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spk02: Good morning, everyone, and welcome to the China Automotive Systems fourth quarter and fiscal year 2022 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 phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Kevin Theis of Investor Relations. Kevin, you may begin.
spk07: Thank you everyone for joining us today. Welcome to China Automotive Systems 2022 fourth quarter and year conference call. Joining us today are Mr. Jay Lee, Chief Financial Officer of China Automotive Systems. He will be available to answer questions later in the conference call with the assistance of translation. Before we begin, I 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, 2022, as filed with the Securities and Exchange Commission. 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 a deteriorating market outlook for automobile sales. The slowdown of regional, national, and international economic growth. Weakened liquidity and financial condition of our customers and other factors that we cannot foresee. Any of these factors and other factors beyond our control could have adverse effects on the overall business environment, cause uncertainties 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 of any further unforeseen delay in our operations or the manufacturing, delivery, and assembly process 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 as 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 fiscal year results for the period ended December 31, 2022. Management will then conduct a Q&A session. The 2022 fourth quarter are unaudited and the fiscal year financial results are audited. And all results are reported using US GAAP accounting. 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, the automobile industry, and our market position. China's GDP growth was 4.8% in the first quarter of 2022, marking a historical soft period which declined further to 4% – I'm sorry, 0.4% growth in the second quarter of 2022, before rebounding to 3.9% in the third quarter. However, GDP growth then slowed to 2.9% in the fourth quarter of 2022. Quarter-over-quarter economic growth between the third and fourth quarters of 2022 was essentially flat. For fiscal year 2022, Chinese economic growth was a low 3%, down sharply from the 8.4% growth experienced in 2021. Total retail sales in China declined by 0.2%, partially due to the effects of COVID-19 lockdowns, and investment in real estate development declined by 10% in fiscal 2022. The COVID-19 outbreak worsened in 2022 first quarter, resulting in lockdowns in several cities across China. The impact of COVID-19 affected the economy throughout the 2022 year, but lessened in the second half with the economy's better growth. supply chain interruptions increased in early 2022, which hindered production, especially with critical computer chip shortages affecting automobile production. Foreign exchange volatility and the economic outlook for key trading partners were concerns throughout 2022. According to the data from the Chinese Association of Automobile Manufacturers, CAAM, Automobile sales increased by only 0.2% year over year in the first quarter of 2022, decreased by 13.3% year over year in the second quarter of 2022, increased by 29.4% year over year in the third quarter, and then declined by 3.3% year over year in the fourth quarter of 2022. In 2022, total automobile sales grew by only 3.4% year over year. Passenger vehicle sales rose by 11.2% year over year, with sedans up 12.5%, MPVs down 11.3%, SUVs up 13.5%, and cross-passenger vehicles 20.3% lower. In 2022, commercial vehicle sales fell 31.9% as bus sales were 19.9% lower, and the much larger market for truck sales declined by 33.4%. Sales of new energy vehicles increased by 93.4%, as new energy passenger vehicle sales rose by 94.3%, and the much smaller new energy commercial vehicle sales were 78.9% higher. We introduced a proprietary EPS product in 2021 to further develop our own advanced driver assist systems, ADAS. This EPS product communicates with the vehicle's main data to create lane keeping assist, automatic parking assist, lane centering, and traffic jam assist functions. A number of auto manufacturers have already adopted our proprietary EPS, primarily for their passenger vehicles. In January 2022, we also signed with Scania AB to develop an ERCB steering system for Scania's trucks and buses to better penetrate the commercial vehicle market in China. With our advanced driver assistance systems L4 platform, named AP04, our proprietary EPS system enables vehicles to execute level four autonomous driving. This ERCB steering system has become the world's first mass-produced fully electric intelligent power steering system for commercial vehicles. The technologies from our subsidiary in Sweden, Sentient AB, promise to further enhance our EPS steering technology, especially for vehicle motion control for autonomous driving