 billion by year-end, the focus on electric power steering has been clear, accounting for a prominent share of new business wins and contributing to an overall trend toward electrification.

Rebranding and Global Impact

The company's five technical centers are now strategically renamed to echo their geographical locations, further emphasizing their commitment to local markets and regional expertise. The technological advancements in steering systems are exemplified by the production milestone of over 100 million EPS systems sold globally, underscoring the firm's leadership in the EPS segment.

Navigating Financial Headwinds and Forecasting Growth

The company remains vigilant in the face of economic pressure from inflation and potential demand fluctuations due to high interest rates. However, the outlook for revenue growth is positive, with an anticipation of record revenue exceeding $4 billion in 2023. Optimism carries into 2024 as well, with predictions for another year of record revenue, built on strong bookings and expected above-market revenue growth. Initiatives are in place to amplify profits through cost reductions and operational optimization.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, welcome to Nexteer Automotive Group Limited 2023 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. Hi. Good day, everyone. Welcome to Nexteer Automotive 2023 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 President and CFO, Mike Bierlein. Today's call will be relatively quick, taking around 30 minutes, covering a few latest updates from company for Q3.

First, we will have Robin provide an update of the company's business development, and then Mike will go through the latest operating environment status. Beyond that, we will take some questions. I would remind you of today's communication package have been posted on our company's website and the safe harbor statement regarding today's communication. Now I will hand it over to Robin.

[Robin Milavec, executive]

Okay. Thank you, Tony, and good day to everybody joining us on the call today. So I'd like to provide a business update for the third quarter of this year. But first, let me just thank our North America team and each region for their extraordinary efforts to minimize the impact of the UAW strike in North America and a Tier 2 supplier issue that we've experienced in the second half. It has certainly been a challenging second half for us, but we continue to take the steps necessary to build robustness and resilience into our business and create a strong future.

After my opening remarks, Mike will focus more on the latest operating environment we're experiencing and our observation in the near term as well as going into 2024.

So the next slide is our launch performance. So in the third quarter, we successfully launched 9 new major programs, and that's on top of the 32 launches during the first half of the year. Out of the 9 programs, 2 are in North America, 1 is in EMEASA and 6 in APAC. As we've shown in the past, the new business products are marked in red font, so you can see that all the Q3 launch programs are new business wins, whereas incumbent win products would have been shown in black font. In Asia Pacific, we started to supply JiYue, a joint venture EV brand of Geely and Baidu with our Rack EPS products.

This model originally called JIDU Robo-01. We continue to see Rack EPS growth opportunities for us in Asia Pacific. In addition, Hyper is a new premium brand unveiled by GAC Aion. We're very excited to supply this first model Hyper GT with column electric power steering. We're expecting a strong launch season and will continue to hit fourth quarter with many new nameplates built by Chinese local OEMs, especially some anticipated electric vehicles backed by new tech companies. We're continually capitalizing on the growth in that sector. We're on track to achieve over 60 launches for the full year, which will be another record launch year for us.

On the next slide, I'll move to new business wins. I'd like to highlight 3 accomplishments in terms of new bookings secured in the third quarter. We won our first gear-based single pinion EPS business with a global EV leader, which now achieves our full portfolio representation of electric power steering, columns and driveline at this customer. Our first EPS win is part of the next-generation platform, and we're focused on a strong development and launch cycle, thus enabling additional opportunities with this critical customer.

Our first stand-alone software business win with a leading global OEM. It was awarded to develop a standardized software plus steering and driver assist features across vehicle platforms. This is a growth, a milestone for us that capitalizes on the software-defined vehicle trend by leveraging our software capabilities. And lastly, we successfully secured an important next-generation incumbency business in our EMEASA division.

In the middle of this slide, it indicates our quarterly bookings followed by our forecasted order bookings for the balance of the year. We booked $4.3 billion year-to-date with nearly $1.5 billion booked in the third quarter. The significant Q3 bookings is from this EPS win with a global EV leader. As we previously mentioned, 2023 is tracking to be another strong booking year expected for customer awards, and we're confident that we will achieve our $6 billion booking target by the year-end.

