Latest E-Cigarette Giant Conference Call Notes

Wonderful look in advance,[Q&A] Meeting Minutes

Q: Can you share more information on sales recovery trends so far in the second quarter, such as the recovery of monthly sales in April so far? And based on the current recovery trend, how do you view the year-round trend? Is it more negative or positive? How is the retailer's recovery?

A: We just mentioned that our monthly sales have improved continuously. This trend has actually continued since November last year, mainly due to the government's crackdown and the launch of our new products. So we actually made a price adjustment on April 17 and willthe cartridgeThe price of the company has been reduced15%, in order to provide better profits for retailers, and since then we have indeed looked at dealer replenishment and recovery. As for the profitability of our retailers, the sales trend of their new national standard products has been rising, especially after the regulatory authorities took special actions in March and April. Of course, if some retailers sell illegal products, their sales may also be adversely affected. So I think it's difficult to quantify their profitability because each of them has a different fixed cost structure.

For the full-year outlook, we are confident in the overall trend as the numbers are growing every month. But there is also uncertainty, as overall user enthusiasm has not yet fully restored, and licensed retailers will need to decide whether to renew their licenses in the coming months. Overall, we are confident in the trend and maintain our internal operating goals.

Q: How many new products are currently in preparation and planned for further launches this year? What are your thoughts on the competitive advantages of these new products over their peers? Has the market share level of illegal products dropped significantly after the crackdown?

A: Regarding the product line, we launched it in Aprilof 20Approved Smoke Bomb SKUs, compared with Februarythe 15。This means that we have hadof 5Increment, and at the same time, we will gradually launch these new products on a provincial basis. We also have some products that have been submitted or are in the process of application, and we will provide updated data once we are approved.

We also have very obvious advantages over other brands. We have industry-leading R & D capabilities to innovate our unique and high-quality cigarettes for other smokers. Unlike most of our colleagues who rely entirely or heavily on suppliers, we have our own exclusive production facility that ensures that our products are subject to strict quality control. Finally, we have the most diversified product portfolio, and we will continue to enrich our product portfolio to meet the needs of different user groups.

Q: What is the market share of the four major series of cigarette bombs and rods? What is the overall ratio of smoke rods to smoke bombs? What is the ideal steady state proportion of the company in the future?# p#pagination title #e#

A: In March and April, we are still gradually launching various SKU markets province by province. The combination of each product line depends largely on the speed of new product launches. We recognize our revenue at the time of delivery. Therefore, if we launch a new sku in a specific series in that month as we did in March and April, the sales contribution of that series will be higher than usual.

At the same time, users of our old tobacco rods can still continue to use them to consume new cigarettes. This is why the huge Mirage user base is still the mainstay of the four product lines. I don't think we have specific goals internally for the proportion of each series because we believe the proportion of each series will depend on user needs.

Q: What differentiated ideas are there for the future research and development of different flavor types (such as Xiyan, Waterfall, etc.)?

A: We do have 4 different series of cigarette bombs. Xiyan is a mild tobacco flavor with China style. Shanyan roast is suitable for people who prefer a more balanced taste, Yanyan roast is suitable for old smokers who prefer a scorched taste, and Waterfall smoke is suitable for people who like the aroma of beans.

So these 4 different cigarette bomb series do provide our users with a wide range of options. For example, if a user has a long history of smoking, they might consider using Rock Roast because of its strong tobacco flavor. However, for users who prefer light tobacco, they may prefer Xiyan.

Q: After the strict crackdown on illegal product supervision, what is the current proportion of sales of legal products? In addition to illegal products, what other aspects of management do regulators focus on?

A: For sales of illegal products, as we mentioned before, it is difficult to estimate their share. But of course, we seeThe special actions in March and April were very effectiveof. And we do observe that users have difficulty getting illegal products compared to before, soMonthly sales of new national standard products have been growing。

In the long term, we do believe that regulators will continue to monitor the market and crack down on illegal products on a regular basis because these products can cause significant tax losses, product safety and youth protection issues. Compared to us, we are a compliant brand, we pay a 36% consumption tax, have strict quality control mechanisms, and fully support youth protection measures.

