Q2 2020 China Automotive Systems Inc Earnings Call
[music].
Thank you for calling issuer direct the leader and Investor Relations conferencing and webcasting.
How does enter May have you any please.
First name David.
Lastly in.
Safra, Yes, China automotive.
Yes.
Thank you one moment.
[music].
Greetings welcome to China automotive systems second quarter 2020 conference call.
At this time, all participants are in listen only mode.
A brief question answer session will follow the fall presentation.
He wants you to car operator assistance during the conference. Please press Star zero on your telephone keypad.
Please note this conference is being recorded.
At this time I'll turn the conference over to Kevin fees, Kevin you may begin.
Thank you everyone joining us today welcome to China automotive systems, Twentytwenty second quarter Conference calls.
Joining us today are Mr. cuisine, Wu, Chief Executive Officer, Mr., James Lee, Chief Financial Officer, Oh, China automotive systems.
We'll be available to answer questions later in the conference call what is the 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 companys estimates and assumptions only as of the data. This call as a result, the copies actual results could differ materially and those contained in these forward.
Looking statements due to a number of factors, including those described under the heading risk factors and the company's form 10-K annual report what do your ended December 31, 2019, That's filed Securities and Exchange Commission on May 14, 2020.
I didn't other documents filed by the company from time to time with the Securities and Exchange Commission.
Yep break of Koby 19 is not effectively in time, they controlled our business operations and financial condition may be materially and adversely affected as result of the deteriorating market outlook.
For automobile sales slowed down the regional and national economic growth, we can live to liquidity and financial condition of our customers and 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 wells uncertainties in the regions, where we conduct business calls our businesses suffer in ways that we cannot predict and materially and adversely impact our business financial condition results of operations.
Prolong disrupt disruption or any further unforeseen delay in our operations on the manufacturing delivery and assembly process with any of our production facilities.
I continue to result in delayed shipments of products to our customers increased cost and reduced revenue.
The company expressly disclaims any duty through like updates to any forward looking statements in this call whether as a result, new information future events or otherwise.
Well in this call I will provide a brief overview in summary financial results for the second quarter and first six months or Twentytwenty management, well, then conduct a question and answer session.
The following 12 to 22nd quarter and first six months financial results are unaudited and I reported under Us GAAP.
For purposes of our call today I'll review the financial results in Us dollars.
Well begin with a review of the recent dynamics of the Chinese economy, the automobile industry in China Automotives market position.
Second quarter Twentytwenty Chinese economy rebounded as GDP growth was 3.2% compared with the 6.8% economic contraction of the first quarter Coffee Party.
With with tragically impacted by the cold in 19 pandemic.
On the Chinese new year in late January to mid March our operations were severely disrupted due to government actions to restrict the impact of the covert 19 infections.
That's the first quarter of 2020 ended close factories began to slowly reopened interrupted supply networks began to rebuild as materials became available and transportation was more accessible and other disrupted daily activities began to rebound from the unprecedented effects of the covert 19 pandemic.
In China, However, sales to customers continued to be limited in the early stage of the economic recovery.
And the second quarter 2020, China was among the first countries to Easter transportation locked down and travel restrictions.
As the Chinese economy began to reopen the government enacted incentives to promote continued economic growth, including higher physical spending.
More approved infrastructure projects and lending rate and bankers are requirements were reduced.
However, lingering fears of a second covert 19 ways continuing tension between the U.S. in China and slower economic growth and in the past continued to limit total retail sales, which declined by 11.4% in first half a twentytwenty. According to National Bureau of Statistics per capita consumers.
A new fell 5.9 per se in same period.
According to the Chinese Association of automobile manufacturers see a automobile sales in April Twentytwenty rose by 4.4% year over year. However, passenger car sedans sales declined by 6.2%.
The sale Npvs was reduced by 36% and crossover vehicle sales were also down 11.5% in April.
The local sales.
Also declined 22.1%.
In the month of April.
In May of 2020, see a reported a 14.5% year over year increase the automobile sale, but with passenger car sedan sales down by <unk>, 0.9% and MTV sales were lower by 24.6% and sales new energy vehicles declined by 20.
