Hello, ladies and gentlemen, thank you for standing by for Viomi Technology Company Ltd's Earnings Conference Call for the Second Quarter of 2022. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Claire [indiscernible], from the company's IR Department. Please go ahead, Claire.

Thank you, Anita. Hello, everyone, and welcome to Viomi Technology Co., Limited earnings conference call for the second quarter of 2022. As a reminder, this conference is being recorded. The company's financial and operating results were issued in our 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 vesting 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 the Chief Executive Officer; and Mr. Thai Wickham, the Head of our Financial Department. The company's management will begin with prepared remarks, and the call will conclude with the Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the United States 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 this and other risks and uncertainties is included in the company's annual report on Form 20-F and other filings as filed with the United States Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statement, except as required by law. Please also note that Viomi's earnings press release and this conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. In addition, Viomi's press release contains a reconciliation of unaudited non-GAAP measures to the unaudited most directly comparable GAAP measure. I will now turn the call over to Viomi's Founder, the CEO, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by an English translation. Mr. Chen, please go ahead.

[Foreign Language] Thank you, Mr. Chen. I will quickly translate our Founder's remarks before discussing our financial performance for the second quarter of 2022. Hello, everyone. Thanks for joining us second quarter 2022 earnings conference call. In the second quarter, our total net revenues reached RMB924 million in line with our previous guidance. The year-over-year decline in revenues was mainly due to two factors. First, this year, we cut off the selling of Xiaomi branded sweeper robot, which had a high prior year base for comparison. Second, since the beginning of this year, owing to the widespread COVID-19 recurrences, market consumption continued to decrease in the second quarter, along with the soft demand industry-wise. To support the release of premium new products and our high-end brand transformation, we continued to enhance our brand promotion and increase advertising spending during the second quarter. In addition to the launch of a large number of elevators and print ads, we reached more targeted young groups by partnering with Tmall and becoming a co-sponsor of the well-known variety show, Design Ideal Future forecasted on Mango TV platform. Our investment in branding and product promotions during a relatively weak period in the macro environment resulted in a temporary operating loss in the second quarter, but we believe these measures will help us to build a long-term brand awareness. Furthermore, judging from our performance during the 618 shopping festival, and the sales of our high-end products in recent months, our marketing investment over the past few quarters has boosted the contribution of high-end products to ourselves and enhanced our trending technology branding position. In the second quarter, we continue to execute our high-quality business operation strategy. First, continue to streamline SKUs and optimize our product mix; second, focus on core business and product lines to build…

Thank you. Now I will go over the detail of unaudited financial results of the second quarter of 2022. Net revenues were RMB924.2 million compared to RMB1,658.9 million for the second quarter of 2021 net revenues in line with the company's previous guidance. In addition to the overall weaker consumption environment, the decrease was mainly due to the complete cutoff sell shop Xiaomi branded with the robots this year as well its high prior year base for comparison, and the ongoing product portfolio adjustments and some categories. Revenues from IoT and home portfolio decreased by 54.2% to RMB524.5 million from RMB1,146.3 million for the second quarter of 2021. The decline was primarily due to the complete cut off of sales of Xiaomi-branded sweeper robots, as well SKU adjustments for some categories. Revenues from home water solutions decreased by 17.4% to RMB180.9 million from RMB218.9 million for the second quarter of 2021. The decline was primarily due to the decreased demand of water purifiers. Revenues from consumables decreased slightly by 1.9% to RMB100.3 million from RMB102.2 million for the second quarter of 2021. Revenues from small appliances and others decreased by 38.1% to RMB118.5 million from RMB191.5 million for the second quarter of 2021, primarily due to the product portfolio adjustment within this category, and decreased demand of small appliances products. Gross profit was RMB204.5 million compared to RMB351.8 million for the second quarter of 2021. Gross margin increased to 22.1% from 21.2% for the second quarter of 2021, primarily driven by the Company's continued efforts to shift the business and product mix toward higher gross margin products, and partially offset by the decreases in selling prices of some products for clean-up due to the product portfolio adjustment in this quarter. Total operating expenses decreased by 14.6% to RMB264.6 million from…

This concludes our prepared remarks. We will now open the call for Q&A session. Our Founder and Mr. Thai will join this session and answer questions. Operator, please go ahead.

[Operator Instructions] The first question today comes from Hildy Ling with Morgan Stanley. Please go ahead.

Hi, thank you, management, for the presentation. I have three questions, allow me to ask. So the first one is about the expectation for the second quarter - not for the second quarter, but the second half of this year in terms of the sales and also the margin expectation, and what do you think about the key drivers behind the such sales expectation? So this is the first question. The second one is about the overseas market expansion or overseas sales. We are seeing that the macro has been quite volatile. But Europe market - the European market is quite weak, but the U.S. market has been relatively more resilient and there seems to be a little bit of improvement in the inflation as well or less pressure from that. What do you think about the overseas trend - overseas sales trends nowadays and what's your expectation in the second half of the year? The third question is about the robotic - robot vacuum segment. How is that performing in the first half of this year? And how do you see for this segment to perform in terms of the demand in the second half? [Foreign Language]

