Q3 2020 China Automotive Systems Inc Earnings Call

Thursday Thursday

Dead dead dead.

wage

Thursday

Greetings and welcome to China Automotive Systems third 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder. This conference is being recorded. I would now like to turn the conference over to your host Kevin feast and best relations.

Thank you everyone for joining us today. Welcome to China Automotive Systems twenty twenty third quarter conference call joining us today are mr. Quiz off of officer. And mr. Jaitley Chief Financial Officer of trying Automotive Systems. They will be available to answer questions later in the conference call with the assistance of translation before I begin. I will remind all listeners that throughout this call. We may make statements that may contain forward-looking statements for which the forward of your statements represent the company 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 described Under The Heading risk factors in the company's form 10-K annual report for the year ended December Thirty One 2019 ES file with Securities and Exchange Commission on ma'am.

14th 2012

And another documents filed by the company from time to time with the Securities and Exchange Commission. If the a break COVID-19 is not effectively in timely control our business operation and financial conditions may be materially and adversely affected as a result of the deteriorating Market Outlook for automobile sales slowdown a regional and National Economic growth. We can liquidy 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 effect on the overall business environment cause uncertainties in certain regions where we conduct business because our business to suffer in ways that we cannot predict and materially and adversely impact Business Financial condition and results of operations a prolonged disruption or other further unforeseen delay in our operations of the manufacturing delivery in New Jersey.

The process with any of our production facilities could continue to result in delays in the shipment of products to our customers increase costs and reduced Revenue the company expressly box claims any duty to provide updates to any forward-looking statements made in this call, whether as a result the new information future events or otherwise on this call provides a brief overview and summary the financial results for the third quarter of first nine months with twenty-twenty management will conduct a question-and-answer session.

The following twenty third quarter and first nine months Financial results are unaudited in our reporters under us gaap for the purposes of today offer you the financial results in US Dollars. We will begin with a review of the recent dynamics of the Chinese economy the automobile industry and trying to Automotive Market position in the third quarter of 2020 Chinese economy rebounded as GDP growth was 4.9% a significant increase over the 3.2% in second quarter of 2028, but much lower than the 6% growth in the third quarter of 2019 for the first nine months Chinese GDP growth was 7% compared with the same period a year ago.

The Chinese economy has continued continued to recover from the severe disruptions caused by the impact of the COVID-19 pandemic after widespread business closures and faith in the first quarter of 2020. China was among the first countries to eat the transportation lockdown and travel restrictions and the Chinese economy began to reopen the second quarter of 2026.

Excuse me, government incentives to promote continued economic growth included higher physical spending more approved in infrastructure projects and lower lending rates to help stimulate renewed economic activities month. However, data from the National Bureau of Statistics so that the total retail sales in China Blue by a full 3.9% in the third quarter of 2020 and defined by 7.2% for the first Nine Months of the Year campaign compared with the same period in 2020, I'm sorry 2019

industrial production

Was up 6.9% in the month of September but increased only 1.2% for the nine-month period asset Investments wage by 8% in the first nine months of 2020 as well.

For the third quarter in the September 30th, 2020 the sale retail Passenger cars in China by 7.9% year-over-year according to the China passenger car Association a more detailed Breakout by the Association of automobile manufacturers caam showed the passenger car sales in the month of July 2020 Rose by 8.5% year-over-year with sedan sales up by 4.6% The sales mpvs was reduced by 2.7% SUV sales Rose by 14% in crossover vehicle sales increased 8.5% in July 2020 export sales of passenger car is declined by 25.9% in the month of July phone number here.

In August of 2020 c a m reported a 6% year-over-year increase in passenger car sales with passenger car sedan sales up 5.8% year-over-year wage TV sales were 1.1% higher and it's usually sales Rose by 6.5% in sales into the smaller market for cross over Vehicles increased by 17.2% off sales of Passenger cars decreased by 18.7% in August year-over-year for the month of September 2020 passenger car sales increased by 8% year-over-year off the passenger car sedan sales up 3% TV sales decreased by 12.3% SUV sales Rose by 16% and cross over vehicle sales tax include like 25.5% year-over-year export sales of Passenger cars increased by 14.7% in September on a year-over-year basis.