5.8%.
For the month of June automobile sales were up 11.6% year over year with passenger car sales down sedans sale down, 4.9% and MPV sales decreased by 11.8% with new energy vehicle sales down 33.1%.
But at six months of 2020.
See a reports the automobile sales declined by 16.9% with passenger cars a day sales, 26% lower than same period last year actually sales were down 14.9% MPV sales were reduced by 45.7% and crossover vehicles.
Sales declined by 19.8% you energy vehicle sales were down 37.5%.
Our production centers were back to quote capabilities in mid March after the totaling 19 liked our restrictions and we reopened our wolfcamp headquarters.
Even in this industry background, our net sales in the second quarter of Twentytwenty.
$83.2 million compared with $105.7 million in the second quarter of 2019, and compared with 73.6 million in the first quarter Twentytwenty.
We experienced reduced sales volume in some markets and average selling prices decline.
Due to competition.
Net sales of traditional steering products and parts decreased $14.5 million.
Or by 18.5% year over year net sales of electric power steering, yes decreased by $7.1 million for 31.4% year over year.
Sales to the company's North American customer she got quite certain poor declined by $18.2 million as production was suspended or much of the second quarter 2022 to coping 19.
I would just operations still continues to generate positive cash flow of $31.4 million, we remain focused on maintaining a strong balance sheet, what the resources to achieve our strategic goals over time.
At June 30, 2020, total cash and cash equivalents and pledged cash were $105.9 million.
Oh parent company stockholders equity was doing an $80 million as of June 30, 2020.
Economic conditions are slowly improving in China, but globally. There is still great uncertainty. So our outlook remains cloud. It. However, we expect progress over the remainder of the 2020 year as domestic government incentives begin to stimulate the Chinese economy and the global economy stabilized. In addition, we anticipate greater revenue.
Contributions from our new eventually.
Hi, some motion mechanic system small powerpack brushless motors, new steering clear the daily land for Iveco in Europe and numerous circulating.
Steering system, the I RCB programs to be used in a global one.
Customers future autonomous vehicles in North America was well supply and the new steering product or F.C. as Jeep model starting in late.
Third quarter of Twentytwenty also in North America.
We maintained our leading market positions and our key domestic markets, while preserving our excellent relationships with our three tier one Oems.
Now, let me review the second quarter of Twentytwenty.
And the second quarter 2020, net sales decreased by 21.3% to $83.2 million compared to $105.7 million in the same quarter of 2018.
Net sales of traditional steering products declined by 18.5% as demand weakened in the Chinese domestic brands automobile market related to the effects of cobot 19 pandemic.
Well, the Chinese economy and passenger vehicle sales.
Additionally, sales of the company's North American customers declined by $18.2 million due to the impact of the Kobin 19 pandemic test production was suspended for much of the second quarter of 2020 as wells cobot.
19th impact on the economies in North America.
And the result in decline in new automobile vehicle sales sales of electric power steering, yes represented 18.6% total net sales.
Gross profit.
Decreased to $7.8 million in the second quarter 2020, compared to $15.2 million in second quarter 2019.
Gross margin was 9.4% and the second quarter of 2020 versus 14.4% in a second quarter of 2019.
Gross profit decrease was mainly due to lower sales and changes in the product mix being another sales was <unk> point $8 million, the second quarter 2020, compared to $2.5 million in the second quarter 2019.
Selling expenses were $3 million into second quarter, 2020, compared to $3.9 million in second quarter of 2019.
The decrease was mainly due to the lower freight expenses, resulting from suspension of who way.
How long is operations for most of the quarter due to that go with my team's pandemic impact in North America.
Selling expenses represented 3.6% of net sales in the second quarter 2020, compared to 3.7 present or second quarter 2019.
General administrative expenses Gionee were $4.8 million, a second quarter 2020, compared with $4.4 million quit a second quarter of 2019.
The increase in expenses was mainly due to higher office and maintenance expenses DNA expenses represented 5.7% of net sales.
