Ladies and gentlemen, thank you for standing by, and welcome to the China Yuchai International Limited Unaudited Fourth Quarter FY 2014 ended 31st December 2014 Conference Call and Webcast. [Operator Instructions] I would like to advise all that this conference is being recorded today, 26th of February 2015. With that, I'll now like to hand the conference over to your first speaker for today, Mr. Kevin Theiss. Thank you. Please go ahead.

Thank you for joining us today, and welcome to China Yuchai International Limited's Fourth Quarter and Fiscal Year 2014 Conference Call and Webcast. My name is Kevin Theiss, and I am with Grayling, China Yuchai's U.S. Investor Relations advisor. Joining us today are Mr. Weng Ming Hoh and Mr. Kok Ho Leong, President and Chief Financial Officer of CYI, respectively. In addition, Mr. Kelvin Lai, VP of Operations of CYI, is joining us today. 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. The words believe, expect, anticipate, project, targets, optimistic, intend, aim, will or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that may be deemed forward-looking statements. These forward-looking statements are based on current expectations or beliefs, including, but not limited to, statements concerning the company's operations, financial performance and conditions. The company cautions that these statements, by their nature, involve risks and uncertainties and actual results may differ materially depending on a variety of important factors, including those discussed in the company's reports filed with the Securities and Exchange Commission from time to time. The company specifically disclaims any obligation to maintain or update the forward-looking information, whether of the nature contained in the script or otherwise in the future. Mr. Ho will provide a brief overview and summary, and then Mr. Leong will review the financial results for the fourth quarter and fiscal year ended December 31, 2014. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the financial results for fiscal year 2014 are unaudited, and they will be presented in RMB and U.S. dollars. All the financial information presented is reported using International Financial Reporting Standards as issued by the International Accounting Standards Board. Mr. Ho, please start your presentation.

Thank you, Kevin. Net revenues in the fourth quarter of 2014 reflected lower sales volume. However, the effect of lower sales volume was offset by the shift in product mix towards the increased sales of engines compliance with National IV emission standards, which were strictly enforced nationwide from January 1, 2015. All commercial vehicles are now required to meet the much stringent National IV emission standards in order to be registered for on-road use in 2015. The little [ph] standard will further help to control emissions and reduce air pollution from automotive vehicles in China's many cities. Net revenue for the fourth quarter of 2014 decreased by 6.4% to RMB 3.9 billion or USD 640.8 million, compared with RMB 4.2 billion in the fourth quarter of 2013. Sales revenue declined less than unit sales due to the higher sales of higher-priced natural gas and National IV-compliant engines. Our unit sales of off-road engines rose in the fourth quarter of 2014 as well. Our ability to sell engines for both on-road and off-road applications to different market segments such as trucks, bus, marine, industrial and agriculture reduced our market risk and created additional growth opportunities. Lower gross expectations that also affect the commercial vehicle sales. China's GDP growth for fiscal year 2014 grew to 7.4%, with sales that were slower than expansion growth since 1990. Real estate development and infrastructure spending slowed as government follows its transition the economy towards more domestic consumption and away from fixed-asset investment and export. It is anticipated that China's economic growth will continue to moderate in the near future. Research and development R&D expenses declined in the fourth quarter of 2014 to RMB 132.6 million or USD 21.7 million from RMB 146.3 million in the same quarter of 2013. However, for full year 2014, R&D…

