China Automotive Systems Q1 2024 Earnings Call Transcript

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May 14, 2024

There are 6 speakers on the call.

Operator

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. Please note this conference is being recorded. I will now turn the conference over to your host, Kevin Theiss.

Operator

Kevin, over to you.

Speaker 1

Thank you. Thank you everyone for joining us today. Welcome to China Automotive Systems 2024 Q1 conference call. Joining us today are Mr. Hanlin Chen, Chairman and Mr.

Speaker 1

Jade Li, 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 that are in the state 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, this differs materially 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 ks Annual Report for the year ended December 31, 2023, as filed with the Securities and Exchange Commission and in other documents filed with the company from time to time with the Securities and Exchange Commission.

Speaker 1

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, causes our business to suffer in ways that we cannot predict and materially affect our impact and clearly impact our business, financial condition and result of 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, increased costs and reduced revenue. The company expressly a result of new information, future events or otherwise. On this call, I will provide a brief overview and summary of the Q1 for the period ended March 31, 2024. Management will then conduct a question and answer session. The 2024 Q1 results are unaudited and financial results are reported using U.

Speaker 1

S. GAAP Accounting. For the purposes of our call today, I will review the financial results in U. S. Dollars.

Speaker 1

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 Q1 of 2024. Gross profit grew by 11.6% year over year with a higher gross margin of 17.3% in the Q1 of 2024. Income from operations was 26% higher as cost controls limited operating expense grew to 2.8% versus the 11.6% increase in gross profit. Both selling and G and A expenses rose in the quarter.

Speaker 1

We returned a positive cash flow from operations of $10,500,000 and diluted income per share increased by 17.4 percent to $0.27 in the 2024 Q1. Total cash, cash equivalents and short term investments were $135,800,000 or approximately $4.50 per share at March 31, 2024. Net sales decreased by 2% to $139,400,000 as sales of traditional steering products declined by approximately $2,400,000 due to lower sales of vehicles using these steering products. We experienced different results in 2 of our large international markets. Sales in Brazil continued to grow with a 17.6% year over year sales rise due mostly to higher volume by Fiat.

Speaker 1

North American sales declined mainly due to temporary lower product sales as Stellantis NV reported total unit shipments declined in North America during the Q1 of 2024. Stellantis sales partially reflected its transitioning toward more NEV models in the 2024 Q1. 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.

Speaker 1

According to statistics from the China Association of Automobile Manufacturers, CAAM, sales of both passenger and commercial vehicles increased by approximately 10% in the Q1 of 2024. Sales of the new energy vehicles totaled approximately 30% of total vehicle sales in China. Part of this automobile growth is due to new purchase subsidies, scrapping 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.

Speaker 1

We closely coordinate our R and 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 and D activities continue to evolve our EPS products performance and quality. We are making progress to include the technologies of our SENTIUS 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.

Speaker 1

We believe the growing demand for hybrid and NEV 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 Q1 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 Q1 of 2024.

Speaker 1

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 NEV production and exports with the largest portfolio of NEV products will be a major beneficiary of this trend. Now let me review the financial results in the Q1 of 2024.

Speaker 1

Net sales decreased by to $139,400,000 in the Q1 of 2024 compared to $142,200,000 in the Q1 of 2023. Net sales of traditional steeling products and parts were $92,000,000 compared to $94,400,000 for the Q1 of 2023. Net sales of electric power steering, EPS products and parts were $47,400,000 for the 3 months ended March 31, 2024, compared with $47,800,000 for the same period in 2023. EPS product sales for the Q1 of 2024 were approximately 34% of total net sales. North American net exports were $30,400,000 compared to $34,700,000 in the Q1 of 2023, primarily due to lower demand of passenger vehicles by Stellietros NV.

Speaker 1

Brazil headlong net products increased by 17.6 percent to $12,700,000 in the Q1 of 2023 compared to $10,800,000 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 percent to $29,000,000 mainly due to higher sales by Wuhan Jilong and Wuhan Hai Xiong. Steering product sales to the commercial vehicle markets of $16,800,000 were consistent with the sales in the 2023 Q1. Gross profit increased by 11.6 percent to $24,100,000 from $21,600,000 in the Q1 of 2023. Gross margin in the Q1 of 2024 was 17.3% compared with 15.2% gross margin in the Q1 of 2023, primarily due to changes in the product sales mix and the decrease in sales unit costs for the 3 months of March 31, 2024.