Excuse me the second quarter of 2020 compared to 4.2% in the second quarter 2019.
Research and development expenses R&D decreased to $6.1 million in second quarter, 2020, compared to $6.8 million and the second quarter of 2018.
R&D expenses continue the folks that focus for the development of the company's yes, and other new products R&D expenses represented 7.4% of sales in the second quarter, Twentytwenty compared with 6.4% and the second quarter 2019.
Loss from operations was $5.2 million in the second quarter Twentytwenty compared to income from operations of $2.6 million and the same quarter of 2019. The decrease was primarily due to much lower sales and gross profit related to the impact of the Kogut 19 pandemic.
Net financial expense and the second quarter 2020.
Was <unk>.
0.0, 6 million compared to net financial income of $1.6 million and the second quarter of 2019.
Loss before income taxes and.
Income tax expenses and equity in earnings.
Loss of affiliated companies was $4.4 million in second quarter 2020, compared to income before income tax expenses equity in earnings loss of affiliated companies of $3 million in a second quarter 2019.
Net loss attributable to the parent company's common shareholders was $4.1 billion in the second quarter 2020, compared to net income attributable to parent companies to common shareholders.
$2.5 million and the corresponding quarter of 2019.
Diluted loss per share was 13 cents in the second quarter 2020, compared to diluted earnings per share of eight cents in the second quarter of 2019.
The weighted average number of diluted common shares outstanding was 31 million 174 and 45.
Shares in the second quarter 2020, compared to 31 million 499, 577 in the second quarter of 2019.
Other whatever six month financial highlights net sales decreased 27.1% to $156.7 million in the first six months of 2020 compared to $214.9 million in the first six months of 2019 six months gross profit was $19 million compared to.
$29.2 million and the corresponding period last year.
Six month gross margin was 12.1% in the first six months of 2020 compared to 13.6% in the corresponding period in 2019.
The gain on other sales was $1.4 million in the first six months of 2020 compared to $3.8 billion in corresponding period in 2019.
Loss from operations was $4.2 million and the first six months of 20 to 20 compared to income from operations or $3.7 million in the first six months of 2019.
Net loss attributable to parent company's common shareholders was $4.1 million in the first six months or 2020 compared to net income attributable to parent company's common shareholders of $3.9 million the corresponding period in 2019.
Diluted loss per share was 13 cents in the first six months or 2020 compared to diluted earnings per share of 12 cents and the corresponding period of 2019.
Well I remember some balance sheet and some cash flow items as of June 30, 2020, cash and equivalents and pledged cash was $105.9 million total accounts receivable, including notes receivable for $188.4 million.
<unk> notes payable were $172 million and shirt short term loans for $55.2 million total parent company stockholders' equity was $280 million as of June thirtyth compared to $289.3 million as at December 31, 2019.
Net cash provided by operating activities was $31.4 million and the first six months or 2020 compared with net cash used in operating activity just $25.7 million in the first six months of 2019.
Payments to acquire property plant equipment for $4.5 million compared with $10.3 million in the first six months of 2018.
But this outlook enabled the company regained its full operating capacity after locked down restrictions were removed and reopened its headquarters accurate temporary location choosing so city in March however, due to the lingering effects OCO with 19 is taken substantial time to create economic growth restore consumer confidence.
And bring supply chains into full capacity in China that go with 19 pandemic continues to reflect our north to South American markets.
Management reiterates its revenue guidance for the full year, a $360 million. This targets based on the company's current view of upgrading the market conditions, which are subject to change, especially in the late October 19th impact when the economies of China, and the U.S. with that operator, where the kids in it.
Thank you well now begin question answer session. If you like to ask a question. Please press star one on your telephone keypad and a confirmation total indicate your line is the question Q.
You mean press star too if you like to move your question from the Q.
Participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith.
One moment, please while we pull for questions.
Thank you.
Our first question is coming from the line of William.
Greg Rusedski with Greenridge can't Global. Please proceed with your question.
Hi, guys can you talk a little bit more about how sales are looking.
