Q2 2019 Earnings Call
Greetings welcome to China automotive systems second quarter 2019 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. Please note. This conference is being recorded I will now turn the conference over to your host Kevin. These thank you you may begin.
Thank you everyone for joining us today welcome to China Automotive systems, 2019 second quarter Conference call.
Joining us today are Mr. acquisitive, Wu, Chief Executive Officer, and Mr., Jie, Li Chief Financial Officer, Oh, China automotive systems, they will be available to answer questions later during 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 companys 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 Companys Form 10-K annual report for the year ended December 31 2018.
As filed with the Securities and Exchange Commission on March 28.
2019.
And in other documents filed by the company from time to time with the Securities and Exchange Commission.
Oh, the company expressively disclaims any duty to provide updates to any forward looking statements.
Made in this call whether as always the Reformation.
Two events or otherwise.
On this call I will provide a brief overview and summary of financial results for the 2019 second quarter management will conduct a question and answer session.
It's probably a 2018 second quarter six months financial results are unaudited and are reported under U.S. GAAP.
For the purpose of our call today I will review the financial numbers in U.S. dollars.
We will begin with review recent than them, so the automobile industry in China Automotives market position.
China's GDP growth in the second quarter 2019 grew at 6.2% down from 6.4% in the first quarter of 2019 and lower than the 6.7% for the second quarter 2018.
Rent growth represented the slowest growth in the last 27 years.
China experienced a sharp decline in exports to the United States, So 8.1% for the first six months of 2019.
The Chinese economy is becoming more dependent on domestic consumption that consumers are nervous and less willing to make major purchases and the government is campaigning against pollution.
New automotive emission standards the national six were implemented on July 1st in some provinces in tier one cities to improve air quality and this resulted in restricted vehicle sales.
This implementation in these areas is actually ahead of the schedule national implementation of the new emission standard.
Unit sales of passenger cars and commercial vehicles declined by 9.6% in June at 12.4% in the first six months of 2019.
The purchasing managers index P.P.M.I.
Gauge of Chinese factory conditions came in at 49.4 for June below the 50 level, indicating economic growth has not reached an expansion stage. According to National Bureau of statistics.
For the month of June Chinese factory output growth slowed again to 51.3 to 51.7 in may but totally new orders declined to 49.60 49.8.
Export orders continued to decline falling to 46.3 amaze 46.5.
Manufacturers continued to cut jobs in June with the employment declining to 46.9 compared with 47 in May.
According to data reported by the China Association of automobile manufacturers see A.M.
Over all vehicle production in June reflected a 17.3% year over year decline.
With sales down 9.6% year over year.
For the first six months of 2019 production declined 13.7%.
Year over year compared to the same period in 2018 and sales declined by 12.4% year over year.
In June 2019 passenger car production declined 17.2% and sales were 7.8% down compared to June 2018 commercial vehicle production in June .
It was down 17.5% sales down 17.8% year over year.
In the commercial vehicle segment.
The traditional internal combustion bus market continues to experience a significant year over year decrease in unit sales in the second quarter of 2019.
Overall truck sales were down 14.1% of total commercial vehicle sales declined by 13.9%.
In response to this environment and net sales of our traditional hydraulic steering products declined by 15.9% year over year to $83.1 billion in the second quarter of 2018.
This reduction reflects lower vehicle sales and market conditions in the second quarter of 2019 as well as the transfer of our yes business. The headlong came by the joint venture.
Our electric power steering products sales in the second quarter 2019.
It was $22.6 million, a 16.3% decline compared with the 2018 second quarter.
As a percentage of net revenues, yes sales accounted for 21.4% in the second quarter 2019, which was consistent with the same quarter in 2018.
We believe our headlong came I'd be joint venture with Japan came by the company limited has the potential for stronger growth among Chinese and Japanese brand of vehicles in the future.
Our combined operations will increase our market.
Position in the Chinese market for Es products.
As most great products to enhance exports in the future we remain optimistic for the success of our exclusive contract with great Wall Motor company or yes systems.
Just here its new all electric small vehicle model already.
Our 150.
But the 100000 units expected to be shipped in 2019 under this contract.
We are also optimistic about the future of our joint venture.
With.
