Viomi Technology Co., Ltd (VIOT) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. My name is Zafar Aziz from the Deutsche Bank team. I'm pleased to announce that our next presentation will be from Viomi Technology Limited from China. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box to the right of slides. Also, all of today's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Claire Ji, Investor Relations Director; and Sam Yang, Head of Capital and Strategy of Viomi Technology, which trades on NASDAQ and the symbol VIOT. Over to you, Claire and Sam.

Thank you, DB, for having us, and hello, everyone. Welcome to Viomi Technologies business update session. Participating, I'm Claire Ji from Viomi and participating in today's sharing is Sam Yang, our Head of Capital and Strategy Department. Sam and I will share the recent strategic development as well as updated financials of the company. Before we continue, please note that 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. Now I'll turn the call to Sam to briefly introduce the recent updates of Viomi.

Thank you, Claire. We announced a reorganization in July, and we completed in August, actually on August 31. And then before we divested certain underperforming IoT business to further focus on water solution by leveraging our extensive expertise in AI technology application, smart hardware and software development, we aim to redefine the home water solution industry. Let's take a look at the snapshot of Viomi going forward. Global Water will be our new vision. Our mission is AI for Better Water. We use AI technology to provide better water solutions for household worldwide, targeting young modern new customer. We position our brand at a Tech Fashion and ranked 439 placed with the brand value over CNY 15 billion on the 2024 Chinese Top 500 Brand by World Brand Lab. We implement strict focused strategy and had a net revenue over CNY 1 billion, returning to our net profit position of CNY 5.6 million net income in the first half of 2024. We maintained a strong cash position with free cash assets totaling CNY 914.3 million at the end of the first half of 2024 that have been cumulated over 8.7 million household users globally, of which 67% users are using our home water solutions. Let's see the investment highlights of Viomi. Firstly, water is a good business. It's big, over USD 33 billion and a 5-year CAGR nearly 5%. The home water solutions sector, we are focusing on have great opportunity, and we are [ equipment ] with competitive advantages. Secondly, we are unique with the AI-powered competitive capability within the industry, achieving comprehensive end-to-end product management, such as R&D, manufacturing, logistics and aftersales services. Thirdly, as a high-tech company, we have the water -- leading water purified gigafactory, achieving optimal scale infinity with the strong supply chain capability. Last but not the least, we have a unique business model, always keep ample cash reserve from healthy cash flow as the fundamental of our future development. Next, I will turn the call to Claire to go through our AI water business.

Okay. Let me introduce our holistic and intelligent whole house water solution. As you can see, it offers fresh drinking water of all time, leading healthy lifestyle with mineral water from the tap. Our solutions have improved the water quality from the point of entry and with integrated functions like instant heating, cooling, ice-making and to meet diversified global drinking demands. Our product portfolio, including under sink RO series on the left side, which is the mainstream purification product format in China of most families living in apartments. We also provide upgraded products, not only make clean and fresh water but also provide healthy mineral water. Whole house water purification system in the middle, including central purifier, the softeners and the water dispenser, point-of-entry purifiers and installation-free products which could be placed in anywhere like living room, bedroom and other scenarios. Our business model is unique and highly scalable like the printer mode. Our water purifier equipment sales brings continued household users, AI technology application helps to improve our user experience and bringing recurring revenues allows high margins from consumables sales. And as you can see here is the demonstration on how the printer mode works and brings a powerful snowball effect. Here we're generating revenue streams across the entire product life cycle, as we founded in 2014 and invented the first intelligent water purifiers in 2015, we constantly redefine and a leading water purification technology. We successfully applied the ERO filtration technology, which is widely used in industry filtration area. We sell consumable products. We're able to adjust the beneficial elements in water, our newly launched products the Kunlun AI water purifier series equipped with innovative mineralization filter technology, enables the sustained release of beneficial minerals making compositions of these minerals in the water almost identical to that of natural mineral water, allowing our users to enjoy fresh mineral water at home. We are leading the healthy drinking trend by this next-generation technology innovations. And our major competitive advantages at outstanding R&D capability as we accumulated for over 10 years. Our strength in AI technology and application innovation, our integrated water purifier gigafactory with strong supply chain capacity, brings optimal scale efficiency and all of which leaded by our visionary management team. And these are the major breakthroughs we have achieved in technology and product innovations. Our tankless large-flux water purifier provides fresh drinking water 24/7, with a water flex up to 2,000 gallons, expanding the usage scenario of purified water from drinking to cooking, washing vegetables and more. And the DIY replacement of filters reduce the cost of maintenance. The application of ERO technology household purification and mineralization filter technologies allows us to offer a range of water solutions from pure water to natural mineral water and promoting a new trend of healthy living. We emphasize the importance of research and development, and our efforts and strengthening technology development has been widely recognized and awarded by national institutions. We have amassed over 1,500 patents and over 500 innovations in this area. We use AI technology to make water better, and this is how we accomplished it. AI sensors are equipped on the hardware front, able to detect water data, collecting data of temperature, water pressure, entry point water quality as well as water flow and adjust the product functionality intelligently. All of our products are connected to the cloud system and make decisions proactively such as the intelligent waterway self-cleaning technology, it significantly extends water filters lifespan and reduces the cost of water purification. We also have proprietary platform to achieve remote real-time monitoring on water quality, usage and provides family future replacement reminders. One-click reordering and DIY replacement options. These innovations make Viomi water purification products, a reliable hassle-free and affordable essentials of our daily life. That play -- take a look at the video of our global leading and water purifier gigafactory and which has high-level automation, high standard hygiene production and end-to-end tractable quality control system. [Presentation]

