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China Yuchai International Ltd  (NYSE:CYD)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 8:00 a.m. ET

Contents:

Prepared Remarks:

Kevin Theiss -- Investor Relations

Thank you for joining us today, and welcome to China Yuchai International Limited's Fourth Quarter 2018 Conference Call and Webcast. Mr. Weng Ming Hoh; and Dr. Thomas Phung, President and Chief Financial Officer of CYI respectively. In addition, we also have in attendance Mr. Kelvin Lai, VP of Operations of CYI.

Before we begin, I will remind all listeners that throughout this call we may make statements that contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, project, targets, optimistic, confident that, continue to, predict, intend, aim, will or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that may be deemed forward-looking statements. These forward-looking statements, including, but not limited to, statements concerning the company's operations, financial performance and conditions, are based on current expectations, beliefs and assumptions, which are subject to change at any time.

The company cautions that these statements, by their nature, involve risks and uncertainties and actual results may differ materially depending on a variety of important factors, such as government and stock exchange regulations; competition; political, economic and social conditions around the world and in China, including those discussed in the company's Form 20-F under the headings Risk Factors, Results of Operations and Business Overview and other reports filed with the Securities and Exchange Commission from time to time. All forward-looking statements are applicable only as of the date they are made, and the company specifically disclaims any obligation to maintain our update the forward-looking information whether of the nature contained in the release, made in today's call or otherwise in the future.

Mr. Hoh will provide a brief overview and summary, then Dr. Phung will review the financial results for the fourth quarter and 12 months ended December 31, 2018. Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, the financial results for the fourth quarter and 12 months ended December 31, 2018, are unaudited, and it will be presented in RMB and US Dollars. All of the financial information presented is reported using International Financial Reporting Standards as issued by the International Accounting Standards Board.

Mr. Hoh, please begin your prepared remarks.

Weng Ming Hoh -- President and Director

Thank you, Kevin. For the fourth quarter 2018, we achieved a 19.7% top line growth and reached RMB4.5 billion or $660.4 million and a 27.5% sales volume growth though 93,881 unit. We not only achieved double-digit growth in both on and off-road engines segment, but also recorded that this growth in a slow economy where China's GDP growth was 6.4% in the fourth quarter and 6.6% in 2018 full year, the slowest pace since 1990.

The industrial production growth in China was 6.2% in 2018, compared with 6.6% in 2017. According to data reported by China Association of Automobile Manufacturers, CAAM, in the fourth quarter of 2018, sales of commercial vehicles excluding gasoline powered and electric-powered vehicles decreased by 6.3%. Truck sales decreased by 6% with heavy-duty truck sales increasing by 3.6%. GYMCL's heavy-duty and medium-duty truck engine sales in the fourth quarter of 2018 increased, with the latter growing by double-digit in percentage terms.

The bus market continued to decline in the fourth quarter of 2018. GYMCL's off-road engine sales rose by double-digit in percentage terms in the fourth quarter of 2018, led by higher sales in the agricultural equipment market.

During the 2018 year, 800 buses manufactured by Anhui Ankai, Automobile Company Limited were exported to Saudi Arabia and powered by -- exclusively by Yuchai engine. Our heavy-duty YC6MK was installed in 600 plus units with the smaller heavy-duty YC6L model powering the remaining 200 buses. First to reach Middle-East and Saudi Arabia in particular continue to be important growth market for our engine. Our research and development, R&D expenses decreased by 53.4% to RMB107.7 million or $15.7 million from RMB231.0 million in the same quarter in 2017. We capitalize the development cost of new engines that met IFRS capitalization criteria. In fourth quarters of 2018, our total R&D expenses including capitalization were RMB222.9 million or $32.5 million and represented 4.9% of revenue.

In 2018, we won the National Technological Invention award and the National Science and Technology Progress award, second prize for the National Office of Science and Technology. These awards and recognitions continue to serve our testimonials of our R&D program and develop leading domestic engine technology. 2020 is a especially a year of (inaudible) companies with advanced technologies to look forward to. The more stringent National VI standards for on-road vehicles is expected to be implemented in mid-2020, followed by National VIb in mid 2023.

