Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Co. Limited Earnings Conference Call for the Third Quarter of 2019. At this time, all participants are in listen-only mode. Today's conference call is being recorded. 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 third quarter of 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 third quarter of 2019. Hello, everyone. Thank you for joining today's earnings conference call. We are again pleased to announce that we continued the robust growth momentum from the first half of 2019 and again achieved strong and healthy top and bottom-line growth with revenues increasing by 89.3% to RMB1.07 billion and non-GAAP net income increasing by 116.4% to approximately RMB83.9 million for the third quarter of 2019, despite ongoing macro and industry-wide uncertainty. Our sustained growth and solid results underscore our exceptional innovation capabilities and execution capability, as well as demonstrating the ever-increasing consumer interest and demand for the Viomi brand and our products. As part of our core strategy for this year, we continue to introduce additional product lines and SKUs to strengthen our overall product portfolio and offerings. In addition to new Viomi-branded products, we've also continued to increase our cooperation with Xiaomi on Xiaomi-branded products over the past several months through the introduction of additional product categories, including range hoods, sweeper robots and more recently refrigerators, which have all been well received by the market. Moreover, we also recently launched our new premium AI-focused coKiing brand starting first with a series of air conditioning products. This brand focuses on the mid to high-end market and we expect coKiing to further complement our IoT @ Home product portfolio, address the needs of more consumer segments, open up new markets, and most importantly, enrich the overall user experience. We will share more updates on the development of this brand and related products in future earnings conferences. In accordance with our AI plus IoT plus 5G strategy to continue the theme…

I will now provide an operational update and discuss our financial performance for the third quarter of 2019. So, I'll first quickly summarize some of the key operational updates. First in terms of sales channels for Viomi-branded products, we saw very strong growth in the online channels including all three of our major e-commerce platforms such as Youpin, JD, Tmall, as well as Suning, et cetera. We have also been stepping up assets in developing our proprietary e-commerce platform in Samsung as well as our own Social Commerce platform, Viomi Lifestyle Center or Yunmi Shangcheng [ph]. Both platforms have experienced significant growth over the past year providing us with additional inwards to enhance user stickiness and create further monetization opportunities going forward. With regard to our off-line store network, we continue to see strong interest and support from franchisees in the Viomi brand. However, in light of prevailing industry conditions, we have shifted our focus in the second half of 2019 more towards further enhancing and optimizing our store performance and productivity, including the closure of underperforming stores. The number of Viomi offline experience stores were approximately 1,600 as of the end of the third quarter of 2019 compared to 1,900 as of the end of the second quarter. Although the number of stores decreased, revenues generated from our offline sales channels still increased on a sequential basis as a reflection of the shift in our offline channel focus. Looking ahead into 2020, we will continue to diversify our sales channels including the opening of additional Viomi Experience stores as well as increasing our presence on other mainstream channels to further broaden our market access and increase brand awareness. In terms of user penetration as of the end of the third quarter of 2019 the number of our household users…

[Operator Instructions] The first question today comes from Lillian Lou of Morgan Stanley. Please go ahead.

[Foreign Language] So I have three questions. First is about the new store opening. So by third quarter the total number was 1,600, there was a decrease. What's the number or target by the year-end? Does the company still stick to the original target of 2,000 stores by the year-end? And the second is on the margin, what's the guidance for fourth quarter and 2020 in terms of the gross margin and the OP margin? And the third question is on the breakdown of the sales guidance for fourth quarter by product. Any color you can mention and provide to us? Thank you.

Thanks, Lillian. So, I'll just take them one-by-one. Firstly, on the store expansion rates. So, as we mentioned, there was a shift in our strategy with regards to the expansion of our off-line store network in the second half of this year mainly taking into consideration the prevailing industry conditions. As we may know the home appliances industry and particularly in offline channels has had some challenges for this year and we have adjusted accordingly. So the focus in the second half of this year has very much been towards further enhancing and optimizing our store performance and productivity as well as raising the bar for potential franchisees wanting to partner with Viomi. So -- and also the closure of some underperforming store and the elimination of some underperforming franchises. So as we discussed, the number of Viomi offline stores was approximately 1,600 as of the end of the third quarter compared to 1,500 as of the start of the year. And as we also noted although the number of stores decreased on a sequential basis quarter-on-quarter revenue generated from the offline channels was still increasing so highlighting the increased productivity per a store. So for the fourth quarter, while we're continuing to open new stores and have largely completed our phase of store closures, we probably don't expect a significant increase in net store count as compared to the end of the third quarter. So it's still around, let's say, 1,600 to 1,700 stores is probably what you should expect by the end of this year. Looking ahead to 2020 and I think there are some uncertainties here as well, right? So our main strategy is to continue to diversify our sales channels including the opening of additional stores as well as increasing our presence on other mainstream channels…

Thank you. That's very clear.

