Earnings Call: Q1 2021

May 27, 2021

Thank you for standing by for Viomi Technology Company's Limited Earnings Conference Call for the Q1 of 2021. At this time, all participants are in a 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 Head of the Company. Please go ahead, Cecilia. Thanks, operator. Hello, everyone, and welcome to Technology Co. Ltd. Earnings Conference Call for the Q1 2021. As a reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and 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.biomi.com. Participating in today's call are Mr. Xiaobin Chen, the Founder, Chairman of the Board of Directors and Chief Executive Officer and Mr. Xu Fei Bao, our new President and Mr. Weitian Cai, the Head of our Finance team. The company's management will begin with prepared remarks and the call will conclude with a Q and A session. Before we continue, please note today's discussion will contain forward looking statements made under the Safe Harbor provisions of the U. S. Private 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. Securities and Exchange Commission. 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 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. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by English translation. Mr. Chen, please go ahead. Thank you, Mr. Chang. I will quickly translate our final remarks before discussing our financial performance for the Q1 of 2021. Hello, everyone. Thanks for joining our Q1 2021 earnings conference call. Leveraging the optimization of our product portfolio, new product sales growth and enhanced brand recognition, we delivered strong net revenues that exceeded our previous guidance, increasing 64% from the same period in 2020, while our operations were impacted by COVID-nineteen. Our gross margin recovered to 21.1 percent from 18.8 percent a year ago, primarily attributable to the product portfolio optimization. Our continued growth over the past several years has been driven by continued optimization of our IoT products and holistic solutions through innovation and integration of cross boundary technologies, alongside a deep understanding of our users' needs. This April, we hosted our strategic new product launch event with the theme of AI helpful with introduction of the sales of AI strategic new products, including the mineral water purifier ERX and AI smart toilet, iBot, equipped with sensors that is able to monitor human health data and AI water heater, which is able to soften the water quality, new AI air conditioners, the Ranchoed iBot 2 and the gas stove with AI assisted cooking functionalities. Our products are designed within on some healthcare, smartifications, home security and natural AI voice interaction. Some new products equipped with sensors and supported by AI algorithms are able to collect home and human health data with users' consent. In addition, we focused our resources on developing key product categories and rolled out more differentiated and industry leading products. For example, last year, we introduced a series of premium water purifiers such as Super 1,000 Gallon, 1200 Gallon and Vision 1200 Gallon Series, which realized large blocks and low ratios of waste and purified water. Our PhD team has been working on research and development for 3 years based on tens of billions in cases of water quality data to invent our mineral water to fire ERX, which retains beneficial minerals for human health during the purification process. Equipped with nice smart sensors, this water purifier product is also able to adjust water quality to meet high end user needs. We have been in Denver and water purification area and have accumulated a significant number of ENopt technology with more than 700 registered patents as of the end of the Q1. Some of these patents have been awarded a China Excellence Patent Award authorized by China National Intellectual Property Administration and World Intellectual Property Organization as well as recognized by China Association for Quality and other authorities. Our Swaver Robo business represents rapid development as well, in particular in overseas markets and has been one of the key drivers of our Q1 slide 12. Our Swaver Robo export business, which launched in the Q4 of last year, has developed rapidly in Mid Europe, Southeast Asia, Korea, Australia and other regions and has also expanded into North Europe and additional Asian countries this year. We are expanding to North American markets. We recently registered our store on Amazon and plan to sell on Amazon in the second half of this year and will cooperate with some KA offline stores as well. In the competitive swivel robot market, we found our initial with our differentiated products. We introduced a series of automatic dust collection swivel robots last year and recently launched an AI laser radar swivel robot Alpha 2 PAS. Compared to the majority of high end swivel robots in the market, this product equipped with 4 laser sensors and supported by AI algorithm for obstacle detection and avoidance is able to identify various low obstacles, cover a wider range of end use and distances as well as map use and support OTA upgrades. We will continue to roll out more differentiated deliverable products and enhance our market shares in both domestic and global markets. In addition to focusing on technology upgrades and product innovation, we also make efforts to enhance our IoT holistic home solutions and provide related value added services and content, including software updates, product maintenance services, repurchase comps and Internet entertainment content as well as strengthen our services team based on our offline channels. We think the offline experience and the landing capabilities are the case to IoT Home Industry. We have been vigorously promoting the off-site comprehensive service model of 1 city, 1 store. We select high quality stores in iteration as our service outlet and provide users with one stop services including sales experience, after sale and installation services. With direct consumption upgrade and evolving user needs, users are keen on brands that are fashionable and at poor quality. In order to promote our 3511 long term strategy and further develop us as the trending brand in the Audi home area, We are pleased to warmly welcome Mr. Bob Bao as the company's President. Prior to joining us, Bob served as the General Manager of BayLink and has extensive experience in the consumer industry with more than 20 years. We believe Bob will bring new energy and insights to our branding development. Looking ahead, we will execute on our growth strategy from 3 perspectives. First, we will construct our IoT holistic Home solutions through our 5 gs type AI type IoT product strategy. 