China Automotive Systems - Q2 2024
August 13, 2024
Transcript
Operator (participant)
Please note this conference is being recorded. I will now turn the conference over to your host, Kevin Theiss. Kevin, the floor is yours.
Kevin Theiss (Head of Investor Relations)
Thank you, and thank you everyone for joining us today. Welcome to China Automotive's 2024 Second Quarter Conference Call. Joining us today are Mr. Jie Li, Chief Financial Officer, Assistant. 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent the company's estimates and assumptions only as of the date of this call.
As a result, the company, actual results could materially differ, differ from those contained in these forward-looking statements due to a number of factors, including those described under the heading Risk Factors and Results of Operations in the company's Form 10-K Annual Report for the year ended December 31, 2023, 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. 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 and adversely impact our business, financial condition, and results of operations.
A prolonged disruption or any unforeseen delay in our operations of the manufacturing, delivery, and assembly processes within any of our production facilities could result in delays in the shipment of products to our customers, increased costs, and reduced revenue. The company expressly disclaims any duty to provide updates to any forward-looking statements made in this call, whether as a result of new information, future events, or otherwise. On this call, I will provide a brief overview and summary of the second quarter for the period June 30, 2024. Management will then conduct a question and answer session. The 2024 second quarter and six months results are unaudited and financial results are reported using US GAAP accounting. For the purposes of our call today, I'll review the financial results in US dollars.
We'll begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy and automobile industry, and our market position. Our net sales of steering products increased by 15.4% year-over-year, and gross profit grew faster at a 29% year-over-year rate in the second quarter of 2024, thanks to changes in product mix and effective cost controls. Sales of our traditional steering products grew by 7.5% year-over-year, with our electric power steering, EPS products, sales increased by 33.7% year-over-year. Our growth in the second quarter was led by the increase in EPS sales, as well as higher sales to Chery Autos passenger vehicles and an almost 19% year-over-year sales increase by our Henglong subsidiary to Chinese passenger vehicle OEMs.
In the Chinese commercial vehicle market, our sales declined by approximately $1 million-$18.7 million in this slower growth market. Internationally, North America declined by $2.1 million year-over-year, mostly from reduced demand by Stellantis, with South American sales experiencing a slight decline. For the six months ended June 30, 2024, Stellantis consolidated shipments in North America had declined by 18.1% year-over-year. For the macroeconomy, during the first half year, Chinese GDP grew by 5%, with total retail sales of consumer goods up by a modest 3.7% year-over-year. Investment in fixed incomes, excluding rural households, increased in the first half of 2024 by 3.9% year-over-year.
However, some important market segments declined, with real estate development down by 10.1% year-over-year, and the sales of floor space of newly built commercial buildings decreased by 19% year-over-year. However, automotive sales posted different performance. According to statistics from the China Association of Automobile Manufacturers, CAAM, the combined sale of passenger and commercial vehicles increased by 6.1 year-over-year in the first half of 2024. Sales of passenger vehicles rose by 6.3% year-over-year, and commercial vehicle sales grew by 4.9% year-over-year. Sales of new energy vehicles increased by 32% year-over-year, led by an 85.2% year-over-year rise in plug-in hybrid vehicles. In addition, automobile exports increased by 30.5% from the six-month period a year ago.
Purchase subsidies by the government and some auto OEMs, favorable trading policies, better loan terms, all aided the automobile industry sales. The automotive industry is a critical industry, but the continued growth of the Chinese economy is expected to receive ongoing support from the Chinese government. Back to our business performance. During the second quarter, our gross profit rose by 29% year-over-year, our gross margin to 18.5%, up from 17.3% in the first quarter of 2024, and 16.5% in the second quarter of 2023. Excuse me. Greater sales of our EPS products, improved economies of scale in EPS production and cost controls generated our higher gross margin. Our operating income climbed faster at 38.7% year-over-year in the second quarter of 2024, despite higher research and development and SG&A expenses.
The diluted net income per share was $0.24 in the 2024 second quarter and $0.51 for the 6 months. Pardon me. Cash flow from operations was $9.1 million in the first 6 months of 2024, compared with cash used in the same 6-month period last year. Board of Directors recently declared a special dividend of $0.80 per common share to be paid on or about August 22nd, 2024. The aggregate dividend amount should be approximately $25 million, which we paid internal funds and cash flow. The cash dividend highlights our confidence in our sustainable growth and cash generation to support and as a thank you to our long-term shareholders. We also celebrate the 20th anniversary of our NASDAQ listing later on August 24th of 2024.