products, targeting both passenger and commercial vehicles. Sentient has already won installation contracts with global truck OEMs with their technologies. We have produced, shipped, and installed more than 3 million power steering sets, including EPS units, to BYD Auto over a 20-year partnership. In late 2022, we expanded our strategic partnership with BYD, the largest Chinese EV producer, for future autonomous driving products. We won design contracts from BYD for CEPS, DPEPS, and REPS from BYD, for all its series of products. We have introduced a new series of EPS products for BYD. Together with BYD engineers, CAS's R&D engineers use computer-aided design and artificial intelligence to shorten the design cycle to five months for our DP EPS products. We completed the DP EPS integration into the chassis general assembly for BYD's model TANG in late 2022. Well, we developed new products and grow global market share. We are maintaining our financial strength as our free cash flow increased to $27.7 million compared with $19 million in 2021. For 2022, we repurchased 666,074 common shares under our repurchase buyback program. As the Chinese automobile market is recovering, our North American and Brazilian operations continue to expand. Our EPS products are gaining greater market acceptance, and our NEV technologies are acquiring more capabilities. Our changing sales product mix is improving our margins. New COVID-19 policies have had a dramatic and positive impact on the Chinese economy, revitalizing social and business activity, and restoring supply chains. We expect the recovery of the economy will strengthen over time, leading to greater automobile sales. Now let me review the financial results in the fourth quarter of 2022. Net sales decreased by 7.2% to $128.8 million compared to $138.8 million in the same quarter of 2021. The net sales decrease was mainly due to a change in the product mix and lower demand for passenger automobiles and commercial vehicles in the fourth quarter of 2022 compared to the fourth quarter of 2021. Gross profit increased by 26.9% to $25 million in the fourth quarter of 2022 compared to $19.7 million in the fourth quarter of 2021. Gross margin in the fourth quarter of 2022 was 19.4% compared to 14.2% in the fourth quarter of 2021. primarily due to a change in product links. Selling expenses were $4.6 million in the fourth quarter of 2022 compared to $3.4 million in the fourth quarter of 2021. Selling expenses represented 3.6% of net sales in the fourth quarter of 2022 compared to 2.4% in the fourth quarter of 2021. General administrative expenses were $10.8 million in the fourth quarter of 2022, compared to $7.6 million in the same period in 2021. G&A expenses represented 8.4% of net sales in the fourth quarter of 2022, compared to 5.5% of net sales in the fourth quarter of 2021, which was mainly due to the increase in provision of allowance for doubtful accounts. Research and development expenses, R&D, were $10.6 million in the fourth quarter of 2022, compared to $9.9 million in the fourth quarter of 2021. R&D expenses represented 8.2% of net sales in the fourth quarter of 2022, compared to 7.1% in the fourth quarter of 2021, mainly due to an increase in salaries and wages as a result of the increased R&D activity for new projects. Loss from operations was $2.6 million in the fourth quarter of 2022 compared to income from operations of $0.6 million in the fourth quarter of 2021. Interest expense was $0.3 million in the fourth quarter of 2022 compared to $0.5 million in the fourth quarter of 2021. Financial income was $1.4 million in the fourth quarter of 2022 due to exchange fluctuations of the U.S. dollar to the Chinese RMB and the Brazilian real, compared to financial expense of $1.5 million in the fourth quarter of 2021. Loss before income taxes and equity in earnings of affiliated companies was $2.7 million in the fourth quarter of 2022, compared to a loss of $0.4 million in the fourth quarter of 2021. Income tax benefit was $1.9 million in the fourth quarter of 2022. compared to an income tax expense of $.7 million in the fourth quarter of 2021, mainly due to the loss before income tax expenses and equity and earnings of affiliated companies in the fourth quarter of 2022. Net income attributable to parent companies' common shareholders was $4.3 million in the fourth quarter of 2022, compared to net income attributable to parent companies' common shareholders of $5 million in the fourth quarter of 2021. Diluted income per share was 14 cents in the fourth quarter of 2022 compared to diluted income per share of 16 cents in the fourth quarter of 2021. The weighted average number of diluted common shares outstanding was 30,229,987 in the fourth quarter of 2022 compared to 30,853,822 in the fourth quarter of 2021. Now we'll review the full year 2022 high leaks. Net sales increased by 6.3% year-over-year to $529.6 million in 2022, compared to $498 million