Thank you, Weng Ming. I will now proceed to report on our financial performance for the fourth quarter of 2014 and full year ended December 31, 2014. Net revenue for the fourth quarter of 2014 decreased by 6.4% to RMB 3.9 billion, USD 640.8 million, compared with RMB 4.2 billion in the fourth quarter of 2013. The decrease in unit sales exceed the decline in net revenue. This was due to higher proportion of National IV engine sales in the fourth quarter of 2014. The total number of engines sold by GYMCL during the fourth quarter of 2014 was 93,094 units compared with 110,583 units in the same quarter of 2013, representing a decrease of 17,489 units or 15.8%. The decrease was mainly due to a decline in engine sales in the truck segment as well as construction applications. According to the China Association of Automobile Manufacturers, sales for commercial vehicles, excluding gasoline-powered vehicles, declined by 14.9% in the fourth quarter of 2014. Gross profit decreased 0.7% to RMB 970.1 million, USD 158.5 million, compared with RMB 976.6 million in the same quarter of 2013. Gross margin increased to 24.7% in the fourth quarter of 2014 compared with 23.3% in the same quarter in 2013. The increase in gross margin was attributable to reduced sales of lower margin engines. Other operating income was RMB 13.8 million, USD 2.3 million, a decrease of USD 56.1 million from RMB 69.9 million in the fourth quarter of 2013. The decrease was mainly due to lower government grants, less interest income from bank deposits and higher foreign exchange revaluation loss. Research and development, R&D expenses were RMB 132.6 million, USD 21.7 million, compared with RMB 146.3 million in the same quarter of 2013. As a percentage of net revenue, R&D spending was 3.4% in…

[Operator Instructions] And the first question comes from the line of David Raso of Evercore ISI.

Can you help us with what percent of your engines in 2015 do you think will be NS IV and if you can remind me the percentage it was in 2014? And a follow-up on that will be how do you expect that change to impact your margins and mix -- the mix impact?

Hi, David. This is Weng Ming. Okay, the -- starting from 2015, all on-road vehicles that are in China will have to use National IV engines for diesel and National V for gas. So we expect all on-road vehicles to be -- diesel-engine vehicles to be National 14 -- National IV, sorry. In 2014, towards the end of the year, we talked about most of our engines sold towards the end were National IV engines, I think, about -- close to about 60% to 70%. Throughout the year -- this is for the diesel -- are for the vehicle engines. For the overall engine portfolio, it's about nearly 50%.

And that -- I'm sorry was that the quarter, it was 50% or the 2014 full year?

Quarter, quarter.

Quarter, yes. Do you have the number for the full year what percent was NS IV?

So full year will be much lower because the first half of the year is not that high. I will say between about 40% to 50% are vehicles -- on-road engines, sorry. And in terms of mix, these are, as you know, the National IV engines average selling price is higher than National III. So that's why we saw, even in the year of 2014, we saw an increase in net revenue despite small drop in the unit sales. In terms of margin, there's not going to be too much difference.

So the mix to 2015 being largely on-road -- literally, it sounds like you're saying almost 100%, is going to be NS IV?

Yes.

Is it -- so you're going to -- essentially, go from 40%-ish or less to 100%?

Yes.

So when it comes to revenue, can you help us with, at least -- I know you don't want to give the exact number, but roughly what is the price point you're selling the NS IV versus the older engine? And, obviously, we can extrapolate that implication on your revenue.

Right. It depends. So if you look at our -- with our 2014 or even the second -- fourth quarter, our engine sales is lower, but our revenue -- although it's also lower, but not that much lower because of the higher average selling price. So -- and if you look at the overall, despite 2% drop in unit sales, our overall revenue has been -- has gone up by about 3 percentage points. So I would think if you factor in, close to about 5% or 10%, you should be [indiscernible].

Okay. And, again, on margin you're saying, don't think of the mix or the change in the margin profile?

There's no effect of that. That's right. Margin profile is broadly the same.

And the next question comes from the line of Alex Potter of Piper Jaffray.

This is Winnie in for Alex Potter, actually. I was wondering if you could elaborate a little bit more also on gross margin. It seems like if I look at this quarter and the past Q4's gross margin seems to be higher than the rest of the quarters. Is there any seasonality or mix factors that we should be considering there?

Yes, Okay. Carry on. Are you finished?

Yes, that's my first question.

Okay. Now, this type happens every year, Winnie. Just, the thing is that the way we -- our sales contract works is that we encourage all customers the mixture -- to stay up all the amount of receivables outstanding to bring their receivables current by -- towards the end of the year, okay? So the way we have been doing that all along is by sort of using the rebates -- sales rebates as, what I call, a tool to encourage them to pay. So in order for them to qualify the rebates, they have to achieve 2 things: one, they have to achieve the volume, targeted volume, of course, and two, they have to bring their receivables current. So the -- throughout the year from the first 3 quarters, we usually have to estimate what the rebate is going to be, and we will finalize it to -- in the fourth quarter once we know the actual status of each customer. So as a result there is normally quite a bit of a higher margin in the fourth quarter because of some, I'd call, adjustments.