During these 20 years, we grew from a small Chinese domestic player to a large global Tier 1 supplier, with operations and customers in North America, South America, Europe, India and Asia. With highly successful customers such as BYD Auto, Zhejiang Geely Automobile, Chery Automobile, Changan Automobile, SAIC Motor and FAW Group domestically. We also have global customers such as Stellantis N.V. in North and South America and Europe, Ford Motor Company in North America, and Mahindra and Mahindra in India. Sales have also grown from $58.2 million in 2004 to $576.4 million in 2023.
We look forward to the further growth of our company's operations as our traditional steering products remain a solid contributor, even as we expand our EPS, our advanced driver assist systems with our Sentient AB operations and other products under development. Before diving into details of financials, we would like to remind all shareholders and interested investors there are two concurrent technological transitions in global automotive sectors: from internal combustion engine to electric powertrain, and from human driving to autonomous driving. Our well-diversified global customer base, award-winning product quality, large-scale manufacturing capacity and best-in-class technology offers, prepares us and positions us with strong advantages for global competition. Now, let me review the financial results in the second quarter of 2024.
Net sales increased by 15.4% year-over-year, to $158.6 million in the second quarter of 2024, compared to $137.4 million in the second quarter of 2023. Net sales of traditional steering products and parts increased by 7.5% year-over-year to $103 million for the second quarter of 2024, compared to $95.8 million for the same quarter in 2023. Net sales of EPS products rose 33.7% year-over-year to $55.6 million, from $41.6 million for the same period in 2023. EPS product sales grew to 35.1% of the total net sales for the second quarter of 2024, compared to 30.3% for the same period in 2023.
Sales of Henlong's passenger vehicle steering customers increased by 18.9%, and sales to Chery Auto rose by 28.8% due to higher demand. Export sales to North American customers were consistent at $26.8 million in the second quarter of 2024, compared to $28.9 million in the second quarter of 2023. North American sales declined basically due to decreased demand from one customer. Sales in Brazil were $12 million in the second quarter of 2024, compared to, I'm sorry, $12.2 million in the second quarter of 2023. Gross profit grew by 29% year-over-year to $29.3 million from $22.7 million in the second quarter of 2023.
Gross margin, 18.5% in the second quarter of 2024, from 16.5% in the second quarter of 2023. Increase in gross margin was mainly due to changes in the product mix and improved cost management. Gain on other sales was $1.7 million in the second quarter of 2024, compared to $0.7 million second quarter of 2023. Selling expenses increased by 21.6% year-over-year to $4.6 million, compared to $3.8 million in the second quarter of 2023. Selling expenses represented 2.9% of net sales in the second quarter of 2024, compared to 2.8% in the second quarter of 2023.
General and administrative expenses, G&A, increased by 40.7% year-over-year to $7.4 million from $5.3 million in the second quarter of 2023, mainly due to higher consulting fees and tax, business tax and surcharges. G&A expenses represented 4.7% of net sales in the second quarter of 2024, compared to 3.9% of net sales in the second quarter of 2023. Research and development expenses, R&D, increased by 23.9% year-over-year to $8.2 million, compared to $6.6 million in the second quarter of 2023. R&D expenses represented 5.2% of net sales in the second quarter of 2024, compared to 4.8% in the second quarter of 2023.
Research and development programs include electric power and hydraulic steering systems, automotive intelligence and software technologies, automobile electronics, steering columns, high polymer materials, automotive parts, manufacturing technologies, and automotive parts, among other things. Other income was $1.7 million for the second quarter of 2024, compared to $2 million for the quarter ended June 30, 2023. The decrease was primarily due to lower government subsidies in the second quarter of 2024. Income from operations rose 38.7% to $10.8 million in the second quarter of 2024, from $7.8 million in the second quarter of 2023. The increase was primarily to higher sales and better margins. Interest expense was $0.2 million in the second quarter of 2024, compared to $0.3 million in the second quarter of 2023.
