CAAS 中汽系统

Operator

Greetings, and welcome to the China Automotive Systems First Quarter 2020 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, Investor Relations for China Automotive Systems. Thank you. You may begin.

Kevin Theiss

Thank you everyone for joining us today. Welcome to China Automotive Systems 2020 first quarter conference call. Joining us today are Mr. Qizhou Wu, Chief Executive Officer; 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 remind all listeners that throughout this call, we may make statements that may contain forward-looking statements. Forward-looking statements represent the company's 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, 2019, as filed with the Securities and Exchange Commission on May 14, 2020, and in other documents filed by the company from time to time with the Securities and Exchange Commission. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook for automobile sales, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot foresee. Any of these factors and other factors beyond our control, could have an adverse effect on the overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations. A prolonged disruption or any further unforeseen delay in our operations of the manufacturing, delivery and assembly process within any of our production facilities could result in delays in the shipment of products to our customers, increased costs and reduced revenue. 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. In this presentation and in the press release, we provide comparisons between the first quarter of 2020 and 2019, respectively, and we must caution that any comparison of operational and financial data between the two quarters will likely be a very limited value due to the impact of COVID-19 infection on business conditions in 2020. On this call, I will provide a brief overview and summary of financial results for the 2020 first quarter. Management will then conduct a question-and-answer session. The following 2020 first quarter financial results are unaudited and are reported under U.S. GAAP. For the purposes of our call today, I will review the financial results in U.S. dollars. We will begin with a review of the recent dynamics of the Chinese economy, automobile industry and China Automotive's market position. In the first quarter, the COVID-19 pandemic created major disruptions in the Chinese economy and automotive industry. For the Chinese New Year in late January to mid-March, our operations were severely disrupted due to the pandemic as the movement of people and products were subject to a nationwide lockdown as mandated by the Chinese central government to limit the spread of the COVID-19 outbreak. Sales to customers, supplies of needed components and materials, workers’ commute to work, temporarily closed factories and service networks and other auto-related occupations were all impacted in an unprecedented manner. During the first quarter, Wuhan, being the epicenter of COVID-19 pandemic outbreak in China, is not only the automobile hub of China but is also where our headquarters are located, we had to temporarily relocate our headquarters to Jinzhou where our main manufacturing operations are located and the infection rate was significantly lower during this period. Not surprisingly, for the first quarter of 2020, China's GDP declined by 6.3%, the worst year-over-year quarterly decline in decades. The government’s nationwide travel restrictions and lockdown directives created unavoidable interruptions in employment, consumer spending, industrial and corporate services, transportation which affected nearly all industrial production and marketing distribution from the first quarter of 2020. Unemployment rose to 6.2% in February 2020, the highest rate ever reported. The COVID-19 pandemic forced an already slowing China's economy and declining auto sales in China. The ongoing trade tensions between the U.S. and China have been weighing on the Chinese economy and the auto industry. Business confidence declined and fixed access investment declined by a reported 16.1% in the first quarter of 2020. According to the Chinese Association of Automobile Manufacturers, CAAM, passenger car sales in China fell 45.4% and commercial vehicle sales declined 28.4% in the first quarter of 2020. The sales of sedans, SUVs, MPVs and crossover vehicles were all down in the first quarter of 2020. New energy vehicle sales fell 56.4% in the first quarter of 2020 and government subsidies were reduced. Automobile sales were already declining as passenger vehicle sales for the 2019 year decreased by 9.6% following a 2.8% decline in car sales in 2018. Including trucks and buses, total vehicle sales decreased 8.2% in the 2019 year. In addition, the electric vehicle subsidy reduction and the impact of the first implementation phase for the more stringent national VI emission standards for gasoline engine powered passenger vehicles also affected auto sales in China. With this industry environment, our net sales in the first quarter of 2020 were $73.6 million suffering a decline of 32.6% year-over-year. The domestic passenger vehicle and commercial vehicle markets experienced reduced sales volume and average selling prices declined as we sold more lower-priced products and price competition increased. As a result, in addition to lower sales of our hydraulic steering products, our Henglong KYB joint venture which mainly provides passenger electric power steering, EPS, products to the domestic China market suffered significant decline in net sales. However, our sales to Fiat Chrysler and Ford in North America were steadfast in the first quarter of 2020. On a positive note, we have begun shipping our EPS systems to Great Wall for their ORA R150 all-electric, small vehicle on an exclusive contract. Also, our Hyoseong Wuhan Motion Mechatronics Systems Company joint venture also recently began delivering its small powerpack brushless motors for our i-RCB, C-EPS and P/DP-EPS products. We have made progress in our development programs, including new steering for the Daily van for IVECO S.p.A. in Europe, a new recirculating-ball steering system, the i-RCB Program to be used in a global tier-1 customer future autonomous vehicles in North America as well as supplying the new steering products for FCA's Jeep models starting in the late third quarter of 2020 also in North America. Despite devastating impact of the pandemic, we remain profitable as we improved our revenue mix, increased our quality of products and reduced expenses in the first quarter of 