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spk04: Greetings and welcome to the China Automotive Systems fourth 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 Thies, Investor Relations. Please go ahead, sir.
spk01: Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2020 Fourth Quarter and Annual Conference Call. Joining us today are Mr. Kui-Zhu Wu, Chief Executive Officer, and Mr. Jay Lee, 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'll remind all listeners that throughout 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, 2020, as filed with the Securities and Exchange Commission today. And another document 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. The slowdown in regional and national economic growth weakened liquidity and financial condition of our customers or 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 uncertainty in the regions where we conduct business, cause our business to suffer in ways that we cannot predict, and materially impact our business financial condition and results of operations. A prolonged disruption or any further unseen delay in our operations of the manufacturing, delivery, and assembly processes within any of our production facilities could continue to result in delays in the shipment of products to our customers, increase costs, and reduce revenue. 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. On this call, I will provide a brief overview and summary of the fourth quarter and annual financial results for the period ended December 31, 2020. Management will then conduct a Q&A session. The following 2020 fourth quarter financial results are unaudited and the annual results are audited and both results are reported using U.S. GAAP accounting. For the purposes of our call today, I will review the financial results in U.S. dollars. We'll begin with review of the recent dynamics of the Chinese economy, automobile industry, and China automotive's market position. The Chinese economy has fully recovered from the impact of the COVID-19 pandemic, with GDP attaining a 6.5% growth rate in the fourth quarter of 2020 and a 2.3% growth rate for the full year of 2020. Statistics from the China Association of Automobile Manufacturers, CAAM, show that in the 2020 fourth quarter, for the month of October 2020, overall automobile sales rose by 12.5% year-over-year, with passenger vehicle sales up by 9.3%, commercial vehicle sales 30.1% higher than the same month a year ago. In November 2020, overall automobile sales were up 12.6% year-over-year, with passenger vehicle sales 11.6% higher, and commercial vehicle sales 18% above last year's November numbers. In December 2020, overall automobile sales rose 6.4% year over year, with passenger vehicle sales up 7.2% and commercial vehicle sales 2.4% higher than last year. December was the ninth straight month that overall automobile vehicle sales rose.
spk02: For the full year of 2020,
spk01: Overall automobile sales were 25.3 million vehicles, representing a decline of 1.9% year-over-year, primarily due to the impact of the COVID-19 pandemic earlier in the year. Passenger vehicle sales were 20.2 million, or 6% lower year-over-year, with sedans down by 9.9%, MPV sales reduced by 23.8%, SUV sales up 0.7%, and crossover vehicles down by 2.9%. Commercial vehicle sales rose 18.7% year-over-year with bus sales decreased by 5.6% and truck sales 21.7% higher. New energy vehicle sales rose 10.9% year-over-year to 1.4 million vehicles with passenger vehicle sales rising by 14.6% and commercial vehicle sales down 17.2% in the 2020 year. Given the volatile sales during the 2020 year, we are pleased to report that our fourth quarter sales rose by 26.4% to $146.5 million from $115.9 million in the fourth quarter of 2019. And our gross profit increased faster at 35.7% to $22.8 million from $16.8 million in the fourth quarter of 2019. Gross margin increased in the 2020 quarter fourth quarter to 15.6% compared with 14.5% a year ago. For the fourth quarter of 2020, our net loss attributable to parent companies common shareholders was $3.2 million or diluted loss per share of 10 cents compared to net income of $1.7 million or diluted income per share of six cents in the fourth quarter of 2019. Included in the net loss for the fourth quarter of 2020 was a non-recurring $4.5 million in expected credit loss provisions, net of minority interest, due to the bankruptcy and reorganization proceedings of our customer, Brilliance Auto. We have decided to take the most conservative approach and have written off the entire accounts and notes receivable due from Brilliance, even as we proceed with our collection process with them. With the year 2020, Our net sales were $417.6 million compared to $431.4 million in 2019, reflecting the very weak sales in the first half of the year due to the impact of