China Automotive Systems, Inc. (CAAS) Q2 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the China Automotive Systems Second Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Kevin Theiss. Thank you. You may begin.

Thank you everyone for joining us today. Welcome to China Automotive Systems' 2017 second quarter conference call. Joining us today are Mr. Hanlin Chen, Chairman; 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 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 financial results for the 2017 second quarter and six month period, management will then conduct a question-and-answer session. The following 2017 second quarter financial results are unaudited and the fiscal year results are audited. These results are reported under U.S. GAAP for the purposes of our call today. I will review the financial results in U.S. dollars. We'll begin with the review of the recent dynamics of the automobile industry in China Automotive market position. The 2016 year is very strong for passenger vehicle sales as the Chinese government reduced its consumption tax on automobile purchases from 10% to 5% for smaller vehicles powered by 1.6 liter engine or smaller. In the 2017 year, the consumption tax was raised to 7.5% and the passenger vehicle sales have slowed. Passenger vehicle sales in the first quarter, I'm sorry in the second quarter grew by 4.6% but sales declined in both April and May. However passenger vehicle sales in June 2017 rebounded into 2.3% year-over-year growth. For the first half of 2017, passenger vehicle sales increased by 1.6% compared to the same period in 2016. The industry sales for passenger vehicles in the second quarter of 2016 were in sharp contrast to our net sales growth of 16.5% to $117.7 million from $101 million in the second quarter of 2016. Our net sales increase was mainly due to higher unit sales and change in the product mix. Net sales of our traditional hydraulic steering products continue to grow. In the second quarter of 2017, hydraulic steering product sales grew by 24.8% following a 5.5% rise in the first quarter of 2017. Net sales of our electric power steering EPS products for the second quarter of 2017 declined slightly $26.6 million from $28 million in the same period of last year and accounted for 22.6% of total sales revenue in this quarter. Despite our product mix in the second quarter of 2017, the market continues to favor EPS steering. We have roughly more resources to enhance our EPS products and production to accommodate the growing requirements for these products. Net export sales grew by 64.5% to $23.9 million in the second quarter of 2017 versus net sales of $14.5 million for the same quarter in 2016. Sales to Fiat Chrysler North America and to Ford in North America continued to grow as we enter these new products to began mass production at the end of 2016. We continue to believe in the bright future of our Brazilian assembly operation as it increases its operation to serve our global Tier-1 customer in Brazil and Chinese OEMs operating in the region. During the second quarter 2017, we acquired another 15.8% equity ownership in our Brazil venture, recently our total ownership in 95.8% showing our confidence in the future of this operation. As we become a larger supplier to the global markets, our international sales will be contributing more to our total sales. In addition of our operations currently at Fiat Chrysler North America, Ford in North America, Brazil, from South America some of our other operations are targeting products to the International markets to expand their market reach and augment their growth. Our gross margin increased to 20.4% for the second quarter of 2017 compared to 18% for the same period of 2016 representing an increase 0.4%. This gain mainly - is mainly due to our 16.5% growth in sales resulting in greater economy of scale as more units were sold and more units were sold into the international markets in the three months ended June 30, 2017. Our income from operations grew by 109.8% due to higher gross profit increased gain on other sales and consolidated operational expenses. The operating margin grew to 9.4% versus 5.2% in the year ago second quarter 2016. Our diluted net income attributable to the parent companies common shareholders per share increased $0.28 from $0.17 in the second quarter of 2016. We continue to invest in our businesses to expand in areas with the best growth potential so we can leverage our leadership into Chinese steering market and beyond back to $10.2 million in plant and equipment in the first six months of 2017 to advance our operation exports and our new product development especially against growing EPS product lines domestically. We continue to invest in research and development expenses in the second quarter of 2017. We increased our R&D spending by 28.3% to $7.7 million from $6 million for the same quarter in 2016. These investments primarily target further development of our EPS technology and to expand our EPS product portfolio meets our growing number of vehicle models. R&D is also developing other products, other new products such as our Advanced Driver Assistance Systems, ADAS for the future. At June 30, 2017 we had cash, cash equivalents place cash and short term investment so $98.2 million. Going to second quarter, cash flow from operations for $19 million, the capital expenditures of $6.9 million remaining to enhance our EPS production capabilities. We're well positioned with our broad product portfolio of hydraulic and EPS steering products that we are well established in the Chinese markets we supply more than 60 customers including the five largest automobile manufacturers in China; the largest light vehicle manufacture in China, the largest state-owned car manufacturer in China and the two largest privately owned car manufacturers in China. The China-based joint ventures are General Motors, Volkswagen, Citroën and Chrysler North America and our customers. This large and prestigious customer that demonstrates