Therefore, we also hope that the government can more closely supervise unlicensed producers and those who export compliant products but still sell illegal products domestically.

#p#Pagination Title #e#Q: You just mentioned that as deleveraging continues, gross profit margins may increase. You also mentioned that the company has made some supply chain optimizations and some product portfolio changes. So, can you give us more information about these three factors: operational leverage, supply chain optimization and product portfolio changes? If possible, how can these three factors drive the increase in gross profit margins?

A: The implementation of the consumption tax in the first quarter has put pressure on our gross profit margin. For the future trend of gross profit margin, the most important factor is our own pace of recovery. So if sales can recover faster than we expected, then gross margins will recover faster.

At the same time, the second factor is product cost, which is calculated on a weighted basis. Therefore, we believe that the benefits of our continued efforts to improve supply chain efficiency will become more significant in the future.

Q: New products such as chewing gum and other products. So how do these products contribute to company profits, and how profitable are retailers making selling them?

A: At this stage, there are still some pilot projects that contribute very little revenue. When they can contribute valuable financial information, we will definitely share it with you. Currently, our new productsGross profit margin is generally higher thanOur core atomization businesses because they are not subject to consumption tax.

Complete content of summary

[Management Review and Sharing]

Exchange summary

In the first quarter, we continued to optimize products that comply with national standards under the new regulatory framework and made steady progress, thanks to our effective product strategy and continuously improving R & D capabilities. However, as we strive to develop new GB products to meet the diverse needs of our users, the prevalence of illegal products continues to pose a near-term challenge to our business in a wider range of industries.

First, let me provide some explanation of the recent market conditions affected by illegal products. The biggest obstacles we face in the first quarter of 2023 areCompetition from illegal products。These includeLicense not yet obtainedproduced by the companyillegal productsandcounterfeit products。The existence of these illegal products not only affects our sales, but also reduces consumers 'willingness to switch to new national standard products.Disrupted the pace of recovery across the industry。

But on the bright side, the government has stepped up its efforts to crack down on illegal products. Recently, they launched a special operation to focus on cracking down on two types of offenders, that is, continue to #p#pagination title #e#Companies that illegally produce flavored productsandRetailers that conduct sales。These policies have worked well. At present, we have found that more and more unlicensed production companies have deleted products within their business scope from their business licenses. After implementing these ad hoc actions, our sales gradually recovered, which our CFO will elaborate on later. We believe that the government will continue to crack down on illegal products and hope that it will effectively support the creation of fair and orderly market conditions and encourage law-abiding companies to return to sustainable growth. At the same time, we remain vigilant for any potential backlash from these illegal activities.

In the first quarter, in the face of external challenges, we focused on enhancing our core competitiveness and pursuing high-quality development. First, improve ourProduct development and scientific research capabilitiesIt has always been a key element of our strategy. We work with the Shenzhen Bay Laboratory to build a new type of laboratoryatomization technologyR & D platform to jointly explore and develop new polypeptide drugs based on electronic atomization technology, and use our deep experience and industry-leading atomization technology to improve absorption efficiency and enhance user experience.

In addition, we continue to implement our proven product strategies to enrich and optimize our product portfolio to meet the needs of different user groups. As of now, we have obtained20 Smoke Bomb SKUsand22 Tobacco Rod SKUsapproval. It is encouraging that we have received positive feedback and constructive suggestions from some users who have already used the new product. We will continue to collect user feedback and develop products accordingly, seeking superior performance and quality, while helping adult smokers transition to new national standards products.