the COVID-19 pandemic on the automotive sales in China and in international markets, including North America. The company sales of steering gears for passenger vehicles decreased by 7.8%. The sales of steering gears for commercial vehicles increased by 12.1% in 2020, compared to 2019 in China. In November 2020, we shipped approximately 70,000 steering units to Chinese truck OEMs and the aftermarket in North America. This amount established the company's new monthly high sales record for commercial vehicle steering products. Our commercial vehicle steering production lines are running near full capacity to keep up with demand. Hydraulic steering products grew by 1.9% while our electric power steering product sales declined in 2020. Changes in product mix and selling prices impacted both sales and growth profit in the 2020 year. The net loss achievable to the parent company's shareholders was $5 million in 2020. It also included $4.5 million one-time non-recurring charge for bad debts due to the building's auto bankruptcy and reorganization. Our research and development has brought a number of advanced products to fruition in 2020 to address changes in automotive technologies. These new products will better serve current customers, attract new ones as well to position CAS for future growth. We began shipping our EPS systems to Great Wall for the ORA R150 all-electric small vehicle as the exclusive supplier in 2020. In fact, approximately 140,000 EPS steering units were shipped to a number of Chinese OEMs for their use in electric vehicles in 2020. And the outlook is for sales of approximately 200,000 EPS units just for electric vehicles in 2021. The Chinese government has targeted that EVs, electric vehicles, should be 20% of all new cars by 2025, and we are well-positioned to capture this expected growth. In addition, we have developed a new steering system for the daily van for IVECO SPA in Europe, and started supplying a new steering product with Jeep models in North America. In addition, a new recirculating ball steering system, the I-RCB program, has been produced to be used in a global tier one customer's future autonomous vehicles in North America. A brand-new dedicated assembly line for our intelligent RCBM steering systems for commercial vehicles has been installed. IRCB is specifically designed for autonomous-drilling commercial vehicles and will provide maximum assistance in parking and in lane keeping at highway speeds. Recently, we announced the introduction of our new EPS system to empower advanced driver assistance systems, ADAS, and the future of autonomous driving. This new EPS product was developed using proprietary technology developed by CAS's R&D team, and it represents the first time a Chinese domestic steering producer drove the entire product development cycle in-house and developed proprietary algorithms for steering control software as well. The company has begun mass production of this product for new vehicle models of the leading Chinese automaker Great Wall Motors. Additional purchase orders have been received from JAC, Cherry Auto, and Fiat Chrysler Automobiles, with other OEMs expressing interest. Carelessly connected with vehicle data, CAS's new EPS system enables drivers to adapt to different road conditions. This new EPS system integrates and communicates with the vehicle's main data architecture to fulfill key ADAS functionalities, including lane keeping assist, automatic parking assist, lane centering, and traffic jam assist. Also, Wuhan Motion Mechatronics Systems joint venture began delivering its small power pack brushless motors to enhance our IRCB, RC EPS, and P slash DP EPS products. Building financial strength remains a top priority to provide resources to support future growth and enhance shareholder value. We continue to generate positive cash flow from operating activities in 2020. Our cash flow provided by operations increased almost 90% in 2020 to $57.4 million from $30.3 million in 2019. Our total cash and cash equivalents pledge cash and short-term investments increased to $138.2 million as of December 31, 2020, compared with $112.2 million in 2019. We repurchased 322,000 common shares in the market during the 2020 year as part of our share repurchase plans. Total parent stockholders, total parent companies, Stockholders' equity rose to $303.2 million at December 31, 2020, from $289.3 million at the end of 2019. Now the automotive markets of 2020 are behind us, and conditions are improving in 2021. For the first two months of 2021, commercial vehicle sales rose by 86.2% to approximately 757,000 vehicles, with growth in all sizes of trucks and buses. In the Chinese passenger vehicle market, CES's main market, Chinese branded vehicles sold 1.4 million units, representing an 87.5% year-over-year growth. This increase correlated to a 