Nexteer Automotive Group Limited (1316) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Nexteer Automotive Group Limited 2022 Annual Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Investor Relations Director, Mr. Tony Wang. Please go ahead.

Thank you, Jason. Good day. Welcome, everyone, to Nexteer's 2022 Annual Results Call. We made the announcement of our annual results this evening, Hong Kong time. And our conference materials were released earlier today and are available on the company's website. Today, we have our Executive Board Director, President, CTO and Chief Strategy Officer, Robin Milavec; Senior Vice President and CFO, Mike Bierlein; and Senior Vice President and COO, Herve Boyer. Starting the presentation, we will have Robin to provide an update of the company's business overview for the year of 2022. After that, Mike will lead us diving into the financial details and wrap up with the company's considerations about 2023. Following the presentation, we will open a Q&A session for you. The slides accompanying today's call are available at our company's website. Please be mindful of the safe harbor statement governing today's communication in the second page of the presentation package. Now I will turn it over to Robin.

Okay. Thank you very much, Tony, and hello to everybody online. Thanks for joining us for our annual results announcement. So using the same approach as we've done in previous meetings and as Tony just highlighted, I'll provide a brief overview of the business, and then we'll switch over to Mike, and he'll take a deeper dive into the finance assessment as well as a preview of 2023 observations. So we'll move to Slide 6 in our deck. In 2022, we remained committed to our 6-point strategy for profitable growth. Our strategy is unchanged, but I would like to draw your attention to a slight but very important edit to our strategy. So under the third icon from the left, we changed this description from capitalize on EPS as an enabler for ADAS to capitalize on megatrend and portfolio alignment. When this was originally written several years ago, ADAS was the primary trend. But since then, the industry has quickly and drastically evolved and we've been capitalizing on our broad product portfolio alignment across all the megatrends, not only ADAS but electrification, software connectivity and shared mobility. With that, let's overview our business highlights from 2022, which include examples of technology and trend alignment that drives continued growth. Next slide, please. So last year was another strong year with 42 major new program launches. This was pulling revenue growth over market by 10%. Our global team achieved strong launch performance across all 3 of our operating divisions despite facing a dynamic operating environment resulting from high interest rates, commodity inflation, semiconductor shortages and ongoing COVID disruptions. We also successfully secured $6.4 billion in new lifetime bookings last year and that was ahead of our expectations of $6 billion. This is a result of strong booking wins from new business, and it was also heavily exposed to electric vehicle penetration. We continued our commitment to technology leadership and megatrend alignment for future growth, including electrification and software. I'll highlight how we capitalize on technology pipeline alignment with the industry megatrends shortly. And lastly, Nexteer earned prestigious awards from the industry, recognizing our technology leadership in steer-by-wire and software. These awards list from 2022 also includes a recent addition to the 2023 CES Innovation Award for Road Surface Detection and Early Warning Software. Next slide, please. So going a little deeper into our topic of program launches This next slide reflects the diversity of program launches we had in 2022 across all our regions, making another strong program launch period. And before getting into the details, let me again clarify the icons and the color coding on this slide. So the green electrification symbol indicates that, that vehicle platform has electric vehicle content. You'll also note that the breakdown of Conquest business is shown in red fonts and incumbent business is shown in black. As I mentioned, we had a total of 42 new program launches, which is a very strong launch year for us. Over 90% of these launches were Conquest programs and 16 of them represented electric vehicle launches. By region, 3 launches were in North America; 6 in EMEASA and a large total of 33 in our APAC division. The heavy launch in APAC reflects a strong launch cycle of local customers, and it's a notable shift considering that in previous years, we had a large revenue exposure from global OEMs in APAC. This more balanced shift from global to local APAC customers also follows the growing trend in the realm of electric vehicles, and I'll elaborate more on that in a few more slides. Additionally, the electric vehicle version of the Ford F-150 launched in North America and won the 2023 North American Truck of the Year, featuring Nexteer's Rack EPS product and the Jeep Avenger electric SUV launched in EMEASA and was awarded the 2023 European Car of the Year, and that featured Nexteer's single-pinion EPS system. It's great to see our technologies not only win awards for Nexteer, but also help our customers win awards as well. As we achieve 42 launches in 2022, despite the challenging environment, we also expect 2023's new program launches to continue to be strong and feature even more electric vehicle content in the pipeline. Next slide. So shifting from our program launches, now we'll focus on the other end of the revenue pipeline. So we secured a strong booking year, $6.4 billion in lifetime