The Tier 4 emission standards for off-road vehicles is also expected to be implemented within the next two years. Tier 4 and National VI emission standards are particularly designed to make drastic reductions in oxides of nitrogen or NOx and particulate matter (inaudible). Emissions compared with earlier emission standards. National VI is a significant advance over National V, with regard to Nox limit. By adopting the National VI vehicle emission standard, China can achieve a significant reduction in the vehicle emission of pollutants like finding particular method of the M2.5(ph)reducing the risk of ischemic heart disease, lung cancer, stroke and asthma.

This changes with the National VI standard are leading to further advances to the full suite of vehicle engine, and after-treatment design. Engine manufactures are installing new after-treatment technologies to limit NOx emission. In addition, EGR, DOC or Diesel Oxidation Catalyst, DPF or Diesel Particle Filter and SCR or Selective Catalytic Reduction system are often used along with ECU or Engine Control Unit. Engine development is a capital intensive business. As one of the largest independent engine producers in China, we've invested heavily in the related technologies in the past, the new market opportunities associated with National VI and Tier 4 standards will validate our investments and long-term commitment to emission reduction. While leaving the new emission regulations to be implemented, we proactively showcase that our new products are ready for change -- for the change. In January 2018, we introduced 14 new engines on-road engines

that's complies with more stringent National VI emission standards. In the city of Shenzhen, the Tier 1 city in the Southern China with a population of 13 million, there are growing number of new school buses powered by our National VI compliant YCS04 engine. In October, we introduced another 10 off-road engines compliant with the Tier 4 emission standards.

To turn this new design to reliable product require new emissions technologies, the more advanced components and new production line. Our comprehensive portfolio of new engines growth provides us with a catalyst for future growth in the number of downstream markets in China. Our model, YCK08 engine became the first domestic engine, diesel engine to be certified for the National VIb emission standards, considered the most stringent and advanced emission certification in China.

The K08 model significantly outperformed the upcoming National VI emission standards. This model and 24 new engines are consistent with our strategy of introducing a bus engine comply with the next generation of emission standards ready for National implementation. With these engines, we can better serve our customers and communities and regain valuable experience to further enhance these engines in the future.

Furthermore, our JV Eberspaecher, Yuchai Exhaust Technology Company Limited is progressing in its development to produce and sell exhaust emission control system for Chinese commercial vehicles, especially to meet China's National VI standard.

We remain optimistic that this new emission control will benefit both ours and Eberspaecher customers in the future. Our balance sheet remains strong at the end of 2018. Cash and bank balance were RMB6.1 billion or $890 million compared with RMB6 billion at the end of 2017. We declared fiscal years 2017 dividend of $2.21 per share and (inaudible) in cash during 2018.

2018 was turbulent year and I'm pleased that gross sales remain profitable with positive cash, operating cash flow, maintain a strong balance sheet and pace actually (ph) cash dividend in 2018. To establish a diversified strategy to address the need of the truck, bus -- off-road buses with heavy, medium and light-duty diesel and natural gas engines so that we can take advantage of growth opportunities in the market segments where (inaudible). In January 2019, (inaudible) balance sheet with one of the major heavy-duty truck producers in China, Shaanxi Holdings and we hope this can open up (inaudible) market for us. We look forward to the growth performance of our comprehensive portfolio of new engines that are compliant with the upcoming National VI and Tier 4 emission standards.

With that, I would now like to turn the call over this is Thomas Phung, our Chief Financial Officer, who will provide more details on the financial results.

Thomas Phungas -- Chief Financial Officer

Thank you, Weng Ming. The comparative figure for the fourth quarter and 12 months ended December 31st, 2017 were restated due to the adoption of IFRS 15 from January 1st, 2018 for revenue -- from contracts with customer by a full retrospective application. The financial impact on the adoption of IFRS 15 is described at the end of the press release.

Now, let me review our fourth quarter results for 2018. Net revenue increased by 19.7% to RMB4.5 billion, USD660.4 million compared with RMB3.8 billion in the fourth quarter of 2017. Gross profit decreased by 18% to RMB0.9 billion, USD125.6 million compared with RMB1.1 billion in the fourth quarter of 2017.

Gross margin was 19% in the fourth quarter of 2018, compared with 27.7% in the fourth quarter of 2017. The decrease in the gross margin was mainly attributable to the market conditions and product mix. The market conditions resulted in a drop in the average selling price compared with the fourth quarter of 2017. The product mix effect was from a higher sales volume of lower -- a smaller capacity engine, a lower average selling price and a lower gross profit from off-road engine sales as compared with the fourth quarter of 2017.

