Niu - Earnings Call - Q2 2019

Transcript

Speaker 0

Ladies and gentlemen, good day, ladies and gentlemen. Thank you for standing by, and welcome to the Niu Technologies Second Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, we are recording today's call.

If you have any objections, you may disconnect at this time. Now I will turn the call over to Mr. Jason Yang, Investor Relations Manager of NIO Technologies. Mr. Yang, please go ahead.

Speaker 1

Thank you, operator. Hello, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the second quarter twenty nineteen. We released the results earlier today. The press release is available on company's IR website well as from newswire services.

Please note that today's discussion will contain forward looking statements made under the Safe Harbor provisions of The United States Private Securities Litigation Reform Act of 1995. Forward looking statements involve certain risks, uncertainties, assumptions and other factors. The company's actual results may be materially different from those expressed today. Further information regarding the risk factors is included in the company's public filings with the Securities and Exchange Commission. The company does not assume any obligation to update any forward looking statements except as required by law.

Our earnings press release today and this call include discussions of certain non GAAP financial measures. The press release contains a definition of the non GAAP financial measures and the reconciliation of GAAP to non GAAP financial results. Please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi. On the call with me today are Doctor. Yan Li, Chief Executive Officer and Mr.

Hardy Zhang, Chief Financial Officer. Now let me turn the call over to our CEO, Doctor. Yan Li. Yan?

Speaker 2

All right. Thanks, Jason, and thanks, everyone, for joining us on the call today. We have been navigating a dynamic market in the second quarter that has been challenged by regulatory changes. Despite the fact that overall China market for electric scooters slowed in Q2, we managed to deliver healthy growth. Our scooter sales volume grew by 14% and revenue grew by 38%.

We also improved gross margin to 23.7% and net profit margin to 9.6%. Both are significantly higher than Q2 last year and further improved from Q1 this year. We're pleased to continue operate profitably in this quarter. NIO is at the forefront of the revolution in urban mobility, and our results this quarter demonstrated our leadership position. We made advances in technology leadership and leveraged our brand awareness into a new adjacent category.

Our brand and product strength really showed in our financial results. First, as we discussed in last earning calls, we launched our two new product lines combined with the new China regulation effective April, namely The U plus and The US. Both products were delivered to the market in late April, and both have received very popular feedback from our customers. The U plus and The US volume represented more than one third of our sales volume in Q2 and widely considered a popular product in the market against our competitors. The US retail price start at $3.04 $9.09 RMB or approximately $500 and is considered an affordable entry level product for new customers to experience new for the first time.

The U plus retail price ranges from $4.03 $9.09 to $5.09 $9.09 RMB and is positioned as a top end electric bicycle model great for daily commuters and for long distance urban riding. Both the U plus and US models are powered by our new energy technology, which has helped to improve the average driving range by 8%, a 40% increase in battery life cycle, and a 6% improvement of power generation. Our growth in the second quarter has been supported by those two product models. We're in the process of launching a new product line under the second brand name GOVA. By leveraging our design capability and the cost efficiencies, we'll position GOVA as a value for money product targeting at the mid end segment.

We intended to sell this product line in both China and international markets. Second, we continue to build a global new brand as a lifestyle urban mobility brand through innovative yet cost efficient marketing and branding activities. On June 1, we celebrated our fourth birthday in China, and we launched a social media campaign called Don't Call Me Electric Scooter to separate our brand image from traditional low quality e bike market. We have engaged many social media influencers across TikTok, Weibo, and Vilibili, receiving more than 20,000,000 views. The Chinese Valentine's Day, which is celebrated in July, we started a new love story event and collected more than 2,000 stories from our new users couples who fall in love because of new and with more than 70,000 page views.

We have made a documentary film based on those love stories, and we'll host a movie viewing party among our highly engaged users. Starting from July, we launched a TVC ad campaign with one of the most popular Chinese Internet drama called twenty four hour in Chang'an. This campaign was a combination of TV ads, social media viral marketing, and user interaction activities on WeChat and offline stores. We have achieved 1,200,000,000 views on the Internet TV, 50,000,000 views on Weibo, and more than 50,000 users participation in the WeChat and offline activities. Now we continue to increase our fan base on all social media from WeChat, Weibo, and TikTok.

Our monthly views on those social medias have reached to over millions. We also start a offline ad campaign called always new forward with the bus ads, subway ads, and billboards covering 12 cities and with more than a billion views. Additionally, several Chinese and international celebrities were spotted riding a new scooter by the paparazzi, which showed the popularity of our products. Those news instantly spread across social and traditional media channels. Those varied varied activities allowed us to capture more than 1,000,000,000 views online of our product, which is just another testimonial to our growth as a lifestyle brand.