2020. Our gross margin increased in the first quarter and we have maintained our profitability during this crisis. Even during most difficult quarter in the company’s history, our operations continued to generate positive cash flow and our cash position improved. With our strong balance sheet and effective cash flow management, we remain financially sound. As of March 31, 2020, total cash and cash equivalents and pledged cash were $132.6 million. Net cash flow from operating activities was $29.2 million in the first quarter of 2020. Total parent company stockholders’ equity was $283.8 million as of March 31, 2020. All our production centers resumed full operations in mid-March after the COVID-19 lockdown restrictions were removed and we are operating with full capabilities at all facilities. We have also reopened our Wuhan headquarters. We are seeing evidence that economic conditions are slowly improving, although we believe it is still a challenging economic environment and the outlook remains clouded. However, we expect progress over the remainder of the 2020 year barring any unforeseen circumstances. The central government has initiated tax cuts, revised regulations and loosened monetary policies. New incentives have been implemented to stimulate the purchase of autos in rural areas and subsidies to new energy vehicles have been reinstated. The U.S.-Chinese trade agreement and reopening of the U.S. should help boost business activities. According to statistics by CAAM, China's overall automobile sales increase in both April 2020 by 4.4% and in May by 14.5%. We remain cautiously hopeful that the resilience of the Chinese economy and large consumer base will propel a reasonable recovery of the auto sector in the remaining part of the year. We wish to thank all our employees, suppliers, customers, government officials and healthcare providers who worked to ensure we successfully reopened our factories without endangering our workers. Now let me review the financial results for the first quarter of 2020. In the first quarter of 2020, net sales were $73.6 million compared to $109.2 million in the same quarter of 2019, reflecting a 32.6% year-over-year decline. The decrease in net sales was mainly due to lower sales volume for legacy hydraulic products due to the COVID-19 lockdown and lower average selling prices in the domestic markets during the pandemic crisis. Gross profit was $11.2 million in the first quarter of 2020 compared with $14 million in the first quarter of 2019. The gross margin increased to 15.2% in the first quarter of 2020 compared to 12.9% in the first quarter of 2019, mainly due to changes in the product mix. Gain on other sales was $0.6 million in the first quarter of 2020 compared to $1.3 million in the first quarter of 2019, reflecting lower scrap volume. Selling expenses were $2.1 million in the first quarter of 2020 compared to $3.1 million in the first quarter of 2019. The decrease was primarily due to lower freight expenses, resulting from the suspension of the company's operations for most of the quarter due to the outbreak of the COVID-19 pandemic. Selling expenses represented 2.9% of net sales in the first quarter of 2020 compared to 2.8% in the first quarter of 2019. General and administrative expenses were $3.4 million in the first quarter of 2020 compared to $4.6 million in the same quarter of 2019. The decrease was primarily due to lower office expenses. G&A expenses represented 4.6% of net sales in the first quarter of 2020 compared with 4.2% in the first quarter of 2019. Research and development expenses were $5.1 million in the first quarter of 2020 compared to $6.6 million in the first quarter of 2019. R&D expenses represented 6.9% of net sales in the first quarter of 2020 compared to 6% in the first quarter of 2019. Lower R&D expenses were primarily due to increased cost controls. Other income was $0.1 million for the three months ended March 31, 2020 compared to $1.4 million for the three months ended March 31, 2019, representing a decrease of $1.3 million, primarily due to lower governmental subsidies and a donation made to combat COVID-19 pandemic in the first quarter of 2020. Income from operations was $1.2 million in the first quarter of 2020 compared to $1 million in the same quarter of 2019. The increase was primarily due to higher gross margin and decreased operating expenses offsetting the impact of lower sales volume in the first quarter of 2020. Interest expense was $0.4 million in the first quarter of 2020 compared to $0.6 million in the same quarter of 2019. The decrease was primarily due to decreased loans. Net financial expense was $0.5 million in the first quarter of 2020 compared to $0.7 million in the first quarter of 2019. The increase in net financial expense was primarily due to a decrease in foreign exchange loss in the first quarter of 2020. Income before income tax expenses and equity in earnings of affiliated companies was $0.4 million in the first quarter of 2020 compared to $1.2 million in the first quarter of 2019. The decrease in income before income tax expenses and equity in earnings of affiliated companies in the first quarter of 2020 was mainly due to lower income from operations and lower other income. Net income attributable to parent company's common shareholders was $0.05 million in the first quarter of 2020 compared to $1.5 million in the first quarter of 2019. Diluted earnings per share were nil per share in the first quarter of 2020 compared to $0.05 in the first quarter of 2019. The weighted average number of diluted common shares outstanding was 31,174,119 in the first quarter of 2020 compared to 31,513,297 in the first quarter of 2019. We'll now go over some balance sheet items and cash flow. As of March 31, 2020, total cash, cash equivalents and pledged cash were $132.6 million, total accounts receivable including notes receivable were $196.5 million, accounts payable were $165.8 million and bank and government loans were $51.1 million. Total parent company stockholders' equity was $283.8 million as of March 31, 2020 compared to $289.2 million as of December 31, 2019. Net cash flow from operating activities was $29.2 million in the first quarter of 2020. Management wishes to reiterate its revenue guidance for the full year 2020 of $360 million. This target is based on the company's current views of operating and market conditions, which are subject to change, especially in light of the COVID-19’s impact on the economies of China and the U.S. With that, operator, we’re ready to begin questions and answers.

