Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited Earnings Conference Call for the Second Quarter 2020. 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, the Senior IR Manager of the Company. Please go ahead, Cecilia.

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Co., Ltd earnings conference call for the second quarter 2020. As a reminder, this conference is being recorded. The Company's financial and operating results were issued in a press release earlier today and are posted online. You can download the earnings press release and sign up for the Company's e-mail distribution list by visiting the IR section of 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 annual report on Form 20-F 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 also 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 our 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, Mr. Xiaoping. This is Shun, Viomi's CFO. I will quickly translate Mr. Chen's remarks before providing an operational update and discuss our financial performance for the second quarter of 2020. Hello, everyone. Thank you for joining our second quarter 2020 earnings conference call. We saw meaningful improvements in operating conditions in the second quarter as both the industry and the overall economy continued to rebound from the impact of COVID-19 earlier this year. Driven by a robust ‘618’ sales season, combined with successful new product launches such as our air conditioning systems, we are pleased to report that our second quarter revenues reached more than RMB 1.68 billion, representing a year-over-year increase of 45.2%, significantly stronger than expected. Although the first half of 2020 was challenging, the recent ‘618’ online shopping festival and related promotional events have shown positive signs of an overall industry recovery trend. We received our best-ever performance during the respective ‘618’ sales season more than doubling related retail sales value across our entire product range on a year-over-year basis. Various products, such as refrigerators, washing machines and air conditioners were ranked among the top 10 in terms of GMV on certain online ecommerce platforms. Such resilience and strong performance further demonstrate our ever increasing brand awareness and market penetration as well as consumers and sales channels ever growing interest in our products, concepts and value propositions. The backbone of our constant growth has been our continued product innovation and new product launches under our IoT @ Home strategic framework. With the recent successful introductions of our air conditioning systems and 21Face Interactive Smart Screen TV, we now have a comprehensive presence across the entire range of major scenarios in the home environment. We also continued to make significant progress in the development…

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

[Foreign Language] Thanks for the management. It’s Hanli Fan from Morgan Stanley. I have three questions here. The first one is, can management help us update recent business operations, particularly in July and August, what's the recovery pace? Could you also elaborate a bit into the offline recovery and also the online channel? And my second question is that in the small appliances business, there are some newly launched, kind of like niche products, for example, like the yogurt machine, a noodle machine, something like that. They were pretty well sold during the virus COVID-19. So, how is Viomi’s preparation into these types of kind of niche products, and what's your kind of strategy into the small appliances? And my third question is about the net profit margin. So, net profit margin at a non-GAAP level is 2.4% in this quarter, primarily coming from the gross profit margin decline. So, could you give us kind of like outlook or guidance regarding the future net profit margin put into the context of gross profit margin as well as expense ratio? That's my question.

Yes. Thank you, Hanli. I'll take your questions one by one. So, the first question is on sales recovery and channel performance. So, since the February lows, there has been a noticeable month on month recovery in sales performance across online, as well as offline channels. For online channels, the year-on-year recovery has been most evident since beginning around May where we started to re-enjoy very healthy double-digit year-on-year growth. For Viomi-branded products, the key drivers have been the various kitchen products, water purifiers, as well as small appliances, as well as of course air conditioning systems. For offline channels, year-on-year growth has reemerged since around June and has continued to accelerate into July. Together with our offline channel partnerships, as well as new stores and points of sales, we're cautiously optimistic about the continued recovery of our offline sales channel performance going into the second half. We haven't really seen any slowdown in online channels heading into July or August or either. I think, that the Viomi-branded product sales through online channels, as discussed more than doubled across the ‘618’ sales season and continued similar levels of strong performance heading into the third quarter, albeit off a relatively low base in 2019. I think, if you look at our quarterly performance in 2019, it was more volatile and you should expect a smoother quarter-on-quarter performance this year. Nevertheless, I think, based on the current trends, we expect strong performance as we have guided, for the third quarter, continuing -- going deeper into the second half and into the Double 11 shopping festival towards the year-end. So, strong performance across both, offline as well as online channels, based on current indicators in the third quarter so far. The second question, based on -- excuse me, second quarter based on what…

[Foreign Language]