revenue. It's the second year in a row of over $6 billion for Nexteer. $100 million higher than we were expected in our quarter 3 communication. Plus electric power steering, columns and driveline booked more lifetime revenue last year than their current revenue scale, which signals a growth mode across all of our product lines. Last year, we successfully booked our first high-volume steer-by-wire wire program with a leading global OEM. This notable business win, combined with increasing OEM interest in steer-by-wire is strengthening Nexteer's steer-by-wire technology leadership in the industry. And speaking of that leadership, if you recall, over the last 2 years, Nexteer launched the electric Hummer and the Ford F-150. In 2022, we continue to enhance our market leadership position of the North American truck market by securing 3 brand-new EV truck platforms. We're also growing alongside local Chinese OEMs that are growing, especially in the NEV market. To date, we've successfully secured Rack EPS programs with 9 Chinese customers which have or will launch in the next 2 years, including traditional and NEV customers. In 2022, we also secured our first driveline win with a leading global EV OEM, adding to our column business that we won with the same OEM in 2021. You can see the mix in the pie charts on the right. Our electric power steering product line was the significant portion of those bookings accounting for 73% followed by driveline at 19%. By geographical region, all 3 regions demonstrate a very balanced split mostly driven by EMEASAs, first steer-by-wire win and Asia Pacific's multiple business expansions with local customers. The pie chart also shows that about 73% of our total bookings were Conquest with 27% incumbent. Finally, the breakdown by EVs compared to non-EVs. The majority of the bookings, 83% in 2022 were associated with all versions of electric vehicles. Turning to Slide 10, I'll update you specifically on our latest progress in Asia Pacific. This division managed through difficult times prior to 2021 due to a weakened China automotive market and then followed by ongoing COVID and chip disruptions and more challenges. The team proactively rebuilt its business model by diversifying the customer mix with local customers and supporting their transitions to electrification. And in fact, the local team has been building trust among strategically targeted local customers for several years and in 2022, we evolved into strategic supplier partnerships. On the left side of this chart, we can see the APAC division's revenue growth well outpaced the market. With the revenue rebound from a low point of $646 million in 2020 to a historical high of $965 million last year. That's an incredible revenue increase of about 50% within only 2 years. We believe this momentum will continue and help Nexteer achieve a new record of over $1 billion of revenue in 2023 from our APAC division. Alongside strong revenue growth, we must continue to be strategic as we allocate resources, balance rapid business expansions and implement cost and time efficiencies to successfully and profitably launch these many new programs and handle the significant customer diversity that now exists in our APAC portfolio. As an example, our modular column-assist EPS, which we call mCEPS, overcomes these challenges by leveraging cost-efficient modular platform design that achieve scalability for Nexteer and flexibility to meet a wide range of OEM's requirements. From Nexteer's mCEPS announcement in 2021 to mass production for China OEMs in 2022, it's a good proof point of our agility and adaptability in the world's largest auto market. In addition to mCEPS, modular rack-assist EPS, which we call mREPS, will launch in the next 2 years for the China local customers. Lastly, China's rapid EV adoption accelerated and expanded our regional business with local leading customers including, but not limited to BYD, Geely Zeekr and GAC Aion. In 2023 and beyond, we anticipate even more new models by local customers featuring Nexteer's premium technology. Now moving from Asia Pacific to North America. Last year, we continued to be a technology and market leader in the North American full-size truck market. We provided Rack EPS steering systems to each of the Detroit Big Three in support of their ICE platforms. As these OEMs accelerated the electrification of these platforms, we've also been honored to secure those electric platforms as well. This transition demonstrates how Nexteer's technology aligns with and supports the electrification megatrend. Even as volume ramps down on the ICE versions, it will ramp up on the BEV versions that Nexteer has. In 2022, our leadership position in the North American truck market strengthened further by securing 3 brand-new battery electric vehicle truck platforms for North America customers. Until now, we've covered all mainstream electric truck models, which had or will launch over the next 2 years. In the past, we've had 2 launches of electric luxury vehicles. The GMC Hummer, which featured our high-output Rack EPS, our column and [ axle ] technology and the Ford Lightning, which featured our 10-fit high availability, Rack EPS and columns. This year, we'll launch the Chevy Silverado electric pickup. In 2024, we see the trend continuing with the market readiness of the GMC Sierra EV and the RAM 1500 EV. Notably, Stellantis highlighted the RAM 1500 electric EV as a key product at 2023 CES in Las Vegas. As electrification and truck trends converge and accelerate, Nexteer is well positioned to capitalize on these opportunities that require our premium solutions in electric power steering, columns and driveline to solve these unique challenges in this space. Just as