Kevin Theiss
Thank you for joining us today and welcome to China Automotive Systems 2015 second quarter conference call. My name is Kevin Theiss, and I’m 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 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, 2014 filed with the Securities and Exchange Commission on March 26, 2015, respectively; and in 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 2015 second quarter and six months financial results. And then I will turn to management to conduct the question-and-answer session. The 2015 second quarter and six months results are unaudited numbers, results are reported under U.S. GAAP. For our call today, I’ll review the financial results in U.S. dollars. First, let’s review the industry status and our market position for the second quarter of 2015. According to China’s National Bureau of Statistics, China’s GDP growth was 7% year-over-year in the second quarter of 2015. This growth was inline with the governments target and that’s the growth in the first quarter of 2015. While the GDP growth has stabilized, it continues at a slow growth rate. The slow economic growth in the second quarter of 2015 reflected a continuing sluggish Chinese real estate development market and general economy. Our sales of $109.2 million was the second highest sales for any second quarter in the company's history only trailing last year's record $115.5 million. In the second quarter of 2015, our sales declined by 5.5%, compared with a 1% decline in total vehicle sales and a 0.6% increase in passenger vehicle sales in the second quarter 2015. However the industry sales of passenger vehicle using the hydraulic power steering gears declined noticeably, while vehicles using the more advanced electric power steering EPS products continue to grow. Our lower sales mainly reflected a sales decrease in our hydraulic steering products due to market conditions. Our EPS sales grew 47% in the second quarter of 2015, representing 16% of total sales. Continue sales growth in the Chinese domestic SUV market help the company sales in the second quarter of 2015 versus last years second quarter. We reported lower sales of steering products for the commercial vehicle market, as sales to commercial vehicles in China declined 8.6% in the second quarter of 2015 compared with the same quarter in 2014. We also continued to expand sales in North America, the second largest global automotive market in the world. Sales to North America increased by 15.2% year-over-year as our key customer Fiat Chrysler reported its 63rd consecutive month of year-over-year sales gain. The Jeep brand reported at June 2015 was its best June sales month ever with a 25% growth over June 2014 sales. June is also Jeeps 21st consecutive month of year-over-year sales gain. Wrangler reported its best June in sales ever and 17% increase was the second highest monthly sales in 2015. Wrangler also won the TheEdmunds.com 2015 best retained value awards in the mid sized traditional SUV category. RAM pickup trucks increased by 1% in June, to its highest June sales in the last in 11 years. We continue supply our second global OEM in North America Ford with steering gears for certain models in North America. We are encouraged by the ongoing orders in Ford. Our South America assembly facility is doing trial production on our steering products and we expect the facility to be fully operational by the end of 2015. In the short [ph] capacity will be for approximate 1000 units annually with the potential expansion up to 400,000 units in the future. We'll be able to directly serve our Tier 1 OEM, Chery Auto operations Brazil and penetrate with the local manufacturers with the service operations – operations and penetrate with the local manufacturers and service network. This facility will make us more efficient to provide quicker supply and inventory control for the local and the regional markets. We anticipate the sales into foreign markets will continue and become a larger portion of our total sales over the next few years. The recent RMB devaluation it will help to build our overseas sales, as our EPS products continue to grow in the second quarter of 2015, we increased our research and development investment by 23.1% to $6.4 million. We developed the first domestic EPS products in China and we are expanding our portfolio of EPS products so they are applicable to a widening number of vehicles. We continue to improve our research and development capabilities and intend to further improve our current products and introduce new products. Cash flow from operations increased $9.6 million in the second quarter of 2015. Total cash, cash equivalent and short-term investments were $108.6 million. Working capital increased to $205.8 million at June 30, 2015, compared to $198.1 million as of December 31, 2014. Total company's stockholders' equity was $313.6 million as of June 30, 2015, compared to $289.3 million as of December 31, 2014. The central governments recent fiscal mandatory [ph] policies have encouraged growth, interest rates have been reduced four times since November and the required reserve ratio for banks has been lowered by more than 1.5%. Additionally the China central government has allocated funds to develop more affordable housing to upgrade the Internet infrastructure and authorize building six new realigns [ph] Investment in fixed assets rose a 11.4% in May and June and we just depreciate R&D will help Chinese exports which in long run will help the company win more international business. We have controlled our operating expenses and enhanced our financial strength. Our increase in research and development is adding a growing number of EPS products excuse me, to our broad product with advanced steering products. We developed the first domestic EPS products and we remain leaders in this domestic technology. Additionally, EPS and other advanced products are relying on us to gain market share in foreign markets as well. Let me now go through the year results for the second quarter of 2015. The second quarter of 2015, our