For the second half of the year or two the U.S. and also how the gross margins are looking it seems like that was quite a bit lower than I was looking for even with the product mix you guys had.
The second quarter.
In the second half.
Uh huh.
Yeah, how sales are looking for international in the second half and then also.
Although the gross margin was down pretty pretty substantially in the second quarter et cetera from product mix.
Maybe just talk a little bit more about that since it seems.
No.
More than just the mix was the reason for the decline.
Okay.
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Seasonal decline or who come to the millionaire one dealer.
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Are you sure energy.
We'll take quite a comprehensive.
Energy [noise].
Oh for your first question.
Second Uh huh.
We are anticipating.
The everything will go home back to normal so we see the with the North America as our customers are returned to production and August export International consumer business will return to normalcy.
And also where are seeing as a matter of fact, we were we believe second half.
Our sales is going to be higher.
Last year same period.
On the second question gross margin in the second quarter.
Our gross margin during the second quarter was heavily affected by the North America business also.
<unk> give you some color our revenue.
Uh huh.
Last a same period.
Last year was 27 million.
But this quarter's only 11 million.
So.
It was a significant loss revenue, because all but north America customer satisfaction close.
When the half months almost two months.
As you know, we have a fixed costs and our Oh facility.
Tied to the North America.
Customers are heavily affected negatively affected our.
Gross profit LOE for the North America business.
With Oh was a loss of.
I mean, what was down seven.
I mean, you us that.
Trigger and negative gross margin.
For the second quarter, our international business.
No. If you look at the domestic China business.
Our gross margin actually are equivalent to the same period last year. So.
With the return of the North Star business and.
We think second.
For the year, we should.
You should stage and come back.
Burger King Okay lyric specialty.
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Just to give her a chapter I'm pretty soon to follow on questions and.
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Okay Oh also.
The second quarter, there was a one time.
Event related to the custom charge.
Our also that's related to South America, typically our I mean, I'll quote to the North America customer use a D P deliver.
Duty paid.
Our son calculation changes during the second quarter adjustments during the second quarter, which.
Caused us a charge of 2 million Usource. That's also affected our gross margin in the second quarter.
Okay and that'll be just a onetime event then.
Or is that something that's going to impact you guys going forward.
Do you anticipate switching the Hudson will allow for you.
Taking a series of humor.
This is the one Tommy about it will not happen again.
Okay. Okay, and then just to clarify <unk> you said second half sales will be higher than last year is that just for North America or is that for the whole business.
HM asphalt yacht GR <unk> senior shopping in the Permian is shell so easily be genius to fame and show called spot on in its also has tended to plenty hotmail account.
Thank you and Chesapeake meeting and I know, we average and she'll be shifts you Gotta combine your society in fact shop on the out she was Uh huh.
Okay. Yes. The answer is yes, the second quarter, a second half a year or were you referring is in North America part of business is going to be higher this year than same period last year.
Because we have a.
Pre.
Well we have some.
Business and we love for the.
Some models, new models and and hasn't been.
Putting into.
Production now it's going to be subject.
Hey me that they need to cool a young since I'm gonna stepping back and say so once again 7 million that cannot be someone near term teaching I did we see cities.
Yes, so it's going to be second half of your the order book because as a higher than same period last year from the North America customers.
Okay. Okay.
Okay, Alright, great. Thank you.
Thank you. Thank you.
That's it reminds me press star one to ask a question.
Thank you.
Our next question is from the line of Robert Polivich, a private Investor. Please proceed with your question.
Oh good morning.
I had a question on pricing.
Brushless motors the joint venture.
I know I believe that's.
Up and running at this point.
And.
I'm just wondering.
What's the status as the score as.
Yes.
I would say, it's more of the cost savings by.
Making the motors and the joint venture versus.
Acquiring them on the outside.
Kind of volume are you doing there and what kind of growth prospects.
What kind of cost savings might we see from this.
As we move into the second half and.
As we move into 2021.
Thank you okay.
No problem.
Just so make oh, Robert the one T I saw it just won't fucking TJ.
