CAAS 中汽系统

Operator

Greetings, and welcome to the China Automotive Systems’ First Quarter 2013 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. It is now my pleasure to introduce your host, Mr. Kevin Theiss with Grayling. Thank you Mr. Thesis, you may begin.

Kevin Theiss

Thank you for joining us today and welcome to China Automotive Systems 2013 first quarter conference call. My name is Kevin Theiss and I am with Grayling, China Automotives’ U.S. Investor Relations Advisor. Joining us today are Mr. Hanlin Chen, Chairman; Mr. Qizhou Wu, Chief Executive Officer; Mr. Jie Li, Chief Financial Officer; and Mr. Daming Hu, Chief Accounting Officer of China Automotive Systems. They will be available to answer questions later in the conference call and we will help with translation. Before we begin, I will remind all listeners throughout this call we may make statements that may contain forward-looking statements. Forward-looking statements represent our 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 described under the heading Risk Factors in the Company's Form 10-K Annual Report for the year ended December 31, 2012 and under the heading Risk Factors in the Company's Form 10-Q for the three months ended March 31, 2013 filed with the Securities and Exchange Commission on May 14, 2013, respectively, and in documents subsequently filed by the Company from time to time with the Securities and 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. I will provide a brief overview and summary of the 2013 first quarter results and then I will turn to management to conduct the question-and-answer session. The 2013 first quarter results are unaudited under U.S. GAAP. For our call today, I will review the financial results in U.S. dollars. Industry overview, our sales increased by 20.1% year-over-year and we outperformed the domestic industries, automotive production and sales growth of 12.8% and 13.2% respectively. We captured market share to further enhance our dominant market position in the steering market in China. Our all, Chinese automotive OEM customers manufacture a large and diverse range of vehicles and our broad product line of steering products is used in almost all categories of passenger vehicles in China as well as sales into the commercial vehicle market. Higher sales of our proprietary electric power steering systems contributed to our sales growth in the first quarter of 2013. We also sold more units in China as automotive vehicle sales grew partially due to the government’s incentive policies to encourage the purchase of lower emission and more fuel-efficient cars that began in 2012. Our net sales increased in the 2013 first quarter was mainly due to significant sales to our new customer SGMW and an increase in sales to Brilliance Auto, BYD Auto, Great Wall Auto and sales increase of electronic power steering products. We look forward during 2013 for fresh economic policies from the new central government which may encourage new investments and fixed assets and therefore improve the outlook for commercial vehicles sales in China. In addition to supply chain of Chinese domestic brands we achieved a milestone in the 2013 first quarter when we begin supply in steering products to another Sino-foreign joint operation in China. With our multiyear supply agreement with the joint venture between SAIC, General Motors and Wuling known as SGMW, we captured market share in the fast growing multi-purpose vehicle market in China. MPV’s grew by 50% over 300,000 units in the 2013 first quarter in China according to data from the China Association of Automobile manufacturers. Our new Sino-foreign relationship further demonstrated our ability to move beyond being a supplier to local domestic Chinese OEM’s as [SGMW] joins FAW-Volkswagen and Dongfeng Peugeot Citroen as customers. Each of these three customers as part of a global operation that requires the higher standards, and we were selected two supply steering after long and thorough due diligence processes. Our product steer the FAW-Volkswagen Jettas and the FAW Peugeot Citroen models 206 and Elysee R23 in China. Our steering products that now also being installed into SGMW’s Wuling Hongguang brand, which is the best selling MPV in China, based on current order rates, total steering systems to be shipped by the company to SGMW could approximate 350,000 units for the 2013 year. Due to our products proven global performance, their ability and high-quality characteristics they typically replace higher priced imported parts. Billion of our products to global standards and let us to diversify into foreign markets to fulfill our global ambitions. Our sales to our North American customer continue to expand in the first quarter of 2013, our North American sales have progressed as we first exported for a leading SUV, followed by steering products for two light-duty truck models. We are also building an aftermarket steering product for an OEM brand for their well-known SUV. The South American market is another promising market, as we shift to a Chinese OEMs operations there as well as having entered into the Brazilian aftermarket for steering products. In addition to supply of steering products to OEMs in foreign markets where they are used in local vehicles as our Chinese OEM customers enter foreign markets an opportunity arises for CAAS to export products for them and create a new base for local sales growth. We look for further growth in foreign markets in the years to come. Our sales growth in China is a result of our close relationships with many of China’s leading automotive manufacturers due to our track record for high-quality, innovative new products resulting from our research and development and large-scale cost effective manufacturing. By upgrading traditional products and producing advanced new products at low cost, we have propelled CAAS into the dominant leader in steering products in China and penetrated into the global markets. We maintained our expenditures in R&D in the first quarter of 2013 at $3.4 million, for further development of our electric power steering and other new products for the Chinese and export markets. The company’s, Jingzhou Henglong Automotive Technology Test Center Laboratory received this National Accreditation from the China National Accreditation Service in the first quarter of 2013. Making at the only nationally approved laboratory among China’s power steering companies, we also invested another $2.8 million during the first quarter of 2013 in new equipment to improve production productivity and capacity to make us a more effective competitor. Our earnings increased faster than sales in the 2013 first quarter, as gross profit increased by 26% and income from operations rose by 45.7%. The increase in gross profit was mainly