Other operating income was RMB64.4 million, $9.4 million compared with RMB370.6 million in the fourth quarter of 2017. The decrease was mainly due to a one-time gain in the fourth quarter of 2017 of RMB324.1 million on the sale of HL Global Enterprises Limited, HLGE hotel assets.

Research and development, R&D expenses decreased by 53.4% to RMB107.7 million, $15.7 million from RMB231.0 million in the fourth quarter of 2017. Lower R&D expenses were mainly due to the capitalization of development costs for National VI and Tier 4 engines that met the IFRS capitalization criteria. In the fourth quarter of 2018, the R&D capitalization amount was RMB115.2 million, $16.8 million. The ongoing investment in R&D continue to be focused on new engines to meet the next-generation National VI and Tier 4 emission standards, and initiatives to improve engine quality and performance.

As a percentage of net revenue, R&D expenses was 2.4% compared with 6.1% in the fourth quarter of 2017. In fourth quarter of 2018, the total R&D expenditure, including capitalized costs was RMB222.9 million. $32.5 million and it represent a 9. -- sorry, it represent a 4.9% of net revenues.

Selling, general and administrative, SG&A expenses decreased by 11.4% to RMB485.8 million, $70.8 million from RMB548.5 million in the fourth quarter of 2017. SG&A expenses represents 10.7% of the net revenue compared with 14.5% in the fourth quarter of 2017. The lower SG&A expenses was mainly attributed to lower warranty expenses in the fourth quarter of 2018 and the extraordinary events including an impairment charge of RMB40 million relate to intellectual property right and a staff severance cost of RMB31.5 million in 2017. Excluding these extraordinary events, the SG&A expenses would have been RMB477.0 million in the fourth quarter of 2017.

Operating profit declined by 48.2% to RMB332.6 million, $48.5 million from RMB641.7 million in the fourth quarter of 2017. The decrease reflects a gain of RMB252.6 million from one-time and extraordinary event in the fourth quarter of 2017. The operating margin was 7.3%, compared with 16.9% in the fourth quarter of 2017. Excluding the one-time and extraordinary event, the operating profit would have been RMB389.1 million in the fourth quarter of 2017.

Finance cost increased to RMB31.1 million, $4.5 million from RMB24.5 million in the fourth quarter of 2017, mainly due to increased bank borrowings. In the fourth quarter of 2018, total net profit attributable to China Yuchai's shareholder decreased by 45% to RMB191.8 million, $27.9 million from RMB348.6 million in the fourth quarter of 2017. Basic and diluted earning per share were RMB4.69, $0.68, compared with basic earning per share of RMB8.54 and diluted earning per share of RMB8.52 in the fourth quarter of 2017.

In the fourth quarter of 2017, the net profit attributable to China Yuchai's shareholder included a net gain of RMB111.6 million from one-time and extraordinary event. Adjusted total net profit attributable to China Yuchai's shareholder in the fourth quarter of 2017, excluding the one-time and extraordinary event was RMB237.0 million. Adjusted basic and diluted earnings per share were RMB5.81 and RMB5.79 respectively in the fourth quarter of 2017. A reconciliation table reflecting the impact of the one-time and extraordinary event on the fourth quarter of 2017 results is attached at the end of the press release.

Basic and diluted earning per share in the fourth quarter of 2018 was based on a weighted average of 40,858,290 share compared with 40,832,405 share basic and 40,889,954 diluted shares in the fourth quarter of 2017. In July 2017, 99,970 new shares were issued to shareholders who elected to receive shares in lieu of a dividend in cash.

Now, I'll review the annual results for 2018. Net revenue of RMB16.3 billion, $2.4 billion) compared with RMB16.2 billion in 2017. According to CAAM, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles decreased by 1.7% in 2018. The truck market decreased by 1.3% with a 2.7% increase in heavy-duty truck sales. GYMCL truck sales increased led by a gain in medium-duty engine sales. The bus market remained weak and experienced a decline in overall sales. GYMCL's off-road engine sales increased in 2018 compared with 2017.

Gross profit declined by nine point -- sorry, Gross profit declined by 7.9% to RMB3.1 billion, $450.5 million compared with RMB3.4 billion in 2017. The gross profit margin was 19% in 2018, compared with 20.7% in 2017. The 2018 gross profit and margin declined primarily due to change in the market conditions and products mix.