Hi, it's on electric company to produce small electric motors for using GPS systems.
Producing these electric motors ourselves, we have better control over the quality production and costs of these products for Oh, yes systems.
Recognize our growing steering technology, one of our tier one customers in North America selected us to develop.
They knew it would be circulating ball.
Steering system the <unk>.
Oh I see.
Hi, RCB program further all kinds of vehicle project.
Commercial production is expected.
In October 2019, with initial annual sales approximating 45000 units.
Our export sales in North America, our hydraulic steering products decreased by 3.9% year over year in the second quarter 2019, we are making progress on the RCD program, because the newer circulating ball steering systems for that companies all columns vehicle. The knowledge developed well these products will be used in other products in the future.
Second quarter 2019, gross margin increased to 14.4% from 13.5% in the second quarter of 2018, mainly due to changes in the product mix.
We reduced our operating expenses by 14.2% in the second quarter of 2019.
And income from operations in the second quarter of 2019 increased to 69.2% to $2.7 million in the second quarter.
Oh, 2019, compared with $2.6 million in the second quarter of 2018.
Net income attributable to parent company's common shareholders increased to $2.5 million or diluted earnings per share of eight cents compared to net income attributable to parent company's common shareholders of <unk> point $8 million or diluted earnings per share of three cents in second quarter of 2018.
As of June 32019, cash and equivalents and pledged cash were $89.1 million.
At the annual General meeting on July 18, 2019, Dr., Henry Lou and Dr., Tom Hoops you.
Were elected a new independent members of the board of directors. They replaced Mr., Arthur Wall, and Mr., Robert telling who did not stand for reelection.
For 2018 and beyond the Central government has initiated a fiscal stimulus plan.
Included about two trillion won were $291 billion of tax cuts, which is slowly affecting the economy.
Other recent government actions include using the regulations for using government debt and some infrastructure projects to help boost the economy.
China's National developed in the report Reform Commission has announced new monetary incentives to promote growth in the automobile sector.
Rural area consumers can dragon vehicles with older emission standards to purchase more efficient.
Compact vehicles, the plan will subsidize replacement cars complying with the 2007 emission standards.
And cars with engine for 1.6 meters are smaller in rural areas and some state owned companies are also adding incentives to encourage the purchase of automobiles to stimulate new car purchases.
Including significant discounts to sell new vehicles that that do not meet the new emission standards.
Equal sales under these programs may affect future sales leader in 2018.
As one of the largest suppliers of high quality steering products in China, we are well positioned to benefit from new growth opportunities.
Even as we continue to supply a number of tier one joint venture I'm sorry.
Tier one vehicle manufacturers in North and South America.
You've entered into joint ventures.
To establish better market position in the P.S. market create a foothold and autonomous hearing and gain knowledge and other emerging steering technology.
We continue to be financially strong and maintain the resources to accomplish our strategic goals.
Now, let me review the financial results for the second quarter of 2019.
Our net sales decreased 15.9% to $5.7 million compared to $125.8 million in the same quarter of 2018.
Net sales of traditional steering products declined by 15.9% as demand weaken in the Chinese domestic brands automobile market.
Additionally, the company sales to its north American customers declined by $1.1 billion sales of electric power steering represented 21.4% of total net sales.
Gross profit decreased to $15.2 million in the second quarter of 2019 compared to $17 million in the second quarter of 2018. The gross margin was 14.4% in the second quarter of 2019 versus 13.5% in the second quarter of 2018.
The gross profit decrease was mainly due to lower sales higher unit cost and a change in product mix.
Gain on other sales was $2.5 billion in the second quarter of 2019 compared to $1 million in the second quarter 2018.
Selling expenses were $3.9 million in the second quarter of 2018 compared to $2 million to $4.9 million in the second quarter of 2008.
The decrease was mainly due to lower logistics expenses related to decreased sales during the quarter.
Selling expenses represented 3.7% of net sales in the second quarter of 2019, compared with 3.9% in the second quarter of 2018.
General and administrative expenses Gionee were $4.4 million in the second quarter.
You chose 2019 and 2018.
Gene next DNA expenses represented 4.2% of net sales in the second quarter of 2019 compared to 3.5% in the second quarter 2018.