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

[Foreign Language] Thank you for taking my question. I have two questions. The first one is Viomi did a really good job in Double 11. As home appliances industry declining in the first half, did you see some recovery in second half? And what's the outlook for 2020? That's the first question. The second one is, as you and Xiaomi have good relationship in IoT home appliances and Xiaomi has put 5G plus the IoT to be the next maybe five to 10 years long-term strategy. What can we expect Viomi's role in Xiaomi's development? Thank you.

Thanks, Xudong. Your first question on the industry outlook. According to the industry data, there's still some ongoing weaknesses in the overall home appliances market industry particularly in the offline channels. It's fair to say that the industry as a whole has not performed as well as had expected, I'd say as at the start of this year. Nevertheless, we believe this does provide exciting opportunities for new brands and companies such as Viomi. And as you can see we've been able to deliver robust and healthy growth despite such industry conditions, which we believe can be attributed to our unique positioning and execution capabilities. I think the overall industry outlook is still quite uncertain and it's quite difficult to predict, given the ongoing macro issues. And we hope to provide more clarity on this again going into 2020 on our next earnings call. The second question on the cooperation with Xiaomi. So it wouldn't be appropriate for me to comment on Xiaomi's own future strategy and where you see Viomi as well. But from our perspective given the evidence that you can see this year, you can clearly see that we've been one of the few Xiaomi existing companies I would say to have materially expanded our relationship with Xiaomi, broadening our product cooperation initially from only water purifiers and some water -- products to now including large appliance products such as range hood stores and refrigerators as well as very core small appliances and products such as sweeper robots and blenders. So we do see ourselves as an important partner for Xiaomi in it's AIoT rollout.

Okay. Thank you. And congratulations on strong growth. Thank you.

Thank you.

The next question today comes from Robert Cowell of 86Research. Please go ahead.

Hi, management. Thank you for taking my question. I actually have two. The first is about the new brand you recently launched coKiing. I'd like to hear your thoughts on the logic of launching a second brand at this time, particularly given the fact that Viomi itself is still a relatively new brand to a lot of consumers? And then my second question is maybe a little bit broader. I think this year you'll have done a very good job of moving quickly and expanding the product portfolio. But I'm thinking longer term what are your core competitive advantages? How do you see that those -- how do you see your core competitive advantages? And what's the CapEx you need in the longer-term to defend and extend the strength of those competitive advantages, particularly as we're looking into 2020 on CapEx spend?

Yes, okay. I'll take them one by one again. So on the new premium coKiing brand. So we recently launched this brand with a series of air conditioning products. So the idea of this brand was to -- and this is a co-branded coKiing and by Viomi brand is that we wanted to essentially set a foundation for say a premium brand. So we really want Viomi to be positioned as you may recall as a more accessible mass market or mid-tier brand for the middle class. But going forward, we also want the opportunity to premiumize our product and had product categories with higher ASP products for the more premium consumer to really lift the brand portfolio and potentially margins going forward as well. So that's why we chose to launch the coKiing brand at this stage. Initially for air conditions which completes in a near term our IoT product portfolio. So as you may have seen, these air conditioning are very much positioned towards the mid to high-end market with innovative AI plus IoT capabilities. So, I think that's the rationale for launching this new brand at this time. And given the size of the addressable market, we see significant room for growth for Viomi as well as the coKiing by Viomi brand in parallel. So your second question on core advantages. So the Viomi concept right is founded on the idea of positioning our brand as a unique high-tech next-generation IoT brand for the middle class consumer in China. So this demographic is very important to us. The largest demographic and very much growing demographic, key characteristics that they have limited or they have controllable living expenses, a good amount of disposable income; like smart products and high-tech products, but also have a degree of price sensitivity,…

Thank you very much.