in 2021. This increase is mainly due to higher sales of passenger vehicles in China, with sales to Chery automobile up 54.5% year-over-year, and total sales of electric power steering, EPS systems, increased by 35.6% year-over-year. EPS sales represented 29.5% of total revenue in 2022 compared to 23.2% in 2021. Net sales of vehicle steering systems to the company's North American customers was approximately the same in 2022, but Brazil HEM loans net sales grew by 54.1% year-over-year to $39.3 million. Gross profit in 2022 increased by 15.7% year-over-year to $83.4 million compared to $72.1 million in 2021. The gross margin increased to 15.7% from 14.5% in 2021 mainly due to changes in the product mix. Gain on other sales in 2022 decreased to $3.7 million compared to $4.4 million in 2021. Seven expenses declined by 7.7% yearly to $16.9 million in 2022, compared to $18.3 million in 2021, mainly due to lower transportation expenses. Seven expenses represented 3.2% of net sales in 2022, compared to 3.7% in 2021. G&A expenses increased by 7% year-over-year to $26.1 million in 2022 compared to $24.4 million in 2021. G&A expenses represented 4.9% of net sales in 2022 compared to 4.9% of net sales in 2021. R&D expenses were $36.1 million in 2022 compared to $28.2 million in 2021. The increase is primarily due to higher investment in EPS products and other new products. R&D expenses were 6.8% of net sales in 2022 compared to 5.7% of net sales in 2021. Operating income increased by 45.5% yearly or to $8 million in 2022 compared to $5.5 million in 2021. The increase in operating income was mainly due to higher gross profit. Interest expense was $1.5 million in 2022, consistent with the $1.4 million in 2021. Net financial income was $10.8 million in 2022, compared to net financial expense of $2.4 million in 2021, primarily due to an increase in foreign exchange gains as the U.S. dollar fluctuated against the Chinese RMB and Brazilian real. Income before income tax expenses and equity and earnings of affiliated companies was $23 million compared to $8.4 million in fiscal year 2021. The change is primarily due to higher operating income and net financial income in 2022. Income tax expense was $3.1 million in 2022 compared to $4 million in 2021. Net income attributable to parent company's common shareholders was $21.2 million in 2022 compared to net income attributable to parent company's common shareholders of $11.1 million in 2021. The muted net income per share increased by 91.7% year-over-year of 69 cents in 2022 compared to 36 cents in 2021. The weighted average number of diluted common shares outstanding was 30,641,274 in 2022, compared to 30,855,431 common shares in 2021. Next, we'll go over a few balance sheet items. As of December 31, 2022, total cash and equivalents, pledged cash, and short-term investments were 171.8 million dollars. Total accounts receivable including notes receivable were $224.3 million. Accounts payable including notes payable were $235.1 million, and short-term bank loans were $45.7 million. Total parent company stockholders' equity was $311.7 million as of December 31, 2022, compared to $321 million as of December 31, 2021. Cash flow from operating activities was $48 million in 2022 compared to $28.3 million in 2021. Cash paid to acquire property, plant equipment, and land use rights was $20.3 million in 2022 compared to $9.3 million in 2021. Business outlook. Management has provided revenue guidance for the year 2023 to $560 million. This target is based on the company's current use of operating and marketing conditions, which are subject to change. With that, operator, we are now ready to begin the Q&A session.
spk02: Thank you, Kevin. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your phone keypad. A confirmation tone will indicate your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For participants using any speaker equipment, it may be necessary to pick up your handset before you press the keys. Please wait a moment while we poll for questions. Thank you. Your first question is coming from Phil Gregorzewski of Greenridge Global. Phil, your line is live.
spk03: Thank you. I have four questions for you today. First off, gross margins in the fourth quarter were much higher than expected. Is this a sustainable long-term margin figure? based on the higher EPS contribution?
spk05: Okay.
spk06: to know if the overall interest rate can continue to be in this position or there is room for improvement.
spk04: Our annual interest rate is 16%, which is 19% higher in the fourth quarter. The main reason is from the ETS, our electric transition, the fastest amount of improvement. I believe that if the volume increases further in 2023, the interest rate will be lower than 19% on the basis of 15.7% last year. Will the interest rate rise this year? So full year 2022, gross margin is 16%. But our first quarter, as you saw, our first quarter gross margin is 19%.
