Good morning, everyone. Welcome to China Automotive Systems First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode, and we will be opening for questions following the presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Kevin Theiss.

Kevin, over to you..

Thank you. Thank you, everyone for joining us today. Welcome to China Automotive Systems 2024 first quarter conference call. Joining us today are Mr. Hanlin Chen, Chairman; and Mr. Jie Li, Chief Financial Officer of China Automotive Systems. They 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's actual results could differ materially from those contained in these forward-looking statements, due to a number of factors, including those described under the heading Risk Factors 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 our overall business environment, cause uncertainties in the region where we conduct business, cause our business to suffer in ways that we cannot predict, and materially 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 cost 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 first quarter for the period ended March 31, 2024.

Management will then conduct a question-and-answer session. The 2024 first quarter results are unaudited and financial results are reported in US GAAP accounting. For the purposes of our call today, I will review the financial results in US dollars.

We will begin with a review of some of the company's highlights, recent dynamics of the Chinese economy and automobile industry and our market position. We had a solid performance in the first quarter of 2024. Gross profit grew by 11.6% year-over-year with a higher gross margin of 17.3% in the first quarter of 2024.

Income from operations was 26% higher as cost controls limited operating expense grew to 2.8% versus the 11.6% increase in gross profit. Both selling and G&A expenses rose in the quarter. We returned a positive cash flow from operations of $10.5 million and diluted income per share increased by 17.4% to $0.27 in the 2024 first quarter.

Total cash, cash equivalents and short-term investments were $135.8 million or approximately $4.50 per share at March 31, 2024. Net sales decreased by 2% to $139.4 million as sales of traditional steering products declined by approximately $2.4 million due to lower sales of vehicles used in these steering products.

We experienced different results in two of our large international markets. Sales in Brazil continued to grow with a 17.6% year-over-year sales rise due mostly to higher volume by Fiat. North American sales declined mainly due to temporary lower product sales as Stellantis N.V.

reported total unit shipments declined in North America during the first quarter of 2024. Stellantis sales partially reflected this transitioning toward more NEV models in the 2024 first quarter. Our electric power steering EPS sales were essentially even with last year. As a percentage of total sales, EPS remained consistent around 34% of total sales.

Despite a slight sales decline in 2024, we remain confident in our sales growth in 2024. According to statistics from the China Association of Automobile Manufacturers, CAAM, sales of both passenger and commercial vehicles increased by approximately 10% in the first quarter of 2024.

Sales of the new energy vehicles totaled approximately 30% of total vehicle sales in China. Part of this automobile growth is due to new purchase subsidies, the scrapping of down payments and lower prices for certain vehicle models. In addition, automobile exports increased by 33.2% from a year ago.

Research and development expenditures were reduced even as we decreased new projects for our traditional steering products while expanding our EPS portfolio of products. We closely coordinate our R&D with our OEM customers to ensure our new products meet their requirements and those of the end users.

As we expand our EPS product line, we can supply our steering products to more vehicles of our current customers as well as attract new customers. R&D activities continue to evolve our EPS products performance and quality.

We are making progress to include the technologies of our Sentient subsidiary to advance our ADAS products and develop prototypes for some current customers. Changes in our recent product sales mix start with our new products and have resulted in improved gross margins as greater economies of scale are gained.

We believe the growing demand for hybrid and NEV passenger vehicles in North America is creating another growth opportunity for our EPS products in addition to our current traditional product sales sold there.

Our customer BYD is one of the largest EV producers in China and we have new products under development to enhance their vehicles steering performance. We remain confident in the outlook for the Chinese automobile industry and its economic outlook. China's gross domestic product in the 2024 first quarter grew by 5.3% year-over-year.

China's retail consumer goods sales grew by 4.7% year-over-year and investment in fixed assets were up by 4.5% year-over-year in the first quarter of 2024.

Automobile growth continues to look promising in China with the new promotional sales policies, more affordable cars being introduced and automobile exports, a sensitive international issue, which should continue for the foreseeable future even some markets implement protective measures.

A number of vehicle OEMs in North America have announced the retirements of their internal combustion engines, driven passenger vehicles with more retirements planned. European vehicle OEMs are also scheduling the retirements of their internal combustion engine vehicles.

China being the world leader in NEV production and exports with the largest portfolio of NEV products will be a major beneficiary of this trend. Now let me review the financial results in the first quarter of 2024. Net sales decreased by 2% to $139.4 million in the first quarter of 2024, compared to $142.2 million in the first quarter of 2023.

Net sales of traditional steering products and parts were $92 million compared to $94.4 million for the first quarter of 2023. Net sales of electric power steering, EPS products and parts were $47.4 million for the three months ended March 31, 2024 compared with $47.8 million for the same period in 2023.