3.1% market share increase for Chinese branded passenger vehicles and accounted for 42.6% of the Chinese market. We have confidence that our sense of customer base in China, growing international market presence, long established hydraulic product line and new technology products, addressing the emerging markets for electric vehicles and autonomous driven vehicles, position us well for future growth. Now let me review the financial results in the fourth quarter of 2020. Net sales increased by 26.4% to $146.5 million in the fourth quarter of 2020 compared to $115.9 million in the same quarter of 2019. The net sales increases mainly due to a change in the product mix and higher demand for Chinese domestic branded automobiles in the fourth quarter of 2020 compared with the fourth quarter of 2019. Gross profit rose by 35.7% to $22.8 million compared to $16.8 million in the fourth quarter of 2019. Gross margin in the fourth quarter of 2020 was 15.6%, compared to 14.5% in the fourth quarter of 2019. The increase in gross profit and gross margin was primarily due to higher volume of sales, a change in the product mix, and reduced costs compared with the fourth quarter of 2019. Gain on other sales was $1.4 million, compared to $0.2 million in the fourth quarter of 2019. Selling expenses were $5.6 million compared to $3.8 million in the fourth quarter of 2019. Selling expenses represented 3.8% of net sales in the fourth quarter of 2020 compared to 3.3% in the fourth quarter of 2019. General administrative expenses were $14.3 million compared to $6.5 million in the fourth quarter of 2019. G&A expenses represented 9.8% of net sales in the fourth quarter of 2020 compared to 5.6% of net sales in the fourth quarter of 2019. The significantly higher G and A expenses in the fourth quarter were mainly attributable to a one-time now recurring expected credit loss provision of $6.4 million related to Brilliant Auto's bankruptcy reorganization proceedings. Based upon conservative accounting practices, This charge, although non-cash in nature, accounted for all the outstanding accounts receivable and notes receivable from Brilliance Auto. The company continues to work with Brilliance Auto on the receivables collection. Research and development expenses were $8.3 million compared to $8.6 million in the fourth quarter of 2019. R&D expenses represented 5.7% of net sales in the fourth quarter of 2020 compared to 7.4% in the fourth quarter of 2019. Loss from operations was $4 million in the fourth quarter of 2020, compared with a loss from operations of $1.9 million in the fourth quarter of 2019. The higher loss was mainly due to the one time now recurring expected loss provision related to Brilliant Auto's bankruptcy reorganization proceedings. Interest expense was $0.4 million in the fourth quarter of 2020, compared to $0.9 million in the fourth quarter of 2019. Net loss attributable to parent companies' common shareholders was $3.2 million in the fourth quarter of 2020, compared to net income attributable to parent companies' common shareholders of $1.7 million in the fourth quarter of 2019. The net loss in the fourth quarter of 2020 was mainly due to a one-time now recurring $4.5 million expected credit loss provision for brilliant solvers. net of minority interest. Diluted loss per share was 10 cents in the fourth quarter of 2020 compared to diluted income per share of 6 cents in the fourth quarter of 2019. Weighted average number of diluted common shares outstanding was 31,077,196 in the fourth quarter of 2020 compared to 31,333,740 in the fourth quarter of 2019. Now, we'll provide a summary of the annual results. Net sales decreased by 3.2% to $417.6 million in 2020, compared to $431.4 million in 2019. The decrease is mainly due to a 27.1% decrease in net sales in the first half of 2020 due to the COVID-19 pandemic impact on automobiles in China and North America. In 2020, sales of hydraulic products increased 1.9 percent. A total EPS system has declined by 24.8 percent. EPS sales represent 14.8 of total revenue in 2020, compared with 19.1 percent in 2019. Net sales of vehicle steering systems to the company's North American customers decreased by 4.7 percent in 2020, compared with 2019. Gross profit in 2020 was $55.3 million compared to $63.4 million in 2019. The gross margin decreased to 13.3% from 14.7% in 2019, mainly due to a change in product mix and lower average selling prices. Gain on other sales mainly consisted of the net amount retained from rental income, gain on disposal intangible assets and sales of property, plant equipment, and technical service revenue. Within December 31, 2020, gain on other sales amounted to $4.3 million, compared to $5.1 million in 2019. This decline was primarily due to a decrease in gain on disposal of property, plants, and equipment. Selling expenses were $14.5 