electrification and truck trends are converging and accelerating so do our electrification, steer-by-wire and software-defined vehicles. As OEMs are quickly transitioning platforms to electrification, they're looking for advanced steering solutions, like steer-by-wire to meet the unique needs of electric vehicles, such as higher output and steering maneuverability for those heavier vehicles as well as the packaging flexibility, NVH performance and more. In the electrification race, steer-by-wire also helps OEMs differentiate their brands by enabling a new safety and performance feature not available in traditional electric power steering systems. And speaking of enabling new features and functions, steer-by-wire, as with the rest of our EPS portfolio, also supports the growing transition from hardware-defined vehicles to software-defined vehicles. As vehicles become more connected, over-the-year updates and software will create new possibilities for automakers to extend platform life spans while also introducing more frequent technology refreshes. Building on our first steer-by-wire booking last year, we are in a strong position and capitalize on these conversion megatrends of electrification, software and others. We're actively quoting and pursuing additional steer-by-wire opportunities with strategically targeted global customers. To keep pace with the growing demand for our steer-by-wire and software-based technologies Nexteer, along with Continental, have agreed to dissolve their joint venture, CNXMotion. This strategic move will allow us to reallocate resources and maximize profitable growth opportunities at both parent companies. We'll continue to leverage the successful innovations that were created by the CNXMotion joint venture, such as the 60-plus records of invention, the 30-plus patent filings and several patent awards and software products, including Brake-to-steer. And while Nexteer and Continental may not have a formal JV, we are both open and stay connected to future potential project-based collaboration opportunities. Now continuing the topic of efficiencies and capitalizing on megatrends such as software, back in 2018, we launched the software development center in Bangalore, India, as part of the strategic expansion of our existing global software team that was co-located across Saginaw, Michigan; Tychy, Poland; and Suzhou, China. Today, acting as one Nexteer team of software experts across our 4 global locations, we focus on delivering innovative solutions with speed, flexibility and seamless vehicle integration. To further enhance the speed, we're now expanding up to 550 employees at our Indian software center by the end of this year. We expect this investment to significantly improve our efficiency and effectiveness on software development and validation. Nexteer's Global Technical Center in Saginaw, Michigan in tandem with regional technical centers in Poland and China will continue focusing on software and feature development and R&D innovation. Meanwhile, the software center in India will continue to focus on software validation and program production support. As I discussed earlier, the role of software in vehicles and especially safety critical steering is evolving very quickly. Consequently, OEMs demand and technical requirements continue to grow exponentially. Our software team structure fosters innovation and ensures the highest level of quality and compliance with our specifications, industry protocols, regulations and customer needs. Last year, Nexteer earned multiple awards for its innovation, quality, manufacturing and exceptional customer relationships. On this slide, we'll mainly focus on innovation awards. We're pleased to share that 3 Nexteer solutions have been recognized by several prestigious industry awards. Our road surface detection and early warning software completed with a partnership with Tata Mobility recently earned the CES 2023 Innovation Award Honoree in the vehicle tech and advanced mobility product category as well as the 2022 Automotive News PACEpilot Finalist Award. Our steer-by-wire with stowable steering column earned the Society of Automotive Analyst's Mobility Innovation Award for technology enabling new business models. And finally, our automated steering actuator, which is also a form of steer-by-wire earned the 2022 Automotive News PACE Award finalist as well as the AutoTech Breakthrough award. These high-profile industry recognitions are yet additional proof points of our commitment to relentless innovation and to showcase how we're well positioned to capitalize on industry megatrends for profitable growth. At Nexteer, our sustainability framework includes 5 key focus areas. By relentlessly innovating with technology, leadership, we're well positioned with the industry megatrends such as electrification, and this alignment is exemplified by 83% of our bookings are supporting battery electric vehicle platforms. From corporate and social responsibility perspective, our commitment to a sustainable future, making tomorrow better than today, continues to gain various recognitions such as great place to work, and top employer awards in multiple regions. We continue to embrace DE&I principles aligned with our One Nexteer Culture including the all-in diversity initiative at our EMEASA division. Nexteer's global team and our collective efforts enabled our recognition as a constituent member for the sixth consecutive year of the Hang Seng Corporate Sustainability Benchmark Index. Our teams are proud of what we achieved in 2022. However, we remain humble, dedicated and committed to embracing sustainability and our strategy for profitable growth. With that, let me hand it over to Mike for a financial review.