2nd, we will develop ready plans in improving brand influence and position us as the trending brand in IoT Home Solutions area. And third, we will expand offline stores to integrate scenario based experience and services. We believe with the multiple upgrades in our products, marketing channel as well as increasing popularization of home modification, we will deliver sustained and healthy growth, maintain our uniqueness in IoT Home Solutions area and bring long term shareholder value. So that concludes our Q1 of 2021 as well as outlook for the Q2. The net revenues were RMB1.26 billion, representing an increase of 64% year over year, primarily due to the continued successful rollout and significant increase in sales of new products, overseas market expansion as well as a low business end of the Q1 of last year due to the COVID-nineteen. Revenues from IoT at Home portfolio increased by 111.5 percent to RMB119.2 million from RMB434.7 million for the Q1 of last year. The growth was primarily driven by sustained sales increases for certain new product areas, in particular, the Viomi branded Swafer robots and the smart kitchen products. Revenues from our home water solutions decreased by 4% to RMB103.8 million. The decline was primarily due to the decrease in average selling prices of Xiaomi branded water purifier products and this was partially offset by the successful introduction and increased sales of new sales of Viomi branded water purifier products, which narrowed the year over year decline for home water solutions compared to previous quarters. Our revenues from consumables were RMB64.8 million compared to RMB65 1,000,000 for the Q1 of last year. Revenue from small townships and others increased by 6.4 percent to RMB167.8 million from RMB157.8 million for the Q1 last year. Gross profit increased by 84.1 percent to RMB265 1,000,000 and gross margin was 21.1%, compared to 18.8% for the Q1 of last year. This is primarily driven by our efforts to shift the business and the product mix towards higher gross margin products, including the rollout of new roaming brand water purifiers and Swebo Robo alongside the optimization of margin across product lines and cost control measures. Total operating expenses increased by 63.8 percent to RMB219.8 million, primarily due to the growth of our business. R and D expenses increased by 10.7 percent to RMB 65,600,000 from RMB 59,300,000 for the Q1 of last year, mainly due to the increase of R and D experts and related salaries and expenses. Selling and marketing expenses increased by 110.8 percent to RMB 138 1,000,000 from RMB65,500,000 a year ago, primarily attributable to the low base effect of the Q1 of last year due to the COVID-nineteen when the company entered very limited marketing and advertising activities. G and A expenses increased by 71 point 3% to RMB 16,200,000 compared to RMB 9,500,000 for the Q1 of last year, primarily due to the increase of personnel and related salaries and expenses. Net income attributable to ordinary shareholders of the company increased by 173.2 percent to RMB 49,100,000 and non GAAP net income attributable to ordinary shareholders of the company increased by 106 0.8% to RMB 65,300,000. Additionally, our balance sheet remained healthy. As of March 31, 2021, we had cash and cash equivalents of RMB 906,300,000, restricted cash of RMB 45,200,000, short term deposits of RMB 97,700,000 and short term investments of RMB596,900,000. Now let's turn to our outlook. So for the Q2 of 2021, we currently expect that net revenues to be between RMB 1 point 72,000,000,000 and RMB 1,850,000,000, representing a year over year growth of around 2.1% to 9.8%. The above outlook is based on the current market conditions and their risk mix to company's current and preliminary estimates of market and operating conditions and customer demand, which are also get to change. While this concludes our prepared remarks, we will now open the call for the Q and A session. The Head of our Finance team, Mr. Wei Chang Cai, will join the session and answer the question. Operator, please go ahead. We will now begin the question and answer session. The first question comes from Lillian Lu with Morgan Stanley. Please go ahead. Thanks a lot, management and Mr. Chen. I have two questions. First is on the sweeper robots. What kind of growth we are looking for this year overall? Because obviously in first Q has a very strong growth and momentum. And Ms. Chen just mentioned that we have the plan to expand the region overseas. And in second half, we'll get into the U. S. On Amazon. So any particular guidance or explanation of how we're going to grow the business overseas will be very helpful. And second question is on the raw material price increase impact, because 1st Q, we already saw the gross margin decrease on sequential basis versus Q4 last year. So how are we going to look at the momentum or trend in the following quarters? Thank you. Okay. Thank you for the next question. For the first question about the Swiper robot, our Swiper robot business grows fast, in particular in the Huawei branded Swiper robot and we expect the rapid growth of own branded Swiper robots will continue. The domestic Swiper robot market is an adjustable market according to our data. The market size of the Zuippo robot is better to reach over RMB10 1,000,000,000 by 2021 and close to RMB20 1,000,000,000 by 2022. There are more players in the industry and we observe the market shares of new brands has been increasing since 2020 and this trend is expected to continue. We also found our niche with our differentiated products including a series of automatic DAS collection stripper robots and the AI laser radar stripper robot we recently introduced. Under such a situation and the observation of the market feedbacks of our Swirpa robots, we are positive for our market shares in domestic market and in the following years. In terms of the global market, the market size is also huge and promising we think. For our research, we think there are a lot of potential opportunities particularly in the Europe and North America. We have sold our Swiper robots in Europe, Southeast Asia, Australia and the sales growth of Swiper robots for this Q1 in overseas market is setting our previous expectation. Next, we will expand to North America market. We recently successfully registered our stock on Amazon and we will start to sell Superwalbe products in the second half of this year. We also plan to sell our products on some offline channels in the North America. With our expansion in North America and the additional regions and markets, we are confident the global market sales will become an important driver for our overall business. For the second question about the gross margin and the raw material prices rising. As we discussed, compared to 2020, our overall gross margin for 2021 would demonstrate a meaningful recovery. While we also experienced some seasonal fluctuations due to some promotional events, such as the coming June 2018 campaign in the Q2, which we expect to have some impacts on our gross margin. Secondly, the increase of this raw material cost will also be a factor that impacts the gross margin for the whole industry. As for this, we have taken some cost optimization measures to mitigate the impacts for raw material costs, including price lock agreements with suppliers and some technical upgrade for cost saving. 