China Automotive Systems, Inc. (CAAS) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to China Automotive Systems, Inc. 2017 First Quarter Earnings Conference. At this time all participants are in listen only mode. [Operator Instructions] I would now like to turn the conference over to your host Kevin Theiss. Thank you. You may begin.

Thank you everyone for joining us today. Welcome to China Automotive Systems' 2017 first quarter conference call. Joining us today are Mr. Qizhou Wu, Chief Executive Officer, 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 would remind all listeners that throughout this call, we may make statements that may contain forward-looking statements. Forward-looking statements represent the Company's estimate 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, 2016 as filed with the Securities and Exchange Commission on March 30, 2017, and in other documents filed by the company from time-to-time with the Securities Exchange Commission. The Company expressly disclaim 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 financial results for the 2017 first quarter then I will turn the call over to the management to conduct a question-and-answer session. Then the following 2017 first quarter numbers are unaudited and the fiscal year end and these results are reported under the US GAAP. For the purpose of our call today, I will review financial results in US dollars. We'll begin with the review of the recent dynamics of the automotive industry and China Automotive market position. According to the Chinese Association of Automobile Manufacturers, CAAM, overall unit sales in China grew by 7% year-on-year in the first quarter of 2017. Passenger vehicles sales in the first quarter grew by 4.6%, there were significant differences in sales growth among the different types of passenger vehicles in the 2017 first quarter. SUV sales completely strong growth at 20.9% and MPV sales grew 17.4%. Moreover sedan sales grew only 0.6% across passenger vehicles decreased 22.7%. Commercial vehicles grew 22.9% in the 2017 first quarter, as truck sales rose and bus sales declined. Chinese OEMs grow 2.7 million units in the first quarter of 2017 representing a 6.5% year-over-year growth. Chinese brands collectively accounted for 45.7% of the total market share in China. According to the National Information Center Ownership has the potential to grow among the many Tier-3 toTier-6 city at disposable income levels calculation base and personal spending or all growth. Entering 2017 the Chinese government decreased the auto consumption tax on smaller engine vehicles to 7.5% for smaller engine vehicle which is still lower than 10% standard rate. In the first quarter of 2017 the sales of passenger cars production capacity 1.6 million and below, which 4,196,000 units up 4.8% year-on-year. In the first quarter of 2017 our net sales were $119.3 million compared to $116.9 million in the same quarter of 2017 representing a 2.1% year-over-year growth. The net sales increase is mainly due to higher unit sales. At sales of our traditional hydraulic steering products were $89.5 million for the first quarter of 2017 a rebound of 5.5%. Net sales of EPS, our electronic products declined to $29.8 million by $2.3 million. As a percent of net sales, sales of EPS products were 25.5% for the first quarter of 2017. We believe our EPS products have a great future and this decline is temporary as we add new more advanced EPS products and enhance our EPS production. Net sales out of China - outside of China increased to $18.1 million for the three months ended March 31, 2017 compared to $14.4 million for the same period in 2016 representing an increase of $3.7 million or 25.7%. Sales to Fiat Chrysler North America continue to grow as well as to Ford North America. Our Brazilian assembly plant continues to ramp up its assembly operations to serve our global Tier-1 customers in Brazil, in Chinese OEMs operating in the region. As we expand our global reach international sales are expected to become a greater proportion of our total sales in the future. We continue to invest in businesses to maintain our leadership in Chinese steering market. We invested $3.2 million in plant and equipment in the first quarter of 2017 to enhance operations focused on expanding exports and EPS products, both growth areas for the near future. We continue to invest in research and development expenses, R&D in the first quarter of 2017. We increased our R&D spending to $6.8 million to $6.1 million for the same quarter last year, a 11.5% increase. These investments were primarily for EPS development and