China Automotive Systems, Inc.

Good morning, everyone. Welcome to China Automotive Systems' first quarter 2024 conference call. At this time, all participants are in a listen-only mode and we will be opening for questions following the presentation. If you would like to ask a question, you may press star 1 on your phone keypad to join the queue. If anyone should require operator assistance during this conference, please press star 0 on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Kevin Thies. Kevin, over to you.

Thank you. Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2024 First Quarter Conference Call. Joining us today are Mr. Hanlin Chen, Chairman, 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 will remind all listeners that throughout this call, we may make statements that may contain forward-looking statements of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represents the company's estimates and assumptions only as though the data is false. As a result, the company's actual results differ materially from those contained due to a number of factors, including those described under the heading risk factors and result of operations in the company's form 10-K annual report for the year ended December 31, 2023, as filed with the Securities and Exchange Commission. And then other documents filed by the company from time to time with the Securities and Exchange Commission. Any of these factors, and other factors beyond our control could have an adverse effect on our overall business environment, cause uncertainties in the region where we conduct business, cause our business to suffer in ways that we cannot predict and materially affect our impact on business, financial condition and result in operations. A prolonged disruption of any unforeseen delay in operations of the manufacturing, delivery, and assembly processes within any of our production facilities could 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 first quarter for the period ended March 31, 2024. Management will then conduct a question and answer session. The 2024 first quarter results are unaudited and financial results are reported using US GAAP accounting. For the purposes of our call today, I will review the financial results in US dollars. We will begin with a review of some of the company's highlights, recent dynamics of the Chinese economy and automobile industry, and our market position. We had a solid performance in the first quarter of 2024. Gross profit grew by 11.6% year-over-year, with a higher gross margin of 17.3% in the first quarter of 2024. Income from operations was 26% higher, as cost controls limited operating expense growth to 2.8%, versus the 11.6% increase in gross profit. Both selling and G&A expenses rose in the quarter. We returned the positive cash flow from operations of $10.5 million and diluted income per share increased by 17.4% to 27 cents in the 2024 first quarter. Total cash, cash equivalents and short-term investments were $135.8 million or approximately $4.50 per share at March 31, 2024. Net sales decreased by 2% to $139.4 million as sales of traditional steering products declined by approximately $2.4 million due to lower sales of vehicles using these steering products. We experienced different results in two of our large international markets. Sales in Brazil continued to grow with a 17.6% yearly year sales rise due mostly to higher volume by Fiat. North American sales declined mainly due to temporary lower product sales as Stellantis NV reported total unit shipments declined in North America during the first quarter of 2024. Stellantis sales partially reflected its transitioning toward more NEV models in the 2024 first quarter. Our electric power steering EPS sales were essentially even with last year. As a percentage of total sales, EPS remained consistent around 34% of total sales. Despite slight sales decline in 2024, we remain confident in our sales growth in 2024. According to statistics from the China Association of Automobile Manufacturers, CAAM, sales of both passenger and commercial vehicles increased by approximately 10% in the first quarter of 2024. Sales of new energy vehicles totaled approximately 30% of total vehicle sales in China. Part of this automobile growth is due to new purchase subsidies, discrepancy of down payments, and lower prices for certain vehicle models. In addition, automobile exports increased by 33.2% from a year ago. Research and development expenditures were reduced even as we decreased new projects for our traditional steering products while expanding our EPS portfolio of products. We closely coordinate our R&D with our OEM customers to ensure our new products meet their requirements and those of the end users. As we expand our EPS product line, we can supply our steering products to more vehicles of our current customers as well as attract new customers. R&D activities continue to evolve our EPS products' performance and quality. We are making progress to include the technologies of our sentient subsidiary to advance our ADAS products and develop prototypes for some current customers. Changes in our recent product sales mix start with our new products and have resulted in improved gross margins as greater economies of scale are gained. We believe the growing demand for hybrid and NEV products passenger vehicles in North America is creating another growth opportunity for our EPS products, in addition to our current traditional product sales sold there. Our customer BYD is one of the largest EV producers in China, and we have new products under development to enhance their vehicle's steering performance. We remain confident in the outlook for the Chinese automobile industry and its economic outlook. China's gross domestic product in the 2024 first quarter grew by 5.3% year-over-year. China's retail consumer goods sales grew by 4.7% year-over-year, and investment in fixed assets were up by 4.5% year-over-year in the first quarter of 2024. Automobile growth continues to look promising in China with the new promotional sales policies, more affordable cars being introduced, and automobile exports, a sensitive international issue which should continue for the foreseeable future even if some markets implement protective measures. A number of vehicle OEMs in North America have announced the retirements of their internal combustion engines driven passenger vehicles with more retirements planned. European vehicle OEMs are also scheduling the retirements of their internal combustion engine vehicles. China being the world leader in energy production and exports