Niu Technologies (NIU) Q2 2019 Earnings Call Transcript

Niu Technologies (NIU 9.76%)
Q2 2019 Earnings Call
Aug. 23, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Niu Technologies second quarter 2019 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 Niu Technologies. Mr. Yang, please go ahead.

Jason Yang -- Investor Relations Manager

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 2019. We released the results earlier today. The press release is available on the company's IR website, as 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 filing 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 are Dr. Yan Li, Chief Executive Officer, and Mr. Hardy Zhang, Chief Financial Officer. Now, let me turn the call over to our CEO, Dr. Yan Li. Yan?

Dr. Yan Li -- Chief Executive Officer

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 are pleased to continue to operate profitably in this quarter.

Niu 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 earnings call, we launched our two new product lines, complying with the new China regulations effective April of this year -- mainly, the U+ 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+ and 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 started at RMB 3,490, or approximately $500.00, and is considered an affordable, entry-level product for new customers to experience Niu for the first time. The U+ retail price ranges from RMB 4,399-5,999, and is positioned as the top-end electric bicycle model, great for daily commuters and for long-distance urban riding. Both the U+ and US models are powered by our Niu Energy technology, which has helped increase average driving range by 8%, a 43% increase in battery lifecycle, and a 6% improvement of power generation. Our growth in the second quarter has been supported by those two prop models.

We're in the process of launching a new product line under a second brand name, Gova. By leveraging our design capability and cost efficiencies, we'll position Gova as a valuable money product, targeting the medium segment. We intend 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 1st, 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 [inaudible], receiving more than 20 million views. For 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 user couples, who fell in love because of Niu, and there were 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 TBC ad campaign with one of the most popular Chinese internet dramas, called 24 Hours in Changan. This campaign was a combination of TV ads, social media viral marketing, and user interaction activities on WeChat and offline stores. We have achieved 1.2 billion views on the Internet TV, 50 million views on Wayforward, and more than 50,000 users' participation in the WeChat and offline activities.

Now, we continued to increase our fan base on our own social, from WeChat, Wayforward, and TikTok. Our monthly views on those social media have reached over millions. We also started an offline ad campaign called "Always New Forward," with 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 Niu scooter by the paparazzi, which shows the popularity of our products. That news instantly spread across social and traditional media channels. That viral activities allowed us to capture more than 1 billion views online of our product, which is just another testimonial to our goals as a lifestyle brand.

Now, globally, we have also signed 22 social media influencers across six countries, creating new [inaudible] and last year's city, and have generated more than 500,000 views. To further build our customer loyalty, we rolled out our Niu Points program in July. Users can receive Niu Points via various activities and can redeem those points for Niu lifestyle accessories. Within one month of the rollout, we already have 39,000 users in the Niu Points program.

All of those events-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 Q2, we opened another 124 stores in China, reaching 1,005 stores in total, which cover 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 in 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 connectivities and 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 solutions, where our competition is just providing a dumb scooter.

The sharing operations we support in the U.S., as mentioned last time, have been very successful and have received positive reviews from The New York Times, Vogue, The Wall Street Journal, The Verge, and The Washington Post. The continuous success of sharing operations in the United States and around the world plays a key role in building our global brand awareness while simultaneously educating a whole new customer base for Niu. All you have to do now is to head over to Brooklyn and see how popular the Niu scooter in the Revel sharing program in the U.S. is, and how we are building a culture for scooters in the Niu America.

Now, lastly, let me touch upon the China market dynamics four months after the implementation of new regulations. As mentioned earlier, the overall retail market has been uncharacteristically soft since the implementation of new regulations. In some markets, we have observed a market contraction of up to 80% since April, when the regulation was put in place. This was partly due to the rushed purchase before the regulation came into effect and partly because the consumers still need time to adjust to these changes, especially adapting to mandatory smaller form factor scooters and the 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 product to meet the new regulations by rapidly expanding our retail footprint as more retail spaces become available. This strategy will position Niu for further growth in 2020. Now, I will turn the call over to Hardy to discuss our financial results. Hardy?