At the same time, we will continue to be committed to our social responsibilities while striving to provide smokers with high-quality compliant products. A prominent example is our"Empty Bomb Recovery Program"This is one of our key sustainability plans. The project has developed rapidly since its launch in 2021. As of the first quarter of 2023, we have accumulated297 citiestheMore than 80000 userscollected more than300 millionAt the same time, users can now use our official WeChat account to find nearby recycling points or make an online appointment to pick up items. Used bombs are recycled to make cement, which is then used to build roads and other rural infrastructure projects. As of today, the first phase of our projectInvested 2 million yuan, while protecting precious resources, provide better guidance to rural villagers.

All in all, the first quarter was mixed. Although we have made solid progress in improving our new national standard products, we have also encountered significant resistance from illegal products. However, we firmly believe that as the government's efforts to maintain market order and fairness gradually take effect and users gradually adapt to national standard products, illegal products will eventually be squeezed out of the mainstream market, and the worst times seem to be over. As a trustworthy boutique brand, we are full of confidence in our core competitiveness. As we explore growth opportunities in a growing industry, we will live up to our commitment to provide compliant, high-quality products that meet user needs.

[Financial Data Sharing]#p#Pagination Title #e#

Exchange summary

Given the severe impact of illegally flavored products, we experienced incredible challenges in the first quarter, especially in January and February. These tempting but unsafe and illegal products have caused users to switch to our new national standard products more slowly than expected, causing our net income to drop significantly to RMB 189 million in the first quarter, but our sales have recently shown clear signs of recovery, thanks in part to the government's massive sales campaign to crack down on illegal products. Specifically, our monthly sales experienced a month-on-month improvement, especially after the government's special action in March. In fact, monthly sales in March nearly doubled compared to January. However, the negative impact of illegal products is still lingering, and it will take some time for the market to digest inventory, just like in the fourth quarter of last year, users took months to consume our old products. Recent challenges from illegal products will gradually ease and become easier to manage, and users will gradually rely on new national standard products.

For gross profit margin, according to the new consumption tax policy for e-cigarette products that came into effect in November, the first quarter was our first full quarter. As a result, our gross profit margin increased from the same period last year.38.3% dropped to24.2%。If we exclude the impact of consumption tax on an adjusted basis and use adjusted net income, our adjusted gross margin only drops1.6%。This result reflects our ongoing efforts to improve supply chain efficiency and product design to mitigate the deleveraging effect of declining sales. In addition, fixed costs, including rent and depreciation we paid for our exclusive manufacturing plant, dragged down our gross margin by low single-digit percentages in the first quarter. As the deleveraging effect I just mentioned narrows, our gross margin will gradually improve as revenue recovers in the coming quarters. In addition to these cost optimization efforts, we continue to focus on improving operational efficiency. Therefore, if equity award expenses are excluded (share-based compensation), our non-gaap operating expenses fell year-on-year in the first quarter15.1%。However, due to our reduced sales, we lost non-gaap operating loss in the first quarter.$133 millionRMB, net loss RMB56.3 million yuan。Exclusion of share-based compensation, our non-gaap net income is 184 million yuan, and non-gaap basic and diluted net income per share are respectively0.139Yuan and0.136Yuan.

Our cash position remains solid. As of March 31, our cash and cash equivalents limited to cash short-term bank deposits, long-term and short-term investments, long-term bank deposits and long-term debt investments of RMB 15.369 billion. Since the second half of the year, we have been working hard to make15.4 billion yuanMaximize interest and investment income generated by RMB cash, and this strategic effort is now underway as a result of which we generated in the first quarter of 2023.$170 millionInterest and investor income in the RMB means that the annualized interest rate exceeds 4%, a significant improvement from less than 2% a year ago.

Regarding the share repurchase plan, our board of directors approved a share repurchase plan on December 8, under which we may repurchase up to US$500 million in shares before December 31, 2023, as of December 31, 2022, we have repurchased approximately US$100 million in shares. Looking forward, we will continue to invest in our core capabilities and improve overall efficiency. We believe that as the industry recovers, our sales and profitability will gradually pick up. Our resilient business model and solid cash position will support us in leading the market and allow us to provide sustainable value to shareholders and stakeholders over the long term.# p#pagination title #e#