Other operating income was RMB192.7 million, $28.1 million, compared with RMB509.4 million in 2017. In 2017, the company had a one-time gain of RMB324.1 million from the sales of HLGE hotel asset. Excluding this one-time event, the other operating income in 2018 was higher than that in 2017, which was mainly attributed to higher interest income partly offset by lower foreign exchange revaluation gain.

R&D expenses declined by 26.4% to RMB447.7 million, $65.2 million, compared with RMB608.2 million in 2017. Lower R&D expenses were mainly due to the capitalization of development costs for National VI and Tier 4 engines that met the IFRS capitalization criteria. The R&D capitalization amount was RMB195.9 million, $28.5 million. As a percentage of net revenue, R&D expenses were 2.8% compared with 3.8% in 2017. In 2018, total R&D expenditure including capitalized costs, was RMB643.5 million, $93.8 million and represent 4% as a percentage of net revenue. R&D expenses were mainly for research and development of new engine compliant with the more stringent National VI and Tier 4 emission standards that are to be implemented over the next few years.

SG&A expenses declined by 5.9% to RMB1.6 billion, $226.5 million from RMB1.7 billion in 2017. These expenses represent 9.6% of net revenue compared with 10.2% in 2017. SG&A expenses included an impairment charge of RMB40.0 million relate to the intellectual property of 4Y20 engine platform, and the staff severance cost of RMB107.7 million in 2017, which are extraordinary events. Excluding these extraordinary event, the 2017 SG&A expenses were RMB1.5 billion.

Operating profit decreased by 20.1% to RMB1.3 billion, $186.9 million from RMB1.6 billion in 2017. The operating margin was 7.9% in 2018, compared with 9.9% in 2017. In addition, 2017 benefit by a gain of RMB176.4 million from one-time and extraordinary events. Excluding these one-time and extraordinary events, operating profit in 2017 would be RMB1.4 billion.

Finance costs increased by 12.6% to RMB113.1 million, $16.5 million from RMB100.4 million in 2017 mainly due to increased borrowing costs. The net profit attributable to China Yuchai's shareholders decreased by 21.8% to RMB695.3 million, $101.3 million, or earnings per share of RMB17.02, $2.48, compared with RMB888.8 million, or earnings per share of RMB21.80 in 2017.

Net profit attributable to China Yuchai's shareholders in 2017 include a net gain of RMB62.1 million from the one-time and extraordinary events. Adjusted total net profit attributable to China Yuchai's shareholders in 2017, excluding the one-time and extraordinary event, was RMB826.7 million, and the adjusted basic and diluted earnings per share were RMB20.28.

Basic and diluted earnings per share in 2018 was based on a weighted average of 40,858,290 shares and in 2017 was based on a weighted average of 40,764,569 shares.

Now, we will go over our balance sheet highlight as of December 31st, 2018. Cash and bank balances were RMB6.1 billion, $893.0 million, compared with RMB6.0 billion at the end of 2017. Trade and bill payable(ph)were RMB7.4 billion, $1.1 billion, compared with RMB7.0 billion at the end of 2017. Inventories were RMB2.5 billion, $366.9 million, compared with RMB2.6 billion at the end of 2017.

Trade and bill payable were RMB4.6 billion, $664.5 million, compared with RMB5.2 billion at the end of 2017. Short and long-term borrowing were RMB2.0 billion, $293.8 million, compared with RMB 1.6 billion at the end of 2017. We continue to generate annual positive cash flow, we review our financial options and operating policies to enhance our operational and financial performance to built value.

With that, operator, we are ready to begin the Q&A session.

Questions and Answers:

Operator

Certainly. One moment please for the first question. We will begin the question-and-answer session now. (Operator Instructions) And we have our first question from the line of William Gregozeski from Greenridge Global. Please go ahead.

William Gregozeski -- Greenridge Global -- Analyst

Hi. I wanted to know what your outlook for the commercial market was in 2019, and given that you outperformed in each segment on this current reporting period, if you think you can repeat that in 2019, and then what the gross margins will be for this year? Thanks.

