Good morning, everyone, and welcome to the China Automotive Systems Inc.

Second Quarter Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Kevin Theiss. Kevin, the floor is yours.

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 of the China Automotive Systems. 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's actual results could materially 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 another 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 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 second quarter for the period June 30, 2024. Management will then conduct a question-and-answer session. The 2024 second quarter and 6 months results are unaudited and financial results are reported using U.S. GAAP accounting.

For the purposes of our call today, I'll review the financial results in U.S. 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 effect of cost control. Sales of our additional 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 Auto's passenger vehicles and an almost 19% year-over-year sales increase our Henglong subsidiary, the Chinese passenger vehicle OEMs. In the Chinese commercial vehicle market, our sales declined by approximately $1 million to $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 6 months ended June 30, 2024, Stellantis consolidated shipments in North America had declined by 18.1% year-over-year.

For the macro economy during the first half year, Chinese GDP grew by 5% with total retail sales of consumer goods, up by a minus 3.7% year-over-year. Investment in fixed income, 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 [indiscernible] newly built commercial buildings decreased by 19% year-over-year.

However, automotive sales goes through a different performance [indiscernible] from the China association of Automobile manufacturer, TAAM, 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 6-month period a year ago, purchased 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 for 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, [indiscernible] 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 control generated our higher gross margin.

Our operating income climbed faster at 38.7% and year-over-year in the second quarter of 2024 despite higher research and development and SG&A expenses. Diluted net income per share was $0.24 in 2024 second quarter and $0.51 for the 6 months. 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. The Board of Directors recently declared a special dividend of $0.80 per common share to be traded on or about August 22, 2024. The aggregate dividend amount should be approximately $25 million with repaid 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 24 of 2024.

During these 20 years, we grew from a small Chinese domestic player to a large global 1 tier supplier with operations and customers in North America, South America, Europe, India and Asia with highly successful customers such as BYD Auto, [indiscernible] Automobile, Chery Automobile, [indiscernible] Automobile, SAIC Motor and FAW Group domestically.

We also have global customers such as Stellantis NV in North and South America and Europe, Ford Motor Company in North America, 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 product 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 2 concurrent technological transitions in global automotive sector 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 compares 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 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 Henglong's passenger vehicle steering customers increased by 18.9% and sales to Cherry 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 second quarter 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, to $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 [indiscernible] 15.5% 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 in the second quarter 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 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 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, including 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 three months 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 due 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/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 and earnings of affiliated companies of $13.4 million in the second quarter of 2023. The change in income before income tax expenses and equity 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 taxed income, GILTI tax expenses. Net income attributable to parent company's 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 $0.24 in the second quarter of 2024 compared to $0.35 in the second quarter of 2023. Weighted average number of diluted common shares outstanding was 30,185,702 in the second quarter of 2024, and compared to 30,189,537 in the second quarter of 2023.

We will now review [indiscernible] for the first 6 months of 2024. Net sales increased by 6.6% year-over-year to $298 million in the first 6 months of 2024 compared to $279.7 million in the first 6 months of 2023. Net sales of traditional steering products and parts increased by 2.5% to $195 million for the 6 months ended June 30, 2024, and 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 6 months ended June 30, 2024, compared to $89.4 million a year ago.

As a percentage of net sales, sales of EPS [indiscernible] 34.6% for the 6 months ended June 30, 2024, compared to 32% for the same period in 2023. 6 month profit increased by 20.4% year-over-year to $53.4 million from $44.3 million in the corresponding period last year. Six-month gross margin was 17.9% compared with 15.9% in the first 6 months of 2023, primarily due to the sales product mix and lower unit cost. Gain on other sales were $2.2 million in the first 6 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 for first 6 months of 2024 from $15.5 million in the first 6 months of 2023. The increase in operating income was primarily due to a $9 million increase in gross profits compared with a nearly $5 million gain in operating expenses. Operating margin was 6.9% in the first 6 months of 2024 compared to $5.6 million in the first 6 months of 2023. Other income net increased to $4.1 million for the 6 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 6 months ended June 30, 2024, compared to financial income net of $3.5 million, similar 6 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 6 months period compared with the corresponding period last year. Net income attributable to parent company's shareholders was $15.4 million in the first 6 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 6 months of 2024 were $0.51 compared to diluted earnings per share of $0.57 in the first 6 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 hours as of December 31, 2023.

