8/13/2024

speaker
Operator

Good morning everyone and welcome to the China Automotive Systems Incorporated second quarter earnings conference call. At this time all participants are in a listen only mode and we will open for questions following the presentation. If you would like to ask a question during the conference, please press star 1 on your phone keypad. A confirmation tone will indicate that your line is in the queue. If anyone should require operator assistance during this 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, Kevin Thies. Kevin, the floor is yours.

speaker
Kevin

Thank you, and thank you everyone for joining us today. Welcome to China Automotive's 2024 second quarter conference call. Joining us today are Mr. Jay Lee, Chief Financial Officer and Assistant He 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent the company's estimates and assumptions only as of the date of this call. As a result, the company... Actual results could materially differ from those contained in these forward-looking statements due to a number of factors, including those described under the heading Risk Factors and Results 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 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 and adversely impact our business, financial condition, and results of operations. A Prolonged Disruption or any unforeseen delay in our 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, increased costs, and reduced revenue. The company expressly disclaims any duty to provide updates to any forward-looking statements made in this call, whether it results in new information, future events, or otherwise. On this call, I will provide a brief overview and summary of the second quarter for the period June 30, 2024. Management will then conduct a question and answer session. The 2024 second quarter six-month results are unaudited, and financial results are reported using U.S. 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 some of the quarterly business highlights, recent dynamics of the Chinese economy and automobile industry, and our market position. Our net sales of steering products increased by 15.4% year-over-year, and gross profit grew faster at a 29% year-over-year rate in the second quarter of 2024, thanks to changes in product mix and effective cost controls. Sales of our traditional steering products grew by 7.5% year over year. With our electric power steering, EPS products, sales increased by 33.7% year over year. Our growth in the second quarter was led by the increase in EPS sales, as well as higher sales to Cherry Autos passenger vehicles, and an almost 19% year-over-year sales increase by our Henlong subsidiary to Chinese passenger vehicle OEMs. In the Chinese commercial vehicle market, our sales declined by approximately $1 million to $18.7 million in this slower growth market. Internationally, North America declined by $2.1 million year over year, mostly from reduced demand by Stellantis, with South American sales experiencing a slight decline. Before the six months ended June 30, 2024, Stellantis' consolidated shipments in North America had declined by 18.1% year over year. For the macroeconomy during the first half year, Chinese GDP grew by 5% with total retail sales of consumer goods up by a minus 3.7% year over year. Investment in fixed incomes, excluding rural households, increased in the first half of 2024 by 3.9% year over year. However, some important market segments declined, with real estate development down by 10.1% year over year, and the sales of floor space of newly built commercial buildings decreased by 19% year over year. However, automotive sales posted different performance. According to statistics from the China Association of Automobile Manufacturers, CAAM, the combined sale of passenger and commercial vehicles increased by 6.1 year-over-year in the first half of 2024. Sales of passenger vehicles rose by 6.3% year-over-year, and commercial vehicle sales grew by 4.9% year-over-year. Sales of new energy vehicles increased by 32% year-over-year, led by an 85.2% year-over-year rise in plug-in hybrid vehicles. In addition, automobile exports increased by 30.5% from the six-month period a year ago. Purchased subsidies by the government and some auto OEMs, favorable trading policies, better loan terms, all aided the automobile industry sales. The automotive industry is a critical industry, but the continued growth of the Chinese economy is expected to receive ongoing support from the Chinese government. Back to our business performance during the second quarter, our gross profit rose by 29% year-over-year, up from 17.3% in the first quarter of 2024 and 16.5% in the second quarter of 2023. Greater sales of our EPS products, improved economies of scale in EPS production and cost controls, generated our higher gross margin. Our operating income climbed faster at 38.7% year-over-year in the second quarter of 2024, despite higher research and development and SG&A expenses. The alluded net income per share was $0.24 in the 2024 second quarter and $0.51 for the six months. Pardon me. Cash flow from operations was $9.1 million in the first six months of 2024 compared with cash used in the same six-month period last year. One