Thanks, Robin, and good day, everyone. 2022 was another challenging year for our industry with ongoing COVID-related issues, semiconductor supply shortages and inflationary pressures impacting material, energy and other input costs. I would like to recognize and thank the Nexteer team for successfully managing through this challenging operating environment. With the team's hard work, we kept our customers running despite supply shortages and unprecedented inflationary cost pressures. We continue to execute on new and Conquest program launches driving above-market revenue growth. And we had another strong year of bookings, including an over $2 billion win with our new steer-by-wire product. Full year 2022 adjusted revenue, excluding FX and commodity recovery, increased by 16% and continued to outperform the market by 10% or 990 basis points. We capitalized on global OEM production increases of 10% in the second half of 2022 compared with the first half. With this increase and the continued launch of our new and Conquest programs, we achieved a record for revenue of over $2 billion in the second half of 2022. The strong second half revenue growth led to an EBITDA improvement in the second half, expanding margins by 130 basis points sequentially. Free cash flow was also positive in 2022, and our balance sheet remains strong, ending the year with a net cash position of $135 million. We achieved customer program bookings totaling $6.4 billion during 2022, which is 66% higher than our 2022 revenue. These strong bookings will enable our continued revenue growth above market. This slide highlights our key financial metrics of revenue, EBITDA, net profit and free cash flow. Nexteer posted revenue of $3.84 billion an increase of $481 million or 14.3% compared with last year, driven by strong global OEM production volume increases and new and Conquest program launches. We posted EBITDA of $365 million in 2022, slightly higher than our 2021 performance. EBITDA margin of 9.5% was lower than last year, impacted by the inflationary pressures that we have experienced in 2022. I'll provide more detail on the margin drivers of our year-over-year EBITDA performance in a coming slide. Net profit of $58 million in 2022 was lower compared with last year. This includes a noncash unrecognized tax benefit expense of $58 million related to U.S. deferred tax assets. If we adjust for this impact, our net profit would be $116 million, which is almost even with last year. Free cash flow for 2022 rose to $30 million. which is a $28 million increase compared with 2021. We will continue to deliver positive free cash flow by focusing on effective working capital management and a disciplined approach to capital spending. This slide presents our key financial metrics for both 2022 and 2021 on a half year basis. Revenue of $2.049 billion for the second half of 2022 increased by $258 million or 14.4% compared with the first half of 2022 and $424 million or 26% compared with the second half of 2021. Second half 2022 EBITDA and net profit margins both improved compared to the first half of 2022 and the second half of 2021. EBITDA of $207 million for the second half of 2022 sequentially improved by $49 million or 30.7% and was higher by $59 million or 40% compared with the second half of 2021. EBITDA margin of 10.1% in the second half of 2022 improved both sequentially and compared with the second half of 2021 by 130 basis points and 100 basis points, respectively. Net profit of $69 million for the second half of 2022 significantly improved from a loss position in the first half of the year and was $80 million or 7.2x higher than the first half of 2022, with margin improving by 400 basis points. As I mentioned on the last slide, there was an unrecognized tax benefit expense of $58 million recorded income tax expense for the year of 2022, with $49 million recorded in the first half and $9 million in the second half. Adjusting for this impact, net profit of $78 million for the second half of 2022 increased by $40 million or 105% compared with adjusted net profit in the first half of 2022 and similar comparison with actual net profit in the second half of 2021. Free cash flow of $37 million for the second half of 2022, fully offset the use of $7 million in the first half, driven full year performance to $30 million, exceeding 2021 by $28 million. The improvements that we see in the second half gives us confidence as we continue to execute and build on this momentum moving forward. Revenue of $3.84 billion in 2022 was $481 million higher than 2021. Unfavorable foreign currency reduced revenue by $117 million, reflecting a weaker Chinese yuan and euro against the U.S. dollar. As expected, the largest driver of the year-over-year increase in revenue was represented by volume and net favorable price with an increase of $540 million, which was largely driven by higher production volumes and new and Conquest program launches in each of our segments. Net favorable customer pricing also provided an uplift within this item with the success of inflationary costs being passed to customers in selling prices. Finally, commodity recoveries provided a year-over-year increase of $58 million reflecting pass-through to our customers of increased commodity costs given the inflationary environment we continue to experience in 2022. On the top of this slide, we have highlighted our regional adjusted revenue, which excludes foreign exchange and customer commodity recovery compared with 2021. The bold percentages show the growth over market. All 3 segments posted strong revenue growth. North America revenue increased by 14.1%, above market growth by 4.8%. EMEASA increased by 12.2%, above market growth by 11.3% with continued ramp-up of customer programs in our Morocco facility. And Asia Pacific increased by 24.5%, above-market growth by 17.1% driven by significant new and Conquest program launches. On the bottom of this slide includes our total revenue. Our total adjusted revenue grew by 16.1% year-over-year outperforming the market by 10% or 990 basis points. We achieved strong revenue growth in 2022, and we expect continued above-market revenue growth going forward. This slide shows our revenue distribution by region. For 2022, North America revenue was 59%; Asia Pacific, 25%; and EMEASA, 16% of total revenue. Both North America and Asia Pacific increased by 100 basis points in share, which was offset by a reduction of EMEASA, which grew slower than the other 2 regions impacted by the Ukraine-Russia war. North America posted revenue of $2.247 billion in 2022, $303 million or 15.6% higher compared with last year. Asia Pacific posted revenue of $965 million in 2022, $153 million, 18.8% higher than last year. Asia Pacific is well on track across the $1 billion revenue mark in 2023. EMEASA posted revenue of $619 million in 2022 and an increase of $30 million or 5.1% compared with last year. As we mentioned before, both Asia Pacific and EMEASA experienced foreign exchange headwinds. Commodity recovery partially offset unfavorable foreign exchange. Adjusting for foreign exchange and commodity recovery, Asia Pacific and EMEASA posted 24.5% and 12.2% year-over-year growth, respectively. 