Earnings Call: Q2 2021

Aug 25, 2021

Hello, ladies and gentlemen. Thank you for standing by for Avangi Technology Co Limited Earnings Conference Call for the Q2 of 2021. At this time, all participants are in listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Cecilia Li, the IR Director of the company. Please go ahead, Cecilia. Thank you, operator. Hello, everyone, and welcome to Valmet Technology, Inc. Earnings conference call for the Q2 of 2021. As a reminder, this conference is being recorded. Kami's financial and operating results were issued in a press release earlier today and are posted online. You can download the earnings press release and sign up for the company's e mail distribution list by visiting the IR section of the company's website at ir.wellme.com. Participating in today's call are Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors and Chief Executive Officer and Mr. Weitian Pla, the Head of our Finance Department. Kem's management will begin with prepared remarks and the call will conclude with a Q and A session. Before we continue, please note that this discussion will contain forward looking statements made under the Safe Harbor provisions of U. S. COVID Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20 F and other filings as filed with the U. S. SEC. The company doesn't assume any obligation to update any forward looking statements except as required by law. Please also note, Viomi's earnings press release and this conference call also include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures. Viomi's press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our Founder and CEO, Mr. Xiaohin Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by English translation. Mr. Chen, please go ahead. Thank you, Mr. Chen. I will quickly translate upon his remarks before discussing our financial performance for Q2 of this year. Hello, everyone. Thanks for joining our Q2 2021 earnings conference call. During the Q2, we optimized the product portfolio for certain categories and increased the sales of new products with higher gross margins, further enhancing our business operations and improving the overall gross margin and profitability. Our 2nd quarter net revenues reached RMB 1.66 billion with gross margin once again delivering both year over year and quarter over quarter increases, reaching 21.2%. At the same time, non GAAP net income attributable to ordinary shareholders of the company increased by 45% year over year, significantly improving the profitability. After years of hard working and intense exploration, we have developed a 5 gs IoT Home structure, which integrates technology framework, AI algorithms, 5 gs IoT technology models, sensors, smart hardware and cloud storage. This structure encourages further implementation of our 1 stop IoT home solution, providing our users with smart home appliances, smart home devices and software services across home scenarios. It enables intelligent interconnection from single products to the entire house, forming intelligent ecosystem for daily living and creating a complete smart home experience for users. To increase our product strategies appeal among younger users, we officially announced our trending technology branding strategy, which is underscored by our products, our channel operations and marketing. First, with respect to our product offerings, we continue to focus on AI applications and innovation to support our AI helpful product strategy. Following the successful April deployment of the series of new products, including the EROX Mineral Waspifier, the space all direction air conditioners, the Alpha 2 plus premium wafer mobile and eyeball AI smart wallet, which can monitor the human health data. We recently launched our SuperPro 1100 gallon water purifier, our Cross 2 X1 AI enabled RAN2 and other new AI products with technology upgrades. Many of these cutting edge products are leading industry consumption trends. During China's 6 18 e commerce shopping festival, many of our products became the better hit and ranked among the top 10 best sellers, including the Alpha 2 Pro Premium Swiper Mobile, the Navi 2 UV sterilization air conditioner and the new smart washer dryer. In terms of self channel, we implemented our larger store, better merchant channel strategy. We have collaborated with high quality merchants with strong store operation experience to offer larger experience stores and improve store image. This larger store provide users with more comprehensive immersive scenario based experiences and services, enhancing with more enhancing our trending technology brand image. We have established 4S and 5S flagship experience stores encompassing over 200 square meters and 300 square meters, respectively, in Henan, Husei, Ganzhou, Yanming and other provinces to offer sales, installation and after sales services. Furthermore, this channel strategy promotes front of sales, decreases customer acquisition costs and drives our overall off line market growth. According to the National Residential Market Research Report 2020, the total new development apartment transactions nationwide exceeded 150,000 square meters in 2020, which equals more than 10,000,000 units on our estimation, creating