high quality performs for forms to reliability of our steering products cash vehicle market for so long as ours make their own or second half of 2017 as believe that the consumption tax rate may increase back to the standard 10% in 2018. International are racings in North and South America are growing in other but we see these areas back as potential new markets. They continue to expand so we focus on market share from building profitability and cash flow. Review the financial results for the second quarter of 2017, in the second quarter of 2017 net sales increased 16.5% to $117.7 million compared to $1 million same quarter of 2016. Net sales to additional steering products grew by 32.8% under company sold more products for the North American customers. Sales of electric power steering EPS represented 22.6% of total net sales. Gross profit increased 32.6% to $24.1 million in the second quarter of 2017 compared to $18.1 million in the second quarter of 2016. The gross margin was 20.4% in the second quarter of 2017 versus 18% in the second quarter of 2016 and 18.1% in the first quarter of 2017. Gross margin increased mainly due to a better revenue mix is total units sold through the international markets increased during the second quarter of 2017. Being another sales increase to $4.6 million in the second quarter of 2017 compared to $1.2 million in the second quarter of 2016. The increase was mainly due to a one-time gain of $2.2 million on the disclosure of the building in the second quarter of 2017. Selling expenses were $4.6 million in second quarter of 2017 compared to $4.1 million in the second quarter of 2016 selling expenses represent a 3.9% of net sales in the 2017 second quarter compared to 4.1% in the same quarter of 2016. The increase was mainly due to higher logistic expenses related to increased sales during the quarter. General and administrative expenses were $5.3 million in the second quarter of 2017 compared to $3.9 million in the second quarter of 2016. G&A expenses represented 4.5% of net sales in the second quarter of 2017 compared to 3.9% in the second quarter of 2016. The increase is mainly due to the increase in allowance for capital accounts of $1.1 million and higher payroll expenses. Research and development expenses increased 28.3% to $7.7 million in the second quarter of 2017 compared to $6 million in the second quarter of 2016. R&D expenses continued to focus on development of the company's EPS other new products. R&D expenses represented $6.5 of sales in the second quarter of 2017 compared with 5.9% in the 2016 second quarter. Net financial income in the second quarter of 2017 was $0.6 million compared with $0.1 million in the second quarter of 2016. Income from operations was 109.8% to a $11.1 million in the second quarter of 2017 compared to $5.3 million in the same quarter of 2016. The increase was primarily due to higher gross profit and a gain from other sales. Percentage of net income the operating margin was 9.4% in the second quarter of 2017 compared to 5.2% in the second quarter of 2016. Income for income tax expense and equity in earnings affiliated companies was $11.1 million in the second quarter of 2017 compared to $6.5 million in the second quarter of 2016. Net income attributable to the parent company shareholders rose 64.8% to $8.9 million in the second quarter of 2017 compared to net income attributable to the parent company's shareholders $5.4 million in corresponding period of 2016. Diluted earnings per share were $0.28 in the second quarter of 2016 compared to $0.17 in the second quarter of 2016. The weighted average number of diluted common shares outstanding was $31,649,322 in the second quarter of 2017 compared to $32,87,634 in the second quarter of 2016. Foreign currency translation gain was $5.7 million in the second quarter of 2017 as compared to the foreign currency translation a $7.9 million in the same quarter in 2016. Let me go over to results for the first six months of 2017. Net sales increased 8.8% to $237 million in the first six months of 2017 compared to $217.9 million in the first six months of 2016. Six months growth profit increased 16.6% to $45.7 million compared with $39.2 million in the corresponding period last year. Six months gross margin was 19.3% in the 2017 period compared to 18% in the corresponding period in 2016. To gain other sales of $5.3 million in the first six months of 2017 compared with $2 million in 2016 period. Income from operations was 48.8% to $18.3 million in first six months of 2017, compared to $12.3 million in the first six months of 2016. Operating margin was 7.7% in the first six months of 2017 compared to 5.6% for the corresponding period of 2016. Net income attributable to parent company's common shareholders increased 31.5% to $14.6 million in the first six months of 2017 compared to $11.1 million in corresponding period in 2016. Diluted earnings per share of $0.46 in the first six months of 2017, compared to diluted earnings per share of $0.34 in the 2016 period; foreign currency transition game of $7.4 million as compared to a foreign currency transition loss of $6.3 million in the last year's similar period. Balance sheet, as of June 30, 2017 total cash and equivalents plus cash and short-term investments were $98.2 million. Total cash receivable and total cash not receivable were $311.1 million. Accounts payable for $226.3 million and short-term bank and government loans were $67.4 million. Total parent company stock actually was $322.2 million as of June 30 2017 compared to $300.5 million as of December 31, 2016. Net cash flow from operating activity increased significantly to $19.2 million from a net use of $6.4 million in the first six months of 2016. The business outlook, management has increased its revenue guidance for the full year 2017 to $490 million. This target is based on the company's current views of operating in market conditions, which are subject to change. With that, operator, we're ready to begin the Q&A session.

