China Automotive Systems, Inc.

Greetings and welcome to the China Automotive Systems first quarter 2020 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Kevin Theiss, Investor Relations for China Automotive Systems. Thank you. You may begin.

Thank you everyone for joining us today. Welcome to China Automotive Systems 2020 first quarter conference call. Joining us today are Mr. Qizhou Wu, Chief Executive Officer, and Mr. Jie Li, Chief Financial Officer of China Automotive Systems. They will be available to answer questions later in the conference call with the assistance of translation. Before we begin, I will remind all listeners that they're at this call We may make statements that may contain forward-looking statements. Forward-looking statements represent the company's estimates and assumptions only as of the date of this call. As a result, the company's actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the heading risk factors in the company's Form 10-K Annual report for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on May 14, 2020, and in other documents filed by the company from time to time with the Securities and Exchange Commission. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook for automobile sales to slow down our regional and national economic growth, weakened liquidity, and financial condition of our customers are other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the regions where we conduct business, caused our business to suffer in ways that we cannot predict and materially adversely impact our business, financial condition, and result of operations. A prolonged disruption or any further unforeseen delay in our operations of the manufacturing, delivery, and assembly process within any of our production facilities could result in delays in the shipment of products to our customers, increased costs, and reduced revenues. The company expressly disclaims any duty to provide updates to any forward-looking statements made in this call, whether a result of new information, future events, or otherwise. In this presentation and in the press release, we provide comparisons between the first quarter of 2020 and 2019, respectively. And we must caution that any comparison of operational and financial data between the two quarters will likely be of very limited value due to the impact of COVID-19 infection On this call, I will provide a brief overview and summary of financial results for the 2021st quarter. Management will then conduct a question and answer session. The following 2021st quarter financial results are unaudited and are reported under U.S. GAAP. For the purposes of our call today, I'll review the financial results in U.S. dollars. We'll begin with a review of the recent dynamics of the Chinese economy, automobile industry, and China automotive's market position. In the first quarter, the COVID-19 pandemic created major disruptions in the Chinese economy and automotive industry. From the Chinese New Year in late January to mid-March, our operations were severely disrupted due to the pandemic as the movement of people and products was subject to a nationwide lockdown as mandated by the Chinese central government. to limit the spread of the COVID-19 outbreak. Sales to customers, supplies of needed components and materials, workers commute to work, temporarily closed factories and service networks and other auto-related occupations were all impacted in an unprecedented manner. During the first quarter, Wuhan, being the epicenter of COVID-19 pandemic outbreak in China, is not only the automobile hub of China, but is also where our headquarters are located. We had to temporarily relocate our headquarters to Jinzhou, where our main manufacturing operations are located, and the infection rate was significantly lower during this period. Not surprisingly, for the first quarter of 2020, China's GDP declined by 6.8%, the worst yearly or quarterly decline in decades. The government's nationwide travel restrictions and Lockdown Directives created unavoidable interruptions in employment, consumer spending, industrial and corporate services, and transportation, which affected nearly all industrial production distribution in the first quarter of 2020. Unemployment rose to 6.2% in February 2020, the highest rate ever reported. The COVID-19 pandemic worsened an already The ongoing trade tensions between the U.S. and China have been weighing on the Chinese economy and the auto industry. According to the Chinese Association of Automobile Manufacturers, CAAM, Passenger car sales in China fell 45.4%, and commercial vehicle sales declined 28.4% in the first quarter of 2020. The sales of sedans, SUVs, MPVs, and crossover vehicles were all down in the first quarter of 2020. New energy vehicle sales fell 56.4% in the first quarter of 2020 as government subsidies were reduced. Automobile sales were already declining as passenger vehicle sales for the 2019 year decreased by 9.6%, following a 2.8% decline in car sales in 2018. Including trucks and buses, total vehicle sales decreased 8.2% in the 2019 year. In addition, the electric vehicle subsidy reduction and the impact were the first implementation phase for the more stringent National Six Emissions Standards for gasoline, Engine-powered passenger vehicles also affected auto sales in China. With this industry environment, our net sales in the first quarter of 2020 were $73.6 million, suffering a decline of 32.6% year-over-year. The domestic passenger vehicle and commercial vehicle markets experienced reduced sales volume, and average selling prices declined as we sold lower-priced products and price competition increased. As a result, in addition to lower sales of our hydraulic steering products, our Henlong KYB joint venture, which