spk06: It's mainly attributable to the electric power steering volume increase. And we also foresee 2023, our EPS electric powered steering product volume will continue to increase. And that said, that will further propel the gross margin expansion. As you know, the EPS product in the past, the gross margin was somewhat in the 15% range. And now, with the higher volume, we believe the better economy scale will give us a better margin for EPS going forward. As a result, the blended gross margin will also continue to climb in 2023. Okay, thank you.
spk03: And then what are your expectations for hydraulic and EPS skills for 2023 and 2024? Expectations for volume? Yes. Okay.
spk04: This year, the EPS will continue to grow. We expect it to grow by 30%. And then we expect the EPS to account for 30% to 36% of our total business volume. This is our initial plan for 2023.
spk06: Okay, let's look at 2023 first. We anticipate EPS sales volume will continue to climb another 30% increase in 2023. As a result, EPS sales will account for about 36% of total sales.
spk05: in 2023. So in 2024 we see
spk03: uh our eps sales volume will reach or surpass 40 percent of total volume okay awesome uh but then third uh rng expenses increased eight million dollars in 2022 compared to 2021. how much rng spending will there be in 2023 and what is going to be the focus of that spending okay uh
spk06: In 2022, the cost of research increased to $8 million. What is the scope of the cost of research in 2023? Where is the main cost of research?
spk04: In 2023, the cost of research is mainly used for EPS, DP, EPS and R-EPS, as well as IRCP and ERCP products, including steering the wire, SBW, this series of product development. Looking at the whole year of 2023, we expect the proportion of non-innovation will be between 6 to 6.5 in sales.
spk06: Our R&D research is mainly focused on the EPS product, and that's including the DP EPS and REPS. We also have some R&D into the spent going to the IRCB and the ERCB product. And last piece we are putting a lot of effort in R&D is steering by wire. So what we call SBW product. And so all these together, we're looking at 2033 R&D expenses accounts for approximately 6 to 6.5% total revenue.
spk03: Okay. And then last question here. Can you provide an update on how the BYD order is going and whether there are any updates related to Sentient and the Volvo order?
spk06: Okay. Can you tell us about the recent situation with BYD and what new orders will be available in the future? BYD is one of our key customers.
spk04: Then its business volume has grown significantly in 2022. In 2023, we expect it to continue to maintain a relatively fast growth rate. Then last year, we conducted a comprehensive strategic cooperation with it. Then we have received the product business order of its entire series. Through our comparison and selection, there are nearly Okay. So, yes, BYD has been a long-term customer and now increasingly become our
spk06: one of our top priorities. In 2022, we grew with BYD significantly, and we expect the growth will continue in 2023. Last year, towards the end of last year, if you recall, we inked a long-term strategic partnership with them through that comprehensive partnership, we are now entering into all series of models of BYT products. And so in 2022, we sold about, you said 400,000 to 500,000, right? Yes. We sold about 400,000 to 500,000 units.
spk05: And we're looking to double in 2023. Okay.
spk03: Is that, were there any updates related to the Sentient and VAVA order?
spk06: This, our Rui Dian company, that piece, what are the latest
spk04: Uh, uh, uh, Yeah, our subsidiary in Sweden, the autonomous driving arm,
spk06: are doing pretty well. We booked some revenue, a moderate revenue in 2022, and we're looking to increase the revenue. They are looking to increase the revenue in the second half of 2023. There's a large batch order will be expected. In the meantime, that's with the European customer. In the meantime, we are deep in our partnership with BYD, especially we are looking into some of the autonomous driving features we can provide. So looking forward to work with BYD to materialize those autonomous functions into their new models.
spk01: Okay.
spk05: Okay. Thank you. That's it.
spk01: Thank you so much. Just as a reminder, if you do have any questions, please press star 1 on your phone keypad now. Okay, it appears we have no further questions in the queue.
spk02: I'm going to hand back over to Kevin for any closing remarks.
spk07: We want to thank everyone for joining us today in our conference call. We wish you to be safe and we look forward to speaking with you in the future. Thank you.
spk02: Thank you, everybody. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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