Hardy Peng Zhang -- Chief Financial Officer

Thank you, Yan, and hello, everyone. Our press release contains all the figures and comparations 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 reporting 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 high-quality growth thanks to the strong sales in international markets and solid sales in accessories and spare parts. Our profitability further improved as a result of several changes in revenue mix and our continued efforts to optimize costs.

Total revenues rose 38% to RMB 531 million, below the guidance we provided earlier due to lower-than-expected sales in China. Despite a challenging market, our scooter sales volume still grew 14% compared with the second quarter last year. Chinese sales were affected by the implementation of the new national standards. The subjective interpretation and poor implementation in different cities caused a lengthy product certification and registration process, which affected the entire China e-scooter market, including us. The new regulation also set the top speed limit at 25 km/h. 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 regulations 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 were partially offset by strong sales from international markets, especially the newly entered markets such as the U.S. and South Korea. We shipped out 1,500 units to the U.S. market and 2,000 units to the South Korean market during the second quarter. We have expanded our international sales network to cover 34 countries compared with 23 countries the same period last year.

We made further entry into the 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 B2B and B2C business. Both have enjoyed very healthy growth in the quarter. The B2B business -- i.e. the scooters and accessories sold to sharing operators or 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 strong sales of accessories, spare parts, and services. The average scooter sales price rose 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 the China sales price. In the second quarter, our international scooter sales accounted for 27% of the total scooter revenue compared with 10.2% in the second quarter last year. Secondly, in April this year, we increased the China retail sales price by 1-5% for selected models, so the retail sales price increase and a higher proportion of international sales both helped our average scooter sales price increase in this quarter.

The other positive development in the quarter is the stronger sales of accessories, spare parts, and services. On average, for each scooter sold, we also sold RMB 796 of accessories, spare parts, and services, increased significantly from RMB 296 per scooter last year. The increase was mainly driven by accessory and spare parts sales from the international markets, especially those to the sharing operators, who tend 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 20-25%, so we are happy to be moving close to our long-term goal. Margin expansion was helped by favorable revenue mix and [inaudible] revenue from sales of accessories, spare parts, and services was 14.9% of total revenue compared with 6.7% last year. International scooter sales were 27% of total scooter revenue compared with 10.2% last year.

Both the accessory revenue and international scooter sales have a higher margin, and hence helped our margin expansion. 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 begin to recover from the slow season in the second quarter.

The margin expansion is also helped by our continued efforts to optimize costs. The cost of revenue on a comparable basis further declined. We secured cost savings on raw materials of 5-7% versus last year and 2-3% 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 these cost reductions are sustainable, and will continue to benefit our gross margin for the coming quarters.

Operating expense on a comparable basis increased in line with the growth of our business. Our total operating expense excluding share-based compensation was RMB 18 million, decreased by 14% year over year, and was 15% of revenue, below the 24% last year. G&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 million. After excluding this amount, our G&A expenses increased by 60%, mainly due to higher staff costs and related office and travel expenses.

R&D expense excluding share-based compensation grew by 79%, as we continue 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 our product launch event in 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 the sales and marketing activities to the third quarter. Our GAAP net income was RMB 51 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 RMB 667 million in cash and equivalents. Operating cash flow was positive RMB 23 million. Cash expenditure was RMB 64 million, 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 RMB 600-700 million. This represents year-over-year growth of 22-42%. 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.

Questions and Answers:

Operator

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 *1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press #. Once again, it's *1 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.

Roger -- Needham & Company -- Analyst

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

Jason Yang -- Investor Relations Manager

Sorry, the quality of the line is not very good, so we didn't hear your question. Do you mind repeating your question and speaking slowly?

Roger -- Needham & Company -- Analyst

Sure. Can you hear me all right now?

Jason Yang -- Investor Relations Manager

Excuse me, operator?

Operator

Yes, sir?

Jason Yang -- Investor Relations Manager

Our connection here is not good. Can we redial again?