Speaker 1

Gain on other sales was 0 point 5 1,000,000 compared to $700,000 in the Q1 of 2023. Selling expenses increased by 20.6 percent to $4,100,000 from 3 point $4,000,000 in the Q1 of 2023. This increase in selling expenses was primarily due to higher office expenses. Selling expenses represented 2.9% of net sales in the Q1 of 2024 compared to 2.4% in the Q1 of 2023. General and administrative expenses, G and A, increased to $5,500,000 compared with $4,800,000 of the Q1 of 2023, mainly due to higher payroll related expenses and maintenance expenses.

Speaker 1

G and A expenses represented 3.9 percent of net sales in the Q1 of 2024 compared with 3.4% of net sales in the Q1 of 2023. Research and development expenses, R and D, decreased by 17.2 percent to 5 $300,000 compared to $6,400,000 in the Q1 of 'twenty three, mainly due to decreased R and D activities for new projects of the traditional products. R and D expenses represented 3.8% of net sales in the Q1 of 2024 compared to 4.5% in the Q1 of 2023. Other income was $2,400,000 for the Q1 of 2023 compared to $1,500,000 for the Q1 of 2023, mainly due to higher government subsidies in the Q1 of 2024. Income from operations was $9,700,000 in the Q1 of 2024 compared to net income I'm sorry, income from operations of $7,700,000 in the Q1 of 2023.

Speaker 1

The 26% increase in 2024 Q1 income from operations was primarily due to higher gross profit, partially offset by a smaller increase in operating expenses. Interest expense was $300,000 in the Q1 of 2024 compared to $200,000 in the Q1 of 2023. Financial expense net was $100,000 in the Q1 of 2024 compared to $400,000 in the Q1 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 and earnings of affiliated companies increased by 37.2 percent to $11,800,000 in the Q1 of 2024 compared to $8,600,000 in the Q1 of 2023.

Speaker 1

The increase in income before income tax expense and equity and earnings of affiliated companies in the Q1 of 2024 was mainly due to higher income from operations and increased net other income. Equity and losses of affiliated company was $800,000 in the Q1 of 2024 compared with equity and income of affiliated companies of $100,000 in the Q1 of 2023. Income tax expense was $1,700,000 for the Q1 of 2024 as compared to $800,000 for the Q1 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 attributable to the parent company's common shareholders was $8,300,000 in the Q1 of 2024 compared to $6,800,000 in the Q1 of 2023.

Speaker 1

Diluted income per share was $0.27 in the Q1 of 2024 compared to net income per share of $0.23 in the Q1 of 2023. The weighted average number of diluted common shares outstanding was 30,185,702 in the Q1 of 2024 compared to 30,000,000 193,082 shares in the Q1 of 2023. Now, I'll provide some balance sheet and other financial highlights. As of March 31, 2024, total cash, cash equivalents and short term investments was $135,800,000 Total accounts receivable including notes receivable was $266,700,000 Accounts payable including notes payable $243,000,000 and short term bank loans were $40,500,000 Working capital rose to $206,700,000 as of March 31, 2024, compared to $180,300,000 as of December 31, 2023. Total parent company stockholders' equity was $358,400,000 as of March 31, 2024, compared to $344,500,000 as of December 31, 2023.

Speaker 1

Our current ratio was approximately 1.6:one. Net cash provided by operating activities was 10,500,000 in the 2024 Q1 compared to net cash used in operating activities of $1,400,000 in the Q1 of 2023. Payments to acquire property, plant and equipment were $4,500,000 compared to $3,200,000 in the Q1 of 2023. The business outlook. Management has reiterated revenue guidance for the full year 2024 of $605,000,000 This target is based on the company's current view on operating and market conditions, which are subject to change.

Speaker 1

With that operator, we are ready to begin the Q and A session.

Operator

Your first question is coming from Jim Fallon of Azusa Holdings. Jim, your line is live.

Speaker 1

Hi, can you hear me? Yes. Yes. Could you please give us an update on the activities in Europe, especially with Sentient?