[Operator Instructions] Our first question comes from the line of William Gregozeski with Greenridge Global. Please proceed with your question.

Hi. Could you talk a little bit about why you are seeing the best increases now in the hydraulic product, and the year-over-year decline again in EPS sales?

[Interpreted] The reason hydraulic product sales has experienced increase in the second quarter is mainly due to a two areas, one is the tax [indiscernible] were picking up. However, and most of our international shipments are hydraulic products. nd the other reason is driving that the increase of hydraulic sales, product sales in the commercial vehicle sector. As you know, the commercial vehicle sector in China has posted very robust growth and as far as in the second quarter. That's why hydraulic sales is up for us.

[Interpreted] Okay. So, in terms EPS or EPS sales, EPS product sales, which is or some quarter sales is relatively flat compared with the same period last year. There are two reasons, one is the report took place late last year, early this has a good visual effect on order site. Second thing is the overall passenger vehicles sector. The growth has been one of the results. Yesterday the passenger vehicle sales year-over-year increase is only 1.6% that's for the entire industry and it was in the industry where the EPS product had mostly in store or NPV and sedan these are even has given us smaller growth, even negative growth for those two segments that's why our EPS - overall EPS sales has been remained flat.

Okay. As far as who they hang on for the international business, the revenue for the quarter was quite a bit higher than I was modeling for the ones you have. What's the quarterly or annual revenue, what you guys have in place now is for the international sport business?

[Interpreted] Okay. Although international front for the business both $40 million in the first half of 2017, we are anticipating $50 million sales in the second half. So, full year would be $90 million for current unit along international.

Okay. And last question is can you give an update on the Brazilian operations and also how you added that 15.8% ownership at no cost.

15.8% oh, okay.

Yes, the equity is there in the quarter?

[Interpreted] Okay. So the Brazilian operation is on track as we announced earlier the annual productions 120,000 units. The first half we brought about $20 million R&D sales in terms -- in terms of the equity consolidation for that 15.8% it's basically in that our Brazilian Venture has been going for a while due to the economic environment in Brazil and being going too well. Even our first quarter of the -- first half of the year was decent revenue was still running at a loss, small loss. So our local partner, the Brazilian partner is somewhat wants to leave the venture. So since the reason is the question you are asking is how we, if we consolidate the equity, which are paying anything human beings local nor require and a local partner at the time of establishment. So we need to have a Brazilian National at that time to form a company with us Joint Venture with us. So we could have that meeting putting in any month. So, that's the reason what we did those share back since business is losing money, it is well interviewed to us on some cost.

Okay. Is there any expectation you might give the rest of it back from the other Brazilian National?

[Interpreted] Not at the moment.

Okay. All right, that's all I have. Thanks guys. See you next week. Thank you.

Thank you.

Thank you. [Operator Instructions] There are no further questions. I will now turn it back to management for closing comments.

Thank you.

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