2022 revenue distribution by product line includes EPS at 68%; Columns, 10%; HPS at 4% and driveline at 18%. All of our product lines posted double-digit revenue growth in 2022. Turning to our earnings performance. EBITDA for 2022 was $365 million, providing a margin of 9.5% compared with $361 million providing a margin of 10.7% in 2021. EBITDA increased by $4 million year-over-year. Volume was favorable $42 million, reflecting the revenue growth across all regions. We experienced significant increases in net commodity inflation in the first half of the year which has been tempered in the second half of 2022. Overall, net commodity inflation pressures negatively impacted our EBITDA performance in 2022 by $45 million. This $45 million headwind presented here is net of commodity recoveries from our customers of $58 million. Logistics costs also increased $10 million compared with 2021. The combination of net favorable price, inflationary cost increases and all other performance totaled a favorable $17 million. Net favorable price increases, we're able to mitigate a portion of the inflationary cost increases that we experienced during 2022. However, we were not able to fully offset inflation when combined with commodity and freight cost increases. This slide highlights EBITDA and margin profile for each of our regions. North America posted EBITDA of $173 million in 2022, remaining even with last year. EBITDA margin lowered by 120 basis points to 7.7% while increased revenue and customer recoveries did provide a tailwind, our North America segment was also the most impacted by net commodity cost increases and other inflationary pressures. Asia Pacific posted EBITDA of $166 million, $12 million or 7.9% higher than 2021, driven by year-over-year revenue growth. EBITDA margins remained strong at 17.2%. Our Asia Pacific team is executing well and has the region positioned for delivering continued growth by leveraging our product strategy for modular column and Rack EPS. The region also continues to benefit from our strong position with customers supporting the new energy vehicle transition. EMEASA EBITDA performance continued to improve in 2022, both in absolute dollars as well as margin, with EBITDA rising $3 million or 7.4% to $44 million compared with 2021. 2022 margins rose 20 basis points to 7.2%. Our EMEASA team continues to improve despite significant macroeconomic headwinds and further challenges from the geopolitical conflict and energy crisis. We continue to invest in order to position the company for further profitable growth with additional investments in both engineering and capital. In 2022, our engineering investment of $289 million was an increase of $18 million compared with 2021. The main driver for this increase is related to engineering investments for the steer-by-wire product. Our strategy is to be the market leader in this product and we are already well positioned considering the large customer program booking that we secured earlier in 2022. We invested $146 million in capital during 2022 or 3.8% of revenue. This was an increase of $14 million compared with 2021. We remain disciplined in our capital spending and expect to maintain spending around 4% of revenue as we continue to grow the business. This slide shows our EBITDA to net profit walk. Although EBITDA showed a slight improvement in 2022, net profit reduced by $60 million. This reduction is driven by a $58 million noncash unrecognized tax benefit expense that we incurred in the U.S. primarily related to R&D tax assets. Adjusting for this item, net profit would have been $116 million and flat compared with 2021. Depreciation and amortization expense in 2022 of $279 million was an increase of $33 million compared with 2021. This increase was primarily related to amortization of our engineering intangible asset as we continue to launch new programs. This increase was -- also included a $9 million impairment charge related to a canceled customer program and another program with lower expected volumes. We are actively working with our customers in 2023 to recover this cost. Moving to cash flow and the balance sheet. For 2022, we generated free cash flow of $30 million, which was $28 million higher than last year. This year-over-year improvement was driven by reductions in cash from investing activities, largely due to timing of capital spending. Our debt level remains low with only $50 million of debt and $61 million of finance leases. And our balance sheet remains strong, as shown by our $246 million of cash balance and available credit facilities of $366 million, totaling $612 million of liquidity at year-end 2022. 2023 continues to be a dynamic operating environment, presenting certain tailwinds and headwinds impacting our industry. Semiconductor availability continues to improve. However, we do continue to experience shortages on some models. Commodity and freight costs have improved starting in mid-2022, although inflation remains elevated and continues to have an impact on our profit margins. We are actively working with our customers to recover these inflationary costs. We are cautious and are closely monitoring the macroeconomic environment with central banks increasing interest rates to reduce inflation. As economies slow, this may have an impact to reduce light vehicle sales volumes. However, production volumes have remained strong year-to-date, and forecast continue to reflect year-over-year production volume growth for calendar year 2023. For example, the IHS February forecast calls for global production of 85 million units, which is higher than 2022 by 3.3%. With this volume outlook, we expect to post record revenue in 2023, crossing over $4 billion in revenue for the first time, and we expect to continue to grow revenue above market driven by our strong new and Conquest business wins over the past several years. Nexteer is well positioned to succeed in 2023 and beyond as we continue to execute on our strategy for profitable growth. I appreciate your attendance today. We will now open the call for questions. Operator Jason, please compile the Q&A.

