Kevin Theiss – Investor Relations-Grayling
Hanlin Chen – Chairman
Qizhou Wu – Chief Executive Officer
Jie Li – Chief Financial Officer
Daming Hu – Chief Accounting Officer
China Automotive Systems, Inc. (CAAS) Q4 2012 Earnings Call March 27, 2013 8:00 AM ET
Greetings, and welcome to the China Automotive Systems’ Fourth Quarter and Year-end 2012 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Kevin Theiss with Grayling. Thank you Mr. Thesis, you may begin.
Thank you for joining us today and welcome to China Automotive Systems 2012 fourth quarter and 2012 fiscal year conference call. My name is Kevin Theiss and I am with Grayling, China Automotives’ U.S. Investor Relations Advisor.
Joining us today are Mr. Hanlin Chen, Chairman; Mr. Qizhou Wu, Chief Executive Officer; Mr. Jie Li, Chief Financial Officer; and Mr. Daming Hu, Chief Accounting Officer of China Automotive Systems. They will be available to answer questions later in the conference call and we will help with translation.
Before we begin, I will remind all listening throughout this call we may make statements that may contain forward-looking statements. Forward-looking statements represent our 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 in the Company's 10-K annual report for the year ended December 31, 2012 and under the heading risk factors in the Company's Form 10-Q for the nine months ended September 30, 2012 filed with the Securities and Exchange Commission on November 8, 2012 respectively and in documents subsequently filed by the Company from time to time with the Securities and Exchange Commission.
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. I will provide a brief overview and summary of the 2012 fourth quarter results and the year-end results. And then I will turn to management to conduct the question-and-answer session. The 2012 fourth quarter results are unaudited numbers under U.S. GAAP. For our call today, I will review the financial results in U.S. dollars.
After difficult first half of 2012, we are pleased to report higher sales for both the fourth quarter and year, with solid profitability and continued financial strength and flexibility as we enter the 2012 year.
Net sales in the fourth quarter of 2012 increased by 7.5% to $101.5 million and net sales grew by 1.9% to $336 million for the 2012 year. Diluted earnings per share were $0.18 in the fourth quarter and $0.70 for the full year.
Net cash flow from operations was $16.2 million for the 2012 year and cash equivalents were $87.6 million at December 31, 2012. We continued to be the steering leader in the domestic Chinese market where we have a large and diverse base of OEM patent driven commercial vehicle manufacturers as customers. We are the primary supplier of steering products for most of these Chinese OEMs.
Our success in the domestic vehicle market was the spring board into the global markets. Our international sales are already mentioned as we supplied steering products to three OEM vehicles to our North American customers for the first time in our history and we remain optimistic regarding our promising business in Brazil. We believe we are poised to capture more OEM customers as well as more vehicle models in the future.
We continue to position China Automotive Systems for current and future market conditions by increasing our research and development by 60% in the fourth quarter of 2012 and 65.5% in the 2012 year compared to the 2011 fourth quarter and year respectively.
New products can have immediate effect on our sales that’s demonstrated by the representing 13.4% of total sales in 2012. Our ability to continue to anticipate current and future customers needs remains as one of our core growth foundations. During 2012, we independently developed our own electronic controlled units for our electric power steering products, as well as high pressure hydraulic power steering for commercial vehicles.
In addition, we created a new rack and pinion steering for GM Wuling in 2012. We especially focused on developing new product models for electric power steering products, upgrades for traditional steering technologies and to meet or exceed the specific requirements to enhance our international sales become a more prominent global supplier.
R&D is also important to improve our competitive position. Our manufacturing productivity has been increased to the proprietary designs with some of our machines and by developing higher performance materials. our goal is to increase our competitiveness in terms of products’ performance and reliability, lowering manufacturing costs, and assist our customers to improve their vehicles for fuel efficiency.
We have almost completed our new R&D center, so all our resources will be integrated at one facility to improve productivity and consistency in our programs. Our formidable R&D program provides the means to satisfy our current customers with improved products, capture new customers, and build our brand name globally.
Commercial vehicle sales declined by 5.6% during the 2012 year, reflecting the slower economic growth, which reduced the demand for trucks to ship products over the highways as well as for construction.
During the year, financial policies began to be realized in the small stimulus package was announced in May 2012, which have not re-ignited economic growth so far. The tenure changeover in Central government leaders has been recently completed, and we’re expecting policies implemented including a larger more effective stimulus package to help build the rural areas of China where more than half of the Chinese populations still reside.
During the 2012 year, we undertook a number of strategic steps to strengthen our corporate structure for the future. We sold our 51% interest in Zhejiang Henglong & Vie Pump Manufacturing Company to our venture partner, in May of 2012, for RMB 52 million. This amount represents a 24% premium as compared to the estimated net book value of approximately RMB 42 million.