Now globally, we have also signed 22 social media influencers across six countries, creating new content under the theme unlock your city and has generated more than 500,000 views. To further build our customer loyalty, we rolled out our new points program in July. Users can receive new points via various activities and can redeem those points for new lifestyle accessories. Within one month of the rollout, we already have 39,000 users participating in the new points program. All of those event based marketing activities have helped us to continue to improve our brand awareness as the leading lifestyle brand in urban mobility.

Lastly, we continue to expand our footprint in China and globally. In q two, we opened another 124 stores in China, reaching 1,005 stores in total, which covers 182 cities in China. Internationally, we further expanded our international footprint and entered six new countries. Now we sell in 34 countries through 26 international distributors. In June, we opened flagship stores at Seoul in South Korea and Ho Chi Minh City in Vietnam.

Now our solution for sharing operation has also been growing very quickly. So far, we have supported a total of 13 operators globally in 11 countries. We provide not only the scooters for their sharing fleets, but also the out of box IoT connectivity and the back end fleet software to allow them to quickly launch their sharing operation. This is a key differentiator for Niu in the sharing space as we are able to provide a full stack of solution where our competition is just providing a dumb scooter. The sharing operations we support in The US, as mentioned last time, has been very successful and have received positive reviews from New York Times, Vogue, Wall Street Journal, The Verge, and The Washington Post.

The continued success of sharing operation in United States and around the world played a key role in building our global brand awareness while simultaneously educating a whole new customer base for news. All you have to do now is to head over to Brooklyn and see how popular the new scooter in the rebel sharing program in The US is and how we are building a culture for scooters even in America. Now lastly, let me touch upon the China market dynamics four months after the implementation of new regulation. As mentioned earlier, the overall retail market has been uncharacteristically soft since the implementation of new regulation. In some markets, we have observed a market contraction by up to 80% April when the regulation was put in place.

This was partly due to the rush purchase before the regulation came into effect and partly because the consumers still need time to adjust to the changes, especially adapting to mandatory smaller form factor scooters and longer process of getting license plates. Additionally, we see a portion of customers are choosing to postpone their purchase as a way to see how the regulatory environment shakes out. We have seen signs of recovery in July and August, but the total market sales volume is still below last year at the same time. Due to the slow sales of the entire market, many of our competitors have had to close their retail shops, and we see this as an exciting time to grow our sales channels. Despite the sluggish market conditions, we have been taking advantage of our competition's reduction in retail outlets and their lack of products to meet the new regulation by rapidly expanding our retail footprint as more retail spaces become available.

This strategy now will position NIO for future growth in 2020. Now I will turn the call over to Hardy to discuss our financial results. Hardy?

Speaker 3

Thank you, Yan, and hello, everyone. Our press release contains all the figures and comparisons you need. We have also uploaded the figures in Excel format to our IR website for your easy reference. As I review our financial performance, keep in mind that we are referring to the second quarter figures unless I say otherwise, and that all monetary figures are RMB unless otherwise noted. As Yan mentioned, the second quarter is a challenging quarter due to the difficult macroeconomic environment and the implementation of the new national standards in China.

We managed to deliver a high quality growth, thanks to the strong sales in international markets and the solid sales in accessory and spare parts. Our profitability further improved as a result of favorable changes in revenue mix and our continued efforts to optimize costs. Total revenues rose 38 to $531,000,000, below the guidance we provided earlier due to lower than expected sales in China. Despite the challenging market, our scooter sales volume still grew 14% compared with the second quarter last year. China sales was affected by the implementation of the new national standards.

The subjective interpretation and poor implementation in different cities caused the long seat product certification and the registration process, which affected the entire China e scooter market, including us. The new regulation also sets the top speed limit at 25 kilometers per hour. Customers are not used to this and will take time to adapt to the new speed limit. The impact from the implementation of the new regulation will continue to affect our China sales in the third quarter and possibly for the rest of the year. But we have seen a positive trend in the recent months that the market began to recover from Q2 and retail sales gradually picked up.

The slower sales in China was partially offset by strong sales from international markets, especially the newly entered markets such as The US and South Korea. We shipped out 1,500 units to The US market and 2,000 units to the South Korean market during the second quarter. We have expanded our international sales network to cover thirty thirty four countries compared with 23 countries the same period last year. We made further entry into Southeast Asia market. We opened a dedicated store in Vietnam, and we are in the process of setting up our own company in Indonesia so as to further expand our business in the promising Southeast Asia market.