For the first nine months or 2020 c a m reports the passenger car sales declined by 12.4% year-over-year with passenger car sedan sales 16% lower than the same period last year SUV sales were down. 5.5% MPV sales were reduced by 32.7% and cross over Vehicles decreased by 7.9% off export sales of Passenger cars for the first nine months of 2020 declined by 11.1% compared with the first nine months of 2019.

Given this industry background in the third quarter of a 2020 our net sales increased by 13.5% to 114.1% million compared to a 15.5 million in the third quarter of 2019 higher sales of our Advanced hydraulic steering products and China combined with increased export revenues from North America offset lower domestic sales of our electric power steering products. EPS net sales were fourteen point three million dollars compared with $16 in the third quarter glass.

Our sales volume declined in some markets in the third quarter of 2020 and our average selling price in North America decreased with combined with lower sales of our ETS products generated lower gross profit. However, we generated nineteen point eight billion dollars and positive operating cash flow in the third quarter of 2020 and 51.2 million and the first nine months of those twenty-twenty a total Cash Cash equivalents includes cash deposits where one hundred thirteen point five million dollars as of September Thirty $20, and we we repurchased approximately 322000 shares of common stock in the third quarter of 2020. It continues to prioritize on maintaining our strong balance sheet total parent company stockholders Equity was 289 point six million dollars as Thursday September 30th 2020.

We have confidence that business conditions will continue to increase in China as the domestic of our further stimulates the economy and consumers become more confident in its growth sustainable the domestic and pricing environment should improve in 2021 compared with twenty $20. We look forward to foreign economies of stabilizing and am moving even as the COVID-19 pandemic continues. Let me review the results for the third quarter of 2020 in the third quarter of 2020 net sales Rose 13.8% 114.4 million dollars compared to one hundred point five billion dollars in the same quarter of 2019. The increase in that product sales is mainly due to a change and a product mix wage higher domestic sales volume of the companies hydraulic products combined increase sales in North American customers tech product Sales North America grew by 9.8% the $37 off.

Compared to thirty three point eight billion dollars for the same quarter of 2019 that product sales for the company electric power steering EPS products worth 16.7 million or 14.6% of net sales.

Gross profit was thirteen point six million dollars in third quarter 2020 compared to Seventeen point three million in the third quarter of 2019 gross margin was 11.9% compared to 17.2% for the same period of 2019 mainly do the higher unit cost for EPs and Export products compared to the third quarter last year selling expenses were three point eight million dollars the third quarter of 2020 compared to three point six million dollars in the third quarter of 2019. So an expense is represented 3.3% of net sales in third quarter 2020 compared to 3.6% in the third quarter of 2019.

General administrative expenses GNA were five point 1 million dollars in third quarter 2020 compared to four point four million dollars in the same quarter of 2019. The increase is primarily due to higher office expenses G&A expenses represented 4.5% of net sales in both the third quarter of 2020 and the third quarter of 2019. Research and development expenses are indeed or six point 1 million dollars in our third quarter of 2020 compared to $6 in the third quarter of 2019.

Orange

Expenses represent 5.3% of net sales in third quarter 2020 compared with 6% in the third quarter last year. The lower R&D percentage was mainly due to more strict cost controls over expenditures that Financial expense 2.3 million dollars in a third quarter of 2020 compared to net Financial income of one point six billion dollars in the third quarter of 2019, which was mainly due to Foreign Exchange losses compared with foreign exchange students in the third person last year's third quarter.

Income from operations 1 million dollars in third quarter of 2020 compared to income from operations of four point four million dollars in the same quarter of 2019. Chef lower income from operations was mainly due to reduce reduced gross profit and lower gross. Margin in the third quarter of 2020.

Loss before income taxes expenses and equity in earnings of Affiliated companies was two point three million dollars in the third quarter of 2020 compared to income before income tax expenses incurred in earnings as Affiliated companies a 5.3 million dollars in the third quarter of 2019 the loss before income tax expense and equity in our end or Affiliated companies was wage you do to lower gross profit and lower income from operations in the third quarter 2020 compared with the third quarter of 2019. Net income attributable to parent companies, shareholders was two point four million dollars in the third quarter of 2020 compared to net income attributable to parent companies, shareholders a 4.3 million dollars in third quarter of 2018 diluted earnings per share for eight cents in the third quarter of 2020 compared to diluted earnings per share of $0.14 in the third quarter 2019.

Where did Irish number of diluted common shares outstanding was 31113374 in the third quarter of 2020 compared to 31492035 shares in the third quarter of 2019.