due to higher sales and economy of scale and sales were $16.1 million higher than in the same quarter in 2012. Gross margin was 20% for the first quarter of 2013 from 19% in the year ago same quarter, income from operations increased a $9.3 million or 9.6% of revenue in the first quarter of 2013 mainly due to the growth of gross profits combined with stringent control of operating expenses. In the first quarter of 2013, we announced that CAAS and its operating subsidiaries, had won the 2012 Chrysler China Regional Excellent Supplier Award, and the second place award for 2012 in the Global Metal Product Supplier category. Additionally, our subsidiary Hubei Henglong, was named as the National Excellent Supplier of Steering Systems in China by China Automotive News, these acolytes provide evidence to the quality of our products and our service to meet or exceed our customers changing supply requirements. In August 2012, we announced a $5 million share buyback to take advantage of abnormally low valuations in the market for Chinese stocks trading in the U.S. approximately 220,000 common shares have been repurchased in the open market transactions, sense August 2012 at a cost of nearly $1 million. We will continue to invest in our company shares and we believe they’ll offer a good return on investment and to show the investment community, our commitment to building shareholder value. At March 31, 2013 our cash and equivalents were at a historical $90.4 million high, this cash position demonstrates the company’s ability to generate substantial positive net cash flow after investing in property, plant and equipment as well as investing in research and development. We continue to invest our refinancing resources to build the company with a goal of expanding out in international base and becoming a leader in the global steering systems market. Now let me walk through our first quarter of 2013 financial results. In the first quarter of 2013, net sales increased by 20.1% to a first quarter record of $97.2 million, compared to $80.9 million in the same quarter of 2012. The net sales increase was mainly due to significant sales to SGMW and an increase in sales to Brilliance Auto, BYD Auto, Great Wall Auto and sales increase of our EPS systems. An increase in automotive vehicle sales in China, the sale of new products to a customer in North America and the appreciation of the R&D versus the U.S. dollar which were partially offset by the lower average selling prices of the product sold in China. Gross profit increased by 26% to $19.4 million in the first quarter of 2013, compared to $15.4 million in the first quarter of 2012. The gross margin was 20% in the first quarter of 2013 versus 19% in the first quarter of 2012. The increase in gross profit and margin was primarily due to greater sales volume and lower unit cost mainly as a result of reduced raw material expenses, and technical improvements to enhance production efficiency. Selling expenses rose by 45.5% to $3.2 million in the first quarter of 2013, compared $2.3 million in the first quarter of 2012. Selling expenses represented 3.3% of net sales in the first quarter 2013, compared to 2.7% in the first quarter of 2012. The increase was mainly due to higher compensation and transportation expenses due to an increase in the number of sales personnel. General and administrative expenses increased by 20.6% to $4.1 million in the first quarter of 2013, compared to $3.4 million in the same quarter of 2012. The increase was mainly due to higher attorney expenses. G&A expenses represented 4.2% of net sales in the first quarter of 2013, and also in the first quarter of 2012. Research and development expenses decreased by 5.6% to $3.4 million in the first quarter of 2013, compared to $3.6 million in the first quarter of 2012, the decrease in R&D expenses was mainly due to lower personnel-related expenses and reduced external support fees. R&D expenses represented 3.5% of net sales in the first quarter of 2012 which was a decrease from 4.4% in the first of 2012. Income from operations increased 47.6% to $9.3 million in the first quarter of 2013, compared to $6.3 million in the first quarter of 2012. As a percent of net sales, the operating margin was 9.6% in the first quarter of 2013, compared to 7.8% in the first quarter of 2012. The increase was mainly due to $4.0 million rise in gross profit and stringent control of operating costs during the first quarter of 2013. Net financial expenses decreased by 77.8% to $0.2 million in the first quarter of 2013, compared to $0.9 million in the same quarter a year ago. This reduction was primarily due to a decrease in interest expenses as a result of the redemption of the remaining convertible notes by the Company on May 25, 2012. There was no gain or loss on change in the fair value of derivatives in the first quarter of 2013 as all the convertible notes had been redeemed by the second quarter last year, compared to a non-cash loss of $3.9 million in the first quarter of 2012 due to movements in the Company’s stock price during that quarter. Income before income tax expenses and equity in earnings of affiliated companies was $9.2 million in the first quarter of 2013, compared to $1.6 million in the first quarter a year ago. The increase in income before income tax expenses and equity in earnings of affiliated companies in the first quarter of 2013 was mainly due to an increase in operating income of $3 million, a decrease in financial expenses of $0.7 million, and a decrease in the loss in fair values of derivatives of $3.9 million in the first quarter of 2012, while there was no such loss in the first quarter of 2013. Net income attributable to the parent company’s common shareholders was $5.9 million in the first quarter of 2013, compared to a net loss attributable to parent company’s common shareholders of $0.8 million, including net income of $0.03 million from discontinued operations, in the corresponding quarter of 2012. Diluted earnings per share were $0.21 in the first quarter of 2013, compared to diluted loss per share of $0.03 in the first quarter last year. The weighted average number of diluted common shares outstanding was 28,050,937 in the first quarter of 2012, compared to 28,260,302 shares in the first quarter of 2012. As of March 31, 2013 total cash and cash equivalents were $90.4 million, compared to $87.6 million as of December 31, 2012. Working capital was $144.5 million at the end of March 2013 compared to $138.7 million as of December 31, 2012. Management’s revenue guidance remains of 10% year-over-year growth in the full year 2013. This target is based on the Company’s current views when operating and market conditions, which are subject to change. With that operator, we are ready to begin the Q&A session.