huge potential source of growth for the smart home appliances market. We also increased our investment in branding and marketing, thereby reaching more diverse consumer growth with our omni channel marketing tools and branding efforts. We invited 1 of China's top celebrities to become our product spokesperson, enhancing our brand recognition among younger generation. To target more consumers in cities, we collaborated with Focus Media and Xing Qiao Media to advertise in around 100 major cities across the nation as well as 3 top domestic airline magazines to increase our exposure to high end consumers. Furthermore, we plan to advertise on television and other channels in the following months. We also strengthened our new channel marketing on social media, including Douyin and the later record through short form videos and KOL live streaming. We expect to strengthen our trending technology brand positioning as well as grow our customer base. We are also expanding our global market at hand. The overseas expansion is our Swiper robot business is progressing in line with our predictions. In addition to our previous coverage in more than 10 countries in Europe, Asia and Australia, we began selling units in India, Saudi Arabia, Thailand and North European countries in the Q2. As we shared in our previous earnings call, our products were launched on U. S. Amazon in August, marking our official entry into the North American market. It will continue to expand globally and begin development of the self operating mode in the second half of the year. Furthermore, our product pipeline includes a series of new swaver robot products for both domestic and overseas market. In addition to our automatic dust collection and UV disinfection technology, we are making great strides with laser and optical optical avoidance technology upgrades. We believe that there are 3 major drivers that will benefit the intelligent transformation and development of the smart home industry. With The main consumer growth in China are in the joint structure transformation. The income of the 20 19 generation has increased and the younger generation has become a major consumption driver in China. According to those research conducted by our 3rd party consultant, the 2019 generation prefers smart technology products and are more likely to demand and purchase more homocancy. Secondly, the development of new energy vehicles over the past 2 years has created an emotional connection between customers and the smart products and many other industries have also entered the intelligent era. Demand for smart products will drive the advancement of the smart home industry and relate to an increase in consumer acceptance. Thirdly, our Chinese 5 gs infrastructure has improved greatly over the past year. According to a report issued by the Ministry of Industry and Information Technology of Chinese Government, the personnel user penetration rate at 5 gs will exceed 40% and average annual growth rate of 5 gs units will exceed 200% by 2026. The Ministry mentioned that Smart Life and Smart Home will be key parts in promoting IoT application. Our national policy support will also benefit the development of the IoT Smart Home Industry. We are committed to becoming the leading Wazda IoT Home Solutions provider while developing our hot core technology. Looking to the second half of this year, we will continue to improve our products through AI innovation, execute our larger store, better merchant channel enhancement strategy and strengthen our changing technology branding. With the ongoing development of home modification in China, we remain confident in our ability to capitalize on opportunities and deliver long term growth as well as contribute positively to our consumer's quality of life and industry wide intelligent transformation. So this concludes our Founder's remarks. Let's now turn to the detailed financial review of the Q2 of this year as well as the outlook for the Q3. Net revenues decreased slightly by 1.5 percent to RMB1.66 billion from RMB1.68 billion for the Q2 last year and increased by 43% compared to the same period of 2019. The slight year over year decrease was primarily due to 1st sales decreases in water fuel fires in small plants resulting from the product portfolio adjustment for margin expansion and second, a high base effect during the same period of last year due to promotional activities after COVID-nineteen pandemic's peak. Revenues from IoT and Home portfolio increased by 7.9 percent to RMB 1,150,000,000 from RMB 1,060,000,000 for the Q2 last year. The growth was primarily driven by sales increases in certain product areas, particularly the Viomi branded server robots and the washing machine. Selling from our home water solution decreased by 18% to RMB 218,900,000 from RMB 266 point 8,000,000 for the Q2 of past year. The decline was primarily due to a decrease in sales of Xiaomi branded waterproof buyers, resulting from product portfolio japhne, though partially mitigated by the sales increases in Xiaomi branded water purifiers. So due to the product portfolio adjustment in Xiaomi branded water purifiers, we achieved year over year and quarter over quarter increases in the overall gross margin of the