of the directors recently declared a special dividend of $0.80 per common share to be paid on or about August 22, 2024. The aggregate dividend amount should be approximately $25 million, which we pay for internal funds and cash flow. Cash dividend highlights our confidence in a sustainable growth in cash generation to support and as a thank you to our long-term shareholders. We also celebrate the 20th anniversary of our NASDAQ listing later on August 24th of 2024. During these 20 years, we grew from a small Chinese domestic player to a large global one-tier supplier with operations and customers in North America, South America, Europe, India, and Asia. With highly successful customers such as BYD Auto, Genji Geely Automobile, Cherry Automobile, Tung Kwan Chang Automobile, SAIC Motor, and FAW Group domestically. We also have global customers such as Stellantis NV in North and South America and Europe, Ford Motor Company in North America, and Mahindra and Mahindra in India. Sales have also grown from $58.2 million in 2004 to $576.4 million in 2023. We look forward to the further growth of our company's operations as our traditional steering product remain a solid contributor even as we expand our EPS, our advanced driver assist systems with our sentient AB operations, and other products under development. Before diving into details of financials, we would like to remind all shareholders and interested investors there are two concurrent technological transitions in global automotive sectors. from internal combustion engine to electric powertrain, and from human driving to autonomous driving. Our well-diversified global customer base, award-winning product quality, large-scale manufacturing capacity, and best-in-class technology prepares us and positions us with strong advantages for global competition. Now, let me review the financial results in the second quarter of 2024. Net sales increased by 15.4% year-over-year to $158.6 million in the second quarter of 2024 compared to $137.4 million in the second quarter of 2023. Net sales of traditional steering products and parts increased by 7.5% year-over-year, to $103 million for the second quarter of 2024, compared to $95.8 million for the same quarter in 2023. Net sales of EPS products rose 33.7% year-over-year to $55.6 million from $41.6 million for the same period in 2023. EPS product sales grew to 35.1% of the total net sales for the second quarter of 2024, compared to 30.3% for the same period in 2023. Sales of Henlong's passenger vehicle steering customers increased by 18.9%, and sales to Cherry Auto rose by 28.8% due to higher demand. Export sales to North American customers were consistent at $26.8 million in the second quarter of 2024 compared to $28.9 million second quarter of 2023. North American sales declined basically due to decreased demand from one customer. Sales in Brazil were $12 million in the second quarter of 2024 compared to $12.2 million in the second quarter of 2023. Gross profit grew by 29% year-over-year to $29.3 million from $22.7 million in the second quarter of 2023. Gross margin, 5% in the second quarter of 2024, from 16.5% in the second quarter of 2023. Increase in gross margin was mainly due to changes in the product mix and improved cost management. Gain on other sales was $1.7 million in the second quarter of 2024 compared to $0.7 million second quarter of 2023. Summing expenses increased by 21.6% year-over-year to $4.6 million compared to $3.8 million in the second quarter of 2023. Summing expenses represented 2.9% of net sales in the second quarter of 2024 compared to 2.8% in the second quarter of 2023. General administrative expenses, G&A, increased by 40.7% year-over-year to $7.4 million from $5.3 million in the second quarter of 2023, mainly due to higher consulting fees and business tax and surcharges. G&A expenses represented 4.7% of net sales in the second quarter of 2024 compared to 3.9% of net sales in the second quarter of 2023. Research and development expenses, R&D, increased by 23.9% year-over-year to $8.2 million compared to $6.6 million in the second quarter of 2023. R&D expenses represented 5.2% of net sales in the second quarter of 2024 compared to 4.8% in the second quarter of 2023. Research and development programs include electric power and hydraulic steering systems, automotive intelligence and software technologies, automobile electronics, gearing columns, high polymer materials, automotive parts, manufacturing technologies, and automotive parts, among other things. Other income was $1.7 million for the second quarter of 2024 compared to $2 million for the end of June 30, 2023. The decrease was primarily due to lower government subsidies in the second quarter of 2024. Income from operations rose 38.7% to $10.8 million in the second quarter of 2024, from $7.8 million in the second quarter of 2023. The increase is primarily due to higher sales and better margins. Interest expense was $0.2 million in the second quarter of 2024, compared to $0.3 million in the second quarter of 2023. Net financial expense was $0.7 million in the second quarter of 2024 compared to net financial income of $4 million in the second quarter of 2023. The change in net financial expense slash income was primarily