Yes, that's -- so our water purifier -- okay. So back to the slides. And our water purifier gigafactory is designated to have an annual water purifier production capacity of 500 million units. And a future production capacity of 30 million units, and we have attracted numerous global top talents in management marketing, product development and quality control with product and Internet themes, led by our founder, Mr. Chen, who has sophisticated experience in product innovation and large cap management. As we mentioned earlier, the water purification market has a great potential with the current market size of over USD 33 billion worldwide and with a nearly 8% 5-year CAGR growth. And in the meantime, the penetration in China is at a very low level, around 20% as compared to that of over 50% like areas like Korea -- South Korea, Japan, U.S. and European countries. Throughout the current forecast of the market scale in the near future is around USD 5.6 billion. We see growing public concerns about bringing water quality, increasing awareness of health and environmental protection and the consumers diversified demand in water such as better taste, better quality. These are the driving factors of increasing market penetration. And the United States market has been the largest market in water purifiers with almost USD 6.7 billion market cap. However, the drinking water quality is still under pressure. We see a potential demand in point-of-use purifiers to ease people's concern. Our growth strategy for the future includes these 3 steps. First, further, we plan to deepen our roots in domestic market, fully leverage our water purification, gigafactory's competitive advantages to strengthen our brand influence; continue to lead at the healthy mineral water trend and promote access for household users. Second, expand in the key overseas markets like U.S. and broaden our footprint in Southeast Asia countries. Finally, we will continuously expand in global market to promote our global water vision and explore other water purification application areas, and Sam will go on to discuss our financial performance.

Thank you, Claire. Let's take a look at our latest financials for the first half of 2024. We had net revenues of over CNY 1 billion, gross margin 24.8%, representing a 2.8 percentage point increase year-over-year. Net income was CNY 5.6 million and a cash asset balance is CNY 914.3 million. We optimized our revenue structure strategically shifting in focus home water solutions. We achieved an increase in both revenue contribution and absolute amount in these categories, which lead to continuous gross margin expansion. If we talk about the core business, it's a 13% increase, okay. And in the meanwhile, we implemented strict cost control measures, which led to a decline in operating expenses, 3 periods consecutive contributing a turnaround in net profit position with a non-GAAP net revenue of CNY 16.1 million. The difference between GAAP and non-GAAP measure is the SBC expenses. We always maintain an ample cash position to provide sufficient support for sustainable development. After the reorganization, we anticipate the full year top line of continuing business to be between CNY 1.7 billion to CNY 1.9 billion with estimated income from operations between CNY 110 million to CNY 130 million. This onetime decrease in scale is in trend for the sustainable and a high-quality growth. In conclusion, as we sharpen focus on this promising track, providing better water, which is fresh and healthy to global users, we are confident to maximize the competent advantage of water purified gigafactory, promote our brand strength globally to guarantee a promising installed base, keep upgrading the AI features in our products to bring recurring revenue, optimize the overall operating results and bring long-term returns for our users and shareholders. Thank you.

Thank you all for listening, and we can go on to the Q&A session now.

Okay. We have questions coming through. First question is what are some of the ways AI can improve water solutions.