EPS product sales for the first quarter of 2024 were approximately 34% of total net sales. North American net exports were $30.4 million compared to $34.7 million in the first quarter of 2023, primarily due to lower demand of passenger vehicles by Stellantis N.V.

Brazil Henglong net products increased by 17.6% to $12.7 million in the first quarter of 2023 compared to $10.8 million for the same period in 2023, due to a higher sales to Fiat.

Sales volumes to Chery Auto Limited also increased and sales for other entities increased by 31.2% to $29 million mainly due to higher sales by Wuhan Jielong and Wuhan Hyoseong. Steering product sales to the commercial vehicle markets of $16.8 million were consistent with the sales in the 2023 first quarter.

Gross profit increased by 11.6% to $24.1 million from $21.6 million in the first quarter of 2023. Gross margin in the first quarter of 2024 was 17.3% compared with 15.2% gross margin in the first quarter of 2023. Primarily these changes in the product sales mix and the decrease in sales unit costs for the three months of March 31, 2024.

Gain on other sales was $0.5 million compared to $0.7 million in the first quarter of 2023. Selling expenses increased by 20.6% to $4.1 million from $3.4 million in the first quarter of 2023. This increase in selling expenses was primarily due to higher office expenses.

Selling expenses represented 2.9% of net sales in the first quarter of 2024 compared to 2.4% in the first quarter of 2023. General and administrative expenses, G&A, increased to $5.5 million compared with $4.8 million of the first quarter of 2023 mainly due to higher payroll-related expenses and maintenance expenses.

G&A expenses represented 3.9% of net sales in the first quarter of 2024 compared with 3.4% of net sales in the first quarter of 2023. Research and development expenses, R&D, decreased by 17.2% to $5.3 million compared to $6.4 million in the first quarter of '23, mainly due to decreased R&D activities for new projects of the traditional products.

R&D expenses represented 3.8% of net sales in the first quarter of 2024 compared to 4.5% in the first quarter of 2023. Other income was $2.4 million for the first quarter of 2023 compared to $1.5 million for the first quarter of 2023, mainly due to higher government subsidies in the first quarter of 2024.

Income from operations was $9.7 million in the first quarter of 2024 compared to net income, I'm sorry, income from operations of $7.7 million in the first quarter of 2023. The 26% increase in 2024 first quarter income from operations was primarily due to higher gross profit partially offset by a smaller increase in operating expenses.

Interest expense was $0.3 million in the first quarter of 2024 compared to $0.2 million in the first quarter of 2023. Financial expense net was $0.01 million in the first quarter of 2024 compared to $0.4 million in the first quarter of 2023. This change was primarily due to a decrease in foreign exchange loss due to foreign exchange volatility.

Income before income tax expenses and equity in earnings of affiliated companies increased by 37.2% to $11.8 million in the first quarter of 2024 compared to $8.6 million in the first quarter of 2023.

The increase in income before income tax expense and equity in earnings of affiliated companies in the first quarter of 2024 was mainly due to higher income from operations and increased net other income.

Equity in losses of affiliated company was $0.8 million in the first quarter of 2024 compared with equity in income of affiliated companies of $0.1 million in the first quarter of 2023. Income tax expense was $1.7 million for the first quarter of 2024 as compared to $0.8 million for the first quarter of 2023.

This higher tax was primarily due to an increase in the Global Intangible Low-Taxed Income tax expense that's GILTI. Net income attributable to the parent company's common shareholders was $8.3 million in the first quarter of 2024 compared to $6.8 million in the first quarter of 2023.

Diluted income per share was $0.27 in the first quarter of 2024 compared to net income per share of $0.23 in the first quarter of 2023. The weighted average number of diluted common shares outstanding was 30,185,702 in the first quarter of 2024 compared to 30,193,082 shares in the first quarter of 2023.

Now we'll provide some balance sheet and other financial highlights. As of March 31, 2024, total cash, cash equivalents and short-term investments was $135.8 million. Total accounts receivable including notes receivable was $266.7 million. Accounts payable including notes payable were $243 million and short-term bank loans were $40.5 million.

Working capital rose to $206.7 million as of March 31, 2024, compared to $180.3 million as of December 31, 2023. Total parent company stockholders' equity was $358.4 million as of March 31, 2024 compared to $344.5 million as of December 31, 2023. Our current ratio was approximately 1.6 to 1.

Net cash provided by operating activities was by $10.5 million in the 2024 first quarter compared to net cash used in operating activities of $1.4 million in the first quarter of 2023. Payments to acquire property, plant and equipment were $4.5 million compared to $3.2 million in the first quarter of 2023. The business outlook.