home water solutions category. Revenues from consumables increased by 18.2 percent to RMB 102,200,000 from RMB 86,500,000 for the Q2 of 2020, primarily due to the increased demand for our water purifier filter products. Revenue from small appliances and others decreased by 28 point 8 percent to RMB191,500,000 from RMB268,800,000 for the Q2 of 2020, primarily due to continued product volume optimization for higher gross margin in this category. Gross profit increased by 46% to RMB351.8 million and gross margin was 21.2% compared to 14.3% for the Q2 last year. The year over year increase in gross margin was primarily driven by our efforts to shift the business and product mix toward higher gross margin products. This includes the increased revenue contribution from sales of new Viomi branded water purifiers and slippable boxes, more as cost control measures and the margin optimization across our product lines. Total operating expenses increased by 29.4% to RMB 309.7 million, primarily due to the increase in selling and marketing expenses. In more detail, R and D expenses increased by 9.1 percent to RMB66.2 million from RMB 60.7 million for the same quarter last year, primarily due to the increase in R and D expenses related to salaries and expenses. Selling and marketing expenses increased by 32.5 percent to RMB 214,800,000 from RMB 162 100,000 a year ago, primarily attributable to the increase of advertising and marketing activities in order to enhance the company's branding and market recognition. G and A expenses increased by 72.6 percent to RMB 28,800,000 compared to RMB 16,700,000 for the Q2 of last year, primarily due to an increase of the estimated allowance for accounting notes receivable, together with the low base set of lease expenses attributable to the lease expense exemption policies inside during the same period of last year due to the COVID-nineteen. Net income attributable to ordinary shareholders of the company increased by RMB367.4 percent to RMB 46,100,000 and net income attributable to ordinary shareholders of the company increased by 44.9 percent to RMB 59,500,000. Additionally, our balance sheet remains healthy. As of June 30, 2021, we had cash and cash equivalents of RMB 667,600,000, restricted cash of RMB 21,500,000, short term deposits of RMB 66,500,000 and short term investments of RMB 393,800,000. I'll now like to turn to our outlook. For the Q3 of 2021, we currently expect net revenues to be between RMB 1,000,000,000 and RMB 1,100,000,000. We expect the sales of Xiaomi branded Super Robot to decrease from the Q3 and the own branded Super Robot business to achieve faster growth, which will become one of our main categories. The above outlook is based on the current market conditions and reflects the current and preliminary avenues of the market and operating conditions and customer demand, which are also objective change. Well, this concludes our prepared remarks and we will now open the call for the Q and A session. The Head of our Finance Department, Mr. Wei Teng Tai, will join the session and ask your questions. Operator, please go ahead. Thank you. So our first question comes from Lillian Lu from Morgan Stanley. Please go ahead. Thank you. I have a few questions. First of all, can you give us a breakdown of the IoT Home product portfolio? In particular, how much the contribution came from the robot sweeper products in Q2? And also, what kind of sales momentum are we seeing in July, August in the near term? That's first one. Maybe I just pause and I will ask the rest of the questions later. Okay. Thanks for Lillian's question. About the IoT Home portfolio, we have more than 10 small categories, including refrigerators, washing machines, water heaters, roofing robots, and the structure. Amount of this, Viomi branded refrigerator contributed around 20% revenues of IoT at home. Viomi branded washing machines contributed around 10% and Viomi branded Swoopa robot contributed around 10%. Viomi branded Swoopa robot was still the biggest driver for IoT at Home G3 due to its low base effect and fast growing revenue contribution. And the revenues from Viomi's Redo robot increased by multiple puts compared to the Q2 of last year. Thank you. And any color on the near term trend in terms of the growth momentum, including water solutions as well? Can we have a little bit of sense? Yes. As we mentioned, we continue to execute quality growth and product optimization strategy in the Q2. So we roll out additional new products with higher margin and high ASPs, in particular some key categories, including, say, the water purifiers. In addition to introducing more high end, Raomi water purifiers, we also shift the focus a bit more on supplying more large parts Xiaomi water purifiers with better gross margin and thus to improve the overall ASP and gross margin and together the revenue contribution in the coming quarters. Okay. Thank you. My second question is on the ASP and the margin trend. Do you have any plans for any price changes, I. E. Given the rising raw material costs? That's one. And I think the implication to margin because in Q2, we have a very good margin improvement with all this mix shift and adjustment on the portfolio. Are we going to to see a