Okay. Thanks for Hildy's questions. For the first question regarding the sales and margin expectation, yes in terms of revenue guidance for the second half of this year, as usual, we don't give specific guidance, especially under the macro environment with more uncertainties due to COVID-19 and the macro market, but we expect the revenues to be driven for several perspectives. First, the sales of our new high-end products have been increasing, increasing over the past several months and some SKUs hit the best solidness during major promotion season. We estimate our AI-centric premium products will help to drive the lead to long-term revenue growth. Second, we have been preparing for exporting additional product categories, including some base compliance to overseas market in the near future, which will partially or partly mitigate the impact from the re-consumer finance and help drive the growth in the short term. With respect to gross margins, we still estimate it to maintain a stable level, let's say, at least over 20% for the whole year. As we will continue to promote premium products with higher margins and take product portfolio adjustments, we expect the overall gross margin to be a reasonable level in the midterm. For the second question about the overseas sales, from our observation, we estimate the overall overseas consumer demand will still be relatively weak not only in the U.S. but especially in Europe. As we see, due to the international geopolitics, the increase in prices of crude oil and raw materials alongside the falling euro exchange rate, the overall consumer sentiment in euro is relatively low, and we expect this to turn into the second half of this year. While we are taking some actions to mitigate the impacts of weak consumer sentiment in overseas market, first, we see the Southeastern Asian market is relatively dynamic and we see a growing market with great potential. So at this moment, we will increase the sales of our products in Southeastern Asia. Second, in the following months, we will start to sell additional product categories in additional sweeper robots, which we think could help drive the growth for our overseas markets. We will share more details regarding this due course. For the third question about our vacuum robot, the sales of our own branded sweeper robots were relatively weak compared to the same period of last year, mainly due to the overseas market, including international geopolitics, the increasing prices of crude oil and raw materials alongside with the euro exchange rate, such we mentioned just now. Euro is very - we expect to this trend to the second half of this year. However, as we discussed previously, we are making some efforts to mitigate this impact, like we will increase the sales in Southeastern Asian market. And second, in the following months, we will sell additional product packages in addition to sweeper robots like some big businesses, which we will share more details regarding this in due course. Thank you.

[Foreign Language] Sorry, allow me to follow up a little bit of a question. So in terms of the revenue and net profit contribution, how much of it is coming from overseas market? And if we think about the in the future, is company planning to expand - put more focus in the domestic market or put more focus in the overseas market? Thank you.

[Foreign Language] I'll quickly translate Mr. Chen's answer. We are quite optimized about our overseas revenues for the second half of the year. As we mentioned before, except of the cleaning products, we plan to introduce new categories of products by these appliance to overseas markets, and we are looking for the overseas revenue percentage to achieve more than 20%, although the revenue percentage of the overseas market of the first half of the year is around 10%. Thank you.

[Foreign Language]. Thank you very much. That's all for me. Thanks.

The next question comes from [Alex Wang] with CICC. Please go ahead.

Thank you for your presentation at me. My first question is how is the company's current cooperation with Xiaomi? What is the contribution from the top tier to Xiaomi in the company's revenue? What is the outlook for related future revenue growth? Will the future cooperation continue to expand or adjust? And my second question is, in terms of the smart home solution, what is the contribution of the new smart home solution in the company's revenue. Could you give me information about how the updated demand account for the revenue? My third question is, in the second quarter of 2022, is there any performance pressure brought from the real estate? How does the company view the impact from the real estate industry in the future in China? [Foreign Language]

Okay. Thank you for questions. For the first question about Xiaomi business, firstly, we always maintain stable cooperation with Xiaomi and the revenue contribution of Xiaomi-branded business has been stabilized around 40% over the past several quarters, and we expect it to maintain at this level in short to midterm. In terms of categories we cooperate, despite the Xiaomi brand sweeper robots we scaled back due to our relevant source strip. We don't have material changes on other categories we cooperate. We currently cooperate on home water solutions, smart kitchen products and some other small currencies. We will maintain the current cooperation and see if we have further reciprocal opportunities to explore cooperation and additional categories. And for the second question about the home solution, first of all, the IoT at home solution offering is one of our selling metrics with bundled sales and certain services and so it's not separately calculated as a revenue disclosure sector. The premium bundle offerings we recently started promoting mainly through our off-line merchants. As we previously shared, our offline merchant partners - our offline market size home solution orders ranging from RMB200,000 to RMB400,000 with customers in Beijing, Guangzhou, Changsha and Kunming in the first quarter and accomplished multiple high-end whole home solution orders assisting RMB200,000 and RMB300,000 in the second quarter in Chengdu, Zunyi, Yinchuan and some other cities. And regarding your question about the impact from real estate, we are not directly impacted by it as we don't have direct cooperation with real industry or in terms of declaration for households. But our sales are indirectly impeded to second degree as an influence on the overall demand for home appliances for new apartments. We observed the impact on the overall industry's trending mill as some cities have implemented policies to stimulate real estate industry, though it takes time to recover. In addition, within the home appliances industry, in particular, the smart home trends demand is less dependent on the real estate than before with the increasing young people starting to replace the old ones with the smart home products. So we think the size of incremental housing markets and smart home industries also rely on the stock housing market, which is more flexible than traditional home plans industry. Thank you.

[Foreign Language] Okay. I will quickly translate - basically translate our Founder's response. So for the first question, our cooperation with Xiaomi is quite stable by now and in the near future. And now we - recently, we are working on new cooperations to introducing new categories to the market. And we are looking forward, the Xiaomi part revenue would be increasing to our total revenue. And about the second question, - the three small questions are actually one topic of the macro environment, the growth industry is decreasing. It brings a new challenge to our company and to detail the new supply to being out the new consumer needs we aim to improve the unit price per customer. And we are looking forward for the - we are looking forward to enhance the bundled sales offering, and we are looking towards this - on those sales of revenue to be 30% industry-wide. Thank you.

Okay. That concludes our response to your questions. Thank you.

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

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

This concludes this conference call. You may now disconnect your line. Thank you for attending.