Earnings Call Transcript - CAAS Q1 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to China Automotive Systems First Quarter 2022 Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Kevin Theiss. Kevin, over to you.

Kevin Theiss, Host

Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2022 first quarter conference call. Joining us today are Mr. Jie Li, Chief Financial Officer of China Automotive Systems. 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. 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 differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the heading Risk Factors in the company's Form 10-K annual report for the year ended December 31, 2021, 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. If the outbreak of COVID-19 is not effectively controlled, our business operations and financial condition may be materially adversely affected as a result of the deteriorating market outlook for automobile sales. The slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot foresee. 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 adversely impact our business, financial condition and results of operations. A prolonged disruption or any further unforeseen delay in our operations of the manufacturing, delivery and assembly process within any of our production facilities could continue to 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. On this call, I will provide a brief overview and summary of the first quarter results for the period ended March 31, 2022. Management will then conduct a question-and-answer session. The 2022 first quarter financial results are unaudited and all 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 will begin with a review of the recent dynamics of the Chinese economy, the automobile industry, and China Automotive's market position. China's GDP growth was 4.8% in the first quarter of 2022, historically low but above expectations and higher than the 4% in the fourth quarter of 2021. The COVID-19 outbreak worsened during the first quarter with lockdowns in several cities across China. Supply chain interruptions increased, retail spending was weak, and unemployment rose to 5.8% in March. Computer chip shortages also continue to affect automobile production. In this environment, Chinese automobile sales increased by only 0.2% year-over-year in the first quarter of 2022, with sales declining by 11.7% in the month of March as the lockdowns and supply chain issues took stronger effect. Passenger vehicle sales rose 9% year-over-year, and commercial vehicle sales declined by 31.7% in the first quarter of 2022. Truck sales were down by 32.8% and bus sales decreased by 18.7% on a year-over-year basis in the first quarter of 2022. Reflecting the auto industry conditions, our net sales in the first quarter of 2022 increased by 4.7% year-over-year to $136.4 million and were consistent with the $138.8 million in the fourth quarter of 2021. Net sales of traditional steering products and parts decreased by 9.7% to $95.4 million for the first quarter of 2022 compared to $105.6 million for the same period in 2021. Sales of electric power steering, EPS, products rose by 66% in the first quarter of 2022. Export sales primarily to our North American customers and South American operations increased by 7.7%. Our gross margin declined to 10.8% from 15.1% in the first quarter last year. Higher material costs and much higher international freight charges were affected by supply disruptions and lockdowns related to the COVID-19 infection spreading in China and abroad. Additionally, our product sales mix compared to a year ago also affected our gross margin. Research and development expenses, R&D increased 20.9% year-over-year to $8.1 million, mainly due to the higher investment in our EPS product line. We are enhancing the performance of our current EPS products, as well as developing new EPS products to expand our market penetration. In 2021, we introduced a proprietary new EPS product, which for the first time was entirely developed in-house in China. This product communicates with advanced driver assistance system functions, including automatic parking assist, lane centering, and traffic jam assist. Great Wall, Karry Auto, Beijing Auto, and JAC Motors all began using our EPS products in 2021. To expand our advanced technology into the commercial vehicle space in January 2022, we agreed with SCANIA-AB to develop an ERCB steering system for SCANIA's trucks and buses. This ERCB steering system is a fully electric intelligent steering system for light and medium-duty trucks and heavy-duty commercial vehicles. Combining our proprietary technology with our advanced driver assist systems platform named AP4, this driver of this system enables vehicles to execute Level 4 autonomous driving. The RCB steering system is expected to become the world's first mass-produced fully electric intelligent power steering system for commercial vehicles. Our access to the technology of Sweden's Sensia AB will further improve our NEV steering products, especially for vehicle motion control for the fast-growing autonomous driving market in both passenger and commercial vehicle markets. As of March 31, 2022, we had cash, cash equivalents, and pledged cash of $109.4 million with working capital of $145.6 million. We have initiated a share repurchase program beginning in April 2022 of up to $5 million of the outstanding common shares over the next 12 months. Repurchases will be made in open market transactions at prevailing market prices up to $4 per share through March 30, 2023. We have maintained our market share in the Chinese and North American steering markets. Our Brazilian operation continues to grow, and we are building a larger footprint in Europe. Our NEV technology is expanding and our EPS product lines are growing in capabilities, performance, and in sales as more customers have been added compared with a year ago. We look forward to adding more EPS products and using Sensient AB technology to further enhance our steering products in the global markets.

Jie Li, CFO

Okay. So the pandemic-related lockdown really impacted our business in the second half of March. So it doesn't fully reflect in our first-quarter numbers. The lockdown impact did come in, in the month of April in a very significant way. If you look at the entire auto industry in China, the sales of passenger vehicles in the month of April were down 40% compared to April last year. So for that reason, we have adjusted downward our annual guidance just to reflect the impact from COVID lockdown, particularly in the month of April.

William Gregozeski, Analyst

Hi. A couple of questions. First, with regards to the lockdowns in China, how much of an impact is that having? You saw some of that in the first quarter. How much is that having right now in the current quarter?

Jie Li, CFO

So the gross margin overall was impacted in the first quarter. Our overall gross margin, including domestic and international business, was affected by three factors. The first is our business in the domestic commercial vehicle sector. We are one of the major players in our commercial vehicle steering market. The overall weak property market does have an impact on truck sales, particularly heavy-duty trucks. We sell many products to heavy-duty truck producers, and weaker sales affected our overall margin on the commercial vehicle side of the business. On the passenger vehicle business, just as you mentioned, the international business accounts for a sizable portion of our overall revenue. The higher shipping costs due to inflated oil prices do affect our costs. The last factor was foreign exchange. In the first quarter, RMB actually was stronger against U.S. dollars, which affected our reporting in U.S. dollars. So that's affecting our margins.

William Gregozeski, Analyst

Okay. Can you talk about what the R&D spending is going towards now? And how much do you expect to spend on that in 2022 and 2023?

Jie Li, CFO

In terms of R&D, Q1, we booked about $8.1 million. We expect about $30 million in R&D for fiscal year 2022. Most of the R&D expenses are going towards the development of electric power steering, what we call EPS products. We now have a series of EPS or other intelligent steering systems, including REPS, GPS, IRC, ERCB, and some of the Level 3 functions we embed into our software and systems, as well as steering systems that feature functions for autonomous driving and the future of artificial intelligence for vehicles. We will continue to invest in these areas, and we expect the R&D expenses will be slightly higher in 2023 compared to this year's spending.

William Gregozeski, Analyst

Okay. Great. And then last question is, when do you guys expect to do any share repurchases?

Jie Li, CFO

Yes. As we just finished the reporting, we will be qualified to make the purchase. We have to line up with our brokers. It will take probably 10 days to get ready, and then we will start buying.

William Gregozeski, Analyst

Okay, great. Thank you, guys.

Jie Li, CFO

Thank you.

Operator, Operator

There appears to be no more questions in the queue. I'm going to hand back over to Kevin.

Kevin Theiss, Host

Yes. We thank you for your participation in today's conference call. We wish you to be safe, and we look forward to speaking with you again. Thank you.

Operator, Operator

Thank you. Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect your phone lines, and have a wonderful day. Thank you for your participation.