China Automotive Systems, Inc. (CAAS)

Q2 2012 Earnings Call

August 9, 2012 9:00 AM ET


Kevin Theiss – IR

Qizhou Wu – CEO


Alain Lillie [ph] – Maxim Group



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Greetings and welcome to the China Automotive Systems’ second quarter 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. Thank you. You may begin.

Kevin Theiss

Thank you for joining us today and welcome to China Automotive Systems 2012 second quarter 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 listeners that 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 and actual results may differ materially from the results described in or anticipated by our forward-looking statements due to certain risks and uncertainties, including those described under the heading "Risk Factors" in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 9, 2012, and in documents subsequently filed by the Company from time to time.

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 second quarter results and then I will turn the call over to management to conduct the question-and-answer session.

The 2012 second quarter results are un-audited numbers under U.S. GAAP. In our call today, I will review the financial results in U.S. dollars. Second quarter unit sales in 2012 continue to be sluggish as total vehicle sales increased by 10.1% to 4.8 million units. However the growth was uneven, as unit sales of passenger vehicles increased 16.6% to 3.8 million units and commercial vehicle sales of 996,973 units were 10.2% lower compared with the same quarter of 2011.

Chinese commercial truck sales continued to decline by 33.6% in the 2012 second quarter due to fewer infrastructure projects, continuing slow real estate market and relatively low utilization of truck fleets compared with a few years ago. These results reflect a slow GDP growth of 7.6% in the second quarter of 2012, the first [ph] quarterly GDP growth in the past three years.

Some of our motor sectors showed growth as sales of passenger vehicles rose 2.5% and light duty and light buses [ph] all posted higher sales in the second quarter of 2012 versus the same quarter of 2011. China’s vehicle export sales grew 28% to approximately 488,000 vehicles during the first six months of 2012 compared with the same period last year.

As Chinese exports increased in our customers established foreign operations, we will have growth opportunities in both the after-market and OEM markets with these vehicles. To fine tune the economy as inflation is no longer a threat, a less disputative monetary policy has been instituted.

Interest rates have been cut twice since early in June 2012 and banks’ reserve requirements had been lower three times since November 2011 to stimulate loan and investment growth. Also railway construction spending has been accelerated and other investment projects are expected to be approved by the Chinese government to help the economy grow. We have dramatically increased our R&D to approximately 5% of net sales in the 2012 second quarter.

As we continue to invest in new advanced products to meet our customer evolving requirements for new technologies and new performance. We also look to innovate new cost efficient production techniques to reduce costs. Our R&D provides a competitive edge to further build our brand equity by supplying new products with global quality and performance that offer added value to our domestic customers and to capture additional contracts to the large international OEMs as well.

New products offer us a chance to enhance our leadership position as we get closer to our current customers, attract new OEM and vehicle models and replaced imported steering units now being used in different vehicles that we had supplied before. We are particularly focused on advancing our electric power steering technology and production capacities to capture additional market share.

We made two various strategic moves during the second quarter of 2012. First, on May 25, 2012, we redeemed all of our outstanding senior convertible notes before their maturity dates. The total principal amount at May 25 was $23.6 million and negotiated total redemption price was $32.4 million including all principal accrued and unpaid interest and the make-whole amounts as of the date of redemption.

The five-year senior convertible notes were part of the $35 million transaction in February 2008 with a schedule maturity date of February 15, 2013. As a result of the redemption of the senior convertible notes, the total share count on a fully diluted basis will be reduced by approximately 3.3 million shares. The senior convertible notes issued by the company included terms that restricted the actions we could take to defend our shareholder value. With the redemption of the senior convertible notes, CAAS has more financial flexibility to fund future operations as this enhances our ability to defend our shareholder value.

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