The right-hand side shows the year-to-date booking composition. You can see within the year-to-date new business bookings, electric power steering accounted for 90%. 44% of the total bookings are conquest wins driven by a second steer-by-wire win and the first EPS win with the global EV leader. And finally, 98% of the bookings are in electric vehicles. This strong EV exposed bookings indicate that we are fully aligned with the electric vehicle megatrend.

On the next slide, I'll talk a little bit about our engineering footprint. As you may recall, in the interim earnings material we discussed optimizing R&D development in the context of thinking global yet acting local. Delving on this effort, we're equipping our divisions with the necessary resources to drive efficient and effective business decisions while also assessing best practices to support a thorough strong global function alignment. To that end, we've recently renamed our technical centers to reflect this strategy and shift our internal mindset.

Furthermore, we continue to rebalance our engineering resources to reflect the overall needs of our global customer base and optimized for cost and time efficiencies. As you can see, our 5 technical centers are now renamed according to their locations, U.S., Mexico, EMEASA, India and APAC. While the India Tech Center will provide global support from a perspective of software production, virtual engineering and cyber security and R&D, the divisional tech centers for the U.S., Mexico, EMEASA and APAC will focus on the business needs of their division with a goal to enhance agility, speed, customer and market responsiveness as well as R&D and innovation.

And speaking of thinking globally and acting locally. I'd like to give you an update on the accumulative global impact, thanks to the efforts of our local production sites. This time last year, we communicated a global production milestone of 90 million EPS units. Just 1 year later, we've achieved another production milestone, over 100 million EPS systems sold globally. The $100 million milestone reinforces our global EPS leadership, and I sincerely appreciate the Nexteer team as they tirelessly supported over 60 customers around the world with outstanding products that enable fuel efficiency, advanced safety and performance features.

With that, I'll turn it over to Mike.

[Michael Bierlein, executive]

Thanks, Robin, and good day to everyone. I will start with an update on a couple of key issues impacting our second half 2023 results. The first topic is the UAW strike that began on September 15, impacting General Motors Stellantis and Ford's production facilities. All 3 OEMs reached tentative agreements with the UAW by the end of October, and the agreements are currently being voted on by the UAW membership. The operating exposure for next year during the strike was significant as the North America region represents 55% of our global revenue and the majority of our North America revenue is with these 3 OEMs impacted by the strike.

Our team has taken measures to mitigate the financial impact of the strike, including employee layoffs, reduced discretionary spending and other cost reduction initiatives. Through October, the UAW strike negatively impacted our North America revenue by approximately $55 million and EBITDA by $15 million. Our team has executed well to smoothly ramp up production to support our customers as they return to producing vehicles.

The second topic is the supplier issue that caused production downtime for our customer. The issue was a result of a supplier's poor execution and a production line move between their facilities. The main causes were lack of an adequate inventory bank to facilitate the move, insufficient training and poor equipment maintenance. Nexteer year has done everything possible to limit the impact on our customer. We deployed resources to oversee that production was stabilized, supported the troubled supplier by paying additional costs, including premium freight and labor costs and working closely with the impacted customer to resource alternative suppliers capable of a quick production ramp-up.

Production at the supplier is currently stabilized. However, we are still incurring premium freight and labor costs related to this issue. We are on track to resource this supplier by the end of the year and do not expect costs related to the supplier issue in 2024. We are currently working with our customers to discuss costs they may have incurred related to this issue. At this point, we are unable to estimate the potential impact of our customers' costs.

Moving forward to Q4 and 2024 considerations. From a headwind perspective, we are closely monitoring customer demand that may be impacted by high interest rates and slowing economies. Inflation has improved, however, remains above historic levels and continues to impact our input costs. We do see significant tailwinds that will lead to improved profitability. We are well on track to achieve record revenue surpassing $4 billion in 2023, resulting from strong bookings over the past years now translating into strong revenue.