due to foreign exchange volatility generating a loss in the second quarter of 2024 compared with income in last year's same pool. Income before income tax expenses and equity in earnings of affiliated companies was $11.7 million in the second quarter of 2024, compared to income before income tax expenses and equity in earnings of affiliated companies of $13.4 million in the second quarter of 2023. The change in income before income tax expenses and equity in affiliated companies was mainly due to foreign exchange volatility generating the loss in the second quarter of 2024 compared with income in last year's same quarter. Income tax expense was $2.1 million in the second quarter of 2024 compared to $1.5 million for the second quarter of 2023. primarily due to an increase in the global and tangible low-tax income, GILTI, tax expenses. Net income attributable to common shareholders was $7.1 million in the second quarter of 2024, compared to net income attributable to pair of companies' common shareholders of $10.5 million in in the second quarter of 2023. Diluted earnings per share was 24 cents in the second quarter of 2024 compared to 35 cents in the second quarter of 2023. Weighted average number of diluted common shares outstanding was 30,185,702 in the second quarter of 2024 compared to 30,189,537 in the second quarter of 2023. We've now reviewed for the first six months of 2024. Net sales increased by 6.6% year-over-year to $298 million in the first six months of 2024, compared to $279.7 million in the first six months of 2023. Net sales of traditional steering products and parts increased by 2.5%, to $195 million for the six months ended June 30, 2024, compared to $190.3 million for the same period in 2023. Net sales of EPS systems and parts increased by 15.2%, $103 million for the six months ended June 30, 2024, compared to $89.4 million a year ago. As a percentage of net sales, sales of EPS 34.6% for the six months ended June 30, 2024, compared to 32% for the same period in 2023. Six-month growth profit increased by 20.4% year-over-year to $53.4 million and $44.3 million in the corresponding last time. The six-month growth margin was 17.9% compared with 15.9% in the first six months of 2023, primarily due to a sales-products mix and lower unit costs. Gain on other sales was $2.2 million in the first six months of 2024, compared to $1.4 million in the corresponding period last year. Operating expenses rose by 16.4% yearly year, led by a 29.3% increase in general administrative expenses due to higher consulting fees and tax-related expenses. Income from operations increased by 3%. 31.7% yearly to $20.5 million first six months of 2024, from $15.5 million in the first six months of 2023. The increase in operating income is primarily due to a $9 million increase in gross profits compared with a nearly $5 million gain in operating expenses. The operating margin was 6.9% in the first six months of 2024 compared to $5.6 million in the first six months of 2023. Other income net increased to $4.1 million for the six months ended June 30, 2024, mainly due to an increase of $0.6 million in government subsidies compared with last year's period year. Financial expense net was $0.7 million for the six months ended June 30, 2024, compared to financial income net of $3.5 million, similar six-month period a year ago. This $4.2 million increase mostly resulted from an increase in foreign exchange loss due to foreign exchange volatility. Income tax increased by almost 65% year-over-year to $3.9 million due to higher GIL, DI tax expenses. The equity and losses of affiliated companies increased by $1.2 million in the 2020 first six-month period compared with the corresponding period last year. Net income attributable to parent companies' shareholders was $15.4 million in the first six months of 2024 compared to net income attributable to parent companies' common shareholders of $17.3 million in the corresponding period in 2023. Diluted earnings per share for the first six months of 2024 were $0.51 compared to diluted earnings per share of $0.57 in the first six months of 2023. Now we'll give some balance sheet and other financial highlights. As of June 30, 2024, total cash and cash equivalents and pledged cash was $148.4 million. Total accounts receivable, including notes receivable, were $288.1 million. Accounts payable, including notes payable, were $254 million. Short-term loans were $46.6 million. Total parent stockholders' equity was $362.9 million as of June 30, 2024, compared to $344.5 million as of December 31, 2023. Our current ratio is 1.5, and working capital, total current SSLS total current liabilities was $190 million as of June 30, 2024. Net cash provided by operating activities was $9.1 million the 2024 first six months compared to net cash used in operating expenses of $0.05 million in the first six months of 2023. Payments to acquire property, plant, and equipment was $10 million compared to $5.5 million in the first six months of 2023. Management. has reiterated revenue guidance for the full year 2024 of $605 million. This target is based on the company's experience on operating the market conditions, which are subject to change. With that operator, we are ready to begin the Q&A.