Weng Ming Hoh -- President and Director

Okay, thank you. Thank you, William. This is Weng Ming, here. If you go by segment-by-segment, I think it will give you more color. Now, before that, let's look at the regulations in the next 12 to 18 months. In the next 12 to 18 months there is going to be the National VIa implementation in China, with the official implementation dated at the middle of next year, but some cities are bringing forward the implementation date to the end of this year. So now -- and also if you look at the last two years for -- let's first talk about heavy-duty trucks, for that matter, I think at a very high level of 1.1 million units. So this is pretty high. I think, there are quite few engine manufacturers who are actually thinking that you will drop somewhat in the year 2019. However, because of the implementation of the National VI in the later part of this year and early next year, the decline will probably be mitigated somewhat by the pre-buy of the National VI engine.

In the case of bus engines, I think is going to be flat. The incentive for (inaudible) kind of coming off, so we don't -- we think the bus market has reached a mature point and the diesel engine bus is going to be tough flat for next year. For off-road engines, I know the market is weak, but we have been able to grow quite significantly, especially in the last quarter for our agriculture machinery engines. We're getting the market share there, so we think that will continue for us.

Now, in terms of gross margin, if you look at our gross margin for the full year, and if you look at it on the quarter-by-quarter basis, it averages about 19%. So the full-year gross margins were 19%. It's a little bit lower than last year of 21.7% for the whole year. So going forward, I think, this will be a good number to use. I hope that answers your question.

William Gregozeski -- Greenridge Global -- Analyst

Yes. Thank you very much.

Operator

We have the next question from David Raso from Evercore ISI.

David Raso -- Evercore ISI -- Analyst

Question about the new National VI engine, what will be the impact on the average price point?

Weng Ming Hoh -- President and Director

I believe, -- because of the emission requirements for National VI was much more stringent than National V, and the components that needed to make it happen, we believe the price point will be higher than what National V would be.

David Raso -- Evercore ISI -- Analyst

Can you help us with a little bit of quantification, just trying to understand the desire to pre-buy is probably predicated a little bit on how much more expensive the National VI are?

Weng Ming Hoh -- President and Director

Right.

David Raso -- Evercore ISI -- Analyst

And I'm just trying to understand, to try to think through the impact, is it -- I know it's a big jump, but I mean, is it -- let's talk the total truck and maybe not your engine, when you think of the truck price, is it 5%, 10%?

Thomas Phungas -- Chief Financial Officer

Okay. If you look at the engine price. I mean, if you look at the truck itself, engine is a big component of a truck. If you look at -- I think -- I guess, my -- the thing is that, at this point, we haven't actually finalized any pricing yet with our OEMs. But we expect to have go by at least five to -- no, I think, we were at 5%. I think, 10% to 15% in terms of pricing.

David Raso -- Evercore ISI -- Analyst

And with that kind of increase, and I appreciate your thoughts, there will be some pre-buy, have some of your truck customers already indicated a strengthening of their build schedules later in the year related to the pre-buy, or is it still a little more speculative that there will be a pre-buy? I'm just curious to see. It's a logical thought; I'm just not sure of oh, yes, hearing from the manufacturers, they are planning for it?

Thomas Phungas -- Chief Financial Officer

Right. Yeah, David. In our case we'll have visibility for up to a month, right. We get about a month for delivery. So it's a lot of -- it's a bit of a functional (inaudible) here that there must be some pre-buy, partly largely because we expect the cost of the new vehicle to be higher based on what I've just said earlier. We have made a difference in the pricing to buy earlier.

David Raso -- Evercore ISI -- Analyst

Okay. Thank you very much.

Weng Ming Hoh -- President and Director

Thank you.

Operator

We have the next question from the line of Ke Chen from Shah Capital Management. Please go ahead.

Ke Chen -- Shah Capital Management -- Analyst

Yes. My first question is regarding your market share. And obviously, you have outperformed the market in the fourth quarter significantly, and could you talk about your market share, especially in the marine and the power generation, what's their market share today, and what's their trajectory. As we already know that, maybe your bus and agriculture is already number one in the market?

Kevin Theiss -- Investor Relations

So Chen, this is Kevin. I mean, the -- talking about our market share in the Q4 for marine and power generation, we actually -- we had recorded a small growth in the power generation. But on the marine side there's a little bit drop. So, but along the whole year, and then we are very -- a little bit much better than the industry in overall sales we have been made. And however, and -- even then, we had a slight drops in the marine segment, but we had a more share on the high horsepower engine on which there is a benefit on the overall sales revenue and also on the profit level of the marine segment. So that is the -- really an advantage of the whole operation.