Okay. Can you also provide an update on your outlook for the 2015 truck and bus market and then any take on 2016?

Okay. I won't mention on 2016. But in terms of 2015, the way we look at the market is because of the National IV implementation enforcement I've talked about 1.5 years, in 2013, 2014. We expect the first half of 2015 truck market to slow. However, we believe that it will pick up again back in -- perhaps in the second half of the year once all the pre-buys have been digested. The bus market, that's, in a way, waiting for the maturity point. We expect that to be quite -- to be flat this year.

Okay. And what do you think about the new-energy bus market in China? I think buses have historically been an area of strength. Do you think this would potentially be at risk going forward given the new-energy bus market government [ph]?

Our natural gas engines have been -- I mean, growing very well. In the last few years has been growing double digit. So that's, actually, because the government, and particularly those in the big cities wants to clean up the environment. They are encouraging the intercity buses, especially, to use the natural gas engine. So we have been selling cross hybrids in there and also some hybrid engines as well.

Okay. And then, specifically, I guess, on the truck obligation for natural gas vehicles. What is your take given the falling oil price this year or in the past few quarters?

Well, we believe the world market shouldn't change too much. I think with the drop in oil prices to the level that it is now, we should see some slowdown in the natural gas market, even though it's not that big right now. However, whatever decline you see in the natural gas market, we should see a pickup in the diesel market.

And the next question comes from the line of Paul Gong of Citi.

The first one I just want to follow-up with Winnie's question just now. You mentioned the comps for the 2015 full year, you expect flat for the full year in terms of the sales of units. Can you just have a breakdown of how that would be play within truck, within bus and construction machinery different categories?

Okay. So I will just break it to just trucks and buses. Okay. Now, in terms of bus, it is flat but mainly relating to the bus market. Now, in the bus market, I think, the growth rate is not to be too high even if it's just going to be some [ph]. Now, the -- one of the growth areas we have -- from we see, is in the city bus and the natural gas segment. Now these are only flatter [ph] because it's actually driven by the environment. In bus, however, in the intercity buses, that would be affected by the -- what I call the high-speed rails that have been built across China. So that in a way is -- will either raise some of the market -- the bus market for the intercity buses. In terms of trucks, it's a bit hard to get a sort of estimate right now. Lastly, because of the enforcement of the National IV engine. So we expect the first half to slow compared to the previous year. This previous year, in the 2014, the first half was pretty strong, okay? In 2014, the second half, in a way, slowed down quite considerably. So we have seen kind of a slowdown and continue into the second half -- from the first half. But second half, we should see it stabilize or maybe some pickup because once the pre-buy is digested, okay? In terms of industrial engines, we -- if you offset last year, we confirmed -- we think that it will continue to slow this year as well.

So basically, if we have to pick on either [ph] bus, truck and the industrial, sounds to me like it's quite difficult to find the other, which one is growing clearly faster, which one is clearly slower. It's more like causing some uncertainties but a similar rate from your point of view, right?

Yes, definitely. The building industry in China is very weak right now. But in our case, we have -- we are fortunate. I mean, last year, especially, we had a quite strong sales in agriculture segment. So we expect this will continue. I mean, we haven't seen anything yet, but we think the government's come up with an incentive. They've actually tried to. Our Marine business, is also -- there's -- we have seen some pretty good growth there. Now with the gasification of the, I call it the marine engine, we think this market will grow as well.

Okay, yes. Okay. My second question is regarding the contribution of natural gas engine. And I think you just mentioned you have developed trucking hybrids engine. Can you remind us how much contribution are these to our revenue right now on the -- especially, for the trucking, is that contributing now?

The hybrid? Yes. They definitely have contribution. Now, I think in total, we did get a result, was 36,000 units of natural gas engines. Many of them would have some hybrid in it, all right? So the contribution of hybrid engines and natural gas engines is definitely higher than our -- of course, our diesel engines right now. In terms of contribution, we have improved our performance this year.

Okay, so the natural gas was 6,000 or...