Our current ratio is 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 for the 2024 first 6 months compared to net cash used in operating expenses of $0.05 million in the first 6 months of 2023. Payments to acquire property, plant and equipment was $10 million compared to $5.5 million in the first 6 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 views on operating and market conditions, which are subject to change. With that, operator, we are ready to begin the Q&A.

[Operator Instructions].

Your first question is coming from Jonathan Niches who's a private investor.

My question is gross market has increased to 18.5% in the second quarter. What is the outlook for the gross margin going forward?

[Foreign Language].

[Interpreted]. Yes, our second quarter gross margin reached 18.5%.

If you look at the whole first 6 months or first half of the year, our gross margin was 17.9%, both second quarter and first half of the year or 2 percentage points higher than the same period of last year. The reason our gross margin improved. It's mainly due to EPS sales volume increase and also the value higher priced or higher value-added products are selling well. And due to the better economy of scale of those products, our gross margin are experiencing a very nice improvement. And 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.

Your next question is coming from Todd Gula, who is a private investor.

My question is, how much are your capital expenditures in 2024? And in what product areas are these investments being made?

[Foreign Language].

[Interpreted].

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 [indiscernible] $15 million in the second half of the year. And out of our $25 million annual CapEx budget, 80% is about $20 million. We'll go to EPS-related product.

We have a number of exciting and innovative product, including RCP product is coming into the market. The remaining 20% of our CapEx will go to other traditional products.

Your next question is coming from Andrew [indiscernible], who's a private investor.

Should we -- you reiterated your guidance, but should we look at -- how is August looking for -- or the first month of quarter 3. How is it looking for the [indiscernible] and how much should we expect the same revenue $15 million for quarter 3.

Andrew, we couldn't hear the second half of your questions.

Andrew, I think your line got a bit distorted. Could you just try asking the question again.

So should we expect in quarter 3 the same $158 million in revenue. Also congratulations for your results. And yes, how is the first month of July and the bit of August looking for revenue?

[Foreign Language].

[Interpreted]. Yes, thank you for your question.

Third quarter due to the summer season, usually our seasonally are lower than the second quarter. A lot of -- due to the higher 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 or keeping their production line. And for that reason, and that we'll see the Q3 is in line with prior year Q3 seasonality. But overall, we maintain a very strong growth momentum.

Okay. And if I could ask another question. Should we expect future dividends in the next year? Or what is the capital allocation going to be for shareholders, buybacks also maybe are more accretive for shareholders?

[Foreign Language].

[Interpreted].

Okay.

We are not excluding all these options. And it's all based on as we disclosed in our announcement on the recent dividend announcement.

Our capital reward program to shareholders 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, future plant, whether dividend or buyback. Again, we believe it's all based on our cash flow conditions and our overall business has been on good track.

Okay. 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.

[Foreign Language].

[Interpreted]. Yes.

So on cash flow, 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 -- our bulk of our business still in Mainland China. The Chinese OEM tend to -- the billing cycle and the payment cycle usually are 4 to 5 months.

So the more we grow our top line in sales in China, the more we're going to experience accounts receivable collection cycles.

So just bear in mind, we'll continue to work with 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.

Okay. Thank you very much. 4 to 5 months, you said, right? Yes. No, no, no. [indiscernible] 4 to 5 months.

Yes.

[Operator Instructions].

Our next question is coming from Jessica Lin, who's a private investor.

My question, I'm just wondering if you could go over what percent of your R&D was spent on the traditional products? And then what percent of the R&D was set on EPS products?

[Foreign Language].

[Interpreted]. The short answer to your question is it's about half-half, 50% of R&D expenses going to traditional steering products, 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 product, it's a key technology going to be fully integrated in the future of automotive industry, whether it's smart vehicle or further electrification all need strong electric power steering to help execute their missions.

So that being said, we will continue to increase in the technology for the future.

For that reason, we're investing -- spending about 50% of R&D expense into EPS product.

[Operator Instructions].

We have another question in from Andrew [indiscernible], who's a private investor.

Yes.

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 a bit? Or what's the guidance for that in Q4. I understood that the billing cycle is 4 or 5 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 from operation is better a bit.

[Foreign Language].

[Interpreted].

Okay.

So Andrew, the short answer to your question is as you mentioned, July -- as we mentioned earlier, July, August is a 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.

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.

Thank you for your participation in today's conference call. Please be safe, and we look forward to speaking with you in the future.

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.