Kevin Theiss
Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2022 first quarter conference call. Joining us today are Mr. Jie Li, Chief Financial Officer of China Automotive Systems. He will be available to answer questions later in the conference call with the assistance of 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 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, 2021, as filed with the Securities and Exchange Commission 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 entirely controlled, our business operations and financial condition may be materially 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 uncertainty in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially 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 continue to result in delays in the shipment of products to our customers, increased costs and reduced revenue. The company expressly disclaims any duty provide updates to any forward-looking statements made in this call, whether as a result of new information, future events or otherwise. On this call, I will provide a brief overview and summary of the first quarter results for the period ended March 31, 2022. Management will then conduct a question-and-answer session. The 2022 first quarter financial results are unaudited and all results are reported using U.S. GAAP accounting. For the purposes of our call today, I'll review the financial results in U.S. dollars. We will begin with a review of the recent dynamics of the Chinese economy the automobile industry and China Automotive's market position. China's GPT growth was 4.8% in the first quarter of 2022, historically low but above expectations and higher than the 4% in the fourth quarter of 2021. The COVID-19 outbreak worsened during the first quarter with lockdowns in several cities across China. Supply chain interruptions increased, retail spending was weak and unemployment rose to 5.8% in March. Computer chip shortages also continue to affect automobile production. In this environment, Chinese on-mobile sales increased by only 0.2% year-over-year in the first quarter of 2022, with sales declining by 11.7% in the month of March as the lockdowns and supply chain issues took stronger effect. Passenger vehicle sales rose 9% year-over-year, and commercial vehicle sales declined by 31.7% in the first quarter of 2022. Truck sales were down by 32.8% and bus sales decreased by 18.7% on a year-over-year basis in the first quarter of 2022. Reflecting the auto industry conditions, our net sales in the first quarter of 2022 increased by 4.7% year-over-year to $136.4 million and were consistent with the $138.8 million in the fourth quarter of 2021. Net sales of traditional steering products and parts decreased by 9.7% to $95.4 million for the first quarter of 2022 compared to $105.6 million for the same period in 2021. Sales of electric power steering, EPS, products rose by 66% in the first quarter of 2022. Export sales primarily to our North American customers and South American operations increased by 7.7%. Our gross margin declined to 10.8% from 15.1% in the first quarter last year. Higher material costs and much higher international freight charges were affected by supply disruptions and lockdowns related to COVID-19 infection spreading in China and abroad. Additionally, our product sales mix compared with a year ago also affected our gross margin. Research and development expenses, R&D increased 20.9% year-over-year to $8.1 million, mainly due to the higher investment in our EPS product line. We are enhancing the performance of our current EPS products, as well as developing new EPS products to expand our market penetration. In 2021, we introduced a proprietary new EPS product, which for the first time was entirely developed in house in China. This product communicates with Nicole's [ph] main data [indiscernible] automatic parking assist, lane centering and traffic jams assist functions as part of the company's advanced driver assistance system, ADAS. Great Wall, Karry Auto, Beijing Auto and JAC Motors all began using our EPS products in 2021. To expand our advanced technology into the commercial vehicle space in January 2022, we agreed with SCANIA-AB to develop an ERCB steering system, for SCANIA's trucks and buses. This ERCB steering system is a fully electric intelligence steering system for light and medium-duty trucks and heavy-duty commercial vehicles. Combining our proprietary technology with our advanced driver assist systems L4 platform named AP4, this driver of this system enables vehicles to execute Level 4 autonomous driving. The steering - RCB steering system is expected to become the world's first mass-produced fully electric intelligent power steering system for commercial vehicles. Our access to the technology of Sweden's Sensia AB [ph] will further improve our NEV steering products, especially for vehicle motion control for the fast-growing autonomous driving market in both passenger and commercial vehicle markets. As of March 31, 2022, we had cash, cash equivalents and pledged cash of $109.4 million with working capital of $145.6 million. We have initiated a share repurchase program beginning in April 2022 of up to $5 million of the outstanding common shares over the next 12 months. Repurchases will be made in open market transactions at prevailing market prices up to $4 per share through March 30, 2023. We have maintained our market share in the Chinese and North American steering markets. Our Brazilian operation continues to