with the largest portfolio of energy products will be a major beneficiary of this trend. Now let me review the financial results in the first quarter of 2024. Net sales decreased by 2% to $139.4 million in the first quarter of 2024 compared to $142.2 million in the first quarter of 2023. Net sales of traditional steering products and parts were $92 million compared to $94.4 million for the first quarter of 2023. Net sales of electric power steering EPS products and parts were $47.4 million for the three months end of March 31, 2024, compared with $47.8 million for the same period in 2023. EPS product sales for the first quarter of 2024 were approximately 34% of total net sales. North American net exports were $30.4 million, compared to $34.7 million in the first quarter of 2023, primarily due to lower demand of passenger vehicles by Stellantis NV. Brazil headlong net products increased by 17.6% to $12.7 million in the first quarter of 2023, compared to $10.8 million for the same period in 2023, due to higher sales to Fiat. Sales volumes to Cherry Auto Limited also increased, and sales for other entities increased by 31.2% to $29 million, mainly due to higher sales by Wuhan JLong and Wuhan Haixiong. Steering product sales to the commercial vehicle markets of $16.8 million increased, were consistent with the sales in the 2023 first quarter. Gross profit increased by 11.6% to $24.1 million from $21.6 million in the first quarter of 2023. Gross margin in the first quarter of 2024 was 17.3%, compared with 15.2% gross margin in the first quarter of 2023. Primarily, these changes in the product sales mix and a decrease in sales unit costs for the three months of March 31, 2024. Gain on other sales was $0.5 million compared to $0.7 million in the first quarter of 2023. Selling expenses increased by 20.6% to $4.1 million from $3.4 million in the first quarter of 2023. This increase in selling expenses was primarily due to higher office expenses. Selling expenses represented 2.9% of net sales in the first quarter of 2024 compared to 2.4% in the first quarter of 2023. General and administrative expenses, G&A, increased to $5.5 million compared with $4.8 million of the first quarter of 2023, mainly due to higher payroll-related expenses and maintenance expenses. G&A expenses represented 3.9% of net sales in the first quarter of 2024, compared with 3.4% of net sales in the first quarter of 2023. Research and development expenses, R&D, decreased by 17.2%, to $5.3 million, compared to $6.4 million in the first quarter of 2023, mainly due to decreased R&D activities for new projects of the traditional products. R&D expenses represented 3.8% of net sales in the first quarter of 2024 compared to 4.5% in the first quarter of 2023. Other income was $2.4 million for the first quarter of 2023 compared to $1.5 million for the first quarter of 2023, mainly due to higher government subsidies in the first quarter of 2024. Income from operations was $9.7 million in the first quarter of 2024 compared to net income from operations of $7.7 million in the first quarter of 2023. The 26% increase in 2024 first quarter income from operations was primarily due to higher gross profit, partially offset by a smaller increase in operating expenses. Interest expense was $0.3 million in the first quarter of 2024, compared to $0.2 million in the first quarter of 2023. Financial expense net was 0.01 million in the first quarter of 2024 compared to 0.4 million dollars in the first quarter of 2023. This change was primarily due to a decrease in foreign exchange loss due to foreign exchange volatility. Income before income tax expenses and equity in earnings of affiliated companies increased by 37.2 percent to 11.8 million dollars in the first quarter of 2024 compared to $8.6 million in the first quarter of 2023. The increase in income before income tax expense and equity and earnings of affiliated companies in the first quarter of 2024 was mainly due to higher income from operations and increased net other income. Equity and losses of affiliated company was $0.8 million in the first quarter of 2024 compared with equity and income of affiliated companies of $0.1 million in the first quarter of 2023. Income tax expense was $1.7 million for the first quarter of 2024 as compared to $0.8 million for the first quarter of 2023. This higher tax was primarily due to an increase in the global intangible low-tax income tax expense, that's GILTI. Net income attributed to the parent company's common shareholders was $8.3 million in the first quarter of 2024 compared to $6.8 million in the first quarter of 2023. Diluted income per share was $0.27 in the first quarter of 2024, compared to net income per share of $0.23 in the first quarter of 2023. The weighted average number of diluted common shares outstanding was $30,185,702 in the first quarter of 2024, compared to $30 million 193,082 shares in the first quarter of 2023. That will provide some balance sheet and other financial highlights. As of March 31, 2024, total cash, cash equivalents, and short-term investments was $135.8 million. Total accounts receivable, including notes receivable, was $266.7 million. Accounts payable, including notes payable, were $243 million. and short-term bank loans worth $40.5 million. Working capital rose to $206.7 million as of March 31, 2024, compared to $180.3 million as of December 31, 2023. Total parent-company stockholders' equity was $358.4 million as of March 31, 2024, compared to $344.5 million as of December 31, 2023. Our current ratio was approximately 1.6 to 1. Net cash provided by operating activities was 10.5 million in the 2024 first quarter compared to net cash used in operating activities of $1.4 million in the first quarter of 2023. Payments to acquire property, plant, and equipment were $4.5 million compared to $3.2 million in the first quarter of 2023. The business outlook, management has reiterated revenue guidance for the full year 2024 of $695 million. This target is based on the company's current view on operating and market conditions, which are subject to change. With that operator, we are ready to begin the Q&A session.

Thank you very much. We are now opening the floor for questions. If you have any questions, please press star 1 on your phone keypad now. We ask that while you're posing your question, you please pick up your handset if you're listening on a speakerphone to provide optimum sound quality. Please pause a moment whilst we poll for any key questions. Thank you. Your first question is coming from Jim Fallon of Azusa Holdings. Jim, your line is live.