mainly provides passenger electric power steering EPS products to the domestic China market, suffered a significant decline in net sales. However, our sales to Fiat, Chrysler, and Ford in North America were steadfast in the first quarter of 2020. On a positive note, we've begun shipping our EPS systems to Great Wall for their ORA R150 all-electric small vehicle on an exclusive contract. Also, our Hyosung Wuhan Motion Mechatronics Systems Company joint venture also recently began delivering its small power-packed brushless motors for IRCB, CEPS, and P-DP EPS products. We have made progress in our development programs, including new steering for the daily van for Iveco SPA in Europe, a new recirculating ball steering system, the IRCD program, to be used in a global tier one customer's future autonomous vehicles in North America, as well as supplying a new steering product for FCA's Jeep model starting in the late third quarter of 2020, also in North America. Despite devastating impact of the pandemic, we remained profitable as we improved our revenue mix, increased our quality of products, and reduced expenses in the first quarter of 2020. Our gross margin increased in the first quarter, and we have maintained our profitability during this crisis. Even during the most difficult quarter in the company's histories, our operations continued to generate positive cash flow, and our cash position improved. With our strong balance sheet and effective cash flow management, We remain financially sound. As of March 31, 2020, total cash and cash equivalents and pledged cash were $132.6 million. Net cash flow from operating activities was $29.2 million in the first quarter of 2020. Total parent company stockholders' equity was $283.8 million as of March 31, 2020. All our production centers resumed full operations in mid-March after the COVID-19 lockdown restrictions were removed, and we are operating with full capabilities at all facilities. We have also reopened our Wuhan headquarters. We have seen evidence that economic conditions are slowly improving, although we believe there is still a challenging economic environment and the outlook remains clouded. However, we expect progress over the remainder of the 2020 year barring any unforeseen circumstances. The central government has initiated tax cuts, revised regulations, and loosened monetary policies. New incentives have been implemented to stimulate the purchase of autos in rural areas and subsidies to new energy vehicles have been reinstated. The U.S.-Chinese trade agreement and reopening of the U.S. should help boost business activities. According to statistics by CAAM, China's overall automobile sales increased in both April 2020 by 4.4% and in May by 14.5%. We remain cautiously hopeful that the resilience of the Chinese economy and large consumer base will propel a reasonable recovery of the auto sector in the remaining part of the year. We wish to thank all our employees, suppliers, customers, government officials, and health care providers who worked to ensure we successfully reopened our factories without endangering our workers. Now let me review the financial results for the first quarter of 2020. In the first quarter of 2020, net sales were $73.6 million, compared to $109.2 million in the same quarter of 2019, reflecting a 32.6% year-over-year decline. The decrease in net sales was mainly due to lower sales volume for legacy hydraulic products due to the COVID-19 lockdown and lower average selling prices in domestic markets during the pandemic crisis. Gross profit was $11.2 million in the first quarter of 2020 compared with $14 million in the first quarter of 2019. The gross margin increased to 15.2% in the first quarter of 2020 compared to 12.9% in the first quarter of 2019 mainly due to changes in the product mix. Gain on other sales was $0.6 million in the first quarter of 2020 compared to $1.3 million in the first quarter of 2019, reflecting lower scrap volume. Selling expenses were $2.1 million in the first quarter of 2020 compared to $3.1 million in the first quarter of 2019. The decrease was primarily due to Lower freight expenses resulting from the suspension of the company's operations for most of the quarter due to the outbreak of the COVID-19 pandemic. Selling expenses represented 2.9% of net sales in the first quarter of 2020 compared to 2.8% in the first quarter of 2019. General administrative expenses were $3.4 million in the first quarter of 2020 compared to $4.6 million in the same quarter of 2019. The decrease was primarily due to lower office expenses. G&A expenses represented 4.6% of net sales in the first quarter of 2020, compared with 4.2% in the first quarter of 2019. Research and development expenses were $5.1 million in the first quarter of 2020, compared to $6.6 million in the first quarter of 2019. R&D expenses represented 6.9% of net sales in the first quarter of 2020 compared to 6% in the first quarter of 2019. Lower R&D expenses were primarily due to increased cost controls. Other income was $0.1 million for the three months ended March 31, 2020, compared to $1.4 million for the three months ended March 31, 2019, representing a decrease of $1.3 million. primarily due to lower government subsidies and the donation made to combat COVID-19 pandemic in the first quarter of 2020. Income from operations was $1.2 million in the first quarter of 2020 compared to $1 million in the same quarter of 2019. The increase was primarily due to a higher gross margin and decreased operating expenses, offsetting the impact of lower sales volume in the first quarter of 2020. Interest expense was $0.4 million in the first quarter of 2020 compared to $0.6 million in the same quarter of 2019.

The decrease was primarily due to decreased loans.