trials as well as development of other link products, we continue to purchase advanced manufacturing equipment, a newly developed products, hiring senior technicians and actively seeking external technical support. We have focused on further developing our EPS production and our EPS product portfolio as the trend in China is for EPS taking market share from legacy hydraulic steering products. In addition, we're also improving our technologies for our Advanced Driver Assistance Systems, ADAS for the future. At Q1 2017 we had cash, cash equivalents, pledged cash and short-term investments are $93.1 million. Going to first quarter cash flow from operations was $2.3 million, capital expenses are $3.2 million mainly due enhance our EPS production capabilities. We continue to supply our advanced steering price for large number of leading OEMs in China as well global OEMs in North and South America. We're expanding our EPS else technologies and developing other advanced steering products for the future. Through these actions we will remain as the steering products leader in China to enhance our premier market position and focus on enhancing profitability and cash flow generation as we create new growth opportunities. Let me review the financial results for the first quarter of 2017. In the first quarter of 2017 net sales were $119.3 million comparing to $116.9 million in the same quarter of 2016 reflecting a 2.1% year-over-year growth. The increase of net sales was mainly due to increased sales volume. Gross profit was $21.6 million in the first quarter of 2017 compared to $21 million in the first quarter of 2016. Gross margin was 18.1% in the first quarter of 2017 versus 18% in the first quarter of 2016. Gain on other sales was $0.8 million in the first quarters of 2017 and 2016. Selling expenses were $4.1 million in the first quarter of 2017, compared to $4.3 million in the first quarter of 2016. The decrease was primarily due to lower marketing expenses. Selling expenses represented 3.4% of net sales in the first quarter of 2017 versus 3.7% in the first quarter of 2016. General and administrative expenses were $4.4 million in the first quarter of 2017, compared to $4.3 million in the same quarter of 2016. G&A expenses represented 3.7% of net sales in the first quarter of 2017 and 3.7% in the first quarter of 2016. Research and development expenses were $6.8 million in the first quarter of 2017, compared to $6.1 million in the first quarter of 2016. R&D expenses represented 5.7% of net sales in the first quarter of 2017 compared to 5.2% in the first quarter of 2016. The increase in R&D expenses was due to increased investment in EPS product research and development such as brushless motor and Advanced Driver Assistance Systems related projects as well. Income from operations was $7.2 million in the first quarter of 2017, compared to $7.1 million in the same quarter of 2016. Interest expense was $0.2 million in the first quarter of 2017, consistent with the same quarter of 2016. Net financial income was $0.3 million in the first quarters of 2017 and 2016. Income before income tax expenses and equity in earnings of affiliated companies was $7.1 million in the first quarter of 2017, compared to $6.5 million in the first quarter of 2016. The increase in income before income tax expenses and equity in earnings of affiliated companies was mainly due to higher operating income and a decrease in other expenses. Net income attributable to parent company's common shareholders was $5.7 million in the first quarter of 2017 and 2016. Diluted earnings per share were $0.18 in both the first quarter of 2017 and 2016. The weighted average number of diluted common shares outstanding was 31,649,908 in the first quarter of 2017, compared to 32,123,588 in the first quarter of 2016. I'll review the balance sheet. As of March 31, 2017, total cash and cash equivalents, pledged cash and short-term investments were $93.1 million, total accounts receivable including notes receivable were $305.9 million, accounts payable were $223.1 million and short-term bank and government loans were $68.5 million. Total parent company stockholders' equity was $307.8 million as of March 31, 2017, compared to $300.5 million as of December 31, 2016. Net cash flow from operating activities was $2.3 million in the first quarter of 2017. The business outlook. Management reiterated its guidance revenue for the full year 2017 of $485 million. This target is based on the Company's current views on operating and market conditions, which are subject to change. With that operator we're ready to begin the Q&A session. Operator?

