China Automotive Systems Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 13, 2024

There are 5 speakers on the call.

Operator

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

Speaker 1

Thank you, and thank you everyone for joining us today. Welcome to China Automotive's 2024 2nd quarter conference call. Joining us today are Mr. Jay Li, Chief Financial Officer 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.

Speaker 1

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 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 ks Annual Report for the year ended December 31, 2023, as filed with the Securities and Exchange Commission and in 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 operation 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 as a result of new information, future events or otherwise.

Speaker 1

On this call, I will provide a brief overview and summary of the Q2 or the period ended June 30, 2024. Management will then conduct a question and answer session. The 2024 Q2 and 6 months results are unaudited and financial results are reported using U. S. GAAP Accounting.

Speaker 1

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 Q2 of 2024, thanks to changes in product mix and effective cost controls.

Speaker 1

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 Henglong subsidiary to Chinese passenger vehicle OEMs. In the Chinese commercial vehicle market, our sales declined by approximately $1,000,000 to $18,700,000 in this slower growth market. Internationally, North America declined by $2,100,000 year over year, mostly from reduced demand by Stellantis, with South American sales experiencing a slight decline.

Speaker 1

For the 6 months ended June 30, 2024, Stellantis' consolidated shipments in North America had declined by 18.1% year over year. For the macro economy, during the first half year, Chinese GDP grew by 5% with total retail sales of consumer goods up by a modest 3.7% year over year. Investment in fixed incomes, excluding rural households, increased in the first half of twenty twenty four 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.

Speaker 1

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 twenty twenty four. 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 0.2% year over year rise in plug in hybrid vehicles. In addition, automobile exports increased by 30 0.5% from the 6 month period a year ago. Purchase subsidies by the government and some auto OEMs, favorable trading policies, better loan terms, all aided the automobile industry sales.

Speaker 1

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 Q2, our gross profit rose by 29% year over year. Our gross margin improved to 18.5%, up from 17.3% in the Q1 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.

Speaker 1

Our operating income climbed faster at 38.7% year over year in the Q2 of 2024, despite higher research and development and SG and A expenses. Diluted net income per share was $0.24 in the 2024 Q2 and $0.51 for the 6 months. Cash flow from operations was $9,100,000 in the 1st 6 months of 2024 compared with cash used in the same 6 month period last year. Board of Directors recently declared a special dividend of $0.80 per common share to be paid on or about August 22, 2020 The aggregate dividend amount should be approximately $25,000,000 which we paid internal funds and cash flow. The cash dividend highlights our confidence in a sustainable growth and cash generation to support and as a thank you to our long term shareholders.

Speaker 1

We also celebrate the 20th anniversary of our NASDAQ listing later on August 24, 2024. During these 20 years, we grew from a small Chinese domestic player to a large Global 1 tier supplier with operations and customers in North America, South America, Europe, India and Asia. With highly successful customers such as BYD Auto, Zhengjie Geely Automobile, Cheri Automobile, Tungkwan Changan Automobile, SAIC Motor and FAW Group domestically. We also have global customers such as Stellantis and Lee in North and South America and Europe, Ford Motor Company in North America and Mahindra and Mahindra in India. Tes have also grown from $58,200,000 in 2,004 to $576,400,000 in 2023.

Speaker 1

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 Senkant 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 2 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 offers prepares us and positions us with strong advantages for global competition. Let me review the financial results in the Q2 of 2024. Net sales increased by 15.4% year over year to 158 $600,000 in the Q2 of 2024 compared to $137,400,000 in the Q2 of 2023.

Speaker 1

Net sales of traditional steering products and parts increased by 7.5 percent year over year to $103,000,000 for the Q2 of 2024, compared to $95,800,000 for the same quarter in 2023. Net sales of EPS products rose 33 0.7% year over year to $55,600,000 from $41,600,000 for the same period in 2023. EPS product sales grew to 35.1 percent of the total net sales for the Q2 2024 compared to 30.3% for the same period in 2023. Sales on 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 $26,800,000 in the Q2 of 2024 compared to $28,900,000 Q2 of 2023.