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

Hi, management. Thank you for taking my questions. So I have a few questions and quite a lot about coKiing. So one is on the investment in new product line for coKiing brands and other like new initiatives, so what we think about R&D expenses going forward? The second question is on the revenue contribution from coKiing to these new brands in fourth quarter and in 2020 and can we share some – our margin profile for this product? And third question is on the competition like on October 1 like many has showed their progress in 5G IoT space in October. So, can we give our view on the competition. [Foreign Language]

Okay. Thanks, Vincent. I'll take your first two questions and our CEO Xiaoping will answer the last one. So, in terms of R&D expenses, so we will obviously continue to invest in R&D of our products as well as technology and services. R&D is a very important part of our core focuses. So R&D expenses will continue to increase. But as you can see our revenues are also continuing to increase at a very rapid rate. So if you think about operating expenses as a percentage of sales, if you roughly expect operating expenses as a percentage of sales to be around say 14% to 16%, over the next several quarters with selling and marketing being around say 10% to 12%, R&D being around 3.3% to 4% and G&A being around 1% to 2%, right? So that's the R&D aspect. With regards to unit economics and margin profile of the coKiing brand, I think it's still very early stage, right? This was only launched a few weeks ago in the fourth quarter. So there was no revenue contribution in the third quarter. And we'll probably only be insignificant revenue contribution as a whole in the fourth quarter of 2019. Now going into 2020 I think we will need some more time to see the performance of coKiing-specific products. So apart from air conditioning will also be launching new product categories under the coKiing brand as well for the premium to high-end market. So I think we just need a little bit more patience in terms of providing specific guidance for that. In terms of margin contribution, I think you should at least for the short term think about it this way. So at least for air conditioning over the next several quarters, you probably should not expect this to be a margin upgrade driver. It will be – or should be at least a breakeven products and will contribute to growth in the operating profits and bottom line as a whole, but likely in the near-term not a margin uplift driver in and of itself. And so I'll pass over to Xiaoping to discuss the 5G competition aspect.

[Foreign Language] Okay. I'll just quickly translate that. So, as we mentioned in the 5G product launch and coKiing product launch a few weeks ago, we very much see our role as well as our positioning in the next 5G generation -- IoT generation to be quite differentiated. So, for a start 5G, we think is very important for IoT especially in the home scenario as we'll be able to provide full and uninterrupted home coverage, no matter how large your home is to really increase the user experience to the next level. And obviously increase speed and levels of connectivity. So, secondly, all of our 5G R&D especially including the development of our CPE products was developed in-house and proprietary, the one-year through our dedicated R&D as well as dedicated 5G team. Thirdly, our 5G CPE this product actually has very advanced and industry-leading specifications. It can allow 256 products to be connected to it, has 3.6 gigabytes and 3.66 MBPS download and connectivity speed. So, this is very much a high-tech product, not just run-of-the-mill CPE product. Fourthly, so, we -- based on our understanding, we don't believe that any of the traditional home appliances brand have dedicated 5G capabilities or dedicated 5G focus. So, we very much think that how first-mover advantage in this space will be able to -- we would be able to provide us a leadership position when the technology does come online and when the next-generation products do come to the market. Fifthly, I think if we look around the industry, a lot of related industries and particularly the traditional home appliances industries are trying to learn from Viomi, right. So, we have -- what we have done by focusing on 5G including the launch of this CPE product company, we have really transformed ourselves from say a smart home or smart appliances or an IoT company into a high-tech company, right? I think this transition will be very important to our future brand positioning as well as how consumers see the Viomi brand. So, going forward or in the future, perhaps consumers will no longer see Viomi as just another home appliances brand or even an IoT Home appliances brand, but really a high-tech or technology brand. That happens to make these IoT @ Home user experience for them. I think that this will be a key point of differentiation between us and some of the traditional home appliances brands. And lastly, I think as stated 5G, plus AI, plus IoT, this focus -- this will really usher in a new generation, right? So, we believe this will essentially or in some ways wipe the slate clean in terms of the competitive dynamics as well as the incumbent strength of some of the traditional companies which is why we very much made a push towards being an early mover as well as double check ourselves as a critical leader in this space.

Thank you.

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 contract 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. Have a good one.

This concludes this conference call. You may now disconnect your lines. Thank you.