Mr. Chen would just like to supplement the response for the two questions. In terms of the small appliances, we have also noted that the industry is growing very quickly and especially for some of these niche products. I think, we would like to reemphasize that small appliances will definitely be a key strategic focus for us. And our team is definitely focusing on growing our market our presence and penetration within this category. I think, in terms of our core focus products, we will more likely be focusing on some of the more mainstream small appliances category with the larger addressable markets to imprint our presence as well as our brands, in the near-term, as a core focus rather than some of the more niche categories as Hanli identified. And also, to supplement the response with regards to margins and profitability, I think just to add, as you have seen, with our growth performance in the second quarter as well as our guidance for the third quarter, top-line growth and market share gains will continue to remain our number one priority, at least for the near to medium term. Of course, we're also implementing various cost and expense control initiatives to ensure a healthy level of profitability and do expect a degree of margin uplift in the second half as compared to the second quarter, but I think it needs to be emphasized that as a rapidly growing Company with a quite differentiated value proposition as compared to some of the more traditional peers in the market, our core focus will continue to be top line growth for the near to medium term.

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

Thank you for taking my question. My first question is, what can we expect for your new product launch in your second half? Since your first half you have great success in your Viomi-branded air conditioner system and your 21Face Smart Screen TV, what can we expect for the Second half? That's my first question. And my second question is, you have your collaboration agreement with Kugou Music, and could you give me more color about this collaboration? Thanks.

Yes. So, I'll answer the first question on the second half key growth drivers as well and Mr. Chen will take the question on the Kugou Music partnership and some additional content collaboration opportunities. So, I think in the second half, you should expect several trends, right? One is the kind of the continued ramp-up of some of the new product categories we launched earlier in the first half, as you may have seen during our major product launch event in May. So, some of the key products that we mentioned here are of course our air conditioning systems, a lot of new next generation water -- Viomi-branded water purification systems as well as an overall kind of -- overall upgrade and premiumization as well as SKU expansion of our pretty much entire product range. I think, in the second half, across our key categories, such as the refrigerators and washing machines, we will be more focused on higher ASP SKUs as well as additional kind of -- additional specific use SKUs, specialized SKUs that will encompass higher margins as compared to where we were initially focused on when we first launched these categories, whereas perhaps some low ASP products to gain the market share. So, in terms of new product launches, we do expect quite a number of new SKUs to come onto the market in the second half. In terms of key categories, I think what we have now, at least for the near-term is pretty much a complete IoT @ Home portfolio across the major appliances categories within the market. I think, there's ample room for expansion still in terms of brand and channel penetration, as well as SKU expansion optimization. But, I think categories, we do have a lot of room for growth organically in that sense as well. So, second half, I think, overall recovery -- overall industry recovery, as well as SKU expansion and ramp-up of some of the newly launched products will be the key drivers of growth. And Mr. Chen will answer the second question on the Kugou Music and other content-related launches.

[Foreign Language]

Yes. So, I think the partnership with Kugou and other related partnership that's including live streaming and content partnerships that we expect to be announcing shortly, the idea of this is to increase the content, as well as enhance the user experience that people -- our users can engage with our products, like for example, the 21Face large-screen refrigerators. Obviously, a key point of sale before these refrigerators is what they can provide outside the core kind of refrigeration capabilities, in terms of content, data collection, control, entertainment, and whatnot. And the overall idea of this is to continue to increase engagement, increase the available smartification of these products within our overall IoT @ Home framework. So I think, based on initial data that we've collected, the engagement has been very positive. The trends are definitely very encouraging, and we hope to continue to collect and improve some of the data metrics as we continue to adopt more kind of these content partnerships and user enhancements going forward. I think, we will continue to collect such data and will share with the market in the coming quarters, once data is a little bit more refined and mature. But, we are very excited about these various initiatives.

Next question comes from Vincent Yu of Needham & Company.

Thank you for taking the question, and congrats on the strong quarter. I have three questions. The first two are quite like more general questions; one is, in which product line the Company sees the most growth potential for the second half of 2020? And the second question is about how home appliance consumer demand will trend during the second half of 2020? And my third question is a follow-up on the question on the refrigerator cooperation with these other internet companies, [Technical Difficulty] screen of the refrigerator. If the users are like for example watching advertisement or going to open their membership on IGE [ph] or KugoU, are we going to share revenue on these activities? Also, is that possible to share how we cooperate with fresh ecommerce companies, like are they -- are the customers ordering fresh food on refrigerator screen, like what -- like generally how much -- like what will kind of like revenue sharing mechanism will work? [Foreign Language]