similar pattern of margin expansion in the second half? Yes. We observed the raw material costs still increase in the Q2 in relatively milder way compared to the previous months. This also contributes to the increase of ASPs across the industry as well as for some of our products. About the margin, we have started some advertising and marketing activities since the Q2 to enhance our branding positioning and recognition. We will invest in more selling and marketing expenses compared to last year, but in a prudent and reasonable way. We expect such expenses will increase thus lower the margin, while we have as we have taken product optimization strategy and the overall gross margin has been improving and we're looking forward to continue improving. We think this will mitigate certain impact of the increased operating expenses on net profit margin. We don't see the material cost increase will impact on the margin as to the Q1 and we have taken serious cost control measures. We don't see any material impact from such kind of cost impact, right. Okay. Thanks a lot. My last question is on the new product strategy. I think Mr. Chen in the opening remarks mentioned quite a few new product being innovative and put in market in second quarter and the first half. So what kind of strategy in terms of how we actually make all these new SKUs a more meaningful contribution to the revenue? Yes, I'll cut on translating Mr. Chen's comments. So we have series of innovative products this year. So first of this series of innovative products can help us to make the margin expansion, which you can see from the quarter and Q2 and make our product portfolio more diverse. And second, such some SKUs of this innovative products such as the super mobiles and the ERX water purifier as well as the all direction air conditioners can also help increase the revenue contribution in the categories respectively. So we think this new SKUs and the margin expansion can also help us to improve the overall gross margin of our business as well as to help drive our overall growth. Thank you. Thanks. That's all my questions. Next question comes from Ruud Wei from CICC. Please go ahead. Hi. Thank you for the presentation. And I have two questions here. The first is that we noticed the company has done a lot on promotion recently like cooperating with Focus Media and we can also see the trend from the financial report. So do we expect a higher selling and marketing expense ratio this year? And like would it be even higher in the second half of this year? And can you share with us the promotion plans or strategy with more details? I'll quickly translate. So since last year and first half of the year, we can see like among the younger generations, they are more likely to get to know and use the smart home products and smart home is like a hotter topic among them. So recently, we invited 1 of Chinese very popular celebrities as our product spokesperson and we also do a lot of advertising on this you can see in Shenzhou and Xin Chao Media and to help us to increase the brand recognition. Okay. Then you mentioned the increase on the selling marketing expenses and we feel like such investment in advertising and marketing will indeed increase such expenses, but this will be partially mitigated by some of our sales structure optimization as well as some customer control measures. And in the second half of this year, we will also continue to invest in some related expenses on advertising and we will do the advertising on television and some other channels. And from the internal data, we can see that our brand recognition has increased due to all of these marketing and advertising tools. So we hope this will also help us to increase our branding image. Thank you. Okay. Thank you. And my second question is about the overseas market. So can you give us a more detailed update about overseas distribution channel development, both online and offline and also are there any negative impacts due to the shortage of shipping containers. Okay. I will answer the question. So in the Q1 of 2020 and Q1 of last year, as we mentioned that we already entered into more than 10 countries in Europe, Asia, Middle East and Australia. And in the past few months, we also expanded into additional 8 countries, including India, Thailand, Saudi Arabia, European countries and the United States. So our exported products are sold on both online and offline channels and most through our franchises. So we sold our products to those franchises and they sold on their offline as well as online channels. So we also in the North American market, we just launched the U. S. Amazon store and we are also seeking cooperation opportunities for offline channels that we can have this year by depending on the further selling condition on Amazon. As for the question about the shortage of the shipping containers, yes, it did some impactful, some delayed orders, but we optimized the manufacturing and delivering timing as well as we can to set up some like local leader warehouses to mitigate the impact. So generally, it does cause any material impacts on our overseas market. Okay. Thank you for answering. That's all my questions. Thank you. Next question comes from Vincent Yu