A woman and I'm, just trying to assume that business I mean, oh, Thank you and I certainly would talk in Cheetah Hudson Tableau 10 core Monty cautious tone today, but just so I'm going to jump on that but certainly a hole to see it just seems to the in sourcing for sort of hard to clean white box.
Adjourned.
One.
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No.
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Oh, Hi, how should I shot by managing Jane Institute and somebody should start Walt.
Okay.
Well I mean, you didn't quite on or some years on penalties and kind of pure Datsun's huh.
And just kind of uncertainty in minutes, you Honda Honda has seen outside of South China.
And he and the coupon nine trade names out or just any arsalan San <unk>, Yeah, Yeah, I'm the chief.
And that's something that series C S energy or getting she she had I'm sure T. S. R. U P. I certainly share gains you try to GE teaching she needs.
So do you think inclusive they can move you know how many do you get juices or something like figure because anytime that trends have been team.
I don't see Craig Tooman since I know how much was okay gentlemen.
And she is our in house Jeremy here.
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Okay.
[noise] the brushless motor.
Production as Stan.
I started the batch production.
And.
Well mass production amongst.
Jim.
We anticipate the second half of 2020, well will produce a around 30000 units.
Turning to 2021, we expect to the production will continue to ramp up to 200000 units the.
We will start with C. S product and then move to P increase the.
Got it.
Offering two P.S. and are you P S.
The total speaking of.
Cost savings or we had our calculation is five doing insourcing, we will say.
Between 12% to 15% on a cost and most important thing by doing this.
Oh, producing a desire producing but fortunately smolder internally is to secure supply chain.
As you know these product or as higher technology content, and we are seeing a domestic shortage of.
Ah such product.
And so there are there hopping a bottleneck on the supply up brush, but some smaller.
Lot of those companies Oh peers have to either.
Deal was the domestic.
Ah shortage or they have to.
EMCORE from another country that being said our goal is to first to make sure. Our we can end up.
Capacity to meet our internal to now for all all lines of EPS product and when we get to that stage or would that whatever we have in addition, we can supply and sell to open market.
Two other customers.
Mhm.
Okay.
That's good to know.
Another question.
I was wondering.
In five years.
What kind of percentage are we looking at as far as a b P. S.
Versus a traditional power steering systems.
How did you see the mix changing.
And.
I know the other question I had was.
During the call I did hear something about you know competitive pressures.
From your competition.
How are you dealing with that in and and what's your view over the next year or to do we see.
That kind of abating or.
Is that going to be something that is going to make things difficult for China automotive.
As we move over the next several years.
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That's enough on language here for next year.
Yeah and sound.
Hi.
RCB out their degree RCP, yeah. So do you agree it seems that she can who and you can configure. It seems it's really busy she takes years he's here.
So you shouldn't you can talk on your function in the hundreds or elsewhere in the functions on consumer.
Habits are you kind of haunted assignments and frankly.
If you know Thomas is going to transact. So one could literally salary and here or are you can say sway what's good about leasing and that's what we keep talking of either one of which are uniquely well ginza hopefully to go back and produce their friends and we'll see some mm.
Okay sure Gonna solution.
Okay. The first to your first question a five year time, we see D. P S.
TPS product will account for 60% the market share in the passenger vehicle sector.
And as you know the passenger vehicle market in China, It's fair large.
And the that's the trend or having oh.
The.
Commercial vehicle.
Hydraulic will continue to play a major at all.
However, I would when I say hydraulic hydraulic.
Powersteering.
However, with our new product reintroduce such as I, RCB and E. RCB product Oh, we are actively adding lectured control.
Components and units that will help was the performance and and.
And also and increase our.
Technology competitiveness or end market, so that being said so we.
We say in the in five to five your time, combining passenger and commercial vehicle, we see the overall electric power steering.
Oh, the sales well exceeding 50% or at least 50%.
In China.
Now how sort of what's your sense. How much is encourage you to cart CIS is anyone wants it sounds like you're interested in my cheat sheet here, what do you shouldn't matter, but once you get your tanker hunting for suit cancer care.
Next year, just you know on major brands that quite a defensive I forget you catch the yet.