Ke Chen -- Shah Capital Management -- Analyst

Okay. My second question is regarding your new strategic alliance with the OEMs. Weng Ming did mention Shaanxi, because the new National VI engines. I'm wondering do you see maybe 10% or higher sales uplift from your new partners like FAW and Shaanxi and other OEMs in 2019, because of this new engines, and also because of -- it's a capital intensive new product, do you see your market share increase because of smaller engine competitors going out of business?

Weng Ming Hoh -- President and Director

Okay. It's Weng Ming here, Mr. Chen. Now, obviously with these -- some of these new OEMs that we signed up as strategic partners, we will see an increasing number of engines will be sold to them. Now, whether or not that reaches 10%, I think, it's a bit too early to say. I don't -- personally I don't think you will hit 10% within the first year of cooperation is there. It will gradually build up. And also because the actual domestic full implementation is not this year. It will be next year -- mid of next year. There'll be some major cities as we have implemented here. So we will see some improvement, I believe, but I don't think we will see the full impact until the National VI is fully implemented.

Ke Chen -- Shah Capital Management -- Analyst

Well, we did heard a lot of cities actually implemented July 1st of this year, so that's different from what you mentioned in the prepared remarks. So I just want to make sure that.

Weng Ming Hoh -- President and Director

Well, I mean, they will -- in the last year, I think, they've mentioned that, but I think, lately, if you look at this year's announcement, some of the cities are actually pushing back the implementation date.

Ke Chen -- Shah Capital Management -- Analyst

Okay. I go back to queue.

Operator

(Operator Instructions) We have the next question from Andrew Morrison(ph)from Lazard Asset Management. Please go ahead.

Andrew Morrison -- Lazard Asset Management -- Analyst

Hello, gentlemen, thank you for the call today. I have a call just a kind of a clarification on the gross margins. And I think, you kind of highlighted in respect to why Q4 this year gross margins were less than what they were last year due to the mix effect. But my question here is that, the magnitude of that difference is so great, yet, if I take your -- you know, the volume of engines sold and divide the sales into the volume, you basically don't get that much of a significant decrease in the overall ASPs. So can you just kind of highlight exactly what's going on, on a year-on-year basis, because if I look also in Q4 '16, you also kind of generated a 27% gross margin similar to what it was last year in Q4, but this year is basically, almost 800 basis points less or 900 actually. So I think there is something more to it, so I just wanted to understand what's driving that real big difference, because I do see also the cost of goods sold is significantly higher than it was last year? Any detail on that would be great. Thank you.

Thomas Phungas -- Chief Financial Officer

Andrew, this is Thomas. As we have explained, the market condition that resulted the change -- the drop in the average selling price as you would have analyzed the financial statement, you will see that approximately 7% drop on the average selling price from -- as compared with the Q4 of 2017, so that will contribute. But if you look at the year-to-date, you will see that the year-to-date is pretty much flat, quarter-by-quarter it -- we stayed at a range of about 19%. So I would say that overall the full year, the percentages are very constant.

Andrew Morrison -- Lazard Asset Management -- Analyst

Right. Yeah. But if you look at the cost of goods sold, you will have $535 million of cost of goods sold in Q4 '18 this year versus $400 million, last year, so that's a $135 million. So if you're thinking that your mix is weaker or a different mix with smaller engines, I would think that the cost of those engines will be less than what it was. So I'm just trying to kind of understand better what's going on in these Q4's?

Weng Ming Hoh -- President and Director

Yeah, Andrew, it's Weng Ming, here. Now. I think, what -- mix is a -- one big major factor that caused the fourth quarter to drop this year. But if you look at our gross margin quarter-by-quarter from one to four, the gross margins are little bit higher than the same period last year, OK, especially in the fourth quarter, right. So now, -- the other thing we need to highlight here is that, I think, come -- end of the fourth quarter, we issued -- we have made provisions for all our sales discounts -- some rebates for performance of sales volume rebates, payments, certain quite conditions that we have to meet. So I will make the necessary other adjustments in the fourth quarter. So this year, I think, there are a lot of the customers who have met our -- the sales conditions. So the -- that will increases the sales rebates as well, back to customer for volume, for achievement of volumes and whatnot, right. So that also has a impact. And the other impact of course is the mix. We are selling a lot more -- less positive in the engines in the fourth quarter this year, or even throughout this year compared to the same period last year.

