Earnings Call Transcript - CAAS Q2 2022

Operator, Operator

Good morning, everyone, and welcome to the China Automotive Systems' Second Quarter 2022 Conference Call. It is now my pleasure to hand things over to your host, Mr. Kevin Theiss. Kevin, please go ahead.

Kevin Theiss, Host

Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2022 Second Quarter Conference Call. Joining us today are Chairman, Chen; Mr. Qizhou Wu, CEO; and Mr. Jie 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. 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 and timely controlled, our business operations and financial condition may be materially and 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 uncertainties 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 processes within our production facilities could continue to result in delays in the shipment of products to our customers, increased cost and reduced revenues. 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 second quarter and first six months results for the period ended June 30, 2022. Management will then conduct a question-and-answer session. The 2022 second quarter and first six months financial results are unaudited and all results are reported using U.S. GAAP accounting. For the purposes of our call today, I will review the financial results in U.S. dollars. We will begin with a review of the recent dynamics of the Chinese economy and automobile industry and China Automotive's market position. China’s GDP growth was a slight 0.4% increase in the second quarter of 2022 and 2.5% for the first six months of the year compared with 12.7% growth in the first six months of 2021. Lockdowns and travel restrictions from COVID-19 interrupted supply chains with delays in raw material and finished good delivery including for automobile microchips and other components. Investments in real estate in the first half of the year fell by 5.4% from last year's same period and industrial production in June missed expectations. In this challenging environment, data from the Chinese Association of Automobile Manufacturers, CAAM, reported that the Chinese automobile mobile sales decreased by 13.3% year-over-year in the second quarter of 2022. The passenger vehicle sales declined by 2.2% year-over-year and commercial vehicle sales declined by 50.1% year-over-year in the second quarter of 2022. For the first six months ended June 30, 2022, CAAM reported automobile sales declined by 6.6% year-over-year. Passenger vehicle sales rose by 3.4% year-over-year with sedans 6.1% year-over-year higher, SUVs 3.3% higher year-over-year. However, on a year-over-year basis, NPV sales declined by 15.7% and cross vehicles were down by 13.7%, respectively. For commercial vehicle sales, CAAM data showed an overall sales decline of 41.2% year-over-year for the first six months of 2022. The truck market declined by 42.2% year-over-year and bus sales were down 30.5% year-over-year. Despite the weak results in both the Chinese passenger and commercial vehicle markets in the second quarter, our net sales grew by 5.5% year-over-year in the 2022 second quarter. Most of our business segments achieved sales growth, except our Commercial Vehicle Products division, which reflected the overall commercial vehicle sector's sales decline. For the second quarter of 2022, while net sales of our advanced hydraulic steering products and parts were 2.6% lower year-over-year, net sales of our electric power steering, EPS products, rose 39.7% year-over-year and represented 25.5% of the total net sales. Export net sales to our Tier 1 North American customers rose year-over-year in the second quarter of 2022. We grew our gross margin by 4.8% year-over-year in the second quarter of 2022 to 17.9% from 13.1%, mainly due to the changes in product mix as our EPS products experienced strong sales growth. Research and development expenses, R&D, increased by 33.9% to $7.9 million in the 2022 second quarter as we continue to build our technologies. Higher gross profit, stricter cost controls, and higher other income helped generate income from operations of $7.2 million in the second quarter of 2022 compared to $0.1 million in the second quarter of 2021. Our 2022 second quarter income per share was $0.31 versus $0.10 in the second quarter last year. In early 2022, we signed an agreement with Global Truck Powerhouse, Scania AB, to develop an ERCB steering system for Scania's trucks and bus to expand our technology in the commercial vehicle markets. Combining our proprietary ERCB steering system with our advanced driver assist systems, L4 platform, known as APO4, allows the vehicles to execute Level 4 autonomous driving. ERCB is a fully electric intelligence steering system for light-duty trucks and heavy-duty commercial vehicles. Furthermore, our subsidiary in Sweden, Scania AB, will further enable us to improve our NAV steering technology, especially for our fast-growing autonomous driving products in passenger and commercial vehicles. As of June 30, 2022, we had cash and equivalents plus pledged cash of $143.8 million and working capital of $150.1 million. Our share repurchase program can use up to $5 million of these resources to buy outstanding common shares through March 30, 2023. Before I move on to discuss the financial results, we would like to comment on recent dynamics of the Chinese auto market. We are particularly encouraged by the June sales of passenger vehicles including sedans, SUVs and MPVs. Over 2.2 million passenger vehicle units were sold, up 41.2% year-over-year in June alone, according to CAAM. The robust rebound of passenger vehicle sales was mainly driven by a recovered supply chain, pent-up demand and favorable government policies, including a 50% reduction in the national purchase tax for some vehicles. Local governments have also issued more license plates and offered purchase vouchers as well. While the Chinese automobile market is recovering, our North American and Brazilian operations continue to expand. Our EPS products are gaining greater market share and our NAV technologies are acquiring more capabilities. Let me now review the financial results for the second quarter of 2022. Our net sales increased by 5.5% to $127.2 million in the second quarter of 2022 compared to $120.6 million in the second quarter of 2021. Net sales of traditional steering products and parts decreased by 2.6% to $94.8 million for the second quarter of 2022 compared to $97.4 million for the same period in 2021. Net sales of electric power steering products rose 39.7% to $32.4 million from $23.2 million for the same period in 2021. EPS product sales were 25.5% of the total net sales for the second quarter of 2022 compared with 19.2% for the same period in 2021. Export net sales in North American customers rose by 20.1% to $38.3 million in the second quarter of 2022 compared with $31.9 million in the second quarter of 2021. Gross profit rose by 43.7% to $22.7 million compared to $15.4 million in the second quarter of 2021. Gross margin in the second quarter of 2022 was 17.9% compared with 13.1% in the second quarter of 2021. The increase in gross margin was mainly due to changes in the product mix and an increase in selling price. Gain on other sales was $2.1 million compared to $0.7 million in the second quarter of 2021. Selling expenses decreased by 8.5% to $4.1 million compared to $4.4 million in the second quarter of 2021, which was primarily due to lower transportation expenses. Selling expenses represented a 3-point net sales in the second quarter of 2022 compared to 3.6% in the second quarter of 2021. General and administrative expenses, G&A, decreased by 6.6% to $5.7 million compared to $6.1 million in the second quarter of 2021, which was primarily due to lower office expenses and professional service fees. G&A expense represented 4.5% of net sales in the second quarter of 2022 compared to 5.1% of net sales in the second quarter of 2021. Research and development expenses, R&D, increased by 33.9% to $7.9 million compared to $5.9 million in the second quarter of 2022 compared to 4.9% in the second quarter of 2021. Net other income was $2.8 million for the second quarter of 2022 compared to $1.5 million for the three months ending June 30, 2021. Income from operations was $7.2 million in the second quarter of 2022 compared to net income from operations of $0.1 million in the second quarter of 2021. The increase was primarily due to higher sales and gross profits and cost growth. Interest expense was $24 million in the second quarter of 2022, substantially consistent with $0.3 million in the second quarter of 2021. Net financial income was $2.5 million in the second quarter of 2022 compared to net financial income of $2 million in the second quarter of 2021. The change in net new income was primarily due to a higher foreign exchange benefit in the second quarter of 2022. Income before income tax expenses and equity and earnings of affiliated companies was $12.2 million in the second quarter of 2022 compared to income before income tax expenses and equity in earnings of affiliated companies of $1.5 million in the second quarter of 2021. Net income attributable to parent company's common shareholders was $9.4 million in the second quarter of 2022 compared to net income attributable to parent company's common shareholders of $3.2 million in the second quarter of 2021. Diluted earnings per share was $0.31 in the second quarter of 2022 compared to $0.10 in the second quarter of 2021. The weighted average number of diluted common shares outstanding was 30,849,09 shares in the second quarter of 2022 compared to 30,855,406 in the second quarter of 2021. I will briefly go over the 6 months financial highlights. Net sales increased 5.1% to $263.6 million in the first six months of '22 compared to $250.9 million in the first six months of 2021. Six months growth profit was $37.4 million compared to $35.6 million in the corresponding period last year. Six-month gross margin was 14.2%, which is consistent with the 14.2% in the first six months of last year. The gain on other sales was $3 million in the first six months of 2022 compared to $2 million in the corresponding period last year. Income from operations was $5.7 million in the first six months of 2022 compared with income from operations of $4.3 million in the first six months of 2021. Net income attributable to parent company's common shareholders was $9.4 million in the first six months of 2022 compared to net income attributable to parent company's common shareholders of $6.4 million in the corresponding period in 2021. Diluted earnings per share was $0.30 in the first six months of '22 compared to diluted earnings per share of $0.21 in the first six months of 2021. Now a review of a few balance sheet items. As of June 30, 2022, total cash, cash equivalents and cash pledged were $143.8 million. Total accounts receivable, including notes receivable, were $203.5 million. Accounts payable, including notes payable, were $210.7 million, and short-term loans were $47.6 million. Total parent company stockholders' equity was $313.6 million as of June 30, 2022. Net cash provided by operating activity was $14.5 million in the first six months of 2022. The business outlook: Management has increased its revenue guidance for the full year 2022 due to $500 million due to the economic impact of COVID-19 and foreign exchange volatility. This target is based on the company's current views on operating in the market conditions, which are subject to change. With that, operator, we are ready to begin the Q&A.

