Siddharth Rajeev

The analyst inquired about the drivers for the recent share price increase, the product launch pipeline for the second half of the year, gross margin targets, and details on tariffs for products imported to the U.S. from Vietnam versus China.

Answer

Management attributed the share price spike to strong product performance, brand recognition, and a market re-evaluation of the company's value. They confirmed a robust pipeline of new products for H2, which is expected to improve the product mix and expand gross margins. They also detailed their strategy of using Vietnamese manufacturing, which has near-zero tariffs, to mitigate the ~25% U.S. tariff on Chinese goods.

Siddharth Rajeev of Fundamental Research Corp. inquired about the impact of new U.S. tariffs on Chinese imports, seeking details on Zepp's supply chain diversification. He also asked for clarification on the significant increase in taxes and the nature of the $13 million impairment loss. Finally, he questioned whether the market was shifting towards lower-priced smartwatches given Apple's sales decline and the rise of Chinese players.

Answer

Chief Financial Officer Leon Cheng Deng explained that Zepp anticipates minimal impact from U.S. tariffs due to its proactive supply chain diversification, with products for the U.S. market now manufactured in Southeast Asia. He clarified that the impairment loss was a one-time, non-cash charge on underperforming past investments and the tax item was a technical, non-recurring deferred tax asset allowance. Regarding market trends, Leon countered that the premium sports segment is growing, citing Garmin's success and the strong performance of Zepp's own higher-margin T-Rex 3, attributing the overall market softness to Apple's lack of updates and a collapse in India's ultra-low-end segment.

Siddharth Rajeev from Fundamental Research Corp. questioned the drivers behind the expected Q4 revenue spike, the specifics of the T-Rex 3 supply constraints, the cause of the Q3 foreign exchange loss, and the company's plans for its significant cash balance.

Answer

CFO Leon Cheng Deng explained that the Q4 revenue surge is anticipated from resolving T-Rex 3 supply issues, new product ecosystem sales (OWS earbuds, Helio Ring), and strong seasonal demand. He clarified the T-Rex 3 constraint was due to unexpectedly high demand for the premium product, which is now being addressed. The Q3 forex loss was attributed to a sharp, unhedged RMB appreciation, which he expects to become a tailwind in Q4. Regarding the $128M cash position, Deng prioritized the extension of the share buyback program and strategic marketing investments over large-scale M&A, though small bolt-on acquisitions are not ruled out.

Siddharth Rajeev of Fundamental Research Corp. posed several questions regarding the impact of macro supply chain disruptions on operations, the reason for significantly higher recovery rates in Q1 despite lower grades, the potential financing strategy for the Velardeña restart, and requested an update on Barrick's activities at the El Quevar project.

Answer

President and CEO Warren Rehn responded that while they are seeing longer lead times for supplies like mill liners, there have been no operational shortages. He explained that at Rodeo, lower gold grades correlate with less silicification, which in turn allows for better recovery rates. For Velardeña financing, Rehn indicated a preference for a combination of debt and forward sales of product. Regarding El Quevar, he expects Barrick to commence drilling this year but has no firm start date.

Siddharth Rajeev of Fundamental Research Corp. asked for clarification on the timing of a formal Rodeo resource update, requested production and cost guidance for 2022, and inquired about plans for the El Quevar project and Barrick's activities on their optioned property.

Answer

President, CEO & Director Warren Rehn clarified that an internal Rodeo update would be done this year and published in a summary form under SK-1300 rules early next year. He also stated that El Quevar is in a second phase of drilling and it's too early for a resource estimate. On Barrick, he noted they are planning to drill within the next year. SVP & CFO Robert Vogels added that full-year 2022 guidance would be provided with the year-end 10-K filing and that Q4 cash costs are expected to remain under $900 per ounce.