Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited’s Earnings Conference Call for the Second Quarter 2019. At this time, all participants are in listen-only mode. Today's conference call is being recorded. [Operator Instructions] I will now turn the call over to your host, Ms. Cecilia Li of The Piacente Group, the company's Investor Relations Partner. Please go ahead, Cecilia.

Thank you, operator. Hello, everyone and welcome to Viomi Technology Co. Limited earnings conference call for the second quarter 2019. As a reminder, this conference is being recorded. The company's financial and operating results were issued in press release earlier today and are posted online. You can download earnings press release and sign up for the company's e-mail distribution list by visiting the IR section at the company's website at ir.viomi.com. Participating in today's call are; Mr. Xiaoping Chen, the Founder, Chairman of the Board of Directors and Chief Executive Officer; and Mr. Shun Jiang, the Chief Financial Officer. The company's management will begin with prepared remarks, and the call will conclude with a Q&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 registration statement on Form F-1 and other filings as filed with the U.S. Securities and Exchange Commission. The company does not 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 Viomi's Founder and CEO, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by English translation. Mr. Chen, please go ahead.

[Foreign Language]

Thank you, Xiaoping. This is Shun, Viomi's CFO. I'll quickly translate Mr. Chen's remarks before providing an operational update and discuss our financial performance for the second quarter of 2019. Hello, everyone. Thank you for joining today's earnings call. We are pleased to report another strong quarter with robust top line as well as bottom line growth, despite increasing macro and industry-wide uncertainties. According to industry data compiled by All View Cloud, the overall home appliances market in China declined by 3.2% in the first half of 2019 in terms of retail sales value and has continued to face headwinds in the second half. Nevertheless, our net revenues for the second quarter increased by 63.6% year-over-year to RMB 1.16 billion, in line with our previous guidance. This sustained and resilient growth momentum was attributable to the continued strong market demand across our product portfolio, driven by new product introductions together with sales channel expansion as well as growing brand recognition and customer trust. As part of our core strategy for this year, we have continued to launch additional product lines and SKUs to enhance and complement our IoT @ Home product portfolio over the past several months. In terms of smart water purification systems, we introduced new series of Xiaomi-branded water purifier products, including both 500-gallon and 600-gallon versions. Recently, we also launched a new ultra-thin series of Xiaomi-branded water purifiers. With respect to smart kitchen and other products, we launched Cross 2, the second generation of our Viomi-branded range hood with innovative motion-gesture AIoT features, together with additional product lines in our flagship series of 21Face smart refrigerators and Zero series of smart instant water heaters, among others. We also brought to market a new Xiaomi-branded range hood and stove series as well as a new series of sweeper…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Lillian Lou of Morgan Stanley. Please go ahead.

Thanks a lot management for the detail explanation and congratulations on the good result. I have three questions. First of all, it's more on the quarter outlook in terms of the -- our strategy. Because I think in second quarter, there has been significant savings in the SG&A ratio, as management mentioned. Is that something that is going to continue in terms of protecting the gross margin, operating margin and net margin? So basically, what's the margin outlook for the quarter and the rest of the year? Second question is about the further cooperation with Xiaomi in terms of other home appliances products. How do we see the potential cannibalization between Xiaomi's product and Viomi's home appliances products? Also, can you give us a little bit detail about the future investments in the IoT and the smart home appliances category? Lastly, a very small technical question is can you give us a little bit detail on the channel split in second quarter? Thanks.

Yeah. Thanks, Lillian. I'll just address them one-by-one. So firstly, on the margin outlook and cost structure, as you can see in the results for this quarter, our operating expenses on a non-GAAP basis were approximately 17% of our revenues during the period as compared to around 20% in previous periods. The decrease in expense ratio predominantly came from achieving efficiencies in selling and marketing expenses such as logistics and advertising, and was mainly as a result of successfully realizing economies of scale and implementing prudent cost control measures. So based on our current business plan and prevailing market conditions, which are subject to change on a dynamic basis, we would expect to place great emphasis on maintaining this cost control strategy and return on investments going into the second half. So accordingly, we will probably target non-GAAP net margin of around 8% going into the second half of the year and for the full year. So your second question on the -- on Xiaomi cooperation, so as you may have seen, we have launched a number of [Foreign Language] Mi Home products in the recent months, including the two larger categories of the range hood and stove as well as recently the sweeper robots. So these two products have actually been very well received by the market. We will continue to launch additional Xiaomi-branded products in the second half of this year, and we will discuss with the market in due course the timing of these as well as the financial impact of these. We very much see a healthy coexistence between Xiaomi-branded as well as Viomi-branded products, even if they are in the same category as we have historically shown in water purifiers with a distinct categorization, functionality and price points for these products. So we do see healthy coexistence between the two brands. In terms of the channel breakdown, in the second quarter, revenue from the Xiaomi channel constituted approximately 40% of our total revenues with the Viomi and other channels representing the remaining 60%. In terms of non-Xiaomi channels, off-line constituted close to one-third, and online two-thirds of the respective revenues. Within the online channels, Yopine and JD, each constituted around one-third of the online portion, with the remaining one-third represented by other sales channels such as Tmall, Suning online, Pinduoduo as well as own e-commerce channels.