Strategically, this transaction moves an operation with slow sales growth in relatively low profitability to make us more focused for the future. In January 2012, we created a new joint venture with SAIC-IVECO to build a new manufacturing facility with an approximate 200,000 power steering unit capacity for SAIC-IVECO’s heavy-duty and specialty trucks in China.
Once SAIC-IVECO’s requirements are met the joint venture can sell to other commercial vehicle manufacturers. China Automotive Systems has a 70% ownership in this joint venture. this new manufacturing capacity combined with the Beijing Auto joint venture capacity will add the capabilities to manufacture up to 500,000 additional steering units per year.
We also anticipated financial programs during 2012. On May 25, 2012, we will be in all our outstanding senior convertible notes to February 13, 2013, the cost of doing these convertible notes early is $32.4 million and we realized a gain of $1.4 million in 2012 due to this transaction. we realized greater financial resources and more flexibility to support our growth initiatives through this no redemption.
On a fully diluted basis, our share count has declined by approximately $3.3 million due to the redemption of the senior convertible notes. Also in August 2012, we began a $5 million program to buyback shares in the open market using our free cash flow. Approximately 220,000 common shares have been repurchased in open market transaction during 2012 at a cost of nearly $1 million.
The uncertain market for Chinese stocks in the U.S. has resulted in abnormally low valuations to produce an opportunity for CAAS to repurchase shares at extremely attractive prices. We view our recent stock price has rare opportunity to purchase an unappreciated asset and show to the investment community, our commitment to building shareholder value.
We look forward to 2013 as we are better positioned to capture market share both domestically and especially internationally. Our financial strength in cash flows from operations will support our growth as we expect the markets will strengthen during the year without more steering units for passenger vehicles, which slightly improved our market share in 2012, and the outlook remains positive for growth in our domestic business in 2013.
Sales into North America were strong in 2012 that continued to promising while our Brazilian sales are emerging. We’re well positioned to benefit by our diverse products, low cost manufacturing and excellent customer relationships to enhance value to our shareholders.
Let me now walk you through our fourth quarter and year 2012 financial results. In the fourth quarter of 2012, net sales increased by 7.5% to $101.5 million, compared to $94.4 million in the same quarter of 2011. The net sales increases was mainly due to an increase of international sales to a customer in North America, a sales increase of new products in China, and an increase in sales volume encouraged by the Chinese government's incentive policy relating to the purchase of lower-emission and more fuel-efficient cars known as the, Government Incentive Policy, which was implemented in May 2012, as well as the appreciation of the RMB versus the U.S. dollar, which were only slightly offset by lower average selling prices of the products sold in China.
Gross profit was $17.2 million in the fourth quarter of 2012, compared to $18.3 million in the same quarter of 2011. The gross margin was 16.9% in the fourth quarter of 2012, versus 19.4% in the same quarter of 2011. The decrease in gross profit was primarily due to lower selling prices and greater sales volume of lower-margin products sold in the China market.
Selling expenses rose by 11.5% to $2.9 million in the fourth quarter of 2012, compared to $2.6 million in the fourth quarter of 2011. Selling expenses represented 2.9% of net sales in the fourth quarter of 2012, which was approximately the same as 2.8% in fourth quarter of 2011.
General and administrative expenses declined by 25.0% to $3.9 million in the fourth quarter of 2012, compared to $5.2 million in the same quarter of 2011. The decrease was mainly due to the reduction in the amount of staff compensation, which was primarily due to the payment of lower performance bonuses to management. G&A expenses represented 3.8% of net sales in the fourth quarter of 2012, compared to 5.5% in the fourth quarter of 2011.
R&D expenses rose by 60% to $4.8 million in the fourth quarter of 2012, compared to $3 million in the same quarter of 2011. The increase in R&D expenses was mainly due to the Company's spending on the improvement of machinery molds, and the increased personnel-related expenses and costs for the further development of the Company's electric power steering products. R&D expenses represented 4.7% of net sales in the fourth quarter of 2012, which was an increase from 3.2% in the fourth quarter of 2011.
Income from operations was $7.4 million in the fourth quarter of 2012, compared to $7.6 million in the fourth quarter of 2011. As a percentage of net sales, the operating margin was 7.3% in the fourth quarter of 2012, compared to 8.1% in the same quarter last year.
Net financial expenses declined to 72.7% or to $0.3 million, compared to $1.1 million in the fourth quarter of 2011. This decrease was primarily due to lower average debt level as a result of the redemption of the convertible notes by the Company on May 25, 2012.
There was no gain on change in fair value of derivative in the fourth quarter of 2012 as all the convertible notes that they redeemed in the second quarter of 2012, compared to a non-cash gain of $1.6 million in the fourth quarter of 2011 due to the movements in the Company's stock prices during that quarter.
Income before income tax expense and equity in earnings of affiliated companies was $7.2 million in the fourth quarter of 2012, compared to $8.1 million in the same quarter of 2011. The decrease in income before income tax expenses and equity in earnings of affiliated companies in the fourth quarter of 2012 was mainly due to a decrease in financial expenses, an increase in other net income in the fourth quarter of 2012, and a gain in the fair value of derivatives of $1.6 million in the fourth quarter of 2011, while there was no such gain in the fourth quarter of 2012.