We are very pleased to see that our products are welcomed in this newly entered market. Our international sales have both 2B and 2C business. Both have enjoyed a very healthy growth in the quarter. Two b business, I. The scooters and accessories sold to sharing operators of fleet management companies, is becoming sizable and contributed significantly to our revenue growth in the second quarter.

Revenue per scooter was RMB 5,339, up 21% year over year. That growth was driven by both higher proportion of international sales and a strong sales of accessories, spare parts and services. The average scooter sales price grew 11%, driven by two key factors. First, and more important, the higher proportion of scooter sales from international markets, where our sales prices are much higher than China sales price. In the second quarter, our international scooter sales accounted for 27% of total scooter revenue, compared with 10.2% in the second quarter last year.

Secondly, in April, we increased the China retail sales price by 1% to 5% for selective models. So the retail sales price increase and higher proportion of international sales both helped our average scooter sales price increase in this quarter. The other positive developments in the quarter is the stronger sales of accessories, spare parts, and services. On average, for each scooter sold, we also sold r and b seven 196 of accessories, spare parts, and services, increased significantly from the r and b two 196 per scooter last year. The increase was mainly driven by accessory and spare parts sales from international markets, especially those to the sharing operator who tends to purchase additional accessories and spare parts together with the scooter.

Gross margin was 23.7%, 8.6 percentage points better than this time last year, and 2.4 percentage points better sequentially. Over the longer term, we expect our gross margin to be in the range of 20% to 25%, so we are happy to be moving close to our long term goal. Margin expansion was helped by favorable revenue mix. Ancillary revenue from sales of accessories, spare parts and services was 14.9% of total revenue compared with 6.7% last year. International scooter sales was 27% of total scooter revenue compared with 10.2% last year.

Both the ancillary revenue and the international scooter sales have a higher margin and hence helped our margin expansion. Out of the total 8.6% margin improvement in the second quarter, we estimate roughly 4% came from the favorable revenue mix. I want to caution you that we do not expect this favorable revenue mix will sustain for the coming quarters when the China e scooter sales began to recover from the slow season in the second quarter. The margin expansion is also helped by our continued efforts to optimize cost. The cost of revenue on comparable basis further declined.

We secured cost saving on raw materials of 5% to 7% versus last year and 2% to 3% versus last quarter. We were able to negotiate lower procurement costs because of our larger scale and in-depth knowledge of the supply chain. We believe this cost reduction is sustainable and will continue to benefit our gross margin for the coming quarters. Operating expense on comparable basis increased in line with the growth of our business. Our total operating expense, excluding share based compensation, was 18,000,000, decreased by 14% year over year and was 15% of revenue, below the 24% we saw last year.

G and A expenses, excluding share based compensation, decreased by 47%, representing 3.3% of revenue versus 8.6% last year. In April 2018, there was a fire incident which caused a damage loss of RMB 22,000,000. After excluding this amount, our G and A expenses increased by 60% mainly due to higher staff costs and related office and travel expenses. R and D expense, excluding share based compensation, grew by 79% as we continued to invest in new product development and design. Sales and marketing expense, excluding share based compensation, decreased by 9% mainly because of the timing of marketing expenditure.

In 2018, we had higher marketing expenditure in the second quarter because of a product launch event at Paris in June 2018. This year, considering the impact from the new national standards in the second quarter, we limited our marketing spending and deferred sales and marketing activities to the third quarter. Our GAAP net income was million with net margin of 9.6%. We are pleased to operate profitably even as we invest heavily in growth, which demonstrates the strength of our business model. Turning to our balance sheet.

We ended the quarter with $667,000,000 in cash and equivalents. Operating cash flow was positive 23,000,000. Cash expenditure was 54,000,000, mainly for building the new manufacturing facility in Changzhou and for expanding our retail sales network. Now let's turn to guidance. We expect third quarter revenue to be in the range of 100,000,000 to 700,000,000.

This represents year over year growth of 22% to 42%. We expect to continue to operate profitably in the third quarter. Please keep in mind that this forecast reflects our current expectations and could change. With that, let's now open the call for any questions that you may have for us. Operator, please go ahead.

Speaker 0

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. Once again, it's star one on your telephone keypad and wait for your name to be announced.

We have the first question from the line of Vincent Yu. Please ask your question.

Speaker 4

Hi. This is Roger in for Vincent. Thank you, management, for taking my question, and congrats on a great quarter. So my first question is, can management help us to break down the unit sales in terms of China versus international? And how should we think about the gross margin trend going forward for the second half of the year?