The percentage increase was mainly due to reduced sales in the second quarter of 2019.
Research and development expenses, R&D expenses decreased 18.5% to $6.6 million in the second quarter of 2019 compared to $8.1 million in the second quarter of 2018.
R&D expenses continue to focus on the development of the company's U.P.S. and other new products.
R&D expenses represented 6.2% of sales in the second quarter of 2019, compared with 6.4% in the second quarter 2019.
Income from operations was $2.7 million in the second quarter of 2019 compared $2.6 million in the same quarter of 2000 and <unk>.
The increase was primarily due to the higher gain on other sales and lower operating costs.
As a percentage of net sales the operating margin was 2.6% in the second quarter of 2019 compared to 1.5% in the second quarter of 2018.
Net financial income in the second quarter of 2019 was $1.6 million compared with $2.9 million in the second quarter of 2018.
Income before income tax expenses and equity in earnings of affiliated companies increased 143.5% to $3.1 million in the second quarter of 2018 compared to $1.3 million in the second quarter of 2018.
Net income attributable to parent company's common shareholders increased 196.3%.
Easily.
The $2.5 million in the second quarter of 2019 compared to net income attributable to parent company's common shareholders of <unk> point $8 million in the corresponding quarter of 2018.
Diluted earnings per share.
Eight cents in the second quarter 2018, compared to diluted earnings per share of three cents and say what are your 2018.
<unk> weighted average number of diluted common shares outstanding was 31 million 499577.
In the second quarter of 2018.
Fair to 31 million 647305 in the second quarter 2018.
Now we will go over six months financial highlights.
Net sales decreased.
17.3% to $214.9 million in the first six months of 2019.
Compared to $259.8 million in the first six months of 2018.
Six months gross profit was 29.2 million compared to $38.7 million in the corresponding period last year.
Six month gross margin was 13.6%.
In the first six months of 2019 compared to 14.9% in the corresponding period in 2018.
In another sales was $3.8 million in the first six months of 2019 compared with $2.5 million.
And the corresponding six month period last year.
<unk> income from operations was $3.8 million in the first six months of 2019 compared to $5.2 million in the first six months of 2080.
Operating margin.
It was 1.8%.
And the first six months of 2019 compared to 2% in the corresponding period of 2018.
Net income, which was the parent companys common shareholders was $4 million in the first six months of 2019 compared to $5.2 million in the corresponding period in 2018 diluted earnings per share were 13 cents in the first six months of 2019 compared to diluted earnings per share of 16 cents.
Well he corresponding period of 2018.
We will now go over some balance sheet and cash flow items.
[noise] as of June 32019, cash and equivalents and pledged cash.
Was $89.1 million total accounts receivable, including notes receivable were $255.1 million.
Accounts payable was $184.1 million short term loans were $71 million total parent company stockholders equity was $308.5 million as of June 32019, compared to $304.8 million as of.
31 2018.
Net cash used in operating activities was $25.7 million in the first six months of 19 compared with net cash used in operating activities of $5.4 million in the first six months of 2018.
Payments to acquire plant.
Property plant and equipment were $10.3 million compared with $17.3 million in the first six months of 2018.
The business outlook.
Management has revised its revenue guidance for the full year 2000 $19 million to $430 million from $510 million. This target is based on the company's current views on operating and market conditions, which are subject to change.
With that operator, we're now ready to begin the Q and a session.
Thank you and if he would like to ask a question. Please press star one on your telephone keypad a confirmation tele indicate your line is in the question queue.
You May press Star two if he were they to remove your question from the Q.
And for a participant using speaker equipment, it may be necessary to pick up the handset before pressing the star teas.
Our first question is from William Greene since he with Greenridge Global. Please proceed.
Hi, guys sales to the North American customers fell in the corner what are you expecting for the remainder of 2019 and ended 2020 from these customers.
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Right.
Okay. The source in the first half of 2019, Oh export to North America.
It was around 55 million U.S.
And we.
Anticipate.
The second half sales to North America customer will have a slight increase.
Due to a new model product coming out.
I mean, our CB product does coming out.
For the second half of 2019, so that will increase.
Total sales and.
In the second half 2020, we will see.
Total sales to North America will be equivalent to 2019, so it's going to be similar.