speaker
Operator

Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad now. A confirmation tone would indicate that your line is in the queue. You may press star 2 if you'd like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions. Thank you. Your first question is coming from Jonathan Niches, who's a private investor. Jonathan, your line is live.

speaker
Jonathan

Hello, my question is, gross market has increased to 18.5% in the second quarter. What is the outlook for the gross margin going forward?

speaker
CapEx

Okay.

speaker
spk05

In this quarter, our product net profit reached 18.5%, and in the first half of the year, it was 17.9%. In particular, it increased by about 2% compared to the same period last year. This is mainly due to the increase in the production of ETS products, which leads to a size effect. In addition, in the combination of products, the proportion of high-value products has also been improved, which improves our net profit. Great, thank you for your question. Yes, our second quarter gross margin reached 18.5%. If you look at the whole first six months or first half of the year, our gross margin was 17.9%.

speaker
spk12

Both

speaker
CapEx

for the second quarter and first half of the year are two percentage points higher than the same period of last year. The reason our gross margin improved is mainly due to EPS sales volume increase and also the value, a higher price or higher value added product are selling well. And due to the better economy of scale of those products, our gross margin are experiencing a very nice improvement. And looking into the future, I think for the rest of the year, we are very confident we can maintain at least 18% for the gross margin.

speaker
Kevin

Okay.

speaker
Operator

Jonathan, have you finished your question?

speaker
CapEx

Yes. Thank you.

speaker
Operator

Thank you. Thank you very much. Your next question is coming from Todd Gerlo, who is a private investor. Todd, your line is live.

speaker
Todd Gerlo

Thank you. My question is, how much are your capital expenditures in 2024, and in what product areas are these investments being made?

speaker
CapEx

Another investor wants to know how much is our capital expenditure in 2024? And then these capital expenditures will probably be in some product range. Some new products will be invested in it. Our entire year's investment plan this year is $25 million.

speaker
spk05

We have invested nearly $10 million in the first half of the year. In the next two years, we will invest $15 million. Out of the $25 million, nearly 80% will be invested in EPS products, including ERCB, IRCB, R-EPS, and other EPS products. The remaining 20% will be used for the modification of traditional production equipment. Thank you.

speaker
CapEx

Our capital expenditure for 2024 full year is going to be $25 million. As you can see, in the first half of the year, we already spent $10 million in the CapEx, and we're going to continue to inject $15 million in the second half of the year. And out of our $25 million annual CapEx budget, 80%, about $20 million will go to EPS-related products. We have a number of exciting and innovative products, including RCP, IRCP product. It's coming into the market. The remaining 20% of our CapEx will go to other traditional products.

speaker
Operator

Okay. Thank you very much. Your next question is coming from Andrew Porberade, who's a private investor. Andrew, your line is live.

speaker
Andrew Porberade

Hello, congratulations for the results, especially the revenue increase. Should we, you reiterated your guidance, but should we look at, how is August looking for, or the first month of August 3?

speaker
spk06

How is it looking compared to, and how much should we expect this in revenue, $150,000 in August 3?

speaker
Kevin

Andrew, we couldn't hear the second half of your questions.

speaker
Andrew

Andrew, I think your line got a bit distorted.

speaker
Operator

Could you just try asking the question again?

speaker
Andrew Porberade

Yeah, sorry.

speaker
Operator

That's better.

speaker
Andrew Porberade

So should we expect in quarter three the same $158 million in revenue? Also, congratulations for the results. And yeah, how is the first month of July and a bit of August looking? for revenue.

speaker
CapEx

Okay, great. Thank you. What is the current state of sales?

speaker
spk05

Normally, our domestic automobile industry has a relatively seasonal cycle. The third quarter is usually a relatively low season, mainly due to high temperature. Many manufacturers carry out equipment repair and the like. So, Thank you for your question. Third quarter, due to the summer season,

speaker
CapEx

lower than the second quarter. And a lot of, due to the high temperature and heat waves during the summer season, a lot of OEMs tend to go in to adjust their production schedules. And also, they're going to spend some time maintaining, upkeeping their production line. And for that reason, And we'll see the Q3 is in line with prior year Q3's seasonality. But overall, we maintain a very strong growth momentum.

speaker
CapEx

Okay.

speaker
Andrew Porberade

And if I could ask another question. It should be banked future dividends in the next year. What is the capital allocation going to be for shareholders? Buybacks also maybe are more accretive for shareholders.

speaker
CapEx

Okay. He wants to know if you can expect to have more dividends in the future? And is it possible to buy back the stock? OK. We are not excluding all these options. And it's all based on, as we disclosed in our announcement on the recent dividend announcement, our capital reward program to shareholders are all always based on our cash flow and need for CapEx We believe the business is in strong momentum. We will make due announcement when we get to that stage of future plan, whether dividend or buyback. Again, we believe, you know, it's all based on our cash flow conditions and our overall business has been on good track.

speaker
CapEx

Okay, thank you very much.