net sales were $109.2 million, compared to $115.5 million in the same quarter of 2014. Net sales declined due to lower sales of domestic vehicles using the company's legacy hydraulic power steering, partially offset by higher sales to North America and sales of our EPS units in China. Also, steering sales to the commercial vehicle market declined due to the economic slowdown in China and the effects of the implementation of the stricter National IV emission standards in 2015. Gross profit increased to $21.8 million in the second quarter of 2015, compared to $21.6 million in the second quarter of 2014. The gross margin was 20% in the second quarter of 2015, versus 18.7% in the second quarter of 2014 and 17.6% in the first quarter of 2015. The gross margin increased mainly due to greater efficiencies driving unit cost lower. Selling expenses decreased to $4 million in the second quarter of 2015, compared to $4.3 million in the second quarter of 2014. Selling expenses represented 3.7% of net sales in the second quarter of both 2015 and 2014. The decrease was mainly due to lower transportation expenses and reduced advertising costs. General and administrative expenses were $3.8 million in the second quarter of both 2015 and '14. G&A expenses represented 3.5% of net sales in the second quarter of 2015 compared to 3.3% in the second quarter of 2014. Research and development expenses, R&D increased by 23.1% to $6.4 million in the second quarter of 2015, compared to $5.2 million in the second quarter of 2014. The increase in R&D expenses was mainly due to higher expenditures for the development of the company's EPS products, and included higher personnel-related expenses and mold improvement costs. R&D expenses represented 5.9% of net sales in the second quarter of 2015, compared to 4.5% in the second quarter of 2014. Income from operations was $8.3 million in the second quarter of 2015, compared to $16.5 million in the same quarter of 2014. The decrease was primarily due to the lower gain on other sales related to a $7.5 million gain on the sale of land use rights recognized in the second quarter of 2014. Without the $7.5 million gain on sale of land use rights, income from operations for the second quarter of 2014 would have approximated $9 million. As a percentage of net sales, the operating margin was 7.6% in the second quarter of 2015, compared to 14.3% in the second quarter of 2014. Without the $7.5 million gain on sale of land use rights, operating margin for the second quarter of 2014 would have approximated 7.8%. Net financial income in the second quarter of 2015 was $0.7 million compared with $0.5 million in the second quarter of 2014. The increase was mainly due to higher interest income from time deposits. Income before income tax expenses and equity in earnings of affiliated companies was $9.2 million in the second quarter of 2015, compared to $16.6 million in the second quarter of 2014. The decrease of $7.4 million in the second quarter of 2015 was mainly due to the reduction in the gain on other sales related to the sale of land use rights in the second quarter of 2014. Net income attributable to parent company's common shareholders was $7.7 million in the second quarter of 2015, compared to net income attributable to parent company's common shareholders of $11 million in the corresponding quarter of 2014. Diluted earnings per share were $0.24 in the second quarter of 2015, compared to diluted earnings per share of $0.39 in the second quarter of 2014. Excluding the one-time gain on the sale of land use rights, net income and diluted earnings per share would have been $5.9 million and $0.21 respectively in the second quarter of 2014. The weighted average number of diluted common shares outstanding increased by 14.5% to 32,138,438 in the second quarter of 2015, compared to 28,064,376 in the second quarter of 2014. Now let's go over the first six months results for 2015. Net sales increased to $232.6 million in the first six months of 2015, compared to $229.8 million in the first six months of 2014. Six-month gross profit was $43.5 million, compared to $42.9 million in the corresponding period last year. Six-month gross margin was 18.7% in both 2015 and 2014. The gain on other sales of $2.4 million in the first six months of 2015 compared with $9.1 million in the 2014 period due to a gain of $7.5 million from the sale of land use rights in the second quarter of 2014. Income from operations was $17.6 million, compared to $26.3 million in the first six months of 2014. Without the gain from the sale of land use rights, income from operations would have approximated $18.8 million in the second quarter of 2014. Operating margin was 7.6%, compared to 11.4% for the corresponding period of 2014. Without the $7.5 million gain on sale of land use rights, operating margin for the first six months of 2014 would have approximated 8.2%. Net income attributable to parent company's common shareholders was $16.2 million in the first six months of 2015, compared to $17.8 million in the corresponding period in 2014. Diluted earnings per share were $0.50 in the first six months of 2015, compared to $0.63 for the corresponding period in 2014. Excluding the one-time gain on the sale of land use rights, the diluted earnings per share would have been $0.45 in the first six months of 2014. Management has revised its revenue growth target for the full year 2015 to be even with 2014 due to the China Automotive markdown - market slowdown. This target is based on the company's current views on operating and market conditions, which are subject to change. The outlook is uncertain over the next few quarter. However, the central government is adopting new policies in actions to increase economic growth in China. We continue to monitor our operations to increase efficiency, and maintain toward increase our margins, with low cost manufacturing and advanced steering products, we are well positioned to defend our domestic market share and become a larger supplier in a global market. With that, operator we are ready to begin the Q&A.