Or flat.
Yeah, Okay. So we should not expect really any growth.
Going forward on this market.
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Okay. Yes. The is the short answer is yes in terms of North America sales in 2020.
So what we would not expect.
The increase it it will be flat compare was plenty 19, we you see in terms of international sales, we see the growth will be coming from other markets such as South America, we have a.
Contract was a Chrysler Oh, sorry, where the fee up.
That's a 300000 units shipments for 2020.
And also we have.
Also with the FIA in Europe , that's another 125000.
In 2020. So these are the gross area, we see internationally domestically.
In China, we see our joint venture was Kyi B will boost our salesforce dot dot joint venture would take off in a significant way.
So we we havent.
A number of product.
Product upgrade and.
So we think the EPS product and Tony.
Tony its going to be.
Much stronger.
In terms of gross.
Okay can you talk a little more about the case why be how is the customer reaction to that and when will we see that business.
That business turn profitable.
Okay.
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Okay. So in terms of customer feedback.
After six months to six months of fine tuning.
Now lets kyi be joint venture our quality.
Oh product quality has increased significantly.
We do just to give you. Some examples we use some of the.
Hi.
Great materials.
We also did some fine tuning on the engineering and so now.
In terms of quality, we have reached.
Japanese standards the same.
The level of product quality sender, okay, why be selling in Japanese market.
So with that we already received.
Overwhelming positive feedback from our domestic Chinese customers on the cost side.
Also we make major strides.
During.
This period.
We have.
And.
And maybe some of the cost reductions.
On the production side.
Fine tuned to Coke production procedures.
Now our gross margin increased from previous.
13%, while we were producing two now 18%.
So.
That's a significant improvement in terms of our cost structure.
So because of volume by now in 29 teams still.
Hasn't leach.
The level.
We we invest it and so.
We are seeing 2019 kyi be joint venture is going to be a slight loss.
However, we expect that will tell around 20 2020 to turn profit.
So.
That will be a boost in 2020.
Business.
Okay.
All right and last question is what's the sales overall sales following why are we still seeing the inventory increase.
[noise].
Just had a quick question again.
The sales are falling and obviously the guidance is for for lower sales in the near future.
But the inventory is still increasing from previous levels why is that.
Okay.
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Okay to answer your question.
It's mainly due to the inventory increase is mainly due to product mix shift.
And part of ours, so structure all part of the mix has changed.
Doing.
The quarter. However, we don't see this inventory increase is significant.
You know.
We increased from 88 million.
And the the year to 90 million.
Now in terms of inventory.
These are mainly shifting from some of the components, we used to use for.
Hydraulic product and now we're moving to other kind of products. So.
And we believe this is.
A natural change because we are in response to the market.
Our.
Shifting or.
Sales mix.
To to adapt to the market trend so.
I would not worry about it.
Inventory at the moment.
Okay, well with with the lower guidance I mean is there any risk then that some of the products you might have on hand, you know you might need to do outweigh the larger write off later this year.
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Okay, well, we do have we do have.
Appraisal evaluation on the inventory every quarter.
And whatever we need to do to to to make prohibition. It's already been done isn't there is no more provision.
Need it.
In terms of.
Inventory at this moment so to answer your question, we don't see any.
Further write down.
Coming.
Okay. Thanks.
Thank you.
Thank you.
Our next question is from Robert Polivich, a private Investor. Please proceed.
Yes, good morning.
I have a couple of questions.
The first.
Is.
The.
Hi, sung joint venture for the electric Motors.
I was wondering.
Well you are in regards to production.
Well I know they were.
Building a plant I think for this product.
I guess, what what stage are we in what sets.
And well these motors ultimately be sold soon.
I guess other companies, making electric power steering systems.
It's just the floor.
Thank you Ben.
Mike.
The case.
Okay.
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Hi, good morning, and congrats.
Okay. So D. The hisun joint venture.
In terms of the status right now the workshop.
It has being completed construction of a workshop or the <unk> production.
Factory has been completed.
No we're doing the interiors at this moment.
We believe it will be done by the end of October .
In the meantime.
The equipment.
And are we ordered will be coming in from Korea.
During that time, and we will start a trial production probably at the end of our.
Over.
And well have.