Speaker 2

Okay. So thank you for your question on Centene, our Swedish subsidiary. Santen is specialized in driverless technology softwares. And that's the main reason that we decided to make them a part of our company through investment and continue to increase our involvement in many fronts. Sentience is at the frontier technology and there is the R and D initiatives mostly are focusing on and solve the driverless to provide the driverless solution.

Speaker 2

We are working with Volvo, use the Sentient's prototype product has been installed in Volvo vehicles

Speaker 1

trucks

Speaker 2

and mainly based on the electric motor type of solutions. And we are we believe it will take some time for this product to continue to go into mainstream. And given the uncertainty of the global market, and we are cautiously optimistic. And overall, we are still very upbeat on the long term prospects of Centene and their technologies. We're very proud this team is making very good progress.

Operator

Okay. Thank you very much. Our next question is coming from Jonathan Yidis, who is a Private Investor. Jonathan, your line is

Speaker 3

My question is R and D spending went down in the Q1 of 2024. What is the outlook for R and D spending in the rest of 2024? And what are the key R and D projects in 2024?

Speaker 2

Okay, great.

Speaker 1

Okay.

Speaker 2

The R and D expenses, the reason for Q1 2024, our R and D expenses are going lower than last year same quarter is mainly due

Speaker 1

to the

Speaker 2

reclassification of our R and D expenses, because some of the expenses are very long term projects. So we reclassify them into the cost of goods sold. So but if you use an apple to apple comparison with last year, the R and D expenses will still maintained at the total R and D cost and expenses still maintain at 4% to 5%. So in that sense, R and D spending has not our spending on research and development has not decreased. Okay.

Speaker 2

For this year's the rest of the year, our R and D expenses will go into a few different categories. First, we'll go into the ERCB project, we're working with European clients. We also have the iRCB product with American client. And then and we're working with BYD on the our EPS product and also we have a project going on with Geely. So we have a number of projects going on with large client and they all are looking to launch new models with us.

Operator

Okay. Thank you very much. Our next question is coming from Margaret Wilson of EYI Independent. Margaret, your line is live.

Speaker 4

Thank you. It's Ms. Wilson. I'm just curious about what is the outlook for the gross margin for 2024, please?

Speaker 2

Okay. Thank you. Okay, great. So thank you for your question on the outlook for gross margin for 2024. And there are a few reasons, some are our business efficiency improvement, some are market related dynamics.

Speaker 2

So on the business front, we have been resilient on cost management and a very stringent cost management program is continuing to take effect. And on the product mix side, we also increased more higher margin product in the revenue mix. So that helps with the margin. On the market dynamics and the raw material, especially the steel price has gone down, which just favors our margin. And also the depreciation of RMB against U.

Speaker 2

S. Dollars predominantly is also helping us with the export. So all things all factors included, we believe we can continue to maintain our gross margin at between 17% to 18% for the balance of 2024.

Speaker 4

Thank you so much. Appreciate

Speaker 2

that. Thank you.

Operator

Thank you very much. Thank you. Okay. Our next question is coming from Jae Yoon of Yoon Capital. Jae, your line is live.

Speaker 5

Okay. Thank you. I just have a question for management. I understand that this is obviously a very growth time for Chinese EVs in the international markets with the pricing being at an advantage. And there's so many models that I think are moving in Europe and South America.

Speaker 5

So how do you at CAS think that you will benefit from this growth trend?

Speaker 2

Okay. So thank you for your question on EVs. You are right, Chinese EVs are doing very well and they have a very competitive pricing and they have made a major advancement in the technology as well. This is the reason driving the demand for more and more Chinese vehicles abroad, in particular in Europe and South America. And also we are hearing more and more of those potentials in North America and particularly in U.

Speaker 2

S. However, given the U. S.-China tension and the ongoing investigation and possible policies come from the White House. We are uncertain we feel uncertain whether Chinese vehicle can make a strong presence in North America. But if the current business environment continues, I think some other market will still sell well, just not in U.

Speaker 2

S. So we are still waiting for the news and closely following with the development.

Operator

Okay. Thank you very much. Okay. We don't appear to have any further questions in the queue. I will now hand back over to the management for closing remarks.

Speaker 1

We want to thank everyone for participating today and we look forward to speaking with you in the future. Thank you.

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Earnings Conference Call
China Automotive Systems Q1 2024
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