Operator

Sure, sir. 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 muted call until then. Ladies and gentlemen, we have Mr. Yang joining back to the conference. Thank you. Once again, ladies and gentlemen, if you wish to ask a question, please press *1 on your telephone keypad and wait for your name to be announced. We have a question from the line of Bin Wang. Please ask your question.

Bin Wang -- Credit Suisse -- Analyst

Thank you, everyone. My first question came from the M series. I understand maybe in a short period of time, not only one product year can be sold in the dealerships, so can I know what's the revised version of M can be legible to sales as a scooter? Which month -- can you specify the timing? That's No. 1. No. 2 is about the new brand, Gova. Can you elaborate what will be the pricing range and the potential margin? Because Niu is in the higher market, so how do you think about the lower markets' profitability? Do you think it will be a long-term issue for margin? That's the second one. The third one, actually, I want to understand -- if you think about that build material has declined by 5-7% year over year in the second quarter. Do you know which components? Is it the battery, or other issues? Thank you.

Dr. Yan Li -- Chief Executive Officer

Hi, Bin. This is Yan Li. Let me address the first two questions. I'll have Hardy answer the build material questions. For the first half of this year, even until now, the products we have actually meeting the new regulations are basically the U+, the U, the US -- essentially, the product family of the U family. Actually, we are working hard to actually get one of the M family to meet the new regulatory requirements. To be honest, there has been a delay a bit on that product because there has been an interpretation of the new regulation, which was announced on March 25th, which actually tightens the new regulation a bit more in terms of the extra spacing in the battery compartments, in terms of the requirement on the backseat rest. So, that actually caused us to literally scrap the original design of the new M and start it over. Now, we're looking at the new M probably will come out in the first half of next year. So, that was the M product.

Now, secondly, while having said that, we also had the M+ and N pass the light motorcycle certifications, and by having M+ and N passing the light motorcycle certifications, we were able to sell N and M+ as light motorcycles in areas where they don't have the restrictions on light motorcycles, and that has generated quite a bit in terms of sales boost.

So, the second question on Gova -- right now, in terms of Gova, we have essentially three product lines, which is the G1, G3, and G5. G3 and G5 are not ready for production probably until Q4 this year, and the G1 we are planning to roll out in early September. The pricing on G1 is anywhere between RMB 2,999 -- basically, a little bit below RMB 3,000 to RMB 3,999. We're in the price range of RMB 3,000-4,000. The reason we launched this as a second brand and actually launched this product here is first of all, G1 is new-regulation-compliant. Second, we looked at our product offerings. The cheapest of our products is actually US, which is RMB 3,500, so we're a little bit short in terms of the product below RMB 3,000 and in the range between RMB 3,000-3,500. Basically, that's the price stack area that we did not cover using Niu product.

But, in order to get 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 Niu. For example, Niu is built as a smart electric scooter -- it's connected -- where the Gova, we do have to strip down the connectivity part. So, this is what I positioned, saying the Gova is the product which can be used to serve the mid-end segment. But, having said that, we do offer accessories, a Sky Eye option, which allow users to add a little box on Gova to enable that connectivity, so that's an option that users can buy as an accessory. I think that answers your question on Gova, and I'll hand it over to Hardy to talk about the BOM part.

Hardy Peng Zhang -- Chief Financial Officer

For the reduction of costs related to the procurement of raw materials, we achieved a 5-7% cost down compared with Q2 last year. This cost down is across different parts of the scooter. In average, the body part, including frame, lights, et cetera, we reduced costs by around 4%. The battery pack, including the battery cell, pack, and BMS, in total, we reduced the cost by around 9%. So, in average, it gives us a 5-7% cost reduction. I hope this answers your question.

Bin Wang -- Credit Suisse -- Analyst

Thank you.

Operator

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

Roger -- Needham & Company -- Analyst

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 unit sales in terms of China versus international, and how should we think about the gross margin going forward for the second half of the year? Thanks.

Hardy Peng Zhang -- Chief Financial Officer

I think in the revenue, we do have a split between China sales and international sales. International sales accounts for 27% of the revenue. China sales accounts for 73% of the revenue. So, by multiplying the revenue 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 growth around 2%. We still have some growth in China, but at a slower rate.

