Kevin Theiss
Thank you for joining us today and welcome to China Automotive Systems 2014 third quarter and nine month conference call. My name is Kevin Theiss, and I am with Grayling, China Automotive’s U.S. Investor Relations Advisor. Joining us today are Mr. Hanlin Chen, Chairman; 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 that 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 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, 2013 filed with the Securities and Exchange Commission on March 31, 2014, respectively; and then documents 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 2014 third quarter and nine months financial results. And then I will turn to management to conduct the questions and answer session. The 2014 third quarter and nine months results are unaudited numbers or the fiscal year numbers are audited, both period results are reported under U.S. GAAP. For our call today, I will review the financial results in U.S. dollars. In the third quarter of 2014, our overall sales increased by 11.9% to a record third quarter high of $111.7 million, compared to $90.9 million in the same quarter of 2013. We continue to capture market share both in the Chinese and North American markets, the two largest automotive markets in the world. We increased our market leadership in China as our 11.9% sales growth exceeded the 8.1% growth of passenger vehicles in China in third quarter of 2014, according to statistics from the China Association of Automobile Manufacturers CAAM. Our slower growth rate compared with previous quarters reflected the slowdown in the Chinese economy as GDP growth slowed to 7.3% in the third quarter the lowest quarterly GDP rate in the past five years. The slower growth reflected a decline in real estate, lower industrial demand and policy concerns as the government shifted the economy to a more consumption orientation. We have used our world class research and development capabilities to develop advanced steering for diverse market segments such as sedans, MPVs, SUVs, mini vans and trucks and buses of various sizes for over 60 vehicle OEMs. Our R&D increased by 26% in the first nine months of 2014. New products and updated legacy products have spearheaded our growth as they meet or exceed customer requirements. In addition to domestic OEMs our high quality and high performance steering products have gained market share with foreign joint venture brand customer's SAIC-GM-Wuling, FAW Volkswagen and Dongfeng Peugeot Citroen. A particularly strong sales driver has been our newer higher priced middle level electric power steering units, they are achieving strong demand due to their ability to lower in engine missions and increase fuel efficiency. We expect our growing portfolio of EPS products will continue to be a key driver of our future growth in China. Our 2013 third quarter sales to North America grew by 22.4% compared to the same quarter last year. Our key customer Chrysler reported its 54th consecutive month of year over year sales gains in September 2014. Our brand reported that September 2014's, 47% sales increase was the highest growth rate among all Chrysler brands and September sales were the best in jeeps history. RAM truck brand sales increased by 35% in September its highest September sales in the last nine years. RAM pickup trucks achieved their 53rd consecutive month of year over year sales gains. Our relationship with Chrysler has been recently expanded again as we announced a new contract with RAM in October 2014. In addition to the RAM 2500 and 3500 model trucks we are now supplying the RAM model 4500 and 5500 mile trucks. With this new multiyear contract we are supplying recirculating ball RCB steering gears for all heavy duty trucks produced by Fiat Chrysler in North America. Other global OEMs have expressed interest in using our products. We have also begun to further invest our resources to enhance our growth and value. We have fully consolidated two of our subsidiaries by purchasing the remaining 20% minority interest in Jingzhou Henglongand and remaining 19% minority interest in Shashi Jiulongat at a cost of 4.1 million shares of CAAS stock. These two subsidiaries are two of our largest contributors to sales and profits these acquisitions are immediately accretive to net profits and as wholly owned subsidiaries we have a greater control over their future operations. To enhance future growth we also entered into an agreement with seven other companies to establish a partnership. Jingzhou Henglong automobile industry venture firm. This venture firm will mainly focus on investments in emerging automobile and part companies. We will contribute RMB50 million equivalent to approximately $8.1 million in three stages, representing approximately 17.9% of the total share capital. We increased our gross margin to 20.2% from 18.2% in the third quarter last year, we achieved more sales of high-end electronic power steering systems which helped the improvement of our gross margin in the third quarter of 2014 versus a year-ago third quarter, reflecting the success of our research and development. As of September 30, 2014 total cash and equivalence and short-term investments were 84.8 million compared to 89.4 million as of December 31, 2013. Working capital was $189.4 million as of September 30, 2014 compared to $179.3 million as of December 31, 2013. Total parent company stockholders equity was $287.1 million as of September 30, 2014 compared to $271.8 million as of December 31, 2013. Given our strong financial condition and profitable growth our first cash dividend of $0.18 per common share was paid in late July. We believe we are well positioned to continue to capture market share in China, North America and with our emerging operations in South America as well. The investments we are making will create opportunities for sustained growth in the future. Now let me walk you through our 2014 third quarter financial results. In the third quarter 2014 our net sales increased by 11.9% to a record third quarter high of $101.7 million, compared to $90.9 million in the same quarter of 2013. The net sales increase was mainly due to continued vehicle growth in the large, Chinese vehicle market