China Automotive Systems, Inc.

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.

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.

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.