For the gross margin Q2, we achieved 23.7%. Q1, we had 21.3%. As I mentioned, out of the 8.6% margin improvement, around 4% comes from this revenue mix. The revenue mix we do not expect to be sustainable the next quarter. However, for the cost reduction, we believe it will continue to benefit us next quarter. We estimate the gross margin for next quarter will be likely in the range of 18-20%. Does that answer your question?

Roger -- Needham & Company -- Analyst

Okay, that's great. Yes, that does. 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?

Hardy Peng Zhang -- Chief Financial Officer

We have some visibility. First of all, the sharing operators are not the main contribution of our international sales. The vast majority of our international sales still fell to end consumers. The sales to sharing operators only account for between 10-13% of the sales across different months. It depends on the sales order. For the second half, we believe it will be in the similar percentage.

Roger -- Needham & Company -- Analyst

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

Dr. Yan Li -- Chief Executive Officer

I think that's a good question. This is Yan Li. As we've been out in the field, talking to distributors and retailers as well as customers, I think it still needs a bit of time for the consumers to adapt to the new regulations because the new regulations -- a few key things on the new regulations. One is actually on the size of the scooter, second, on the weight of the scooter, as well as a more stringent check on the speed. So, all those factors are very different from before with the private case before the regulations were in place.

So, we have observed that, as I mentioned on the call, some people actually made a rash purchase in Q1 before the regulation was in place, and then, some consumers decided to postpone because the major part of this market is the replacement market, where every year, people replace their old scooters and purchase new scooters, and we do actually observe that some people decided to postpone that replacement by keeping their old scooter for another six months or a year before switching to the new regulation scooters. But, having said that, the market has been slowly recovering, where in the cities where the new regulations started to have been enforced, the entire market in the month of April or May, in some cities, the entire retail dropped by 80%. But now, I'm not saying they're back to last year's levels, but month by month, the sales have been improving. That's on the consumer side.

Roger -- Needham & Company -- Analyst

Okay, great. Thank you so much.

Dr. Yan Li -- Chief Executive Officer

The last thing I want to add is actually, a lot of retail shops, to be honest, in the last few months have been suffering because the bomb has been dropped, and you actually look around, the major portion of scooters being sold in those markets are very cheap scooters, ranging anywhere from RMB 1,400-2,000, and there's little margin to be made on those cheap scooters. And so, many retail shops from our competitors' brands have actually shut down their shops, so we did manage to take advantage of that and were actually able to acquire the hot retail spaces, which we wouldn't be able to previously.

Roger -- Needham & Company -- Analyst

Okay, great. Thank you so much.

Operator

Once again, ladies and gentlemen, if you wish to ask a question, please press *1 on your telephone keypad and wait for your name to be announced. We have the next question from the line of George Lin Wang. Please ask your question.

George Lin Wang

Hi, management team. You explained that the sales and marketing expense may be larger in the coming quarter. Could you give us guidance about how large it could be? Thank you.

Hardy Peng Zhang -- Chief Financial Officer

For the sales and marketing, just on a comparable basis, it'll be slightly larger than the second quarter, but we don't believe it will be a significant increase in the marketing spend. It won't be any more significant.

George Lin Wang

Okay, thank you.

Operator

Once again, ladies and gentlemen, if you wish to ask a question, please press *1 on your telephone keypad and wait for your name to be announced. Thank you. Seeing no more questions in the queue, let me turn the call back to Mr. Li for closing remarks.

Dr. Yan Li -- Chief Executive Officer

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

Operator

Thank you. Thank you all again. This concludes the call. You may now disconnect.

Duration: 40 minutes

Call participants:

Jason Yang -- Investor Relations Manager

Dr. Yan Li -- Chief Executive Officer

Hardy Peng Zhang -- Chief Financial Officer

Roger -- Needham & Company -- Analyst

Bin Wang -- Credit Suisse -- Analyst

George Lin Wang

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