[Operator Instructions] Our first question comes from Tim Hsiao from Morgan Stanley.

I have 2 questions. The first one is about the pricing pressure because lately, we saw the intensifying pricing more in China. So how should we think about Nexteer's pricing and the margin trajectory this year? We understand that the annual price [ call ] might have been fixed in signing the contract. But is any additional request from the OEM for rebates, quick saving for leverage or whatever the car makers refer to them to past-through the cost pressure. So that's my first question. And my second question is about the U.S. market because we saw the steep rate hike of the car loan in the U.S. So just wondering if that will urge consumers to trade downs or chose cheaper model is that -- if that's the case, would this reverse the trend of upgrading to the steering system, as we saw over the past few years were resulting in a unfavorable mix of cheaper products and resulting in lower [ increase ] in margin. So those are my 2 questions.

Thanks, Tim. This is Mike. Let me try to take a shot at those. So Typically, in our industry, we're experiencing pricing pressures from our customers. So I would expect that 2023 to be a similar kind of year. So certainly, as we have the detailed negotiations with our customers and we've seen certainly some of the EV pricing pressures that the OEMs are facing, they'll no doubt turn to us to offset some of those pricing reductions. So our strategy is to work to maintain our prices to the extent possible. But also to the extent that we are giving price back to our customers. We are also working to lower the cost on our side, whether it be through leveraging our supply base as well as to reduce costs through design changes as well. So in the ideal case, if we have a price down with a customer, we're also looking to offset that from a cost standpoint as well. And then on the U.S. economy, this is certainly an area that we're watching very closely. So far to date, we haven't seen this trade-down impact and the OEM sales remain a relatively strong year for January and February. But of course, that could change as the interest rate environment continues to increase over time. But we're so far cautiously optimistic relative to the U.S. auto sales at this point.