Andrew Morrison -- Lazard Asset Management -- Analyst

Right. So these provisions that you basically sold was a rebate back from the customer if they didn't meet certain volume?

Weng Ming Hoh -- President and Director

Yeah, there are few conditions that they meet -- require them to meet. One is the cost of volume, right. We have been -- in order to achieve a certain sales volume, we have a step up (inaudible) system to them. And the other one, of course, is the payments. We expect them to make regular payment or prompt payment. If you look at our receivables, you see that our collection is actually very good. If you take out the yield, we have a total -- payout days is less of a month, about two weeks or less. So that drives it, so there is conditions, I won't go into a lot details, we have gone through the issue of customers would come in whether or not they meet the requirements and it's tied to the rebates, I'd agreed. (Multiple Speakers)

Andrew Morrison -- Lazard Asset Management -- Analyst

So just to kind of -- if I understand this correctly, so in Q4, 2017, you basically had these payments back or whatever provisions that were kind of written off or written back that reduce the cost of goods sold?

Weng Ming Hoh -- President and Director

Most was the pricing which were further affected by cost of goods sold.

Andrew Morrison -- Lazard Asset Management -- Analyst

Okay, thank you.

Operator

We have the next question from the line of Ke Chen from Shah Capital Management. Please go ahead.

Ke Chen -- Shah Capital Management -- Analyst

Yes, Weng Ming you mentioned Eberspaecher joint venture. Could you guys talk about more about other joint ventures like MTU, (inaudible) and how this joint venture will impact our future bottom line?

Kevin Theiss -- Investor Relations

Mr. Chen. It's Kevin again, (inaudible) regarding on the -- some of the joint venture under the GYMCL. Regarding on the MTU Yuchai -- I mean the (inaudible) already been established and now they can ready for the full-scale production. But in the year of 2018 the production is only around 100 plus unit, but in the year 2019 they will really introduce introduced and then their production volume (inaudible) and there we plan for further 400 unit. So this is another bit jump on the MUT Yuchai joint venture.

Regarding on the Eberspaecher Yuchai debt JV for the after-treatment facility manufacturing, it's has already been -- the company has already been set up and the renovation work for the factory is now being processed. So we are planning (inaudible) had the joint venture in operation by Q3 of this year. And so, that will be the main supplier for the Yuchai Engine for the next six engine of the Xiamen in future.

Regarding on the YC engine, our 6K engine joint venture with the GYMCL. So with that one and we also -- we would expect there will be slight growth on the engine production in the year 2019, mainly because in '19 we have some new market on the off-road for the 6K engine. So that's the some of the update for you.

Ke Chen -- Shah Capital Management -- Analyst

Okay. Well, my second question is regarding your patents. As the leaders in National VI engines, could you talk about how many issue patterns you have for your products? More importantly, how you capitalize this patents, like, for examples, for future domestic and international licensing revenues?

Kevin Theiss -- Investor Relations

This is Kevin again. We have numbers of patterns for the National VI and also for Tier 4 engines. I'm not going to (inaudible) and then the numbers of patterns here. But most of those patterns in the end that will remain the property of the Yuchai instead of the licensing or transfer. And then, at the moment we don't have any pending licensing out these patent to other manufactures or to any other third-party.

Ke Chen -- Shah Capital Management -- Analyst

Okay.

Operator

Thank you. We have now reached the end of our Q&A session. I will turn it back over to Mr. Hoh.

Weng Ming Hoh -- President and Director

Thank you all for participating in our conference call. We look forward to speaking with you again. Thank you.

Operator

Ladies and gentlemen, that does concludes your conference for today. Thank you for participating. You may all disconnect now. Thank you.

Duration: 51 minutes

Call participants:

Kevin Theiss -- Investor Relations

Weng Ming Hoh -- President and Director

Thomas Phungas -- Chief Financial Officer

William Gregozeski -- Greenridge Global -- Analyst

David Raso -- Evercore ISI -- Analyst

Ke Chen -- Shah Capital Management -- Analyst

Andrew Morrison -- Lazard Asset Management -- Analyst

More CYD analysis

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