3rd, we noticed the latest news that the government plans to take measures to control the raw materials price uplift. We expect the pressure from this increase in raw material costs to be relieved under the government's involvement. Yes, thank you. So Mr. Chen had some comments. Yes, I will just quickly translate. So that's for the first question about development of our super robot business. So we have established an independent department to our super robot category and we have been attracting the talent from our work supplies from the outside. So the second is the development of our swerve mobile business within 2 to 3 years. So we're well regarded as one of the key categories of our strategy. So we are very confident that this category will be one of the drivers for both the top line growth as well as to drive our profitability. Yes, so that's the commentary comments from Mr. Chen. I hope it's helpful. Yes. So we already have some internal plans regarding our silver robot category in terms of product and the establishment of team development in both system, methane global markets. And our aim is to develop as the top brands in the silver robot category. Yes, that's it. The next question is from Wei He and Rudy Wei with CICC. Please go ahead. Hello. Thank you very much for the management's presentation. And actually, I have two questions here. The first is about domestic market development. Since we know the actually the profit margin of the businesses with Xiaomi is quite low. And how the company plans to further promote the self owned brand and the products in the domestic market, especially, I suppose, should be the water purifiers and robotic vacuum cleaners? And the second question is about overseas. Like, are we going to like promote more categories to overseas or currently we just limit the category to like the water purifiers and robotic vacuum cleaners? Yes, that's my question. Okay. I will quickly translate. So for the first question about how to develop our own branded business in domestic market. So we still could focus on developing our IoT at home holistic product portfolio. So we have expanded to like around over 60 product categories and across the almost a whole home scenarios. And we also have some key categories in the SKUs that we aim to develop mostly this year to drive our branding influence and the position as the trending brand in IoT at home holistic solutions area. So as far as we know that in the past half to 1 year, the concept of IoT at home stratification has increased in domestic market. So we are confident that we can have a better development in the domestic market with our advantages and the differentiation. So for the key categories, we think the water purifier and swivel robot business are still the key categories for us this year and we will develop and investing more R and D and marketing resources in the 2 categories and we believe these 2 categories will be also the drivers for our top line. For your second question about the overseas market expansion, so this year that we will still focus on the development of our Swiffer robot business in the export market. So, so far we don't tend to expand the categories, but we will expand the global markets as well as the channels and to increase our branding influence in overseas market in the swivelrobot category. Thank you. Thank you, sir. The next question comes from Roger Doohan with Needham and Co. Please go ahead. Hi, thank you for taking my question. I have two questions here. First one is a follow-up on the raw material increase price increase. Can management give us a sense of just how much the raw material increase in the last several quarters? And do we have any plan to increase our retail prices like others have done in the industry? And the second question is around the pricing strategy for sweeper robots internationally. Is the pricing strategy different internationally versus domestic? And will that continue to be a margin driver for the year? Thank you. Okay. I'll quickly translate. So for the first question about the impact from the increase of the raw material cost and the impact for our pricing strategy. So we have seen like the increase of the raw material cost increase since the Q1 of last year and we have taken like 3 measures to mitigate the impact. So first, as some other company in the whole industry that we increased ASPs of some of our products to some and reasonable extent. So second, we also optimized the sales and the product structures. So we promote and sell more products with higher margins. For example, in the smart kitchen product, we sell more the mid to high end refrigerators with higher gross margins. 3rd, we have been increasing the percentage, the rounding contribution from the bundled sales to mitigate the impact of the raw material cost price, I believe, for single product. So this stands with your first question. So for your second question about the pricing strategy for our Swivel Robot in domestic and global market. So we position our Swivel Robot as mid to high end products in both of the domestic and global markets. So for the domestic markets, so most of our Sabre robots, the ASPs are around 2,000 to RMB 3000, so that's about the average ASPs of some super robot brands in China. So we have some differentiated functionalities such as the sales of super robot that we introduced last year, which aims to the auto that automatic debt collection. And this year we introduced the laserator super robot, which is also a differentiation for our silver robot category. So for the global market, we're also aiming to position as the mid to high end products for this category. So the average selling price is above some of the global brands. Also, that's the comments from Mr. Chen He. That's helpful. Thank you so much. As there are no further questions, now I'd like to 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 contact us through the contact information on our website or the Piacente Group, our Investor Relations partner. Thank you all. Have a good one. This concludes this conference call. You may now disconnect your line. Thank you.