Speaker 1

North American sales declined basically due to decreased demand from 1 customer. Sales in Brazil were $12,000,000 in the Q2 of 2024 compared to $12,200,000 in the Q2 of 2023. Gross profit grew by 29% year over year to $29,300,000 from $22,700,000 in the Q2 of 2023. Gross margin was 16.5% in the Q2 of 2024 from 16.5% in the Q2 of 2023. Increase in gross margin was mainly due to changes in the product mix and improved cost management.

Speaker 1

Gain on other sales was $1,700,000 in the Q2 of 2024 compared to 0 point $7,000,000 Q2 of 2023. Selling expenses increased by 21.6% year over year to $4,600,000 compared to $3,800,000 in Q2 2023. Selling expenses represented 2.9 percent of net sales in the Q2 of 2024 compared to 2.8% in the Q2 of 2023. General and administrative expenses, G and A, increased by 40.7% year over year to $7,400,000 from $5,300,000 in the Q2 of 2023, mainly due to higher consulting fees and business tax and surcharges. G and A expenses represented 4.7 percent of net sales in the Q2 of 2024 compared to 3.9% of net sales in the Q2 of 2023.

Speaker 1

Research and development expenses, R and D, increased by 23.9% year over year to 8 point $2,000,000 compared to $6,600,000 in Q2 of 2023. R and D expenses represented 5.2% of net sales in the Q2 of 2024 compared to 4.8% in the Q2 of 2023. Research and development programs include electric power and hydraulic steering systems, automotive intelligence and software technologies, automobile electronics, steering columns, high polymer materials, automotive parts, manufacturing technologies and automotive parts among other things. Other income was $1,700,000 for the Q2 of 2024 compared to $2,000,000 for the quarter ended June 30, 2023. The decrease was primarily due to lower government subsidies in the Q2 of 2024.

Speaker 1

Income from operations rose 38.7 percent to $10,800,000 in the Q2 of 2024 from $7,800,000 in the Q2 of 2023. The increase was primarily due to higher sales and better margins. Interest expense was $200,000 in the Q2 of 2024 compared to $300,000 in the 2nd quarter of 2023. Net financial expense was $700,000 in the Q2 of 2024 compared to net financial income of $4,000,000 in the Q2 of 2023. The change in net financial expenseincome was primarily due to foreign exchange volatility generating a loss in the Q2 of 2024 compared with income in last year's same pool.

Speaker 1

Income before income tax expenses and equity and earnings of affiliated companies was $11,700,000 in Q2 of 2024 compared to income before income tax expenses and equity and earnings of affiliated companies of $13,400,000 in the Q2 of 2023. The change in income before income tax expenses and equity in our affiliated companies was mainly due to foreign exchange volatility generating the loss in the Q2 of 2024 compared with income in last year's same quarter. Income tax expense was $2,100,000 in the Q2 of 2024 compared to $1,500,000 for the Q2 of 2023, primarily due to an increase in the global intangible low tax income GILTI tax expenses. Net income attributable to common shareholders was $7,100,000 in the Q2 of 2024 compared to net income attributable to parent company's common shareholders of $10,500,000 in the Q2 of 2023. Diluted earnings per share was $0.24 in the Q2 of 2024 compared to $0.35 in the Q2 of 2023.