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Bill Gregozeski with Mont Blanc Capital. Please state your question.

William Gregozeski

Hi, I have a few questions for you, can you tell us what the EPS sales and the international sales were in the first quarter? [Foreign Language]

Unidentified Company Representative

Okay. The EPS sales in the first quarter is about 30,000 units that’s total amounted to US$3 million and international sales which is our export business to North America that total around US$10 million.

William Gregozeski

Okay. And then on the SGMW order, when did you actually start supplying to them, because I was under the impression from the press release a couple of weeks ago that you’ve just won that order? [Foreign Language]

Unidentified Company Representative

Our shipment to SGMW actually started in January 2013. The volume has dramatically increased in the recent months and also it took us some time to finalize the contract. So we made an announcement after the contract has been finalized, which is a detail of total amount at the volume, they will be purchasing from us on an annual basis.

William Gregozeski

Okay. Is that 350,000 of fixed numbers then or could that fluctuate going forward?

Unidentified Company Representative

[Foreign Language] [Foreign Language]

Unidentified Company Representative

Okay. 350,000 units is based upon their projected sales for 2013. And the share we are getting in terms of the volume for as a supplier and so that’s how we get calculated, however in the future, if they can continue to increase the volume, we will, our total supply contract will also increase proportionally.

William Gregozeski

Okay, so you’re probably at 40%, 50% of what they are going to do as a total amount of sales going forward or at least that where it is right now?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Okay, it depends on the vehicle models, some models we have penetrations up to 80%, 70% to 80%, some models we only have 20%, so it’s a vehicle model based calculation on to come up this total volume in number.

