Earnings Call Transcript - CAAS Q1 2025

Operator, Operator

Good morning, everyone, and welcome to China Automotive Systems' First Quarter 2025 Conference Call. At this time, all participants are in a listen-only mode and we will be opening the floor for questions following the presentation. Please note this conference is being recorded. I will now turn the conference over to our host, Kevin Theiss, Investor Relations. Kevin, the floor is yours.

Kevin Theiss, Investor Relations

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2025 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 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's actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including those under the heading Risk Factors and Results of Operations in the Company's Form 10-K annual report for the year ended December 31, 2024, 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 uncertainties 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 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 2025 results, for the period ended March 31, 2025. Management will then conduct a question-and-answer session. The 2025 first quarter results are unaudited and the 2025 results are audited. These financial results are reported using U.S. GAAP Accounting. For purposes of our call today, I will review the financial results in U.S. dollars. We will begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy, and our market position. Following our record net sales of $650.9 million for the 2024 year, our net sales increased by 19.9% to $157.1 million in the first quarter of 2025, compared to $139.4 million in the first quarter of 2024. All operations reported sales growth with the exception of North America in the first quarter of 2025. Total net sales of electric power steering systems (EPS) increased by 54% year-over-year as our sales transitioned to higher technology products. Our Henlong KYB subsidiary achieved 38.2% year-over-year sales growth of its EPS products in the first quarter of 2025. Our largest steering subsidiary, Henlong, which produces traditional hydraulic steering systems for the Chinese passenger vehicle market, reported that sales climbed 37.5% year-over-year in the first quarter of 2025. Sales of traditional steering products, the Cherry Auto, increased by 13.5% year-over-year, and sales by Ulong's commercial vehicle steering products rallied to 17.4% year-over-year growth in the first quarter of 2025. While North American sales declined by 10.3% year-over-year to $27.2 million due primarily to lower sales to Stellantis, our sales to the Brazilian market increased by 30.2% year-over-year due to higher demand by Stellantis. In the macroeconomy, Chinese GDP growth was 5.4% year-over-year in the first quarter of 2025, consistent with the fourth quarter of 2024. The Chinese economy is stabilized, but is still facing challenges. According to statistics from the China Association of Automobile Manufacturers (CAAM), the combined unit sales of passenger commercial vehicles increased by 11.2% year-over-year to 7.5 million units for the first quarter of 2025. Passenger car unit sales grew 12.9% year-over-year to 6.4 million units, and China's passenger vehicle brands sales totaled 4.4 million units and represented 68.1% total passenger vehicle market sales in the first quarter of 2025. New energy vehicle unit sales grew by 47.1% year-over-year to 3.1 million units, and new energy vehicles (NEVs) represented 41.2% of total car sales in China in the first quarter of 2025. For the first quarter of 2025, Chinese commercial vehicle sales increased by 1.8% year-over-year to 1.05 million units, and exports of automotive vehicle units increased by 7.3% year-over-year to 1.4 million units. Tax incentives, subsidies for scrapping older vehicles, and lower interest financing are among the government incentives to support the purchase of automobiles in China for 2025. Additionally, local government and private incentives may also aid buyers. Gross profit increased by 18.8% year-over-year to $28.6 million compared to $24.1 million in 2024. Gross revenue margin was 17.1% compared to 17.3% in the first quarter last year, up from 15.6% in the fourth quarter of 2024. R&D expenses increased by 64% to $8.7 million from $5.3 million in the first quarter of 2024. The increased investment was partially due to continuous development of our hydraulic and EPS products, especially our R-EPS product, which recently started mass production. The increase also reflected the purchase of new molds for a new product beginning in the first quarter of 2025, as the project was still in place. A 41.3% increase in operating expenses, including R&D, resulted in a 10.5% year-over-year reduction in income from operations. Net income attributable to parent company's shareholders was $0.24 versus $0.27 in the year-ago first quarter. Net cash provided by operating activities rose 73.1% year-over-year to $18.1 million for the first quarter of 2025. Total cash and cash equivalents, pledge cash, and short-term investments were $135.9 million, or approximately $4.50 per share, at March 31, 2025. Our R-EPS steering product developed for managing Iveco has entered mass production in the first quarter of 2025. This product features an electric motor with unit control and a ball nut and belt drive reduction system to provide steering assist. R-EPS architecture is capable of performing autonomous driving functions such as automatic parking, lane keep assist, and lane follow assist. Our Shanshi Zhulong power steering gears company subsidiary won customer awards and accolades from two major vehicle OEM customers, UK Flotam Motors and Shanshi Automobile Heavy Truck. Shanshi Zhulong provides steering assistance to various commercial vehicles in China. Shanshi Zhulong is the bearer of the excellent supplier series award from the all-man business unit of Flotam Motors for exemplary product development cooperation, supply guarantee, and quality reliability. In addition, Shanshi Zhulong won the Strategic Synergy Award, the highest award given by Shanshi for future research and development and supply chain cooperation. We remain well positioned with our advanced steering technology and diverse product portfolio to address market opportunities in China and overseas. Now let me review the financial results in the first quarter of 2025. Net sales increased by 19.9% to $167.1 million in the first quarter of 2025, compared to $139.4 million in the first quarter of 2024. Net sales of traditional steering products and parts increased by 2.3% to $94.1 million compared to $92 million for the first quarter of 2024. Net sales of electronic power steering (EPS) products and parts grew by 54% to $73 million for the three months ended March 31, 2025, compared with $47.4 million for the same period in 2024. EPS products for the first quarter of 2025 were approximately 43.7% of total sales compared with 34% of total net sales in the first quarter of 2024. Export sales were $27.2 million compared to $30.1 million in the first quarter of 2024, primarily due to lower demand for passenger vehicle products. Net traditional net product sales increased by 30.2% to $16.5 million in the first quarter of 2025, compared to $12.7 million for the same period in 2024, due to higher demand. Overall, gross profit increased by 18.8% to $28.6 million. Gross margin in the first quarter of 2025 was 17.1%, which was consistent with 17.3% in the first quarter of 2024.