Not provide a brief summary of the nine months results for the first nine months of 2020 or a 271.2 million compared to three baths 15.5 billion. The first time was a 2019 reflecting the impact of the COVID-19 pandemic in the automobile industry in China and globally nine month gross profit was thirty two point six million jobs compared to forty six point six million dollars in the corresponding period last year 9 month gross margin was 12%. 14.8% for the corresponding. 2019 month. So the nine months ended September 30th 2020 gain on the other sales allow the two point nine billion dollars compared to a four point nine billion dollars for the corresponding period in 2019 lost from a recent was four point 1 million dollars compared to income from operations or eight point 1 million dollars in the first nine months of 2019.

net loss attributed to parent companies, Cheryl

1.89 compared with net income attributable to parent company's common shareholders eight point two million in the corresponding period last year they looted loss per share was $0.06 and the first nine months with $20 compared to earnings per share of $0.26 for the corresponding period in 2019 net cash provided by operating activities was 52.7 million. And the first name is a 2020 compared with net cash provided by operating activities of four point 1 million dollars in the first time once of 2019.

Payments to acquire property plant equipment over eight point nine million dollars compared with twenty three point six billion dollars in the first nine months of 2019 approximately 322000 chairs. Repurchased during the third quarter of 2020 and the company expects three purchase more shares in the future depending upon market conditions.

Now if you highlight of the balance sheet, so September Thirty $20 total cash and cash equivalents includes cash deposits were one hundred thirteen point five billion dollars total accounts receivable off for $209 billion dollars accounts payable including notes payable or two hundred one point four million dollars in short-term loans are forty four point six billion dollars total parent company that is 200 million as of September Thirty $20 September 30th, 2020 compared to 289.3 as of September 7th 31, 2019 home business Outlook increases Revenue guidance from $360 to $390 for the full year twenty-twenty. This target is based on the company's crazy used operating the market conditions, which are subject to change.

Operator with that we are ready for the Q&A.

Thank you, sir. At this time will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation page indicate. Your line is in the question queue. You may press star to if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, please. While we pull for questions.

Once again, if you have a question, please press star one on your telephone keypad.

Once again, if you have a question, please press star one on your telephone keypad.

Our first question today comes from Robert polovich of a private investor. Please proceed with your question.

Thank you. Good morning. How how is everybody today? You know, I was just wondering if you're moving to

2021 Volvo I guess looking at twenty twenty. We know that the margins are lower than they were a year ago.

The outlook for 20 21 as far as profit margins.

Do we see that at some point returning to more normalized levels?

Thank you for the question. Just how do you go in tissue take Molly from that take darling darling in the multicolored should be kitchen table. They could town to the union is important.

Okay.

Yes. Did you want to contribute to a hospital base off gross margin in uh in this year? Uh

First is the obvious obvious reason is the COVID-19 pandemic, um affected, uh, every manufacturer's in in a world including China. Secondly, the electric power steering EPS product sells and has been a week. We are we saw in 10% first nine months. We saw a 10% year-over-year decline. So that's the second factor and the third one is the issue. We're facing a higher tariff for our international business. So, you know combining these two are our birth.

Or gross margin, what's the affected and and in terms of twenty Twenty-One and first organized has been under well under control in China life has came life has come back to normal and so as our customers, suppliers and and all production as well. So that's that's non-factor already and we we already give you some data on the uh, pretty strong rebound of the sales in the auto market.

Secondly on the EPS. We we have some issues during the year partly due to the the cost control. We we made uh recently made a management change as a result of that. We we took we believe in the coming quarter in the fourth quarter. We'll see some very significant Improvement and will continue to walk to see a growth in 2021 and and that's our plan. So we believe next year will be a lot better off and was the oldest or would think gross margin next year will be a

improved

Okay, I have another question as it relates to EPS. How do we see the growth in that in that category moving into 2021 and also the transfer better profitability from home? Yes. I know that.

Have the joint venture with pricing motor Motors and you have production I guess is underway at this point. I thought well that contribute to better profitability as we move into 2021.

Tata Tiago in Ireland if he has the choir who is the $10 off the whole thing quite quite so that you PS the Molly supposed to create an offer to the High Senior go here, so

You see the one I sent in the National primary you guys are here that you saw your parents are see some has ended up in a few calls that Americans. We have a question about getting people to your home. It's a good time in the pop up on my phone call from the zoo.