Okay. Thanks a lot.

Thank you.

The next question comes from Xudong Chen of CICC. Please go ahead.

[Foreign Language] Thank you for taking my question. My first question is about Xiaomi sweeping robot. The company has launched this category for Xiaomi. It seems this category is still growing under weak macro environment. Can you give me more color about this product and its future strategy? And my second question is the water purifier seems to recover this quarter. What can we expect for the second half in 2019? Since China home appliances market is suffering from the weak macro, what can we expect for Viomi-branded products in the second half? Thanks.

Thanks, Xudong. So I'll just take those one by one as well. So in terms of the sweeper robots, you're absolutely right. This is very much growing in essence market in China that we do see a lot of headroom for future growth. So we recently launched the Xiaomi-branded sweeper robot series, a new category for us. This has already received over 20,000 units in terms of shipments within one to two months. So this is definitely performing very well. And as mentioned, we also have a number of other Mi Home products coming in the second half. So also just to give you a little bit of color on the range hood and stove, we've also shipped close to 20,000 units of this product category as well, which also only came online over the past couple of months. So on your second question regarding the water purifiers and the overall kind of revenue development for the second half so as you saw water purifier growth resumed quite healthy growth. We guided healthy double-digits. We achieved over 20% year-on-year growth in water purifier product in the second quarter. This was mainly driven by additional new SKUs, some larger volume products. In the second half, we will also have some additional products, additional SKUs within the water purifier category, for example, the ultra-thin series that we recently launched. So I think for the full year, including the temporary decline in the first quarter as well as the increase or the resumption of growth in the second quarter, you can probably expect around 15% growth for the water purifier category on a year-on-year basis, which is well ahead of the industry growth. In terms of Viomi-branded products, given the relatively low base in 2018, the year-on-year growth will still be extremely healthy. And we are also continuing to launch new product categories, going into the second half. So in terms of our Viomi-branded products we expect well over 100% year-on-year, growth for this category.

Thanks.

[Operator Instructions] The next question comes from Vincent Yu of Needham. Please go ahead.

Hey, Shun and Xiaoping congrats to the -- on the strong quarter. So, I have a few questions. One, can you share some insights on the business strategy behind on opening 300 experience stores, in this quarter? In addition, it's approaching our annual target. So are we going to lift the target? The second question is around, the related consumable sales. So, considering the strong smart water purification system, sales in the quarter, when will we see the related consumer -- consumable sales loop in, like around fourth quarter or beginning next year? And my last question is around our, strategy to develop new product lines. Are we going to focus -- are we going to see more SKUs in kitchen use, bathroom use or home safety? Thanks.

Thanks. Again, I'll take them, one by one. So in terms of our store opening schedule, so we opened around 300 new stores on a net basis for the second quarter of 2019. This has been relatively on track, on our historical store opening speed, so around 100 new stores per month. So as we discussed during the call, our target was around 2,000 stores, for this year. While we expect to continue to open new stores on a gradual basis, given strong interest from potential franchisees, we believe that going into the second half, core focus will be more to emphasize, enhancing store profitability and productivity, rather than to increase raw store count. On your second question on consumables, so, at the end of last year, we had -- there was around 100 million units, I am sorry, 1 million units of water purifier products in the market. And we're obviously continuing to sell additional units this year. So we estimate that each unit roughly generates around, RMB300 of consumables revenues per year. So, I think if you extrapolate that, the 1 million units should be able to generate around RMB 300 million of consumables revenues for this year. And on an ongoing basis, the consumables revenues will ramp up the increase in installed base. And on your third question on new product development, so if you look at our product portfolio, we pretty much cover the entire range of large appliances or white good products in the home environment already, which is very much part of our product positioning and to be able to provide integrated IoT @ Home experience to our users. This larger appliance focus positioning is then complemented by our various small appliances and smart devices to further enhance connectivity and overall user experience. So our strategy in the short-term will be to continue to build out additional SKUs within pretty much all of our existing product categories to cover a wider range of consumer demands and price points. We will, however, update the market in due course, if we intent to enter into any new product categories on a large scale or material nature down the road.

Got it. Thank you.

[Operator Instructions] As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Thank you, once again, for joining us today. If you have further questions, please feel free to contact Viomi's Investor Relations department through the contact information provided on our website or The Piacente Group, the company's Investor Relations consultant. Thank you all.

Thank you everyone.

Thank you.

This concludes the conference call. You may now disconnect your line. Thank you.