grow, and we are building a larger footprint in Europe. Our NEV technology are expanding and our EPS product lines are growing in capabilities, performance and in sales as more customers have been added compared with a year ago. We look forward to adding more EPS products and using Sensient AB technology to further enhance our steering products in the global markets. Now let me review the first financial results for the first quarter of 2022. Net sales increased by in 4.7% to $136.4 million in the first quarter of 2022 compared to $130.3 million in the first quarter of 2021. The net sales increase was mainly due to the recovery of the Chinese economy post COVID-19 and higher demand for passenger vehicles in the first quarter of 2022. Net sales of traditional steering products and parts decreased by 9.7% to $95.4 million for the first quarter 2022 compared to $105.6 million for the same period in 2021. Net sales of electric power steering products, EPS rose 66% to $41 million from $24.7 million for the same period in 2021. EPS product sales were 30.1% of total net sales for the first quarter of 2022 compared with 19% for the same period in 2021. Export net sales grew 7.7% to $43.4 million in the first quarter of 2022 compared with $40.3 million in the first quarter of 2021. Gross profit declined to $14.7 million compared to $19.7 million in the first quarter 2021. Gross margin in the first quarter of 2022 was 10.8% compared with 15.1% in the first quarter of 2021. The main causes in the decline in gross profit and margin decline or increased raw material and international transportation expenses and the change in product mix. Gain on other sales was $0.9 million compared to $1.3 million in the first quarter of 2021. Selling expenses were $4.3 million compared to $5.6 million in the first quarter of 2021. This decline in selling expenses was primarily due to lower transportation expenses. Selling expenses represented 3.2% of net sales in the first quarter of 2022 compared to 4.3% in the first quarter of 2021. General and administrative expenses, G&A, were $4.8 million compared to $4.6 million in the first quarter of 2021. G&A expenses represented 3.5% of net sales in the first quarter of 2022 and then the first quarter of 2021 also. Research and development expenses, R&D increased 20.9% to $8.1 million compared to $6.7 million in the first quarter of 2021. R&D expenses represented 5.9% of net sales in the first quarter of 2022 compared to 5.1% in the first quarter of 2021. Net other income was $3.5 million for the first quarter of 2022 compared to $1.7 million for the 3 months ended March 31, 2021. The increase of $1.8 million was mainly due to increased government subsidies, which totaled $3 million received in the first 3 months of 2022. Loss from operations was $1.5 million in the first quarter of 2022 compared to income from operations of $4.2 million in the first quarter of 2021. The 2022 first quarter loss was primarily due to lower gross profit and higher operating expenses in 2022 compared with the same quarter last year. Interest expense was $0.4 million in the first quarter of 2022 compared to $0.3 million in the first quarter of 2021. Net financial income was $2 million in the first quarter of 2022 compared with a net financial loss of $18 million [ph] in the first quarter of 2021. The net financial income in the first quarter of 2022 was due to foreign exchange gains. Income for income tax expense and equity in earnings of affiliated companies was $3.6 million in the first quarter of 2022 compared to $5.3 million in the first quarter of 2021. The reduction in income before income tax expenses and equity and earnings of affiliated companies in the first quarter of 2022 was mainly due to a loss from operations, offset by higher other income, net and financial income. Equity and loss of affiliated companies was $2.5 million in the first quarter of 2022 compared with equity and loss of affiliated companies of $1.4 million in the first quarter of 2021. Net loss attributable to parent company's common shareholders was $0.06 million in the first quarter of 2022 compared to net income attributable to parent company's common shareholders of $3.2 million in the first quarter of 2021. Diluted loss per share was zero in the first quarter of 2022 compared to net income per share, $0.10 in the first quarter of 2021. The weighted average number of diluted common shares outstanding was 30,851,776 million in the first quarter of 2022 compared to 3,857,736 million in the first quarter of 2021. Next, we'll review a few balance sheet items. As of March 31, 2022, total cash and cash equivalents and pledged cash were $109.4 million. Total accounts receivable, including notes receivable, were $222.4 million, that's payable, including notes payable, were $227.7 million and short-term bank loans were $48.2 million Total parent company stockholders' equity was $322.3 million as of March 31, 2022, compared to $321 million as of March 31, 2021. Net cash used in operating activities was $4.3 million in the first quarter of 2022. The company purchased $44.7 million of short-term investments in the first quarter of 2022. The business outlook. Management has reduced revenue guidance for the full year 2022 to $490 million from $510 million due to the economic impact of COVID-19 and foreign exchange volatility. This target is based on the company's current view on operating and market conditions, which are subject to change. With that, operator, we're ready to begin the Q&A.