2024 will be another record year for revenue with further above-market revenue growth, led by continued strong performance from Asia Pacific. This revenue growth will provide further leverage on our cost structure, improving operating margins. Commodity and freight costs continue to improve compared to 2022. We have also implemented fixed cost reduction and footprint initiatives that will improve our profit margins, including an early retirement program completed in the second half of 2023. A balanced and optimized global engineering footprint plan that Robin presented, consolidating the U.S. driveline operations from 2 plants to 1 plant and transitioning columns and I-shaft production from the U.S. to our Mexico facility.

With these initiatives, we are well on track and focused on improving our profit margins. Our strategy for profitable growth is the key enabler to our success in driving the business forward with above-market revenue growth and increasing profit margins. This concludes our Q3 business update. I'll turn the call back to Jason for Q&A.

[Operator]

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

[Rebecca Wen, analyst]

My first question is regarding the GM or our supplier issue because I heard from our auto analyst in the U.S. saying that he's hearing that GM supply chain has been impacted in the third quarter by some cross-border issue because the customer needed to redirect staff and resources away from the commercial truck and rail inspection. Just want to confirm, is this the same issue that we are facing with our supplier that you expect earlier?

[Michael Bierlein, executive]

It's actually a different topic. Thanks for the question, Rebecca. This issue is related to a supplier that they move production from facility to facility and weren't able to, say, ramp up production in time to make -- to meet our customer volume requirements. This issue around the Mexico border and the congestion that we saw there, that was a separate topic impacting some of our customers in North America.

[Rebecca Wen, analyst]

I see. Because like the GM supplier issue that I'm hearing from our auto analyst staff, they are saying that this has also impacted the level of production and steadiness in the third quarter, aside from the UAW strike. So just like any ballpark thinking about how much this GM supplier issue may cause or may impact our revenue or EBITDA?

[Michael Bierlein, executive]

Yes. So in total, the supplier issue that we've noted, we expect the costs associated with ramping up production and keeping that production steady during the second half. That's going to impact our financials by $40 million for the second half. Now there is some volume component included in that for a couple of million as we did see some reduced volume from the customer during the second half caused by this reduced production level that we were able to provide the customer. Now we do expect that these costs will be behind us, say, a onetime issue in the second half of 2023, and we're well on track to put this topic behind us as we transition then into 2024.

[Rebecca Wen, analyst]

Okay. So you don't see another supplier issue from GM, right? So like this is what we are seeing so far. Like there's no other additional impact from GM specific supplier, right, on top of this?

[Robin Milavec, executive]

I would -- Rebecca, this is Robin. I would disconnect what you're talking about the GM supplier issue with the issue that we're having with our Tier 2 supplier. And this supplier issue that we had began late summer, and that has been resolved now. We've been able to restore production for several weeks now.

There are not any remaining supplier disruptions as a result of this supplier, yet we are still finishing up the resourcing of the supplier and continuing to have premium costs associated with maintaining production at our current supplier until we transition by the end of the year. So I would disconnect what you're seeing between other GM supplier issues and the specific case we're having with our supplier.

[Rebecca Wen, analyst]

Okay. Sure. And then another question is you mentioned we had the first EPS win with a global EV leading OEM. Can -- is it possible to share a little bit more details? Like is this EPS win with a new model that they are launching in the future or an existing model that are -- that is already selling in the market? And if possible if you can share like is it like in the North America, Europe or China origin for this EPS win.

[Robin Milavec, executive]

Yes. So thanks again for the question, Rebecca. So this is a customer that's relatively new for us in our portfolio. As I mentioned in my initial remarks, we have 2 prior business wins, 1 with our driveline with our column product line, and this has been in the China region. This business win with the customer with the EPS is on a new platform. It will launch first in North America. And I would say our focus is really on this development process that we're in with the steering system with this customer. We've got about a 2-year development process, and we're really focused on excellence in this development process and a perfect launch so that we're well positioned to continue to grow and expand with this customer. So it's something we're very excited about, but we're also very focused on our execution right now.