Net financial expense was $0.7 million in the second quarter of 2024, compared to net financial income of $4 million in the second quarter of 2023. The change in net financial expense, slash income, was primarily due to foreign exchange volatility, generating a loss in the second quarter of 2024, compared with income in last year's same quarter. Income before income tax expenses and equity in earnings of affiliated companies was $11.7 million in the second quarter of 2024, compared to income before income tax expenses and equity in earnings of affiliated companies of $13.4 million in the second quarter of 2023.
The change in income before income tax expenses and equity in affiliated companies was mainly due to foreign exchange volatility, generating a loss in the second quarter of 2024, compared with income in last year's same quarter. Income tax expense was $2.1 million in the second quarter of 2024, compared to $1.5 million for the second quarter of 2023, primarily due to an increase in the global intangible low-tax income, GILTI tax expenses. Net income attributable to common shareholders was $7.1 million in the second quarter of 2024, compared to net income attributable to parent company's common shareholders of $10.5 million in the second quarter of 2023.
Diluted earnings per share was 24 cents in the second quarter of 2024, compared to 35 cents in the second quarter of 2023. Weighted average number of diluted common shares outstanding was 30,185,702 in the second quarter of 2024, compared to 30,189,537 in the second quarter of 2023. We will now review for the first six months of 2024. Net sales increased by 6.6% year-over-year to $298 million in the first six months of 2024, compared to $279.7 million in the first six months of 2023.
Net sales of traditional steering products and parts increased by 2.5% to $195 million for the six months ended June 30, 2024, compared to $190.3 million for the same period in 2023. Net sales of EPS systems and parts increased by 15.2% to $103 million for the six months ended June 30, 2024, compared to $89.4 million a year ago. As a percentage of net sales, sales of EPS, 34.6% for the six months ended June 30, 2024, compared to 32% for the same period in 2023. Six-month gross profit increased by 20.4% year-over-year to $53.4 million from $44.3 million in the corresponding last time.
The six-month gross margin was 17.9%, compared with 15.9% in the first six months of 2023, primarily due to the sales products mix and lower unit cost. Gain on other sales was $2.2 million in the first six months of 2024, compared to $1.4 million in the corresponding period last year. Operating expenses rose by 16.4% year-over-year, led by a 29.3% increase in general and administrative expenses due to higher consulting fees and tax-related expenses. Income from operations increased by 31.7% year-over-year to $20.5 million, first six months of 2024, from $15.5 million in the first six months of 2023.
The increase in operating income is primarily due to a $9 million increase in gross profits, compared with a nearly $5 million gain in operating expenses. The operating margin was 6.9% in the first six months of 2024, compared to 5.6 million in the first six months of 2023. Other income net increased to $4.1 million for the six months ended June 30, 2024, mainly due to an increase of $0.6 million in government subsidies compared with last year's period. Financial expense net was $0.7 million for the six months ended June 30, 2024, compared to financial income net of $3.5 million in the six months period a year ago.
This $4.2 million increase mostly resulted from an increase in foreign exchange loss due to foreign exchange volatility. Income tax increased by almost 65% year-over-year to $3.9 million due to higher GILTI tax expenses. The equity and losses of affiliated companies increased by $1.2 million in the 2024 first six-month period, compared with the corresponding period last year. Net income attributable to the parent company's shareholders was $15.4 million in the first six months of 2024, compared to net income attributable to parent company's common shareholders of $17.3 million in the corresponding period in 2023. Diluted earnings per share for the first six months of 2024 were $0.51, compared to diluted earnings per share of $0.57 in the first six months of 2023.
Now we'll give some balance sheet and other financial highlights. As of June 30, 2024, total cash and cash equivalents and pledged cash was $148.4 million. Total accounts receivable, including notes receivable, were $288.1 million. Accounts payable, including notes payable, were $254 million. Short-term loans were $46.6 million. Total parent stockholders' equity was $362.9 million as of June 30, 2024, compared to $344.5 million as of December 31, 2023. Our current ratio is up to 1.5, and working capital, total, current assets less total current liabilities, was $190 million as of June 30, 2024.
Net cash provided by operating activities was $9.1 million in the first six months of 2024, compared to net cash used in operating expenses of $0.05 million in the first six months of 2023. Payments to acquire property, plant, and equipment was $10 million, compared to $5.5 million in the first six months of 2023. Management has reiterated revenue guidance for the full year 2024 of $605 million. This target is based on the company's current operating and market conditions, which are subject to change. With that, operator, we are ready to begin the Q&A.