Net income attributable to the parent company's common shareholders was $5.1 million in the fourth quarter of 2012, compared to net income attributable to parent company's common shareholders of $6.0 million, including $0.5 million from discontinued operations, in the corresponding quarter of 2011.
Diluted earnings per share were $0.18 in the fourth quarter of 2012, compared to diluted earnings per share of $0.19 in the fourth quarter of 2011. The weighted average number of diluted common shares outstanding was 28,076,879 in the fourth quarter of 2012, compared to 31,511,685 in the fourth quarter of 2011.
For fiscal year 2012, annual net sales increased by $6.2 million to $336 million compared to $329.8 million in 2011. Higher sales in 2012 were mainly due to growth in new product export sales to a customer in North America, growth in sales volume which was encouraged by the Government Incentive Policy, and the effect of RMB appreciation against the U.S. dollar, which were slightly offset by the lower average selling prices of products sold in China.
Gross profit in 2012 decreased to $60.8 million from $63.4 million in 2011. Gross margin was 18.1% compared to 19.2% in 2011, primarily due to lower selling prices and greater sales of lower-margin products in the China market.
Selling expenses in 2012 increased by 4.3% to $9.6 million in 2012 from $9.2 million in 2011, mainly due to higher office costs, increased staff compensation and increased traveling expenses. Selling expenses represented 2.9% and 2.8% of net sales in 2012 and 2011 respectively.
G&A expenses decreased by $2.6 million or 16.8% to $12.9 million in 2012 from $15.5 million in 2011. Lower G&A expenses were primarily due to reduced staff compensation as a result of the payment of lower performance bonuses to management, decreased maintenance expenses and reduced office expenses. G&A expenses represented 3.8% of net sales in 2012 compared to 4.7% in 2011.
R&D expenses increased by 65.6% or $5.9 million to $14.9 million in 2012 from $9 million in 2011, primarily due to costs incurred related to the Company's further development of its Electric Power Steering technology with the improvement of machinery molds and higher staff compensation costs. R&D expenses represented 4.4% of net sales in 2012, which was an increase from 2.7% in 2011.
Operating income decreased to $27.8 million in 2012 from $31.1 million in 2011, due to lower gross profit and higher operating expenses, which were partially offset by a greater gain on other sales for material scraps and fixed assets. The operating margin represented 8.3% of net sales in 2012 compared to 9.4% in 2011.
Financial expenses decreased by 45% to $2.2 million in 2012 from $4 million in 2011, as interest expenses were reduced after the convertible note redemption, which was slightly offset by higher interest income for higher cash balances in 2012.
There was no convertible notes conversion or any resulting gain from the conversion in 2012 compared to a gain on convertible notes conversion of $1.6 million in 2011.
The loss on change in fair value of the derivatives embedded in the convertible notes was $0.4 million in 2012 compared with a $21 million gain in 2011. The loss in 2012 was due to the increase in the stock prices during the period from the beginning of 2012 to the date of the redemption. The loss was non-cash in nature.
The Company recorded a gain of $1.4 million on the redemption of the convertible notes in 2012. There was no redemption or any gain resulting from any redemption in 2011.
Income before income tax expenses and equity in earnings of affiliated companies was $27.1 million in 2012 compared to $49.8 million in 2011. There was a decrease of $22.7 million or 45.6%, mainly due to lower operating profit and a decrease in gain on change in fair value of derivative of $21.4 million. Income before taxes represented 8.1% of net sales in 2012 compared to 15.1% in 2011.
Income tax expense was $4.4 million in 2012, compared to $4.1 million in 2011. The income tax increase was mainly due to a higher effective tax rate of 16.2% for the year ended December 31, 2012 from 8.3% for the year ended December 31, 2011. The lower tax rate in 2011 was primarily, because the gain on change in fair value of derivatives of $21 million, which was recognized in 2011 but was not taxable.
Net income attributable to parent company’s common shareholders was $19.8 million in 2012, compared to $36.3 million in 2011. Diluted earnings per share were $0.70 in 2012 compared to $0.69 in 2011. The weighted average number of diluted common shares outstanding was 28,215,367 in 2012, compared to 31,511,685 in 2011.
As of December 31, 2012, total cash and cash equivalents was $87.6 million, compared to $73 million as of December 31, 2011. Working capital was $138.7 million as of December 31, 2012, compared to $147.8 million as of December 31, 2011.
Net cash flows from operations were $16.2 million in 2012, compared to $34.1 million in 2011. Cash used to acquire properties, plants and equipment was $19 million in 2012, compared to $14.9 million in 2011. Company’s orders have determined the Company’s internal patrols over finance employees were effective in 2012.
The Management’s revenue guidance is for a 10% year-over-year growth for the year 2013. 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 session.
[No Q&A session for this event]
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