from Needham and Company. Please go ahead. Hi, management. Thanks for taking my questions. So I have two questions and the analysts actually analysts has already mentioned. So but I would like to discuss a little bit more. The first one is that looks like we missed our guidance range this quarter. So can management talk more about like which segments didn't perform as well as we previously expected? And did our portfolio optimization contribute to the top line miss as well? And the second question is also want to touch about the margins. So in terms of the in our understanding, can management share us how did the raw material trends in August compared to Q2? And do we think that we have seen the peak in terms of raw material prices? Thank you. Okay. So I'll translate the comments for your second question first about raw material costs. We already observed the fluctuations of raw material costs like demonstrating more stable when entering in August. So as the industry expects, we also say the raw material cost has been relatively high position and will not likely to increase a lot. So for your first question about the guideline, the Q2 revenue and the Q3 guidance, so we have we are shifting our focus on the product portfolio adjustment for the Q2 and Q3, and we have 2 main points. So first, we will increase the sales of some new products with potential growth, and it will take some time to increase the earning contributions of these new products and FKEs. And second, we will invest in more R and D resources in our own branded products, in particular, some like vehicle robots, water purifier and home devices. And we can see that in long term, these categories and products can help us to drive the overall growth in long term. So overall, in the Q1, we'll be also conservative about our selling and the guidance and we remain focused on the product portfolio, Jeff Nunn. I hope that helps. Thanks, management. Let me follow-up one more question. So we mentioned that we are investing in new stores, hiring new spokesperson. Have these expenses already incurred in Q2 2021? And will we see sales and marketing expenses on a year over year basis grow faster than the like total revenue growth? Thank you. Okay. So for the selling and marketing expenses and the impact on the operating expenses and the margin. So for the investment in the off-site channels, as you know, like we cooperate with the merchants to open the offline stores and merchants themselves to take care of the store operation and that won't like reflect in our operating expenses. So it's why on this part. And for the selling and marketing, like we have been conducted, the advertising and inviting the small person just the second quarter. So we already put some of the selling and marketing expenses in the Q2. And in the second half of this year, we will have some ongoing expenses on this part. So compared to the first half of this year, the expenses will increase. But we also see that in fact from our internal data, I see all of these advertising activities also help our sales online and offline. So we think this is in effect and we will continue to do such advertising activities as anyhow. Okay, thank you. Thank you very much. Very clear. Thank you, Xu Xia. Next question comes from Sue Gautam from Blue Lotus. Please go ahead. Where international sales play an increasing role, Does the management see international growth continuing or with the easing of pandemic measures, has international growth slowed a bit? Thank you. Okay. So for the first half of the year, we can see there are robust sales as there were still probable in the overseas market, that's due to the post pandemic situation in some of the other countries. But entering into the second half of the year, we also see the pandemic solutions, take some changes over time and we remain conservative and we see there are indeed some uncertainties in the global market. But so far from the sales data we see internally, the sales performance is good and in our expectation, but we still are conservative about the selling overseas market, but we will also take very good measures and prudent way to make any promotion and marketing activities overseas. Thank you. Is there any particular strategy for marketing in the U. S. Market? Thank you. Thank you. So in terms of the U. S. Market, as you know that our products were just officially launched last week on Amazon store. So on one part, we will cooperate with some local third party operator to operate our Amazfit together, so they know better about the operation guidelines on Amazfit as well as the American customers' culture. And on the other hand, we also will start to do some marketing and the PR activities on the U. S. Market, such as the KOL recommendations. So we already have a steroid members on the pipeline to do that to help us promote the sales in U. S. Market. Okay. Thank you. So as there are no further questions now, I will turn the call back over to Cecilia Li for closing remarks. Thank you once again for joining us today. If you have further questions, please feel free to contact us with the contact information on our website or the testimony of our Investor Relations consultant. Thank you all. Have a good one.