Operator (participant)
Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone would indicate that your line is in the queue. You may press star two if you'd like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for question. Thank you. Your first question is coming from Jonathan Mitches, who's a private investor. Jonathan, your line is live.
Speaker 5
Hello. My question is, gross margin has increased to 18.5% in the second quarter. What is the outlook for the gross margin going forward?
Speaker 4
[Foreign language]
Jie Li (CFO)
Great. Thank you for your question. Yes, our second quarter gross margin reached 18.5%. If you look at the whole first six months or first half of the year, our gross margin was 17.9%. Both for second quarter and first half of the year are two percentage point higher than the same period of last year. The reason our gross margin improved is mainly due to EPS sales volume increase and also the value a higher price or higher value-added product are selling well. Due to the better economy of scale of those products, our gross margin are experiencing a very nice improvement. Looking into the future, I think for the rest of the year, we are very confident we can maintain at least 18% for the gross margin.
Operator (participant)
Okay, Jonathan, have you finished your question?
Speaker 5
Yes. Thank you.
Operator (participant)
Thank you. Thank you very much. Your next question is coming from Todd Gerlow, who is a private investor. Todd, your line is live.
Speaker 6
Thank you. My question is: how much are your capital expenditures in 2024? And in what product areas are these investments being made?
Jie Li (CFO)
Our capital expenditure for 2024 full year is going to be $25 million. As you can see, in the first half of the year, we already spent $10 million in the CapEx, and we're going to continue to inject $15 million in the second half of the year. Out of our $25 million annual CapEx budget, 80%, it's about $20 million, will go to EPS related products. We have a number of exciting and innovative products, including E-RCB, RCB, i-RCB product that's coming into the market. The remaining 20% our CapEx will go to other traditional products.
Operator (participant)
Okay. Thank you very much. Your next question is coming from Andrew Poboraid, who's a private investor. Andrew, your line is live.
Speaker 7
Hello. Congratulations for the results, especially the revenue increase. You reiterated your guidance, but should we look at how August is looking, for the first month of quarter three? How is it looking compared to, and what—and how much we should expect the same revenue and [audio distortion]?
Jie Li (CFO)
Andrew, we couldn't hear the second half of your questions.
Operator (participant)
Andrew, I think your line got a bit distorted. Could you just try asking the question again?
Speaker 7
Yeah, sorry.
Operator (participant)
That's better.
Speaker 7
So should we expect in quarter three, the same $158 million in revenue? Also, congratulations for your results. And, yeah, how is the first month of July and a bit of August looking for revenue?
Jie Li (CFO)
Okay, great. Thank you.
Speaker 4
[Foreign language]
Jie Li (CFO)
Yeah, thank you for your question. Third quarter, due to the summer season, usually seasonally lower than the second quarter. And a lot of the due to the high temperature and heat waves during the summer season, a lot of OEMs tend to going to adjust their production schedules. And also, they're going to spend some time on maintaining up keeping their production line. And so for that reason, and we'll see the Q3 is in line with prior year Q3's seasonality. But overall, we maintain a very strong growth momentum.
Speaker 7
Okay, and if I could ask another question, should be-Sure. expect future dividends in the next year, what is the capital allocation going to be for shareholders? Buybacks also maybe are more accretive for shareholders.
Speaker 4
Okay，[Foreign language]
Kevin Theiss (Head of Investor Relations)
we are not excluding all these options, and it's all based on as we disclosing our announcement on the recent dividend announcement. Our capital reward program to shareholders are all always based on our cash flow and need for CAPEX. We believe the business is in strong momentum. We will make do announcement when we get to that stage of future plan whether dividend or buyback. Again, we believe you know it's all based on our cash flow conditions and and and our overall business as being on good track.
Speaker 7
thank you very much. Last question would be talking about cash flow. What do we expect free cash flow to be in 2024 for full year? Considering CapEx is a bit larger, net cash from operations, will it be higher than last year, compensating for the increased CapEx from 2023? What is free cash flow approximately?