Okay, we we're still working our working on our 2021 projection the month. We will have better Clarity in December. However, the preliminary plan for next year is we will grow old plan to grow our EPS business by 20% We will continue to implant Implement better cost control measures that will help with margin the electric motor side as you just mentioned the month is still in child production in 2022 and 2020.

The next year we will start full-scale commercial production and that will help those significantly improve our insourcing capability electric motor. We plan to have our JV to supply off between fifty to sixty percent of our internal production for EPs and so long that will help with the gross margin in 2021.

Oh, okay. I guess my last question really has to do with contract Awards, you know, we know that the automotive industry has been doing better than a lot of us anticipated six months ago. But with contract renewals, you know, we would expect with a better Outlook and better production numbers in automotive that the contract should Renew at improving margins. How do you feel about this month to Holy ones? He has his own opinion that you could teach social but it'll kind of horrible learning Union. What time?

Hi on somebody go hunting shop off the TV.

It depends on what you on Thursday and I figure Showdown I scheduled switch off Akinator, please. Say hi to hear me. See if I'm seeing here. She she she she don't Winger Christians Berg, see how much is amazing price, but I can get you to show your birth.

Sorry a hardship on this show off how good as we mentioned earlier our 20 21 planning will be completed sometime in December. However, we are in the preliminary discussion with our OEM customers, volumes of pricing for next year. As you just mentioned twenty-twenty has been pretty remarkable turnaround for Auto industry in China.

and

We also remain optimistic for 20 21 for a continuous Wars for the second. We recently had a the auto the power steering industry recently had a confirmation in what we are the hosting company for such a large event consists of all pretty much all major steering producers in China during the conference. We had a consensus, you know in some environment where and Anna competition in the past many years have been quite intense. Um, it's not really helping with wage.

This the players like us that none of the players because of the very intense price competition. So wrong with the consensus is going forward will going to come together a more rational pricing strategy among all players.

That being said we we are optimistic for 20 21 in terms of bargaining power with the OEM customers long as the demand for vehicles continue to rise it will put pressure on the supplier side in order to maintain a top-notch quality and on-time delivery a safe production. We we will need to have a better module that being said having such a industry leader consensus for the power steering industry Thursday. So is is laying a great foundation for twenty Twenty-One. So we are very excited about next year. We think.

In many ways, so it will be a better year for for us.

Okay. Thank you. I appreciate that information. Thank you. Thank you, very

Once again, if you would like to ask a question, please press star one on your telephone keypad.

Once again, if you would like to ask a question, please press star one on your telephone keypad.

We have a follow-up question from Robert polovich a private investor. Please proceed with your question. Oh, thank you. I'm back. You know, I had one more question Thursday 8 to Paris, you know Imports into the US and so forth. You think we have a little more optimism now that we're going to have it towed transition of power in Washington and maybe some of those the import tariffs will come down. What are your thoughts on on that situation?

That's when they take off the country. So we

she said I can go either converter you.

We are hopeful the new president will be more open-minded in terms of a global trade. It's a a wing for both customers and suppliers and to ensure the the product and product is top quality and price competitive. So Monday we have proven. We are a such a supplier to us Industries and we like to see the leadership in Washington to realize there are many things off.

Us China can do it, too.

And so in a nutshell, we we are we look forward to improve the relationship and Tara and faith can be one of these things will come to a more reasonable level.

Okay, you know I had another question while we're while we're doing questions here. I know you have some operation in Brazil, but what about the potential for maybe some assembly operation in Mexico? Do you see anything like that as a as a potential?

development that you might consider

how you going to touch it all on the same channel issue since I GT?

You said 2:00 a.m. She was Mexico is under consideration wage really is our long-term Global planning. The other part is actually we're getting some suggestions and requests from our customers in North America. So we are doing some research on the possibility of setting up something in Mexico. Although it's still a preliminary our long-term. It doesn't change our long-term planning want to be a global supplier.

We have to have presents in in all the key markets.

Yeah, that sounds good. Again. I appreciate your answers. Thanks for taking my call.

Thank you.

There are no additional questions at this time. I would like to turn the call back to Kevin Dees for closing remarks. You want to thank everyone for participating in today's conference call. Please be safe and we look forward to speaking with you again in the future. Have a good day.

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

Dead dead dead dead dead.

Dead dead dead.