Thank you. [Operator Instructions] Our first question is from William Gregozeski from Greenridge Global. You may begin.

Hi, I got a couple of questions. You guys talked about the EPS demand exceeding your capacity for a while and the sales were down this quarter - year-over-year, can you just talk a little more why that was the case?

[Interpreted] Yes, it was due to the recall one of our OEM customer we have been made an announcement earlier that was a recall by our OEM customer time. But after a number of discussions, which we're now back on track, I think the order was start flowing - starting from second quarter. And so that was the reason first quarter was big weak and due to this large customer.

Okay. Can you give us update on how things are going in Brazil?

[Interpreted] Okay. So for Brazil our first production line is up and running and we're expecting to produce 120,000 units in 2017. The main product from that facility though be manual steering gears, we're expecting 60 million RMB in USD - in sales, in revenue and 60 million RMB.

Okay, all right. And last question was looks like you guys took $29 million loan and one that two a related party, it was classified as advanced payment through related on the balance sheet for a long and the cash flow statement, so I just wanted to get some more information on what that was and what - I want to know what that $29 million was for?

So for that particular related party transaction we see - given us a line of credit which we can draw down at relatively lower rates. So our costs for those - interest costs for the mark will be four point something percent new rate when we loan to related party for that transaction will be charging six point something percent interest, so its relating transaction, but it's also we're going to make money on that transaction.

Okay, so it's strictly just a vehicle to make interest spread?

Okay.

Okay. And what's the length of that loan?

[Interpreted] Okay. So it's a one year loan, but there is a special term the creditor can call back any time.

All right. That's all I have. Thanks guys.

Okay, thank you.

[Operator Instructions] Okay. Our next question is [indiscernible] Private Investor. You may begin.

Thank you good morning. I had a question or two on revenue guidance for I guess this quarter, Q2, Q3, and Q4 I know you're targeting $485 million for the year, but if you look at the comparisons from last year Q2 and Q3 do you feel that this year your comparisons for Q2 and Q3 will be up maybe closer to 10% and maybe Q4, which was very strong last year might be lower. What's your view at this point?

[Interpreted] Okay. So let me take it through the overall market dynamics. In 2017 it's been widely perceived the overall - all the market will grow about 5% in China. Within that segment you will see commercial vehicle will grow faster, so as a whole we'll see the growth will be around 10%. The commercial was mainly due to the government policy and the entire overloading situation in China and enforced by central government. And that's why we're seeing the growth has been quite strong since the fourth quarter of 2015 and we will see growth will continue in 2017. And in terms of passenger vehicle, we're seeing overall growth it's relatively smaller than the - what we have achieved in 2016 and also compared with the commercial vehicle growth in 2017. Reason being one the base is higher - the base is higher in 2016 and makes the comparable difficult to continue to achieve higher growth. And secondly the subsidy in 2016 is now being reduced in 2017 and subsidy is related to consumption tax for smaller vehicles and in 2015 it was given - it's a very generous discount for consumption tax for new car purchase for the smaller engine vehicles. However, that policy continued, but it's in the smaller scale in 2017, so we'll see that the overall sales for passenger vehicle growth. Together we see 2017. First and second quarter is generally good, third quarter it's essentially somehow it's relatively flat and fourth quarter is last year 2016 was the strong quarter, so we think the year-over-year because of higher comp comparable is going to affect the year-over-year growth and so we'll see a growth would be relatively small.

Okay. And as far as u guess it's right to say, but year-over-year it was $0.75 for the full year in 2016 do you see the potential for 10% up maybe above 75%.

[Interpreted] Okay, go ahead.

No I'm done, go ahead.

[Interpreted] Normally not giving the bottom line guidance, the net income guidance have already provided a top line guidance, but at the same time we also implement stringent cost control, expense control, so we'll make our best effort to reflect the revenue growth in the bottom line.

Okay. I have last question. 2018 what's your forecast for I guess improvement in EPS and percentage of that business growing you're probably looking at transition of more vehicles into the EPS requirement what do you see for next year?

[Interpreted] Well, due the recall in the first quarter which has reflected in 2017 first quarter, our EPS full year will come down a bit, because of first quarter based on the EPS sales to that particular life customers. So but overall we're still projecting EPS steering sales at 1.2 million units in 2017. For 2018 we're seeing around 20% year-over-year growth for the EPS product and we believe is our continue investment into R&D and product development and we'll achieve that goal.

Okay. Actually maybe I could ask one last question. Anything on buybacks I know you've completed what almost half the buyback, but your position on that as far as the share repurchase?

[Interpreted] No plan right now. We'll make an announcement in a week to that point.

Okay. Thanks for answering my questions.

Thank you.

[Operator Instructions] Okay, ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the conference back over to Kevin Theiss for closing remarks.

Thank you for attending China Automotive Systems first quarter 2017 earnings conference call. We look forward to speaking with you. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.