and with sales to SAIC-GM-Wuling, Dongfeng Peugeot Citroen and others. We continue to expand our sales to Chrysler North America which is our largest single customer and we have the new recent RAM agreement in addition. Gross profit increased by 24.6% to $20.6 million in the third quarter of 2014 compared to $16.5 million in the third quarter of 2013. The gross margin was 20.2% in the third quarter of 2014 versus 18.2% in the third quarter of 2013. The increase in gross margin was mainly due to greater sales of more advanced EPS Electronic Power Steering units with a higher gross margin and continued production efficiencies. Gain on other sales was $1.1 million consisting of net amount retained from the sale of materials and property, plant and equipment. For the third quarter 2013 the gain on other sales included $5 million from the sale of partial idle land use rights which represented a pretax gain of $4.1 million calculated based on the difference between the land selling price and the net book value of the related land use rights. Selling expenses rose by 42.3% to $3.7 million in the third quarter of 2014 compared to $2.6 million in the third quarter of 2013. Selling expenses represented 3.7% on net sales in the third quarter of 2014 compared to 2.9% in the third quarter of 2013. The increased selling expenses were primarily due to increases in transportation expenses and compensation to sales revenue resulting from higher sales volume. General and administrative expenses G&A increased by 32.1% to $3.7 million in the third quarter of 2014 compared to $2.8 million in the same quarter of 2013. The increase in G&A expenses was due primarily to office facility improvement expenses and higher compensation. G&A expenses represented 3.7% of net sales for the third quarter of 2014 and 3.1% in the third quarter of 2013. Research and development expenses, R&D, increased by 5.9% to $5.4 million in the third quarter of 2014 compared to $5.1 million in the third quarter of 2013. The increase in R&D expenses was mainly due to the development in trial production and the company’s EPS and other new products as well as improvement in production molds and higher external technical support fees. R&D expenses represented 5.3% of net sales in the third quarter of 2014 compared with 5.6% in the third quarter of 2013. Net financial income was $0.4 million in the third quarter 2014 compared to net financial income of $0.7 million in the third quarter of 2013. Income from operations was $8.8 million in the third quarter of 2014 compared to $11 million in the same quarter of 2013. The decrease was mainly due to no gain on the sale of idle land use rights in the 2014 third quarter versus the gain of $4.1 million in the third quarter of 2013. Income before income tax expenses and equity in earnings of affiliated companies was $9.3 million in the third quarter of 2014, compared to $12.2 million in the third quarter of 2013. The decrease in income before income tax expenses and equity and earnings of affiliated companies was mainly due to lower operating and net financial income in the third quarter of 2014 compared with the third quarter of 2013. Net income attributable to parent company's common shareholders was $6.7 million in the third quarter of 2014 compared to net income attributable to parent company’s common shareholders of $8.6 million including $2.8 million of net income from idle land sales in the corresponding quarter of 2013. Diluted earnings per share were $0.24 in the third quarter of 2014, compared to diluted earnings per share of $0.31 including $0.10 from idle land sales in the third quarter of 2013. The weighted average number of diluted common shares outstanding was 28,063,661 in the third quarter of 2014 compared to 28,062,297 shares in the third quarter of 2013. For the nine months, net sales were -- net sales increased by 15.9% to a nine-month record high of $331.5 million, compared to $286 million in the first nine months of 2013. Nine months gross profit was $63.5 million, compared to $54.3 million in the corresponding period last year. Nine months gross margin was 19.2% compared to 19% for the corresponding period in 2013. For the nine months ended September 30, 2014 gain on other sales amounted to $10.3 million compared to $6.8 million for the same period of 2013. This increase of $3.5 million was mainly due to the higher gain on a sale of land use rights in the second quarter of 2014. During the nine months ended September 30, 2014, CAAS sold its remaining land use rights for a gain of $7.5 million compared with a $4.1 million gain for the same period of last year. Income from operations increased by 24.8% to $35.1 million to $28.1 million in the first nine months of 2013. Operating margin was 10.6%, compared to 9.8% for the corresponding period of 2013. Income before income tax expenses and equity and earnings of affiliate companies increased 24.4% to $36.2 million from $29.1 million in the first nine months of 2013. Net income attributable to parent company’s common shareholders increased 25.4% to $24.5 million from $19.5 million in the corresponding period last year. Diluted earnings per share were $0.87 in the first nine months of 2014 compared to diluted earnings per share of $0.70 for the corresponding period in 2013. As of September 30, 2014. Total cash and cash equivalents and short term investments excluding pledged deposits were $84.8 million compared to $89.5 million as of December 31, 2013. Working capital is $152.4 million as of September 30, 2014 compared to $179.3 million as of December 31, 2013. Total parent company's stockholders equity was $241.6 million as of September 30, 2014 compared to $226.7 million as of December 31, 2013. For the 2014 year, we reiterate our revenue guidance of 15% year-over-year growth. This target is based on the company's current views in operating and marketing conditions, which are subject to change. We continue to focus on capturing market share in China and expanding our international operations as our customer base increases. We continue to be focused on maintaining our gross margins and to generate positive cash flow. With that operator, we are now ready to begin the Q&A session.