Speaker 3

Sorry. The quality of the line is not very good, so we didn't hear your question. Do you mind to repeat your question as it speaks with us?

Speaker 4

Yes, sir. Can you hear me alright

Speaker 1

now? Excuse

Speaker 3

me, operator? Yes,

Speaker 0

sir.

Speaker 1

Our signal here is not good. Can we without later? Without again?

Speaker 0

Sure, sir. I I will dial you back in. One moment, please. Ladies and gentlemen, the speaker is facing technical difficulties. We will be dialing them back and connect them to the conference.

Your line will be on music hold until then. Ladies and gentlemen, we have Mr. Yang joining back the conference. Thank you. We have a question from the line of Bin Wang.

Please ask your question.

Speaker 5

Thank you, everyone. My first question came from the M Series. I understand maybe in a short period of time, not only one plus called you can be sale in the dealerships. So can I know what's the revised version of M can be eligible to sell as a scooter? Which months can you specify the timing?

That's number one. Number two is about the new brand Gova. Can you elaborate roughly the pricing range and the potential margin? Because new was in the high end market. So how you think about the lower market's profitability?

Do you see this will be a long term issue for margin? That's the second one. And the third one, actually, I want to understand, if you think about the new material has been declined by 5% to 7% year over year in the number second quarter. Do you still know which is the key components? Is it the battery or other issues?

Thank you.

Speaker 2

Hi, Vin. So let this is Yan Li. So let me address the first few questions. I'll have the hardy answer the on the on the phone, a few material questions. So, yes, I mean, for the for the first half of this year, even for until now, the product we have actually meeting the new regulations are basically The U Plus, The U, The US, essentially the the the product family of The U prod u family.

We are we well, actually, we are working hard to actually get one of the m the m family to meeting the new regulation requirement. There has to be honest, there has been a delay a bit on that product because the the there has been a what do you call that? The the interpretation of the new regulation, which is announced in March 25, which has you know, which actually tightened the new regulation a bit more in terms of the extra spacing in the battery compartments, in terms of the, what do you call, the the the back seat rest, the requirement on the back seat rest. So so that actually caused us to literally, you know, scratch the original design of of the new end and then restart it over. Now we're looking at the new end probably will come out in the first half of next year.

So that was with the end product. Now secondly, while having said that, the you know, we also have the end plus as also at the end passing the light motorcycle certifications. And those by having n plus and n passing the light motorcycle certification, they they you know, we were able to sell n and n plus as light motorcycles in areas where they don't have the restriction on light motorcycles. And that has been generated, you know, quite a bit internal sales boost. So the second question on GOVA.

So the GOVA right now, the we have the internal GOVA. The we have essentially three product lines on GOVA, which is the g one, g three, and g five. G three and g five are not ready for production probably until later this year, q four this year. And the t one, we're planning to roll that out in early September. And the price range on t one is anywhere between $2.09 $9.09 RMB, basically, just, you know, a little bit below 3,000 RMB to $3.09 $9.09 RMB.

So, basically, anywhere basically, in the price range of 3,000 RMB to 4,000 RMB. The reason we launched this as a second brand and actually launched this product here is, first of all, T1 is new regulation compliant. Second, we look at our product offerings. The Chipsisar product is actually US, which actually added 30, you know, 3,500 RMB. So we're a little bit short in terms of the product in below 3,000 RMB and in a range between 3,000 and 3,500 RMB.

Those are basically what we call a, you know, the price gap area that we we did not cover using an I u product. But in order to get us the gova to get to that price range while maintaining a healthy margin, we had to deliberately separate some of the functionalities between GOVA and the NEW. For example, NEW is viewed as a smart electric scooter. It's connected. Where the Gova, we do have to stream down strip down the connectivity part.

So this is what I position saying the Gova is the product which use can be used to serve the mid end segment. But having said that, we do offer accessory, what we call a SkyEye option, which allow users to add a little box on Gova to enable that connectivity. So that's the option that users can buy as accessory. So I I think those answers the question on Gova, and then I'll hand over to Hardy to talk about the fun part.

Speaker 3

Yeah. For the reduction of costs related to the procurement of raw materials, we achieved five to 7% cost down compared with the q four last year. This cost down is across different parts of the scooter. In the average, the body parts, including frame, lights, tire, etcetera, we reduced the cost by around 4%. And for the battery pack, including the battery cell, the pack and the BMS, in total, we reduced the cost by around around 9%.

So in average, it give us a five to 7% cost reduction. I hope this answer your question.

Speaker 1

Thank you. Have the

Speaker 0

next question from the line of Vincent Yu. Please ask your question.