Natural gas was about 36,000.

36,000. And the hybrid was?

The hybrid right now is not that big. It's very small right now.

Okay. So very small, okay.

Yes.

And the third question is, actually, a small question. I noticed that in the first quarter, that tax rate has been significantly lower than 1 year ago. Can you briefly explain what was the reason behind?

Yes. So I'll leave it to Kok Ho to answer the question.

Yes. This is mainly because we have a global losses in the other joint venture that -- and also the deferred tax resulting from some of these government grants that we have that's resulting in the shift in the tax effect. But by less [ph], if you look at our history, our tax effect are ranging from 17% to 19% range, around that. This is because the main operating entity, which is GYMCL is still continuing to enjoy a preferential tax rate 15%. So that's roughly, that would be it, yes.

So with effective tax rate outlook doesn't change. It will remain to be 17% to 19%?

Yes.

But in fourth quarter, it was because net loss on the JV -- I assume the JV -- the tax rate is already like on the previous [ph] level. So the equity income contribution is already a net of the tax. So that shouldn't affect our effective tax rate. Is that the case or are there any other reason?

The other part is what I would say is the deferred tax resulting from some of these government tax grants that we had. That helped -- that caused the shift.

So some tax credits that we had some.

Yes.

And the next question comes from the line of Mohit Khanna of Value Investment Principals.

Could you please just elaborate what is the age -- average age of the trade receivables on the balance sheet? And what is the average trade tables or figure that you would see? And also, what is the free cash flow yield for the company this year in '14?

Yes. Maybe on the ARB, maybe I can give you a quick understanding. If you look at the total trade and bill receivable, we are trending [ph] around about 180 days. But bear mind that in all these trade and bill receivables, about 90% of bank debt builds if you -- bank debt just means that we can choose in our own timing to discount them into cash. But usually, we will watch the market and depending on the discounting rate, before we discount them. Because discounting rate is unlike bank lending rate, which is set by the government. It can string in the large range, even from 3.5%, sometimes even go up to close to 7%, see? So while our AR base, you look at it, it may -- I'm going to say the ARB as a trade and bill receivable you look [indiscernible] but 90% are backed by the bank. AP we have shortened our days somewhat, but this is a general overall situation that we see in China. Many of these supplies that we book with them are for long term. So this is the moment we cover up each other. And for or for the cash generating ability, if you look at our numbers, our EBITDA generation is always close to RMB 1.6 billion to RMB 1.7 billion, consistently for both 2014 and 2013. We have remained so consistently throughout the year. Yes.

Let me add to that a little bit, what he's trying to explain. Now, if you remove the bank bills, which is the -- in a way is guaranteed by the banks. There's a [indiscernible]. What's left, as you know, of course, half [ph] credit, is less of than a month in total here. So in terms of operating credit, we have very low ARB.

And the next question comes from the line of Stephen Fohard [ph] of Pacific Investment Advisors.

Okay. The question I have is, as I see it, the C&C joint venture is doing pretty well. That looks like a good one. And I'm also wondering about the China North joint venture. They were -- you were saying that it was going to be 150,000 engines per year when it was up and running. So my question is actually pretty simple. When are those joint ventures going to start contributing to our earnings in your opinion?

Okay, okay. Firstly, the C&C joint venture, C&C joint venture is doing quite well. We have sold over 6,000 units last year. We expect to sell more this year and achieve a little breakeven point this year. Now, if you look at on our -- what we call -- come from our associate company, the total losses come down significantly, okay? So there is move in the right direction. We think we can get better. In terms of the joint venture, no, [indiscernible] we have not taken it to the next step yet. So we are still explore -- what I call -- we're exploring and looking at markets and also talking to our customers about our joint venture partner about it. So this one we haven't really focused the investing in this joint JV yet.

Well, do you have any idea when the C&C joint venture will contribute to earnings, any idea?

So we expect if not this year, next year.

Ladies and gentlemen, thank you for your questions. We have now reached the end of our Q&A session. With that, I will now like to turn the call back over to Mr. Ho. Please continue.

Thank you, all, for participating in our conference call. We hope -- look forward to speaking with all of you again. Thank you.