speaker
Andrew Porberade

Last question would be talking about cash flow. What do we expect free cash flow to be in 2024, 444 year? Considering CapEx is a bit larger, net cash from operations, will it be higher than last year compensating for the increased CapEx from 2023? What is free cash flow approximately? Okay.

speaker
CapEx

Uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, will the operating cash flow also increase? And then, will the overall free cash flow situation improve compared to last year?

speaker
spk05

Our cash flow has a relatively large relationship with the growth of sales. Because in our country, especially in China, it is about four to five months for customers. So if there is a relatively large sales growth, then the cash flow may be more fluid. Now, according to this year's 6.05 billion, 605 million revenue, it should be said that the cash flow should be good.

speaker
CapEx

Yes, so cash flow, overall cash flow is doing very well. And as you know, as we grow revenue, as we continue to grow revenue, we're going to see some fluctuation on the cash flow. as we are bulk of our business still in mainland China, the Chinese OEM tend to the billing cycle and the payment cycle usually are four to five months. So the more we grow our top line in sales in China, the more we're going to experience the accounts receivable collection cycles. So just, Bear in mind, we'll continue to work with OEM on the collection, but at the same time, we believe the cash flow is highly depends on how fast we can collect from our customers. At the same time, based on our 605 million revenue guidance for 2024, We are confident we will continue to have a positive free cash flow for 2024.

speaker
Kevin

Okay, thank you very much.

speaker
Andrew Porberade

Four to five months, you said, right? No, no, no. Four to five months. Okay, thank you very much. Have a wonderful year. Congratulations. Thank you. Thank you.

speaker
Operator

Thank you very much. Just a reminder there, if anyone has any remaining questions, you can press star 1 on your phone keypad now to join the queue. Thank you. Our next question is coming from Jessica Lin, who's a private investor. Jessica, your line is live.

speaker
Jessica Lin

Good morning. My question, I'm just wondering if you could go over what percent of your R&D was spent on the traditional products, and then what percent of the R&D was spent on EPS products?

speaker
CapEx

Great, thank you. 他的问题是我们第二季度的科研费用大概多少是用在这个传统这个产品,多少是EPS产品?

speaker
spk05

We are now about half and half. Although our EPS product ratio is only 35%, EPS represents the future. Product intelligentization, electrification, this is a trend. Therefore, if we invest in this area, the ratio will be a little higher. The short answer to your question is, it's about half-half, 50% of R&D expenses going to traditional steering product, 50% goes to EPS product. Although at the moment, EPS...

speaker
CapEx

Revenue only accounts for 35% of total revenue. However, given the importance of electric power steering EPS products, it's a technology going to be fully integrated in the future of automotive industry, whether it's a smart vehicle or further electric vehicles. all need strong electric power steering to help execute their missions. So that being said, we will continue to increase in the technology for the future. For that reason, we're investing, you know, spending about 50% of R&D expenses into EPS products.

speaker
Andrew

Thank you.

speaker
CapEx

Thank you. Thank you.

speaker
Operator

Thanks very much. Just another reminder there, if there is anyone still wanting to ask a question, you may press star 1 on your phone keypad now. Okay, we appear to have reached the end of our question. Oh, apologies, somebody's just jumped into queue. We have another question in from Andrew Poverade, who's a private investor. Andrew, your line is live.

speaker
Andrew Porberade

Yeah, sorry, I didn't really understand the cash flow from operations if it's looking better in the first month of July, August. Cash flow from operations, if they improved in Q3 a bit, or what the guidance for that and Q4. I understood that the billing cycle is four or five months, and as you grow revenue, cash flow will increase more, cash flow from operations, but I'm curious in July and August if Cash flow vibration is better a bit.

speaker
CapEx

Okay. Okay.

speaker
spk05

So, Andrew, the short answer to your question is, as we mentioned earlier, July, August is slower season due to the summer seasonality.

speaker
CapEx

The nature of slow season for our collection is actually better because we're not shipping as many products as our high season. So our collection is in full gear, and so our cash flow is better in the months of July and August.

speaker
CapEx

Okay, I understand.

speaker
Andrew Porberade

Thank you very much. Thank you.

speaker
Operator

Thank you very much. Well, we appear to have reached the end of our question and answer session, so I will now hand back over to Kevin for any closing remarks.

speaker
Kevin

Kevin, is your line live?

speaker
Kevin

Thank you for your participation in today's conference call. Please be safe, and we look forward to speaking with you in the future.

speaker
Operator

thank you very much this does conclude today's conference you may now disconnect your phone line at this time and have a wonderful day thank you for your participation

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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