Tim, this is Robin, I can add a little bit more commentary to Mike's answer. I think he's on the right track there. Pricing pressure is nothing new to us. Our strategy is to stay neutral to the pricing. And what I mean by that is if we are to give pricing concessions to our customers we need to find ways to offset that so that we're neutral to that impact. And Mike mentioned we leverage design changes to improve the cost of our products, we leverage our supply chain to get price reductions from our supply chain. We look towards internal efficiencies that we can drive to offset those costs. So it's a very dynamic environment that we're used to operating in. We are seeing specific, I would say, additional pressure in the China market as the OEMs have signaled significant pricing reductions on their electric vehicles. so that's a market that we're specifically looking at and managing closely. And in terms of the U.S. truck market, as you probably know, our product portfolio is pretty rich in terms of its segmentation relative to the full-size truck and large SUV market. And that market historically has proven to be pretty resilient in times like this. We'll see. It's certainly something that we continue to monitor. But we feel like we're pretty well positioned in that market as it's been resilient. And as we have not only secured both the ICE engine version of those platforms as well as the battery electric vehicle of those future platforms. It gives us the flexibility to move between the technologies as it shifts in the market and still remain on margins.

Our next question comes from Rebecca Wen from JPMorgan.

Robin, Mike, so my very first question is I just wanted to clarify when you talk about the commodity recovery in the revenue bridge. Does that include all the ASP hike that is metal like already? Or is it kind of like a one-off commodity recovery that you negotiate with customers?

Thanks for the question, Rebecca. So what we call out in that commodity walk on the bridge is where we have escalation clauses with our customers. So to the extent that we have changes on the material side, some material, in this case, costs are increasing for our key commodities but we're able to contractually increase our prices to our customers. So if we look into 2022, we had cost increases for $103 million and then our contractual pricing increase to customers by $58 million. So that was the net impact for the year for EBITDA of $45 million, but I'll note that we also experienced increases in 2021 as well compared to 2020. So in 2021, we saw increases relative to commodities impacting our profit margin by $29 million. So if you add up 2021 and the 2022 impact, our margins or our EBITDA reduced by $74 million on a 2-year comp basis.

Herve speaking -- complement, right? This [ $79 million ] is obviously something that we use in the negotiation with the customers when it comes to this pricing pressure, all right? Because even though the coverage was not 100%. So we're really working both ways. So first of all, we are trying to align moving forward for the new contracts. The contractual terms between suppliers and customers to limit this exposure to such a situation moving forward. But also, we use this negative impact for us to negotiate reduced pricing reduction to the customers.

So that is actually both the usual metal link contract that we have with customers, including the metal cost inflation. So as the kind of like the one-offs that we negotiated in the past 2 years, right? So that includes total sales?

Yes. So the commodity line that we called out is just relative to specific commodity price increases as well as the escalation contracts that we have with our customers. So on the EBITDA bridge, we've included other net favorable pricing with our customers in that all other $17 million on the EBITDA bridge.

Right, I see. And I guess related to that, on your 16% adjusted revenue growth. So I guess this 16% revenue growth, there is no -- nothing related to the commodity price hike that's included in the 16%, right? So if you could give us a bit of color on the 16% adjusted revenue growth, how much would be coming from volume versus on the product ASP increases or content value increases, content [ per car ] increases, if that's something that's possible to breakdown.

Sure. So I'd say that about, say, 3% or so was related to the net favorable pricing. So if you think about that 16% revenue growth backing out net favorable pricing as well as the FX and the commodity recovery, I'd be at 13% growth.

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

So first question would still be focusing on the gross margin change. So we have expectation of gross margin back first half 2021 level, which is 13% this year. Could you kind of walk us through like how could we achieve target and moving parts behind besides from the annual price coverage as you mentioned previously. How are we going to spread out the cost pressure within our supply chain and also any production line or plant upgrade, optimization, economies of scale enhancement. And my second question would be the demand outlook in 2023. So could we comment -- can you comment or give some color on the key clients growth outlook, for example, for GM, for Stellantis and some other Chinese OEM, including Great Wall, Geely and BYD.