Actually, this is a very good question. We can see that in this way, AI is very important in producing the better water. Actually, we -- right now, in the hardware side, we have the sensors equipment in the machine and the data from the sensors are collected and based on the cloud, and we just measure the temperature, the water pressure and the flow and the quality of the water and then we produce the best water for the users actually. So that's why we use the AI for this side. And also, this AI is very important for the future. We believe that the AI will just give us the better solutions for all the global users and it will be in the long run.

Okay. And the second question is how does Viomi plan to sustain and enhance its profitability margins in the face of increasing competition?

Well, this is a very good question. We can see for the first half of 2024, we declared the continued business, talk about CNY 800 million actually and also it's profitable for the first half. And we believe that this is going to be continued because for the full year forecast, we have what gives a number -- that number is, talk about, CNY 110 million to CNY 130 million. So that's for the whole year that this year actually we think that even the competition is fierce, and we are still having the goals, and we are healthy. We have the profitability. And we are making money.

Yes. Okay. And what is your geographic footprint? Do you have plans for international expansion and new market? Yes, as you can see in our growth strategy and for this year, and actually, we are planning for the 2025 to expand our footprint in the U.S. market. And the strategy we are planning to do is first online markets like the Amazons and so on. And as we mentioned, U.S. market has great potential, and people's concern about healthy water is still increasing and the point of entry from our products and especially in RO filtration technology is still under fast development. And this is what our advantage is at. And also our product is unique from what we can see from the current market. So we have the AI features which people have entrusted our product quality, the water coming from our product is transparent and has good taste and the good functions and people can rely on the products and their mobile phones directly. They don't need to rely on the door-to-door service. So that's why we think our product is competitive in this new geographic market. So -- and the next step is we are also targeting on the Southeast Asian markets like Malaysia and these countries are under fast to develop. So I think we'll make further stacks in 2025 and able to share with you more details later. Okay. And that's all for this question. And what is Viomi's capital structure and the level of debt?

Talking about the capital structure, which is actually we displayed in our financials. I believe you can find it there, and we can give you a very simple answer. That is talking about the level of debt. If we talk about the cash level, we have around USD 100 million. So that's out of the debt, we have no exclusive debt. So that's a very simple answer.

And we always maintain a prudent way on this cash basis and ample cash reserves. And we can go to the next question. What are the primary drivers of your cost structure and how you are managing this cost to maintain or improve margins?

Well, this is a very good question. And for the time being, I think we have already established the world-class gigafactory, which has actually integrated supply chain, and we can find the cost saving here because we can save the logistics and we can save our material and we can save the semi-assembling cost and so on. And also, we are doing our self-branding, which is actually we -- right now, what we are doing is in China, we are selling our Viomi products. We are increasing the prices. So that will benefit us. We have more and more margin from the increasing pricing. And based on both, we can get more margins. And talk about the overseas, I want to add one more point. That is about the U.S. market, because right now, the China's efficiency, I mean, the supply chain efficiency actually is a world-class level. And once we ship that product to the overseas, and normally, we can get a better price. That means we can get a higher gross margin for the overseas selling. So I hope that has already answered your question.

And the next question, can you discuss your sales channels in China? Are you selling through retail stores, partners and so on?

Our sales channel, actually, it's pretty straightforward. We have online sales and also we have offline sales. So the online sales, we have the main channel that is Taobao, Jingdong, something like that. And also for the offline stores, we have about several hundred stores in China, which can sell our own products. So I hope that answers your questions.

Can you discuss your sustainability and innovatives? Okay. I'll answer this question. Yes, this is actually what we are doing by focusing on the water business, especially providing better water through these intelligent products. As we discussed earlier, we use technologies to extend the filters lifespan, which is -- would be more environmental friendly and also reduce users' cost. And also you drink through the purified water through water purifiers is much environmental from the bottled water and also more healthy. So from this way and all our production process have qualified the environment protection standards in our local places. So all of this, we think our business is a sustainable and environmental friendly and long-lasting and also brings a good financial performance to the company as a whole.

Right. And also water is actually essential for human, for human beings. So we do believe that water is actually a sustainable business. So we keep our strength on our water solutions, and that is kind of the sustainability we can produce for the world and for the global users.

Okay. I think we have answered all questions. And also, we are running out of time. Okay. Thanks, everyone, for joining us today. If you have further questions, I think we can still get your questions, and we can keep in touch further by e-mails. And, yes.