million in 2020, compared to $14.3 million in 2019, mainly due to higher marketing expenditures. Selling expenses represented 3.5% of net sales in 2020 compared to 3.3% in 2019. G&A expenses were $27.6 million compared with $20 million in 2019. The increase is mainly due to a one-time not recurring expected credit loss provision of $6.4 million, reflecting all accounts and notes receivable of buildings auto. CAF took full provision in accordance with the conservative accounting practice but will continue to spend efforts on collections. The bankruptcy reorganization proceedings are brilliant although it's still underway. G&A expenses represented 6.6% of net sales in 2020 compared to 4.6% of net sales in 2019. R&D expenses were $25.7 million in 2020 compared to $28 million in 2019. The decrease was due primarily to reduce activity from the impact of the COVID-19 earlier in 2020 and tighter cost controls. R&D expenses represented 6.2% of net sales in 2020 compared to 6.5% of net sales in 2019. Operating loss was $8.1 million in 2020 compared to operating income of $6.2 million in 2019. The loss was mainly due to lower sales and the one-time non-recurring expected credit loss provision related to Brilliant Soldiers bankruptcy reorganization proceedings. Interest expense was $1.6 million in 2020 compared with $3 million in 2019 as a result of decreased loans and lower interest rates. Net financial expense was $4.9 million in 2020 compared with net financial income of $2.5 million in 2019, primarily due to an increase in foreign exchange losses because of exchange rate fluctuations. Loss before income taxes and equity in earnings of affiliated companies was $12.2 million compared to income before income tax expenses and equity in earnings of affiliated companies of $7.6 million in 2019. Net loss attributable to parent company's common shareholders was $5 million in 2020 compared to net income attributable to parent company's common shareholders of $10 million in 2019. The loss was primarily due to lower sales and a one-time now recurring $4.5 million expected credit loss provision with brilliance auto net of minority interest. Diluted net loss per share was 16 cents in 2020 compared to diluted income per share of 32 cents in 2019. The weighted average number of diluted shares outstanding was 31,077,196 in 2020 compared to 31,458,926 in 2019. Net cash flow from operating activities was $57.4 million in 2020 compared with $30.3 million in 2019. Payments to acquire property plant equipment were $15.8 million in 2020 compared with $34.4 million in 2019. Approximately 322,000 shares of common stock were repurchased during the year 2020 and the company expects to repurchase more shares in the future reflecting market conditions. We'll now go over a few balance sheet items. As of December 31, 2020, total cash and cash equivalents pledged cash and short-term investments were $138.2 million. Total accounts receivable, including notes receivable, were $234.1 million. Accounts payable, including notes payable, were $225.3 million. And short-term bank in government loans for $44.2 million. Total parent company stockholder equity was $303.2 million as of December 31, 2020, compared to $289.3 million as of December 31, 2019. The business outlook. Management provides revenue guidance of $470 million for the full year 2021. This target is based on the company's current views on operating and mark the conditions which are subject to change. With that, operator, we're now ready to begin the Q&A.
spk04: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question comes from the line of William Gregorzewski with Green Ridge Global. Please proceed with your question.
spk06: Hi, guys. Can you talk about what your working relationship with Brilliance has been since they announced the restructuring and, you know, what likelihood you think there will be to recover some of that write-off?
spk03: Okay. After the resumption of the expansion, what is the relationship between us and Huacheng? And then, how are we going to deal with the revenue balance?
spk02: Since Huacheng has been announced to resumption of the expansion, we have been paying close attention to its direction.
spk05: uh uh uh Okay, so we are closely following and monitoring the process
spk03: and of the grains autos restructuring at the moment. We also very closely follow it up with the senior management team on the outstanding receivables. So we are actively and aggressively collecting the receivables. And we have collected some of the account receivables from Brilliance Auto. We also plan to continue to collect after they complete the restructuring proceeding. Yeah, so that's our plan. We still, on the business side, we're still working with them, and they have some new product lines coming, and so we are very carefully managing the relationship.