William Gregozeski

Okay, how many units did you ship to them in the first quarter?

Unidentified Company Representative

[Foreign Language] 80,000 units in the first quarter to SGMW.

William Gregozeski

Wow, okay, so it is probably not going ramp too much up going forward from that quarterly figure then right?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

Second quarter well you see it’s exceeding 80,000 units.

William Gregozeski

Okay. And my last question is with all the cash you have, are there any plans for what to do with that?

Unidentified Company Representative

[Foreign Language] We are… [Foreign Language] Okay. [Foreign Language]

Unidentified Company Representative

Okay. So, basically the cash flow we use in the following areas, first, it will go into similar portion of that cash flow will be used in the CapEx and mainly to expand our capacity for the export related business and also prepare us to expand our footprint globally, we’re not looking only in the U.S. market, we’re looking other areas as well. And secondly, we are going to inject some of the money into our Beijing, as I mentioned it was Beijing Auto, so we’re going to continue to build out that facility and to prepare the rollout of the number of products with Beijing Auto. And lastly, we put some of the money into the low risk financial instruments in China to create some of the returns. So, that’s how it has been used and on top of that we’ll get some of the buyback, so, that’s the general answer for the cash.

William Gregozeski

Okay, all right. Thank you, very much.

Unidentified Company Representative

You are welcome, thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of [Robert Pavlovich] a Private Investor. Please state your question.

Unidentified Analyst

Hi, how is everybody today, this is a great day right?

Unidentified Company Representative

Thank you.

Unidentified Analyst

I have a couple of easy questions, actually, I am a shareholder of fair significance I guess I’ve had the stock for a couple of years, but I was just wondering, I know China Automotive has been making inroads of new contract agreements and so forth. How do we look as far as inroads with German or Japanese auto manufacturers, I know that these companies typically like if they start to manufacture in China, they tend to partner up with their suppliers that were based out of their primary countries, what do you see in that areas, as far as our potential to make them progress in those areas, maybe get some awards?

Unidentified Company Representative

[Foreign Language] Okay. [Foreign Language]

Unidentified Company Representative

Okay so regarding your question, we actually have been supplied to FAW, Volkswagen as John mentioned in China for a number of years, since 2007 and the model we supply is Volkswagen, Jetta. And we also recently started a conversion with Volkswagen, China, and looking to a number of other vehicle models, the initial evaluation, we’re already passed initial evaluation, so we are still in discussion with them and to develop that part of business, possible business. In terms of Japanese OEMs, Japanese system is very protected, it’s hard to penetrate, and however we are making some inroads was one of that John mentioned in China, is Nissan, Dongfeng Motor. Nissan Dongfeng are looking on our EPS product, where are in the [design] evaluation phase, one of the particular model, right now. So, we’re making some progress on that as well, although in general, it’s hard to get into the Japanese market.

Unidentified Company Representative

I would assume that as these companies want to setup manufacturing in China, there is a better [shop] for China Automotive to get some of that activity you know. [: [:

Unidentified Company Representative

Okay. And those joint venture with a foreign OEM when they come to China, they start off former joint venture with the Chinese player, but also they bring in some of the relationship they already established with their home market, so the suppliers are using the home market and to follow [search] and open the factory in China. So that’s how the procurement start with OEM and however, over time we see opportunities that they will start to looking at the local supplier, where the technology and the qualities standard meet their requirement. And so, at that point we definitely will see some of the portion of the business will come out to us, it’s a good possibility there, but again if we want to take over completely as a main key supplier it’s going to be a long way to go. [Foreign Language]

Unidentified Company Representative

Okay. So, it’s not in the near-term action to become a key supplier to those players, with some relationship they have established has been longstanding.

Operator

Thank you. As this brings us to the end of our Q&A session, I would like to turn the floor back over to Kevin Theiss for closing remarks.

Kevin Theiss

Thank you for participating in our first quarter 2013 earnings conference call. We look forward to speaking with you again and we wish you a good day.

Operator

This does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.