Operator, Operator

And our next question is coming from Gary Nash from NASH Consulting. Gary, your line is live.

Gary Nash, Analyst

Thank you. First, good day to everyone. Two-part question. Could you please comment on the almost $1 million increase in inventories in the first quarter of 2025? And then if you could also comment on what is the outlook for inventory levels and the rest of 2025?

Qizhou Wu, CFO

Thank you. So Gary, to answer your question. The inventory increase is partly related to the trade war and as the U.S. administration has been putting a lot of pressure on the tariff. So in response to the potential pressure, we have made some advanced shipments to the U.S. a month ahead. Our customers will not experience any disruption in their production. So our inventory in the U.S. has been built up to September in case any kind of productivity policy comes into play. This is somewhat out of the ordinary practice, but we had to address such potential risk. That's why our inventory increased. In terms of percentage, inventory increased about 10% while overall revenue increased by 19.9%. So it's not an outsized increase. On a full year basis, we believe we will maintain a healthy inventory level without excess.

Operator, Operator

Okay. So that answers your question, Gary?

Gary Nash, Analyst

Yes, it does.

Operator, Operator

We appear to have no further questions in the queue. Okay. I'll hand back over to Kevin then for further comments.

Kevin Theiss, Investor Relations

Well, we have some additional questions that were e-mailed to us. So I'll go ahead and ask those. The first one is, what is the impact of the U.S. proposed tariffs under your new order flow? And is it impacting any areas beyond North America?

Qizhou Wu, CFO

In terms of tariffs, we mentioned earlier in the year that we anticipated pressure coming from the administration. We made a decision to make some advanced shipments to our U.S. facility. These inventories are meant to carry us through foreseeable challenges in the coming quarters. Moreover, as of yesterday, the U.S. announced changes related to tariffs, which is a very positive development. We have immediately contacted our customer base in North America, and we have come to good discussions where they have agreed to absorb part of the increased costs tied to these tariffs. Overall, the tariff has very minimal impact on our business and order flow. The new order continues to develop products towards our customers. Outside the U.S., we still see some opportunities, as we reported today; we have a healthy strong growth in Brazil. We are also planning for global expansion, which we will announce, and this will aid us in navigating different market conditions.

Kevin Theiss, Investor Relations

Thank you. I have another question that was e-mailed in. Please provide an update on the manufacturing of the R-EPS steering product for NeginkoLeco? And have other automotive OEMs also ordered the R-EPS product?

Qizhou Wu, CFO

Yes. R-EPS is a growth area. We have started R-EPS production. In addition, other OEMs have also placed orders for our new products. These include Cherry Auto, Guangzhou, Guangxi Auto, Yitong Bus, and Qingdao. For this new R-EPS product, we have also built a brand-new facility dedicated to production and installation of new production lines. We are excited about the opportunities this presents to us.

Kevin Theiss, Investor Relations

Thank you. And the last question is, can you provide an update on the Sentient operation as far as the automatic driving systems?

Qizhou Wu, CFO

Yes. We have made significant progress with Sentient AB, our subsidiary focused on developing autonomous driving technologies. Our main customer currently is Volvo Truck for the EPS product, and we are shipping 3,500 units. By the end of this month, we are targeting 40,000 units for 2025. In terms of revenue, with this specific customer, we are expecting around EUR 30 million by 2035. Additionally, we have a contract with BYB for their new Model Song, which we expect to enter mass production for in 2025. We have also begun working with Volvo passenger vehicles on fly-by-wire technology, and Renault is another automaker we are collaborating with. We anticipate a significant contribution from Sentient moving forward.

Operator, Operator

Just before we wrap up the call, I'm going to check to see if there are any further questions from the audience.

Kevin Theiss, Investor Relations

Well, we want to thank everyone for your participation in today's conference call. Please be safe. And we look forward to speaking with you in the future. Thank you.

Operator, Operator

Thank you very much. This does conclude today's conference call. You can disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.