Speaker 1

Weighted average number of diluted common shares outstanding was 30,185,702 in the Q2 of 2024 compared to $30,189,537 in the Q2 of 2023. We will now review the Q2 for the 1st 6 months of 2024. Net sales increased by 6.6% year over year to $298,000,000 in the 1st 6 months of 2024 compared to $279,700,000 in the 1st 6 months of 2023. Net sales of traditional steering products and parts increased by 2.5 percent to $195,000,000 for the 6 months ended June 30, 2024, compared to $190,300,000

Speaker 2

for the

Speaker 1

same period in 2023. Net sales of EPS systems and parts increased by 15.2 percent to $103,000,000 for the 6 months ended June 30, 2024, compared to $89,400,000 a year ago. As a percentage of net sales, sales of EPS 34.6% for the 6 months ended June 30, 2024 compared to 32% for the same period in 2023. 6 month gross profit increased by 20 0.4% year over year to $53,400,000 $44,300,000 in a corresponding period of time. The 6 months gross margin was 17.9% compared with 15.9% in the 1st 6 months of 2023, primarily due to the sales products mix and lower unit cost.

Speaker 1

Gain on other sales was $2,200,000 in the 1st 6 months of 2024 compared to $1,400,000 in the corresponding period last year. Operating expenses rose by 16.4% year over year, led by a 29.3% increase in general and administrative expenses due to higher consulting fees and tax related expenses. Income from operations increased by 31.7 percent year over year to $20,500,000 1st 6 months of 2024 from $15,500,000 in the 1st 6 months of 2023. The increase in operating income is primarily due to a $9,000,000 increase in gross profits compared with a nearly $5,000,000 gain in operating expenses. Operating margin was 6.9% in the 1st 6 months of 2024 compared to $5,600,000 in the 1st 6 months of 2023.

Speaker 1

Other income net increased to $4,100,000 for the 6 months ended June 30, 2024, mainly due to an increase of $600,000 in government subsidies compared with last year's period. Financial expense net was $700,000 for the 6 months ended June 30, 2024 compared to financial income net of $3,500,000 similar 6 months period a year ago. This $4,200,000 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 $3,900,000 due to higher GILTI tax expenses. The equity and losses of affiliated companies increased by $1,200,000 in the 2024 1st 6 months period compared with the corresponding period last year.

Speaker 1

Net income attributable to parent company's shareholders was $15,400,000 in the 1st 6 months of 2024 compared to net income attributable to parent company's common shareholders of $17,300,000 in the corresponding period in 2023. Diluted earnings per share for the 1st 6 months of 2024 were $0.51 compared to diluted earnings per share of $0.57 in the 1st 6 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 $148,400,000 Total accounts receivable, including notes receivable, were $288,100,000 Accounts payable, including notes payable were $254,000,000 short term loans were $46,600,000 Total parent stockholders' equity was $362,900,000 as of June 30, 2024 compared to $344,500,000 as of December 31, 2023. Our current ratio was 1.5 and working capital, total current assets less total current liabilities was $190,000,000 as of June 30, 2024.

Speaker 1

Net cash provided by operating activities was $9,100,000 in 20.24 1st 6 months compared to net cash used in operating expenses of $500,000 in the 1st 6 months of 2023. Payments to acquire property, plant and equipment was $10,000,000 compared to $5,500,000 in the 1st 6 months of 2023. Management has reiterated revenue guidance for the full year 2024 of $605,000,000 This target is based on the company's current operating and market conditions which are subject to change. With that operator, we are ready to begin the Q and A.

Operator

Thank you very much. We will now be conducting our question and answer

Speaker 2

quarter. What is the outlook for the gross margin going forward?

Speaker 3

Great. Thank you for your question. Yes, our Q2 gross margin reached 18.5%. If you look at the whole first 6 months or first half of the year, our gross margin was 17.9%. Both second quarter and first half of the year are 2 percentage points higher than the same period of last year.

Speaker 3

The reason our gross margin improved is mainly due to EPS sales volume increase and also the value 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.

Operator

Okay. Jonathan, if you finish your question?

Speaker 3

Yes. Thank you.

Operator

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

Speaker 1

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

Speaker 3

Our capital expenditure for 2024, full year is going to be $25,000,000 As you can see, in the first half of the year, we already spent $10,000,000 in the CapEx. We're going to continue to inject $15,000,000 dollars in the second half of the year. And out of our $25,000,000 annual CapEx budget, 80% about $20,000,000 will go to EPS related products. We have a number of exciting innovative products, including ERCP, iRCP product is coming into the market. The remaining 20% of our CapEx will go to other traditional products.