[Rebecca Wen, analyst]

Yes. Okay. Just my very last question for me if that's okay. What's our assessment for 2024 industry growth, like market outlook?

[Michael Bierlein, executive]

So at this point, we're seeing the market being just slightly increasing in production volumes next year, probably led more so by some increase in North America, considering that the OEMs will likely look to make up for this volume loss during the strike. China, we see as being strong, slightly up and then basically flat everywhere else that we operate. So slight volume increases. I'd say that from our revenue perspective, we are continuing to see the benefits of our strong bookings over the past several years. I'd anticipate that we continue to outperform the market probably around, say, 5% above the market levels is what we're currently thinking.

[Operator]

[Operator Instructions] There are no questions in the queue. Thank you so much for all of the questions and today's participation. If there are any further queries...

[Tony Wang, executive]

I do think -- Jason, I think we have one more question. I think we have one more question.

[Operator]

We have a question from Yiming Liu from Haitong Securities.

[Unknown Analyst]

This is Yiming from Haitong Securities. I was just a little bit curious about your steer-by-wire system. So I'm wondering if you had any new bookings during Q3 on this system. And how -- what is the quantity that you are expecting to launch? I mean, how many parts you will produce, do you expect next year in like 2024 or 2025.

[Robin Milavec, executive]

Thank you for the question. So steer-by-wire is a technology that we've been developing for many years now. We see this as a new technology that will have higher levels of adoption probably starting in 2030 and beyond as there's more mass production adoption of steer-by-wire. It's really a technology that enables a lot of additional steering functionalities, steering features and helps with the transition between manual driving vehicles and fully autonomous vehicles. So it is a technology that will transform our steering industry, and we expect it to be a large product offering going forward.

We are currently in development phase with a number of different customers and so far, we've had 2 major business awards with 2 large global OEMs. Our second business award happened this year. And for that second business award, it is a fully integrated steer-by-wire system, so it includes a hand wheel actuator, a road wheel actuator, and all of the software that integrates the steering system into the vehicle and all the functionality and communication to the vehicle. So those programs will launch later in this decade. You can think about 2027 and beyond. There won't be any near-term revenue in '24 or '25 or steer-by-wire. It will begin towards the end of this decade, and I do see it ramping up, maybe between 10% and 20% of the market as we go into 2030 and beyond.

[Unknown Analyst]

Okay. I'm sorry, just another question, a little bit. So what [Technical Difficulty] of the new bookings compared to the profitability of your current production because we -- actually, we did see some reduction on your profitability on either gross margin or the net profit. And we do know that there are some disruptions on your operations. We are actually very curious about what is the future.

[Michael Bierlein, executive]

Yes. So as you noted -- thanks for the question. We have experienced some margin contraction over the past couple of years, largely related to these inflationary pressures that we've been experiencing. So we're working through a number of initiatives. I talked about -- in my comments, I talked about these fixed cost reduction and footprint initiatives that we've been implementing.

I think those will be certainly helping us drive improvement in our margins as well as we have a significant backlog of business that we're implementing and as our revenue continues to grow, we do see our profit margins continuing to improve. Now it is going to take some time to continue to work through this inflationary environment. But I'm confident that we can make continued sequential progress on improving our margins over the next several years.

In terms of the backlog of business and the profitability, we certainly see the EV transition as being something that is a benefit to our profit margins moving forward with a lot of these electric vehicles being heavier and require some of our, say, more higher-end technology as well as this transition to steer-by-wire. We also see those new business wins as being improvement, say, from our current profitability levels and will also help to expand our margins as we implement those new programs.

[Operator]

[Operator Instructions] The next question comes from Jia Lou from BOCI.