Speaker 4

Hi, management. This is Roger again. Sorry about that. My line was disconnected. So my question was, can the management team help us to break down the unit sales in terms of China versus international?

And how should we think about the gross margin going forward for the next for the second half of the year? Thanks.

Speaker 3

I think I think in the in the in the revenue, we do have the split between China sales and international sales. International sales accounts for 27% of the revenue. China sales accounts for 73% of the revenue. So if I multiply total revenue with this percentage, it gives you the total China sales. If you compare the second quarter China sales revenue with the same period last year, that has a growth around 2%.

We still have some growth in China, but at a slower rate. For the gross margin, Q3 sorry, Q2, we achieved 23.7%. Q1, we have 21.3. In Q out of the as I mentioned, out of the 8.6% margin improvement, around 4% coming from this revenue mix. The revenue mix, do not expect it will sustain for the next quarter.

However, for the cost reduction, we believe it will continue to benefit us in the next quarter. We estimate the gross margin for next quarter will be likely in the range between 18% to 20%.

Speaker 4

That's great.

Speaker 0

Okay. Yes.

Speaker 4

That does. Okay. My second question is, do we have any visibility on how much e scooter purchase will be made by the sharing platforms in the second half of the year?

Speaker 3

We have some visibility. First of all, the the sharing operator, they are not the main contribution of our international sales. Vast majority of our international sales, they still sell to the end consumers. The the the sales to sharing operators normally account between 10% to 30% of the sales across different months, depends on the sales order. For the second half, we believe it will be in the similar percentage.

Speaker 4

Okay. Great. Okay. My my my last question is, can you maybe talk a little bit about some of the feedbacks you guys heard from distributors or customers on how they think about the new regulation? And also, when will we see the demand become more normalized from your standpoint?

Speaker 2

Yeah. I think that's a good question. So Yan Li. So, you know, as we we've been on the field talking to the distributors and the retailers as well as the customers, I think it's still in the bid time for the consumers to get adapt to the new regulations. Because the new regulation a few things on the key things on new regulation.

One is actually on the size of the scooter. Second, on the weight of the scooter. As well, it's actually there's this what they call a more stringent check on the speed. So all those actually is very, very different with, you know, before with with the previous case, before the regulation are in place. So what we have observed that is, well, as I mentioned on the call, some people actually, you know, did a rash purchase in q one before the regulation in place.

And then, you know, some consumers decide to postpone because a lot of major part of this market is a replacement market where every year people replace their old scooters and purchase new scooters. And we do see actually observe that some people decide to postpone that replacement by, you know, keeping their old scooter for another six months or for another year before switching to the new regulation scooters. So but having said that, you know, the market has been slowly I have said slowly recovering, where in, you know, this in the cities where, you know, the new regulations started to being heavily enforced, I think the, you know, the entire market at the, you know, month of April or May, really, you know, some of the city actually dropped the entire retail dropped by, like, 80%. But now it it not saying they're back to the last year level, but, you know, the month by month, the sales has been improving.

Speaker 0

Okay. Great. Thank you so much. Sorry. Yeah.

Mhmm.

Speaker 2

Yeah. I think that's just on the consumers. The last thing I want to add is actually, you know, a lot of retail shops, to be honest, in the last few months has been suffering because, you know, the volume has been dropped. And then the only you will actually look around, the major portion of scooter being sold in those, you know, those market are very cheap scooters. Basically, anywhere ranging from 1,400 RMB to 2,000 RMB.

And there's little margin to be made on those cheap scooters. And so many retail shops from our competitive brands really has shut down the shops. So that actually we we did manage to take advantage of that and actually able to acquire some, you know, the hot retail spaces, which, know, we wouldn't be able to, previous year.

Speaker 4

Okay. Great. Thank you so much.

Speaker 0

We have the next question from the line of Joycelyn Wang. Please ask your question.

Speaker 3

Hi, management team. You explained that the sales and marketing expense may be larger in the in the coming quarter, could you give us guidance about how large it could be? Thank you. I think it's just for the sales and marketing, it's just on a comparable basis. It will be slightly larger than in the the the second quarter.

But I we don't believe there will be a significant increase in the market spending. There won't be any any amount of. Okay. I see.

Speaker 0

Thank you. You. Seeing no more questions in the queue, let me turn the call back to Mr. Lee for closing remarks. Once again, seeing there are no further questions in the queue, let me turn the call back to Mr.

Li for any closing remarks.

Speaker 2

Okay. Thank you, operator, and thank you all for participating in today's call and for your support. So we appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you.

Speaker 0

Thank you.