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Right, that's what I'm hearing your sooner.
So just looking minus <unk> shop superior transition back to support presumably you got me and I cannot be care seasons corridor.
On the competitive landscape in at the current stage they are.
Our son.
The competition is intense in China.
And I see.
Mentioning to pass or to international brand.
On the P.S. side or are putting your question.
And coming to China. They are left by Jay Tac.
Bosh and next year those are Japanese German American.
Respectively.
And that being said as our.
Huh.
Main business is mostly in the domestic Brad you know, we're talking about the white decent gili.
Great all those are household names.
However, their sales force a has been.
Good themselves.
Gross all their sales expense fasting fluctuating quite a lot and in the last.
Two quarters due to the economic change.
Environment and also the pandemic impact.
But our goal is.
On one side to continue to and maintain our strong ties and relationship and and sales once the domestic Brad.
On the other side will want to expand into the international brands those joint ventures in China.
Global names.
With our technology, a resource now we're able to produce very high quality pdps product on our NPS product.
And also always joint venture.
Oh It was dollar Japanese partner, we think our product will be very competitive in terms of caught a cost and quality and and and also pricing. So.
So with that that will be on call to continue to strengthen our domestic brands presence and also extended to international brands Joint ventures.
Oh, okay.
One last question as you as it relate BK would be do you see a lot of growth potential.
Okay why be has ties with all the Japanese automakers and.
Outside of Japan potentially in the U.S. are those areas, where you can do more business with the.
The relationship with key way be.
Having been supplying.
I guess, the Japanese brands for a long time.
[noise] are generally on T.. She is just kind of thoughts on rather than to close on the Hudson what about you I'd be glad to digest, Joe I'd be to inquire Oh can handle tool you know to clean the go Hellermanntyton your.
Yeah.
Hi, this is on us so there's something but now comes out here, but just in case anybody.
<unk> Kong coming on board, yes, or no higher to sustain nascent Nicholas Tia Maria.
So you crazy so machine that sort of call. It a figure or is she to legend.
I actually don't see quite Oh, well, just as long as you know chiefly countries even put into the one that you guys basement. She's looking at things for the shale remains a question I just wonder.
Oh.
Our main goal.
The Thomas forming a joint venture was came why be is continuing to strengthen our.
Technology compared to the technological competitiveness.
For the domestic China market and so that's number one priority is we want to be able to no only continuing to compete and maintain and strengthen our presence in domestic Brad but also expanding to.
The Japanese joint ventures in China.
So that would be it a huge lift.
In terms of market and opportunities.
Because of Japanese joint venture in China are farewell establish in in terms of.
Most grinding and the volume.
Second the dairy goal is to look beyond China, there are many markets.
Internationally, we can.
Potentially get into it.
However, due to you didn't mention arrangement.
The time assigning a we were not.
Oh, hey, both to going to Japan, because that's the Kuwait. These kyi Beach main market.
So outside of Japan.
Still a very large market awards, a large place so we see great potential there.
But the step one is.
One to be able to.
To connect.
Through our.
Most product and pay why be relationship to come back with the Chinese joint ventures in China.
Mm Hmm the to an interesting situation you know the.
Okay why be I assume at some point your relationship with K why be may be re negotiated worries some additional potential.
And that would be a good thing.
But [noise].
Okay. That's that's all I have.
Appreciate the your responses.
A couple Tony so it seems like <unk> compassion, whether to go after that Youre Whelan email so co EBITA Zika she quit a surgical hospital Ocado Jorge Toning, Patricia you should see mabelle bought anyway. We like this is on the ramp up well for them that take a question.
Can you can help achieve.
No actually can you tell me though.
Thanks, Mike.
Uh huh.
Great.
Great. Thank you Robert.
Thank you.
As a reminder, you mean press star one if you like asking question.
Thank you.
At this time, if we reduced in far additional time for question and answers and external management for any final closing remark.
Well, we thank you for your participation in todays conference call, which used to be safe and well and look forward to speaking with you again.
Thank you.
Thank you.
Thank you everyone. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.