Prototype coming out during that time as well.
In the fourth quarter and our plan.
Is.
Two.
Launch.
Mass production in March 2020.
So thats the general plan in terms of Hisun joint venture.
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I'm a home in a time and quite frankly, the rights for content. So.
Okay.
The.
To your question on.
As future sales all electric motor from this joint venture into other.
Companies as producers, yes, the short answer is yes.
Our design capacity for this joint venture is 3 million units.
Annual production.
With the phase one we are aiming at 1 million units in phase one that 1 million units will be mainly use it internally for rcs product on EPS product.
The remaining or the additional 2 million coming online what decide and a lot of big portion of that will be used.
For sales to other S. producers.
Yes.
Okay.
I appreciate those answers.
My next question is regarding.
I guess, the U.S. market in North America and Brazil.
I know.
Brazil, you have some operations.
You do assembling a I don't know what the extent is products at that location.
In light of everything going on with the U.S. and trade issues or.
What what would they.
What would a good strategy be at this point too.
Make sure that you continue to.
Develop and grow in the North American market.
Okay.
Today I want to you can you quantify or do you just on the warranty off just a second.
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John you've been kind of in the one that's on your downtown Kinda back we'll get nice Yaki only think that anybody could contain here cannot be bigger ticket you cannot be done.
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My Shocker.
Okay.
So we see it.
Yes.
In terms of tree issues.
Ongoing chain issues, we have extended conversation with our.
Customers and also perhaps.
The.
In terms of specifically on.
How are we going to tackle the.
Incremental part of it.
So we have made.
Some positive progress in terms of our negotiation or.
Our discussion with our customers.
How are we going to share the increase of tariff.
And we were Oh, we remain optimistic.
It will have some resolution.
And coming and in terms of.
Youre you us youre.
Your comment across South America in particular, Brazil markets, we have increased our.
Capacity in Brazil.
As we mentioned earlier in 2020, we have.
Already in our the order book from fee yet.
South America 300000 units.
That's for 2020 and.
So we are increasing South America.
In particular.
Brazil facilities production.
And.
We're hoping that will also help us to.
Does it become another route to the U.S. market.
As.
But most of the product will be produced locally in Brazil.
Other than some of the other.
Locations.
We're looking at Canada, and possibly Malaysia as well.
These countries are.
No.
In across hair of.
The trade.
Dispute.
So we are.
Working.
Some of the.
Markets too.
To develop.
The solution so that being said is.
Which we think will we are making progress we are making strategic planning.
Two.
To diversify as well as to maintain our gross.
Prospects in.
North America and other international markets.
[noise].
Okay. Thank you.
Uh huh.
I had another question.
And it has to do with.
Yes.
Back in the fall I guess are there was a go private proposal and that.
Was pulled.
For China automotive to become a privately owned company.
Just wondering.
Where are we where is trying to automotive at this point.
In their position are they.
Committed to remaining a public company at this point.
And so.
The company did have a share buyback in effect.
Is that something that will still be ongoing.
And.
Those are my final questions. Thank you.
Okay.
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What can I saw the partner I'm here to know our people to feel products your policy on climate.
Im going from a partner halfway tissue boxes, I think that people want to go or actually I think I got comfortable.
So don't forget when you go to acquire I think if you like to hang show chain back again up on actions that you're cooking for doing their primary commodities here trying to.
Great. Thanks, so much generic kinda comfortable I know you don't want to know if I now want nothing she she kind of confuse you see shooting equal.
Mm Hmm.
There's no further plan.
Oh, no intention to go private as far as we heard from our shareholders and we are committed to the U.S. illicit Janice US listed company.
The in terms of the share buyback a we as you may have heard.
In the past.
Quarters, and even a year or so China Chinese government has implemented very strong capital control.
Restrictions for for capital too.
Leave China.
In.
It's the whole processes have become longer terms application, but we have coming to a point, we believe our process the application for capital to come out to do share buyback.
Has reached a point and we should see.
Our.
Fun.
We'll get approved.
In the near future.
And so with that we will resume our share buyback.
As we announced in the past so.
Yes, so that's part of the plan.
Oh, Okay I. Thank you for answering those questions I appreciate it.
Thank you.
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Thank you.
Okay.