spk06: Okay. If you exclude the write-off, the G&A was still pretty high in the fourth quarter on an absolute dollar basis. I mean, what's like a good G&A amount you guys expect going forward? Excluding, you know, any write-offs or recoveries.
spk02: Okay.
spk03: He said if we remove the one-time write-off, our management cost is still relatively high. Can you tell us what the reasons are? This is the first one.
spk05: The second one is how we can control the management fees in the future. In the whole year of 2020, the management fees, if we exclude the one-time write-off, it is basically the same as in 2019. Of course, in general, we still have room for improvement. The first thing to say is that last year's management costs were also covered by some costs that were increased due to the outbreak of the epidemic, including the cost of prevention, including the cost of providing free food for employees. So in addition to this part, we should still have some changes compared to 2019. Speaking of construction, we are also continuing to pay attention to this part of the total cost, including what we did from the beginning of December last year. Then in this year's January and the whole year of 2021, the effect of the cost reduction effect will gradually improve. You said December, right?
spk03: So excluding, if you look at our 2020s GMA expenses, excluding the one-time non-recurring and non-cash write-off related to the brilliance autos restructuring, proceeding. Our G&A expenses is in line with 2019. Now, we want you to be also mindful that in 2020, there was a major COVID event, which hit our operation pretty hard, especially in the first quarter. And during that time, we have to increase to facilitate the reopening of our production. We have to increase the PPE and also the sanitization cost for all our business operations. And in addition to that, we have to do, we have to provide our worker and housing accommodation and the dining. And because it's a special time, we need to make sure they do everything properly and to contain any kind of, to avoid any kind of spreading of the COVID. So all that extra cost, we bear that in 2020. And even with all that, we're still at the very similar level of 2019. Also, in December 2020, we started a program to further streamline our cost management, especially in the G&A category. We reduced some of the staffing staffs, and also we cut back some of the expenses in the G&A category. Within a month or so, maybe a month and a half in January, we already see very evident changes after implementing the cost control measures. So we feel 2021, we should be able to manage the GMA expenses pretty well.
spk06: Okay. And then my last question is, last week you guys discussed that new self-developed EPS product. What's going on with the JV that you're self-developing EPS products for the Chinese market again? I thought that was all going to be done through the JV.
spk03: Okay. He said, last week we announced an electronic transformation, a product of our own development electronic transformation. It's mainly for the market of autonomous driving in China. He wanted to ask, what is the difference between this product and the EPS product of our joint venture? He always thought that KYB's joint venture is mainly in charge of the EPS product line.
spk05: This is actually produced by our joint venture. The R&D part was developed by our R&D team. After that, it was transferred to the joint venture company for production. At present, the entire R&D According to the initial contract, basically, we are in the leading position here, and the other side is providing some know-how. But from the perspective of the performance, we decided to rely on the autonomous part. So for ADAS, it is a symbol that we are independent, fully autonomous, and developed a higher-end EPS.
spk03: Okay. To clear this point, the production has always been managed by the joint venture with KYB. According to initial arrangement or contract, CAS will still lead the R&D of the EPS product and especially the new generation UPS product. When our joint venture partner, they will provide some of the know-how and the technology know-how as well as managing the production with our local team. So that's the arrangement. And for this particular new product we just recently announced, That's in the ADAS area for the assist driving, autonomous driving future. Our team, R&D team, led the entire process, and we believe this is the way we're going forward. And most of the high-end product need the as centralized in terms of R&D. So we're doing that, and we're pretty pleased with the results.
spk02: Okay. All right. Thanks. Thank you.
spk04: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. One moment, please, while we poll for questions. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Kevin Thies for closing remarks.
spk01: We want to thank all of you for participating in today's conference call. We wish you to be safe, and we look forward to speaking with you again. Have a great day.
spk04: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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