Operator, Operator

Your first question is coming from William Gregozeski from Greenridge Global.

William Gregozeski, Analyst

Excellent quarter. The gross margin was the highest you guys reported in like 5 years. What is the margin level you're expecting going forward?

Jie Li, CFO

Yes, our gross margin in the second quarter reached 17.9%, marking one of the highest records in the last five years. Two main factors contributed to this increase. First, our electric power steering product has finally reached a stage of good economies of scale, resulting in significant volume increases and lower costs. This reduction in costs due to higher volume has led to improved efficiency. Additionally, we have raised the average selling price of our EPS product, resulting in EPS gross margins exceeding 15%, which is the highest we've seen recently compared to past margins that were around single digits. The second factor boosting our gross margin is the foreign exchange rates; the slight increase in the U.S. dollar against the RMB has also been beneficial. Looking ahead, we believe EPS gross margin can continue to improve as our order book is strong. We anticipate increased volume will help reduce costs further and achieve better economies of scale. Moreover, EPS will represent a larger percentage of our total volume, supporting further margin improvements. I project that gross margins could increase to 16% to 17% in the upcoming quarters.

William Gregozeski, Analyst

Okay. Great, great. And then last question. Have you guys continued repurchasing shares in the current quarter that we're in now?

Jie Li, CFO

The answer is yes. We have already repurchased over 200,000 shares since the announcement, and we will continue to repurchase shares in the overall market.

William Gregozeski, Analyst

Okay. Great.

Operator, Operator

It appears we have no further questions in the queue. I will now hand back over to Kevin for any closing remarks.

Kevin Theiss, Host

We want to thank everyone for joining us today, and we look forward to speaking with you again. So please keep safe, and we’ll talk to you on the next quarterly conference call. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.