Yes. So in terms of our margin profile moving forward, so the way I'm thinking about it is, as I mentioned, we showed some progress, some stability relative to our margin in the second half of 2022. So we saw an increase of 130 basis points versus the first half of 2022. And also then we saw an improvement on a year-over-year basis comparing second half to second half by 100 basis points. And what we're aiming to do is to continue that momentum as we move into 2023. We are working to continue to expand our margin. However, these inflationary pressures are still with us, and they're still impacting our profit margins. So we will not see, say a recovery to pre-market gross profit levels in 2023. That being said, we are certainly optimistic relative to our continued above-market revenue growth. As we mentioned, we booked $6.4 billion in 2022. And as those programs launch, we will continue to expand our margin, which will further leverage our cost base to expand EBITDA margins as we move forward into the out years.

And I guess before we get to the second question, Jessie, this is Robin. A couple of other things I would add to Mike's answer on that. For our North America market, we are actively pursuing, I would say, kind of an of our production between the U.S. and Mexico to ensure we have sustainable profitability for our product portfolio in North America. So that's an active project that we're doing today. And I would also say we have kind of ramped up production in our Morocco facility and stabilized that production at a profitable level. So we're very happy of the results that we're now able to see in Morocco and also Brazil over the years has been challenging for us, but that has also turned to a positive level as well so in those emerging markets in those regions, in particular, as we've gone through the start-up phase in the prior years, have now stabilized and are contributing to our margins as we go forward.

And then from a revenue standpoint for 2023, Year-to-date, our revenue is slightly above what we had planned. So well on track so far to achieve these revenue levels. And we evaluate our customer forecasts as well as outside forecast from IHS. And as we look currently at the forecast, they're all pointing toward slight volume increases on a year-over-year basis. Say, we have particularly strong opportunities for continued growth, given our profile in China with the local OEMs targeting as well on the new energy vehicles. So I'd say at this point, we're optimistic relative to the 2023 volumes across our customer base.

Our next question comes from Jia Lou from BOCI.

I have 2 questions. The first one is regarding the revenue breakdown. I noticed that HPS posted stronger growth than other product lines since HPS is an old product line. So any special reason behind it? My second question is the noncash items. And last year, we recognized a lot of -- a large amount of items related to deferred capital tax assets, which accounted for [ 50% ] of our earnings. So is there any additional unfavorable items need to be recognized in 2023? Yes. That's it, that's all for my questions.

Thanks for the question. Yes, so from an HPS perspective, we did see revenue growth. And part of that is due to the success of the heavy-duty truck program that our HPS product is on. So volumes were higher. The other part of that, given the content of our products being heavily weighted towards steel and the escalation that we have with our customer, we were able to increase prices with our customers, say, disproportionately to our other product lines. So that's really the main reason why you see that slightly higher percentage for HPS growth versus our other product lines. As far as the second question, we did record this $58 million deferred tax assets. That was $49 million in the first half of 2022, $9 million in the second half. And as our U.S. operations be in the total of our U.S. plant facilities, our corporate headquarters as well as our intellectual property holding entity, we are continuing to expect potential losses in that particular jurisdiction. So when -- from an accounting standpoint, when that happens then, essentially, you cannot record any income tax expense benefits on those losses. So we would expect to have ongoing, say, deferred tax asset impacts to us in 2023, say, more so relative to carry forward of what we've seen in the second half of 2022.

And Jia, this is Robin. I can just add a little bit more to your first question about the HPS growth. It is true that, that is older technology within our portfolio. It does have a finite life remaining with us based on the customer plans. But it's not old technology. There's a lot of new technology associated with that hydraulic power steering gear. In fact, new electrical architecture. And part of the reason for the revenue is a little bit of a mix shift towards a more premium gear that enables some autonomous driving features in those heavy-duty trucks. So that's one other aspect of that product bringing new technology to an older product that's driving some revenue growth even though it is short term in nature.

So that means that the revenue of HPS -- revenue growth of HPS can continue. And if that -- because I noticed that in our backlog -- order backlog, there's no new bookings related to HPS for a long time.

No, we don't see an extended future with the HPS product we see it phasing out by the end of the decade. But certainly, in the remaining production we have, we continue to look for opportunities to improve the revenue and the margin performance of that product.

Due to the limited time, this ends 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 [email protected]. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you, Jason.