[Jia Lou, analyst]

Yes. I have two questions. One is regarding our Q3 financial profile as just mentioned that Asia Pacific witnessed a robust growth. What about our revenue positions in U.S. and Europe? And also, could management give us some detailed guidance for next year's growth. This is the first question. And the second question is, could we have preliminary guidance for next year's GP margin guidance.

[Michael Bierlein, executive]

Thanks for the question, Jia. This -- so starting out on the revenue front. So we continue to see strong revenue in Q3. Despite this UAW strike starting in mid-September, we are still well on track to exceed $4 billion in revenue this year and to exceed that by a healthy margin as well. So that's the first time as a company that we're crossing this $4 billion mark, say, all regions currently performing quite well in Q3 and expect -- and we've seen in Q4 volumes continuing to be strong. In terms of 2024, I'm expecting that, as I mentioned, the industry volumes to be slightly up at this point year-over-year.

And then our revenue, we're anticipating, given the significant backlog of bookings that we've had to be around, say, 5% above that market level of growth. So we see continued strong revenue for the company. In terms of profit margins, so recall that in 2022, we had EBITDA margins of 9.5%. This management team is focused on continuing to expand our margins from that level. I will have to note that given the supplier issue that we've seen as well as the UAW strike impact and some costs relative to this fixed cost reduction initiatives. If we exclude those items from our 2023 results, I'm confident we will see a slight improvement in the margins from the 2022 level and then as we work forward into 2024, we plan to continue to expand on those margins.

[Jia Lou, analyst]

Yes. Just a quick follow-up. As we see that if we look at the EBITDA margin breakdown, actually the EBITDA margin in Asia Pacific and Europe seems okay, and there is continuous downturn for the North America EBITDA margin. So how -- when shall we see the North America margin recovery, say, to recover to, yes, the mid-teens level in 2018 or 2019.

[Michael Bierlein, executive]

Yes. So as you noted correctly that we have seen very strong performance from our Asia Pacific division. And we're just executing well. We're crossing $1 billion of revenue for the first time in Asia Pacific, and margins are holding in quite strong. We do need to continue to focus on improving margins in EMEASA as well as North America. And I'd say, as we think about the challenges on the profit margins in those regions, we've -- that's where we've seen the most significant impacts related to these inflationary pressures over the past couple of years. So we need to continue to work through those issues.

I'm confident we have the plan in place including with some of these fixed cost reductions and footprint initiatives that I mentioned, most of those are, in fact, impacting us in our North America operations, and we'll continue to drive of this improved profitability. And then also quite exciting new business win that we've had in North America will also help us to further diversify our customer base in the North America region as well as work to improve our profit margins.

[Robin Milavec, executive]

Yes. And I would just build on what Mike said. Most -- a lot of restructuring initiatives that we're focused on is targeting our North America operations. So Mike mentioned it, but I'll just highlight again, we've been going through a consolidation in our U.S. operations for Driveline. We're consolidating our operations from 2 plants into 1 that will be completed this year, and we will expect to see some stabilization of that product line's margins as we go forward. Our column in the steering shaft, production, we are in the process of transitioning that and moving it from our U.S. manufacturing locations to our Mexico manufacturing locations.

One program has already been relocated and the remaining programs will continue to be relocated over the next couple of years. In the engineering footprint that I discussed, we are transitioning a lot of our engineering resources into Mexico. We've now identified a new Mexico technical center which we will begin increasing our technical resources in Mexico to better serve the needs of the Mexico region. And then as Mike also mentioned and I mentioned before, we're focused on customer diversity. We've added this new EV leader to our portfolio.

And as that program launches, that will give us additional revenue and additional diversity from a customer base. So the actions that we're taking are really targeted at improving the margin performance of our North American business and ensuring it's robust and stable going forward.

[Operator]

That ends the 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 now concluded. Thank you for attending today's presentation. You may now disconnect.