Yes. Thanks, Vincent. I'll take your questions. First question is with regards to which product lines Company sees most growth potential in the second half. I think, in terms of like-for-like growth versus last year of course air conditioners. Air conditioners is a relatively large product category and as a new product introduced this year, will be a significant contributor to the year-over-year growth. But nevertheless, based on the trends we are seeing in July and heading into August, growth is recovering across nearly the entirety of our product lines, especially for some categories that were lagging in previous months, such as refrigerators and washing machines. Additionally, as discussed, we're placing significant emphasis on next generation of Viomi-branded water purifiers, as well as various trendsetting small appliances products and expect these categories to add a new layer of growth for the upcoming quarters as well. Your second question on views on how home appliances consumer demand will trend during the second half. I think, if we look at the performance of some of our peers that have reported their first half results, as well as some of the major online retailers and together with their overall growth consumption outlook, I think the tone is generally relatively positive, definitely as compared to say earlier the year with the worst of the impact of COVID-19 in the past. Although uncertainties and challenges will definitely continue to remain in the second half, as mentioned, based on the current trends that we're seeing, we're cautiously confident in a continued and sustained rebound in overall consumption demand in the second half. Thirdly, on the kind of the monetization opportunities for some of these internet services initiatives, I think, there's a lot of options and past monetization, right, whether it's revenue splits, kind of advertising revenues,…

[Foreign Language]

Mr. Chen wanted to reemphasize just a couple of points I think on the first a couple of questions. As discussed, small appliances is going to be definitely one of our key growth categories going forward, and even in larger appliances, right? Given the impact of COVID-19 we're definitely seeing a transformational stage within the industry where people are -- or consumers and users are more focused on kind of enhancing their home living lifestyle, paying more attention to say the user experience of such products and more kind of engage with products with these next-generation IoT product -- IoT capabilities. So, this definitely presents a good opportunity for us and it's reflected into the trends that we saw in the second quarter as well as heading into the second half. And last question on the monetization opportunity, I think, just to reemphasize again, the near-term focus will be to build out our installed base and then there's several -- or many kind of monetization avenues going forward, including advertising revenues, GMP, revenue sharing for subscriptions or whatnot that we’ll look forward to exploring down the road.

The next question comes from Robert Cowell with 86Research.

Hey, management. Thanks for taking the time. So, I wanted to ask about the share-based compensation in the second quarter. It looks like you all significantly stepped up the SBC there. And it makes sense, given the situation that we use share-based compensation as a way to retain some of the important members of the team. I guess, on this front, I want to ask, if you can provide any more color on the structure of the grants that you all provided in the second quarter. So, the first would be about the number of participants, or if you could provide any more specificity as to specifically, which teams or departments are getting this compensated with SBC. And then, also on vesting schedule and strike price, if you could provide any maybe an average strike price or some sort of color on either of those fronts, it would be helpful for us to better understand the incentive plan.

Thanks, Robert. So, as discussed, we issued around 15.6 million options to approximately 100 employees, quite a diverse claim. These employees predominantly were in the R&D teams, as well as certain management personnel, predominantly R&D focused personnel. In terms of the kind of the terms of these options or the incentive plan, as disclosed in our prospectus as well as the 20-F Annual Report, these are five-year vesting period, incentive plan with 40% of the amount issued matured after two years, so zero, after one year 40% up to three years, and then 20% for the next three years, accumulating for the entirety of the plan. The average strike price -- or the average kind of exercise price is around US$0.55 to US$1.1 per share, which translates into -- or translates into 1.65 to $3 or $3.30 per ADS. So, this is relatively in the money options. Small portion of these were vested. So, just over 1.5 million were vested immediately, so some back dated options to certain management employees that were hired few years earlier. I think, the overall impact on our share-based compensation expense line item, while outsized this quarter, should not be too different from what we have historically expensed. The historical SB expense was predominantly due to -- or predominantly arose from the amortization of our 2015 share option plan which has now largely been fully amortized. So, now, this 2018 share option plan is in essence replacing the 2015 share option plan. Now, in this particular quarter, the expense was slightly outsized due to the kind of the immediately amortized portion that were expensed kind of on a one-off basis. I think, over the second half of this year, you should expect around say RMB 40 million of SBC expenses in relation to the 2018 plan, subject to of course exchange rates or any forfeitures. So, on average, around RMB 20 million per quarter, and probably slightly decreasing over time, given the amortization schedule.

Thank you. That's very helpful.

At this time, we show no further questions. And I would like to turn the conference back over to management 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 everyone. Have a good day and night.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.