Operator

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

Speaker 2

Hello. Congratulations for the results, especially better than your increase. Should we you reiterated your guidance, but should we look at how is August looking for or The 1st month of quarter 3, how is it looking compared to and how much we should expect to see revenue

Speaker 3

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

Operator

Andrew, I think your line got bit distorted. Could you just try asking the question?

Speaker 2

Yes, sorry.

Operator

That's better.

Speaker 2

So, should we expect in quarter 3 the same $158,000,000 in revenue? Also congratulations for your results. And yes, how is the 1st month of July and a bit of August looking for revenue?

Speaker 3

Okay, great. Thank you. Yes. Thank you for your question. 3rd quarter, due to the summer season, usually are seasonally are lower than the Q2.

Speaker 3

And a lot of due to the high temperature and heat waves during the summer season, a lot of OEMs tend to going to adjust their production schedules and also they're going to spend some time maintaining up keeping their production line. And so 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 2

Okay. And if I could ask another question. Should we expect 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 3

We are not excluding all these options. And it's all based on as we disclosed in our announcement on the recent dividend announcement.

Speaker 2

Our

Speaker 3

capital reward program to shareholders are 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 it's all based on our cash flow conditions and our overall business has been on good track.

Speaker 2

Okay. Thank you very much. Last question would be talking about cash flow. What do we expect free cash flow to be in 2024 for full 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?

Speaker 2

What is free cash flow approximately?

Speaker 3

Okay. Okay. Yes. So on cash flow, our 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.

Speaker 3

As we our bulk of our business is still in Mainland China. The Chinese OEM tend to the billing cycle and the payment cycle usually are 4 to 5 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 dependent on how fast we can collect from our customers.

Speaker 3

At the same time, based on our $605,000,000 revenue guidance for 2024, We are confident we will continue to have a positive free cash flow for 2024.

Speaker 2

Okay. Thank you very much. Yes. 4 to 5 months, you said, right? No, no, no.

Speaker 2

4 to 5 months. 4 to 5 months. Okay, okay. Thank you very much. Have a wonderful year.

Speaker 2

Congratulations.

Speaker 3

Thank you. Thank you.

Operator

Thank you very much. Thank you. Our next question is coming from Jessica Lin, who is a Private Investor. Jessica, your line is live.

Speaker 4

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

Speaker 3

Okay. Thank you. The short answer to your question is, it's about half half, 50% of R and D expenses going to traditional steering product, 50% goes to EPS product. Although at the moment, EPS revenue only accounts for 35% of total revenue. However, given the importance of electric power steering EPS product, it's a key technology going to be fully integrated in the future of automotive industry, whether it's smart vehicle or further electrification, all need strong electric power steering to help execute their missions.

Speaker 3

So that being said, we'll continue to increase in the technology for the future. For that reason, we're investing spending about 50% of R and D expenses into EPS product.

Speaker 4

Thank you.

Speaker 3

Thank you.

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 just jumped into queue.

Operator

We have another question in from Andrew Pulberade, who is a private investor. Andrew, your line is live.

Speaker 2

Yes. Sorry, I didn't really understand the cash flow from operations if it's looking better in the 1st month of July, August. Cash flow from operations, if they improved in Q3 a bit? Or what's the guidance for that in Q4? I understood that the billing cycle is 4 or 5 months, but and as you grow revenue, cash flow will increase more, cash flow from operations.

Speaker 2

But I'm curious in July August if cash flow from operations is better a bit.

Speaker 3

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

Speaker 2

Okay, understood. Thank you very much.

Speaker 3

Thank you.

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. Kevin, is your line live?

Speaker 1

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

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.

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Earnings Conference Call
China Automotive Systems Q2 2024
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