Operator

Thank you. [Operator Instructions]. Thank you. Our first question comes from the line of Robert Pavlovich [ph], a private investor. Please proceed with your question.

Unidentified Analyst

Yes. Good morning. I had a question regarding the brushless motors for the electric power steering and you mentioned that they could potentially be sold to other automotive steering suppliers. What kind of potential do you see for these motors?

Qizhou Wu

[Foreign Language] So brushless motors are widely used in the automotive sector. For us, brushless motor is one of the important component in the electric power steering systems. As we are ramping up the production of EPS, electric power system, ourselves, so bulk of the product of the brushless motor production aisle will go to our internal use. When we have any additional which we expect that as well, then we will plan to sell to other steering producers.

Unidentified Analyst

Okay. Thank you.

Qizhou Wu

Thank you.

Operator

Thank you. [Operator Instructions]. Our next question comes from the line of Sam Sarabi [ph], a private investor. Please proceed with your question.

Unidentified Analyst

Congratulations to the management team for a job well done for quarter one. My question is related to the communications between the leadership of this organization and the shareholders. I’d like to hear some comments from the top leadership of the company regarding moving forward how they’re going to communicate with the shareholders to make sure that we promote the products and we assist in marketing of the products to the shareholders as well as the organizations that are the recipients of the products on both national and international markets?

Qizhou Wu

[Foreign Language] Okay. Thank you for your question. We are diligently fulfilling our duty to make announcement quarterly and annual reporting with the regulators and also make announcement to the shareholders. And in addition to that, we also make periodic updates through announcement to inform shareholders and investors, analysts when we have any kind of business development news, whether we sign any new customers or a new product coming offline. And we also keep in close contact with our analysts just to update and to help him to better understand the company, so for him to educate investors out there. And lastly, we did have a plan to do a bit of more marketing but due to the pandemic and subsequent travel restrictions, that plan has been on hold. But at the meantime we’re doing video calls with interested investors. When this thing is over, we’ll have a plan to come to visit investors in the U.S.

Unidentified Analyst

Thank you.

Qizhou Wu

Thank you.

Operator

Thank you. [Operator Instructions]. Ladies and gentlemen, our next question is a follow up from Sam Sarabi, a private investor. Please proceed with your question.

Unidentified Analyst

Yes, it’s me again. A couple of years ago the Chairman was planning to take the company private and after a lot of investigative work, it was decided not to do that. Moving forward, can someone please elaborate on the possibility of taking this company private again sometime in the future?

Qizhou Wu

[Foreign Language] So at this moment in time there’s no plan to go for the large shareholder and Chairman to go private. And we don’t have any visibility in terms of his intension going forward in the future whether he wants to go or not. We have not received any indication or notice.

Unidentified Analyst

Thanks very much.

Qizhou Wu

Thank you.

Operator

Thank you. Our next question is another follow up from the line of Robert Pavlovich, a private investor. Please proceed with your question.

Unidentified Analyst

Yes. As it relates to electric power steering system, major automotive manufacturers and I know Volkswagen Corporation, they have a big program for EV production and I was wondering if China Automotive Systems would be a part of that program? And I guess what other key companies do you feel that you have EPS business with in the U.S. and Europe and possibly Japan? Thank you.

Qizhou Wu

[Foreign Language] So we want to make a clarification here. The EPS product can be used in both electric vehicle and traditional internal combustion powered vehicle. And our EPS products are now being used in a wide range of vehicles in China. And so our IRCB products are now developed to target the commercial vehicle, those are the electric powered commercial vehicles and mostly in international markets. And also – in particular, we see opportunity for us is in Europe. And also we take a few steps to get into that EV market. We are providing the mechanic steering systems for those OEMs. And with our new product and going to these markets, like IRCB, ERCB, we’re seeing more and more involvement for us to get into the EV sector.

Unidentified Analyst

Okay. Thank you.

Qizhou Wu

Thank you.

Operator

Thank you. [Operator Instructions]. Ladies and gentlemen, this concludes our question-and-answer session. I’ll turn the floor back to Mr. Theiss for any final comments.

Kevin Theiss

We want to thank you for your participation in today's conference call. We wish each and every one of you to be safe. And we look forward to speaking with you again. Goodbye.

Operator

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