Speaker 4
OK, he wants the last question, he wants to ask, it is roughly this year's this free cash flow, that is this free cash, cash flow, roughly what is the situation, because free cash flow's calculation is with this operating cash flow minus this capital expenditure, this year's capital expenditure seems will be higher than last year a bit, that is, he wants to know is it free cash, this, this capital, this operating cash flow also will increase, then is it overall this, free cash flow this situation will compared to last year hold flat or is increase.
[Foreign language]
Operating cash flow will, this outflow will be relatively higher. Now, looking at it, according to this year's $605 million, $600, $605 million of revenue, looking at this, it should, it should be said, this cash flow should still be pretty good. Overall, there should, there should, there should be, there should be this free, free cash flow appearing.
Jie Li (CFO)
Yes, So cashflow, our overall cash flow is doing very well. And as you know, as we grow revenue, as we continue to grow revenue, we're going to see some fluctuation on the cash flow. As we is our bulk of our business still in, in mainland China. The Chinese OEM tend to the billing cycle and the payment cycle usually are four to five months. So, the more we grow our top line in sales in China, the more we're going to experience the accounts receivable collection cycles.
So just bear in mind, we'll continue to work with the OEM on the collection, but at the same time, we believe the cash flow is highly depends on how fast we can collect from our customers. At the same time, based on our $605 million revenue guidance for 2024, we are confident we will continue to have a positive free cash flow for 2024.
Speaker 7
Okay, thank you very much. Yeah. four to five months you said, right? No, no, no.
Jie Li (CFO)
Yeah, four months to five.
Speaker 7
You said four to five months.
Jie Li (CFO)
Yeah.
Speaker 7
Okay. Okay. Thank you very much, sir. Have a wonderful year. Congratulations.
Jie Li (CFO)
Thank you. Thank you.
Operator (participant)
Thank you very much. Just a reminder there, if anyone has any remaining questions, you can press star one on your phone keypad now to join the queue. Thank you. Our next question is coming from Jessica Lynn, who's a private investor. Jessica, your line is live.
Speaker 8
Good morning. My question, I'm just wondering if you could go over what % of your R&D was spent on the traditional products, and then what % of the R&D was spent on EPS products?
Hanlin Chen (Chairman and CEO)
Great. Thank you. [Foreign language] The short answer to your question is, it's about 50/50. 50% of R&D expenses going to traditional steering product, 50% goes to EPS product. Although at the moment, EPS revenue only accounts for 35% of total revenue. However, given the importance of electric power steering, EPS products, it's a key technology going to be fully integrated in the future of automotive industry. Whether it's a smart vehicle or further electrification, all need a strong electric power steering to help execute their missions. So that being said, we'll continue to increase in the technology for the future. For that reason, we're investing, you know, spending about 50% of R&D expenses into EPS product.
Speaker 8
Thank you.
Jie Li (CFO)
Thank you. Thank you.
Operator (participant)
Thanks very much. Just another reminder there, if there is anyone still wanting to ask a question, you may press star one on your phone keypad now. Okay, we appear to have reached the end of our question... Oh, apologies. Somebody's just jumped into queue. We have another question in from Andrew Poboraid, who's a private investor. Andrew, your line is live.
Speaker 9
Yeah. Sorry, I did not really understand the cash flow from operations if it's looking better in the first month of July, August. Cash flow from operations, if they improved in Q3 a bit, or what's the guidance for that in Q4? I understood that the billing cycle is four or five months, but and as you grow revenue, cash flow will increase more, cash flow from operations. But I'm curious, in July and August, if cash flow from operations is better a bit.
Jie Li (CFO)
Oh, okay.[Foreign language] So, Andrew, the short answer to your question is, as you mentioned, as we mentioned earlier, July, August is slower season due to the summer seasonality. The nature of slow season for our collection is actually better because we're not shipping as many products as our high season. So our collection is in full gear. And so our cash flow is better in the months of July and August.
Speaker 9
Oh, okay. I understand. Thank you very much.
Jie Li (CFO)
Thank you.
Operator (participant)
Thank you very much. Well, we appear to have reached the end of our question and answer session, so I will now hand back over to Kevin for any closing remarks. Kevin, is your line live?
Kevin Theiss (Head of Investor Relations)
Thank you for your participation in today's conference call. Please be safe, and we look forward to speaking with you in the future.
Operator (participant)
Thank you very much. This does conclude today's conference. You may now disconnect your phone line at this time and have a wonderful day. Thank you for your participation.