Management has reiterated revenue guidance for the full year 2024 of $605 million. This target is based on the company's current view on operating and market conditions, which are subject to change. With that, operator, we are ready to begin the Q&A session..

Thank you very much. We are now opening the floor for questions. [Operator Instructions] Thank you. Your first question is coming from Jim Fallon of Azusa Holdings. Jim, your line is live..

Can you hear me?.

Yes..

Yes.

Could you please give us an update on the activities in Europe especially with Sentient?.

[Foreign Language] Okay. So thank you for your question on Sentient, our Swedish subsidiary. Sentient is specialized in driverless technology software. And that's the main reason we decided to make them a part of our company through investment and continue to increase our involvement in many fronts. Sentient is at the frontier technology.

And there is the R&D initiatives, mostly are focusing on and solve the driverless to provide the driverless solution. We are working with Volvo, the Sentient's prototype product has been installed in Volvo vehicles, trucks. And mainly based on the electric motor type of solutions.

And we are -- we believe it will take some time for this product to continue to go into mainstream. And given the uncertainty of the global market and we are cautiously optimistic. And overall, we are still very upbeat on the long-term prospects of Sentient and their technologies. And we're very proud of this team is making very good progress..

Okay. Thank you very much. [Operator Instructions] Our next question is coming from Jonathan Yudis. He is a Private Investor. Jonathan, your line is live..

Hello.

Can everybody hear me?.

Yes, we can hear you fine..

Okay. My question is R&D spending went down in the first quarter of 2024.

What is the outlook for R&D spending in the rest of 2024? And what are the key R&D projects in 2024?.

[Foreign Language] Okay. The R&D expenses, the reason for first quarter 2024, our R&D expenses are going lower than last year same quarter is mainly due to the reclassification of our R&D expenses because some of the expenses are very long-term projects. So we reclassify them into the cost of goods sold.

So but if you use an apple-to-apple comparison with last year, the R&D expenses is still maintained at the -- on the total R&D costs and expenses still maintain at 4% to 5%. So in that sense, R&D spending has not -- our spending on our research and development has not decreased. [Foreign Language] Okay.

For this year's, the rest of the year, our R&D expenses were going to a few different categories. First, we'll go into the ERCB project, we're working with European clients. We also have the I-RCB product was with American clients. And then -- and we're working with BYD on the R-EPS product. And also we have a project going on with Geely.

So we have a number of projects going on with large clients and they're all looking to launch new models with us..

Okay. Thank you very much. Our next question is coming from Margaret Wilson of EYI Independent. Margaret, your line is live..

Thank you. It's Ms. Wilson.

I'm just curious about what is the outlook for the gross margin for 2024, please?.

[Foreign Language] Okay. Great. So thank you for your question on the outlook for gross margin for 2024. And there are a few reasons. Some are our business efficiency improvement, some are market-related dynamics.

So on the business front, we have been resilient on cost management and a very, very stringent cost management program is continue to take effect. And on the product mix side, we also increased more higher-margin product in the revenue mix. So that helps with the margin.

On the market dynamics, and in the raw material, especially the steel price has gone down, which favors our margin. And also the depreciation of RMB against US dollars predominantly is also helping us with the export. So all things -- all factors included.

We believe we can continue to maintain our gross margin at between 17% to 18% for the balance of 2024..

Thank you so much. Appreciate that..

Thank you..

Thank you very much. [Operator Instructions] Okay. Our next question is coming from Jae Yun of Yun Capital. Jae, your line is live..

Okay. Thank you. I just have a question for management. I understand that this is obviously a very growth time for Chinese EVs and the international markets with the pricing being at an advantage. And there's so many models that I think are moving in Europe and South America.

So how do you at CAAS think that you will benefit from this growth trend?.

[Foreign Language] Okay. So thank you for your question on EV. You are right, Chinese EVs are doing very well and they have a very competitive pricing and they have made a major advancement in the technology as well. This is the reason driving the demand for more and more Chinese vehicles abroad in particular in Europe and South America.

And also we hear more and more of those potentials in North America and particularly in the US. However, given the US China tension and the ongoing investigation and possible policies come from the White House. We are -- we feel uncertain whether Chinese vehicle can make a strong presence in North America.

But if the current business environment continues. I think some of the other markets will still sell well just not in US. So we are still waiting for the news and closely following with the development..

Okay. Thank you very much. [Operator Instructions] Okay. We don't appear to have any further questions in the queue. I will now hand back over to the management for closing remarks..

We want to thank everyone for participating today and we look forward to speaking with you in the future. Thank you..

Thank you very much. That does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation..