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spk01: Ladies and gentlemen, welcome to Luckin Coffee's third quarter 2023 earnings conference call. All participants will be in listen-only mode during management's prepared remarks, and there will be a question and answer session to follow. Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Alicia Guo, the head of investor relations of Luckin Coffee, for prepared remarks and introductions. Please go ahead, Alicia.
spk04: Hello, everyone, and thank you for joining us on today's call. Locking Coffee announced its third quarter 2023 financial results earlier today. Today, you will hear from Dr. Guo Jingyi, chairman and CEO of Locking Coffee. Ms. An Jing, CFO of Locking Coffee, and Mr. Reynald Shackle, CSO of Locking Coffee. After the company's prepared remarks, the management team will conduct a question and answer session based on questions submitted via the company's webcast. We will be referring to a slide presentation on today's call, which can be found via a conference call webcast link, as well as on the company's IR website. The IR website link is investor.lkcoffee.com. During today's call, the company will be making some forward-looking statements regarding future events and results. Statements that are not historical facts, including but not limited to statements about the company's beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. Further information regarding these and other risks is included in the company's filings with the SEC. With respect to any non-GAAP measures discussed during the call today, the accompanying reconciliation information related to those measures can be found in the earnings press release issued earlier. During today's call, Dr. Guo will speak in Chinese, and his comments will be translated into English. Now I would like to turn the call over to Dr. Guo Jingyi, Chairman and CEO of Locking Coffee. Dr. Guo, please go ahead.
spk03: 大家好,欢迎参加今天的业绩沟通会。 感谢各位对瑞幸咖啡的持续关注与支持。 我是瑞幸咖啡的董事长兼CEO郭景一。 In the third quarter of this year, in the face of a fierce industry competition environment, Ruixin Coffee achieved a high-speed growth in revenue with its unique business model, endless product innovation and scale advantages. This quarter, the number of Ruixin Coffee stores and new paid users quickly rose, creating a new high in history. At the same time, Ruixin continues to give back to consumers, through the 10,000-storey Tongqing discount event, allowing consumers to enjoy high-quality coffee at a more affordable price. This quarter, we have also successfully created a phenomenon-level exposure product, and refreshed the record of Ruixin single products. In the future, we also want to steadily advance according to established strategies, while returning customers, constantly expanding market share, and continuing to bring high-quality, high-efficiency, and high-performance quality coffee to consumers, promoting the continued development of the Chinese coffee market.
spk04: Hello everyone, welcome to today's earnings conference call, and thank you for continuing to support Lock-in Coffee. I am the Chairman and CEO, Guo Jingyi. In the third quarter, despite the industry's intense competitive landscape, we achieved high revenue growth thanks to our distinctive business model, continuous product innovation, and skill advantages. Both the number of Locking Coffee stores and new transacting customers increased rapidly and reached historic heights. At the same time, we continued to reward our customers through the 10,000 store celebration event, which allowed customers to enjoy high-quality coffee at a more favorable price. During the third quarter, we also achieved a remarkable feat of introducing a top-selling product that surpassed our previous single-item sales record. We will continue to make steady progress by executing our established strategy and continue to expand our market share while giving back to our customers. We're committed to providing consumers with coffee products of high quality, high affordability, and high convenience, driving the development of the Chinese coffee market. 具体来看,
spk03: The three-week income continues to grow at a high rate, and the profit level has fallen. Of which, the total income of 7.2 billion yuan increased by 84.9%, the operating profit rate by 13.4%, and the operating profit rate by 23.1%, and the sales growth rate of the same store by 19.9%. The increase in the number of stores is 2,437, Taking a granular view.
spk04: Revenue continued to grow rapidly in the third quarter, while profit levels saw a slight decline. Total net revenue was RMB 7.2 billion, representing an 84.9% year-on-year increase. Operating profit margin was 13.4%. Meanwhile, profit margin for self-operated stores was 23.1%. with a same-store sales growth rate of 19.9%. Additionally, there were 2,437 net new store openings in the third quarter, bringing the total number of stores to 13,273 as of the end of the quarter. The cumulative number of transacting customers exceeded 200 million, with an average monthly transacting customers exceeding 58 million in the third quarter. Our CFO, An Jing, will provide further details on the financials later.
spk03: As the largest coffee chain brand in the Chinese market, we will continue to run the market. Of which, we own 8789 stores, and we have 4,466 joint stores. As the Chinese coffee market is growing, we will continue to encrypt the number of stores in high-end cities. At the same time, through the joint mode, we will accelerate the expansion of the market and further expand the market share. It is expected that by the end of this year, the total number of Rui Xing coffee stores will exceed 15,000. At the same time, the number of Singapore-based stores in the third quarter has reached 18, and 11 have been added to the second quarter. In the future, we will continue to set up overseas markets, allowing more consumers around the world to taste Rui Xing's high-quality coffee.
spk04: In the third quarter, we have more than 2,400 net new store openings, bringing the total number of stores to 13,255 in China as of the end of the quarter. We continue to lead the market as the largest coffee chain brand in China, based on store counts. Among the total number of stores, there were 8,789 self-operated stores and 4,466 partnership stores. As competition in the coffee market in China intensifies, we will continue to expand our presence in high-tier cities and accelerate our penetration in new markets through our partnership model. we expect that by the end of this year the number of locking coffee stores will exceed 15 000 at the same time the number of singapore stores reached 18 as of the end of the quarter with an addition of 11 stores compared to the end of the second quarter in the future we will continue to expand into international markets so that more consumers around the world can enjoy our high quality coffee
spk03: Thank you for watching. At the same time, our Ceylon Latte series has reached a milestone of more than 200 million sales since its launch in September of this year. In addition, for celebrating the first anniversary of the launch of Raw Latte, our recently launched Mascarpone Raw Latte has broken through 16.24 million sales in the first week alone. In the future, we will insist on product innovation, and hope to continue to provide customers with higher quality and more fresh consumer experience by reducing the amount of latte, mascarpone, raw latte, and other innovative single products. With the rapid deployment of stores and the continuous innovation of products, the number of new customers in RuiXing is more than 30 million this quarter, and the number of trading customers in YueJun is more than 58 million, creating a new high in history. In terms of products,
spk04: In the third quarter, we launched 12 freshly brewed products and successfully collaborated with Guizhou Baotai to create popular Jiangxiang-flavored latte, which broke our single-item sales record with an impressive 5.42 million cups sold on launch day and surpassed RMB 1 billion in single-item sales. While the new products performed exceptionally well, our Velvet Latte series also reached a milestone in September with sales volume surpassing 200 million cups since its launch. Furthermore, to celebrate one year anniversary of the launch of our cheese-flavored latte, we recently reintroduced mascarpone latte, which achieved a first-week single-item sales volume of more than 16.24 million cups. Going forward, we will continue to focus on product innovation, aiming to provide customers with a higher quality and fresher experience through innovative items such as Jiangjiang-flavored latte and mascarpone latte. With the combined effect of accelerating store expansion and continuous product innovation, we have gained over 13 million new transacting customers in the third quarter, with an average monthly transacting customers exceeding 58 million, reaching a historic high. As of the end of the third quarter, our cumulative consumer base has exceeded 200 million.
spk03: For a clear direction of sustainable development, Sun Coffee has released a sustainable development strategy for a bright future. The overall strategy is to build a long-term development area, build a responsible value chain, and protect green and prosperous homes. In addition, this year, we completed the first carbon-fueled tea and carbon-coated tea of the entire company. and conducted an in-depth investigation into the carbon footprint of the first carbonated latte and two latte products, as well as the carbon footprint of the company's operation and products, and established a data base for the research of future carbon reduction strategies and low-carbon products. In the future, we will surround the core issues of sustainable development strategy, further define the sustainable development goals of Ruixin Coffee, 推动有锐性特色的可持续发展实践加速落地,协同合作伙伴与消费者,共创更美好的未来。以上是三季度业绩的主要情况,下面请CFO安静向大家介绍具体财务数据。
spk04: We have formulated a sustainable development strategy being a force for a brighter future to guide our sustainable development efforts. The overall strategy is divided into three parts. Boosting the sustainable business, co-building a responsible value chain, and improving a better planet. with support of digital and intelligent empowering. This strategy represents our vision and practice direction of sustainable development for ourselves, our value chain, and for the broader social environment. As is indicated by the digital and intelligent empowering text, the strategy is being bolstered by Lacking's core advantage of digitalization. As part of this report, we completed a carbon inventory and verification for the whole company for the first time. We also completed the carbon footprint verification of coconut milk latte and latte for the first time. According to the in-depth understanding of carbon emission of our operations and products, we can lay the data foundation for our future carbon reduction strategies and to drive research to develop more low-carbon products. In the future, we will focus on the core issues of sustainable development strategy, further developing our sustainable development goals, accelerating the implementation of sustainable development practices with the company, and collaborating with partners and consumers to create a better future. These are the key highlights of our performance in the third quarter. Next, I would like to invite our CFO, An Jing, to present the financial data and commentary.
spk02: Thank you very much, Jingyi. Good morning, afternoon, and evening, everyone. Thank you for joining us today. I'm An Jing, the CFO of Locking Coffee. and today I will provide an overview of our financial performance for the third quarter of 2023. Before we start, I want to convey my thanks to our committed staff, loyal customers, esteemed partners, and cherished investors for their support. Now, I will take some time to overview our 2023 third quarter results in detail. Let's start with our financial highlights. Our revenue once again hit the record high of RMB 7.2 billion, growing 84.9% year-over-year in the third quarter. As a result of our efforts to expand our market presence, Growth in net revenues was predominantly driven by the expanded sales volume, increased number of operational stores, and the rise in the count of monthly transacting customers. Meanwhile, we kept rolling out the promotional campaign during the quarter. At the same time, our product launches during the quarter were very popular with existing and new customers. During the quarter, both our self-operated and partnership store performed well. Self-operated revenue reached RMB 5.1 billion with a growth rate of 79.3%, driven by the rapid store expansion as well as the increased sales volume. Meanwhile, our partnership stores demonstrated strong growth with an increase of 104.7% year-over-year, reaching over RMB 1.8 billion in revenue. Turn into profitability we remain committed to financial discipline and strategic focus as we execute our market share expansion strategy through aggressive store expansion to attract more new customers. In doing this, we had more than 2,400 new stores opening during the quarter and maintained our pricing strategy which have effectively reflected in the increased sales volume and a lower margin profile while increasing the operating profit dollar values. As a result, operating profit margin decreased to 13.4% from 15% in the same time last year, while operating profit grew to RMB 962 million from RMB 585 million. We view this decline in margin as a strategic shift as we aim to acquire more customers and maximize market share in China's competitive coffee market. Let's now take a closer look at our store network. In the third quarter, the number of stores reached a total of 13,273, which represents a total expansion rate of 69.2% compared to the same period of last year. During the third quarter, we had 2,437 net new store openings. Of these new store openings, 1,619 were self-operated store and 818 were partnership store. Our dedication to expanding our reach and catering to the diverse needs of our customers is demonstrated in the steady growth of our store network, both self-operated and in partnership. At the same time, we have made strategic efforts to expand our geographic reach. In the third quarter, we operated a self-operated store in 73 cities across China, with one overseas market. Meanwhile, our partnership stores expanded our footprint to 287 cities in China. We remain committed to diversifying our geographic presence and capturing new market opportunities. During the quarter, we reached 58.5 million average monthly transacting customers, a substantial increase from 25.1 million in the previous year, demonstrating our ability to attract customers. This growth was a result of store expansion to new geographies and new traffic driven by the popularity of our Jiangxiang-flavored latte. Next, I would like to spend some time to discuss the details of our margin and bottom line profile. On a good level, we reported next income of RMB 988 million or a net profit margin of 13.7% for the third quarter. If excluding the deferred tax assets valuation loans release of RMB 252 million, the net profit would be RMB 736 million or a net profit margin of 10.2%. During the third quarter, we re-evaluated the recognition of deferred tax assets, given the largely reduced uncertainty of the company's business performance, after a certain number of the company's operation entities have turned to cumulative profits. As a result, we reversed the recognition of approximately RMB252 million in valuation allowance against our deferred tax assets. From a store-level view, for our self-operated stores, the operating profit margin was 23.1% in the third quarter of 2023, compared to 26.9% in the same period of 2022. The decrease was primarily due to the decrease in average selling price of our products. We all offset by the benefits of scale from the increased product volume sold. Meanwhile, overall operating expenses increased as volume increased and operation expanded. Offset by enhanced efficiency through cost control, technology-driven operations, as well as scale advantage. Our general and administrative expenses on an absolute value basis increased by 25.5% year-over-year, while the G&A expenses as a percentage of revenue decreased from 9.9% in the third quarter of last year to 6.7% in the third quarter of this year due to scale benefits. the sales and marketing expenses ratio rose to 5.3% this quarter from 4.1% in the same period of last year. As we continued to strategically invest in branding to increase brand awareness and bolster the current positioning through various channels, including collaboration with Guizhou Maotai and the launch of Jiangxiang-flavored latte, Meanwhile, in this quarter, we spend more on commission fees to third-party delivery platforms due to increased delivery orders, as well as more on subcontractor service fee to support the e-commerce business and promotion activities. In addition, we are glad to share that the expenses related to fabricated transactions and restructuring, which consisted primarily of professional and legal fees of securities litigation and other otherwise service fees, were around 3 million, or 0% of net revenue in the third quarter, compared to 0.2% in the same quarter of last year. At the same time, we have also updated our provision for equity litigants based on developments that occurred in the third quarter, in accordance with the relevant accounting standards. Let's now turn to balance sheet and cash generation. We ended the third quarter with RMB 5.7 billion of cash at bank and on hand, and zero interest-bearing debt. Our healthy balance sheet and strong cash on hand has provided us with competitive advantage in this uncertain financial environment, as well as providing additional growth potential. In addition, we achieved a positive operating cash flow of RMB 1.3 billion in the quarter, which is around $179.6 million U.S., compared to RMB 416.9 million in the same quarter of 2022. Free cash flow year-to-date through the third quarter was about RMB 402.3 million. To conclude, while we expect volatile customers and market dynamics and competition to continue, we remain confident in our strategy and the result it delivers. As we look to the remainder of the year, we are confident in our current pricing strategy, strategic promotional calendar, and blended product offerings. We are committed to continue to adhere to our long-term goals, maintaining the current pricing strategy, rapidly expanding our stores network, and further increasing our market share. All the while, providing customers with high-quality and affordable products in the long run. I will now turn it over to Jingyi for concluding remarks followed by Q&A.
spk03: The rapid growth of Ruixin Coffee is the result of nearly 70,000 Ruixin partners' united struggle. Of course, it is also inseparable from the support and trust of large consumers, partners and investors. Here, I would like to express my sincere thanks to all of you. At the same time, in order to improve the mutual business relationship between Ruixin and its partners, at the recent Ruixin Coffee Partner Conference, we announced that from the beginning of 2024, the deadline will be shortened to 30 days. We hope to work together to create a positive competitive environment and promote the standardized development of the entire industry. In the future, we will continue to encourage consumers to further explore the potential of the Chinese coffee market to provide good and inexpensive coffee for everyone with better products and better prices. We will work hard to make Ruixin a coffee brand with long-term business, and work hard to achieve long-term, healthy, high-speed, and sustainable growth of the company's performance.
spk04: The rapid growth of Locking Coffee is the result of the joint efforts of our nearly 70,000 hardworking employees, as well as the love of our customers, the support of our partners, and the trust of our investors. We would like to express our heartfelt gratitude to all of you. At the same time, to enhance the mutual trust and win-win relationships among business partners, at the recent Locking Coffee Partnership Summit, we announced that we will shorten the payment period to 30 days starting from 2024 to jointly build a healthy competitive environment and promote the standardized development of the overall industry. Going forward, we will continue to reward our customers with the long-term returns and further explore the potential of China's coffee market. We will continue to deliver better quality and better prices and provide customers with a coffee that is delicious and affordable. We will continue to focus on the long-term value of our brand and aim to make Locking Coffee a world-class brand. And we will work towards achieving long-term, healthy, high-speed, and sustainable growth. 随着公司的日益壮大,强大的组织能力是公司业务发展的前提和基础,对公司发展的持续性愈加重要。
spk03: In order to further match the company's strategy and business development needs, strengthen co-operation, and improve performance, the company has promoted and introduced four senior executives with leadership skills in three seasons, including a senior vice president of the human resources department, and three vice presidents of coffee supply chain, IT products, and operation structure, respectively. I believe they will be able to use the creativity of a young team, with their professional ability and passion, to help RuiHsing, such a young and fashionable brand, grow rapidly, and continue to meet the diversification needs of young customers. At the same time, the company's chief strategist, Mr. Rainer, due to personal reasons, will resign as the chief strategist at the end of the year, and continue to provide strategic support to the company as a consultant.
spk04: As we continue to expand, strong organizational capabilities are the foundation of our business development and are increasingly essential to the sustainability of our continuous growth. To further align with our strategic goals and business needs, enhance collaboration and boost efficiency. In the third quarter, we promoted and introduced four senior management professionals who are post 80s generations. with outstanding leadership skills, including a senior vice president responsible for the human resource department, and three vice presidents overseeing core areas such as coffee supply chain and IT technology, including IT products, IT operations, and IT architecture. We believe that they will be able to tap into the creativity of a young team and use their professional capabilities and passion to help Locking Coffee, a brand similarly useful and fashionable, to grow rapidly and continuously meet the diverse needs of our young customers. At the same time, for personal reasons, Mr. Reinau Shackle, our chief strategy officer, will depart from his position as chief strategy officer at the end of the year. He will continue to provide strategic supports to us in the capacity of an external consultant. Over the past five years, Reinau has worked and stood side by side with us through our most challenging times. We have faced challenges as a team and overcame difficulties together. I would like to express my sincerest gratitude to Rhino for his hard work and tireless efforts over the past five years. We're confident that Rhino will continue to provide support for our development after the change in roles.
spk00: Thank you, Jinyi, for your kind words and giving me the opportunity to elaborate on the upcoming change in role. I joined Luckin Coffee in January 2019 as CFO and CSO and have been with the company for almost five years. During that period, the company has encountered many ups and downs and our journey has been challenging at times. However, under Jinyi's leadership, we've collectively been able to overcome these challenges and today the company is in its strongest position yet. I feel privileged and very proud that I've been able to contribute to the company's success and incredible turnaround story by overseeing various private and public financing rounds, leading our successful offshore financial restructuring, reorganizing our finance team and functions, reverting to normalize financial reporting, and helping to build a foundation for our international expansion. With the company in a position of strength, it is an appropriate time for me to consider my priorities and have therefore decided to resign from my current position as Chief Strategy Officer by the end of this year. My journey at Luckin has been truly remarkable. I have gained invaluable experience that has shaped me as a professional and made lifelong friendships. Whilst my achievements at Luckin Coffee are something I'm incredibly proud of, like all of us, I've had to make many sacrifices during this time. Being able to spend more time with my young children and family has been an important factor in my decision to resign. I am honoured that I have been offered a role as an external consultant and that I have had the opportunity to continue to support Luckin Coffee in various areas, including, for example, growing Luckin Coffee into a world-class brand and supporting our capital market strategy, albeit in a supporting role. At the same time, I will also have the opportunity to explore personal projects and ambitions in Hong Kong, focusing on charitable work for causes close to my heart. I would like to thank our board of directors and our management team for their trust, support and guidance, all of our shareholders for their support and sticking with us through very challenging times, and all of our outstanding Luckin employees for their exceptional dedication, perseverance and hard work. A special thanks to Jin Yi, who helped facilitate a shift in our corporate culture towards transparency, accountability, integrity, and professionalism, oversaw the implementation and execution of our revised corporate strategy, and brought us all together with a single-minded goal of redemption. It has been an absolute pleasure working alongside you and the rest of our highly talented, principled, and courageous management team in achieving that objective. Thank you.
spk04: Thank you, Dr. Guo, Ms. An, and Reino. Now we would like to open the floor to questions.
spk01: Ladies and gentlemen, we will now begin the Q&A session. I will turn the call over to Alicia Guo at Luckin Coffee, who will moderate today's Q&A session.
spk04: Thank you. Now let's begin with the first question. Congratulations on the solid third quarter results. We noticed that in this quarter, the company's margins have declined. While facing the fierce competition in the Chinese coffee market, how does the company perceive the margin outlook?
spk03: The Chinese coffee industry is in a strategic period of rapid growth, and industry competition is also intensifying. The development pattern is far from complete. Therefore, the market share has become the core goal of company development. Based on the above judgment, we will continue to focus on customer value, hope to provide high-quality products for consumers, and adopt a more friendly pricing strategy, thereby reducing the cost of decision-making of users, and further expand the number of users, and continue to improve the consumption frequency. In this quarter, RISC-Coffee's monthly transaction number exceeded 58 million, and increased by 133%. Therefore, based on the company's strategic decision to continue to return customers and expand the market, the company is satisfied with the performance of this quarter. In the current competitive environment, Ruixin, as a leader in the Chinese coffee market, will insist on the current opening strategy and pricing strategy to return customers for a long time to expand market share. In addition, In the fourth quarter, due to seasonal factors, product combination structure adjustment, raw material costs will be increased, and the profit rate may still have room for decline. However, we will further strengthen the core strategic goal of attracting new customers by accelerating the increase in market share. We are confident to continue to consolidate the market leading position and work hard to create long-term value.
spk04: Thank you for your question. Although we saw margin declines this quarter, it was within our strategic expectations. China's coffee industry is experiencing rapid growth with huge growth potential, and the industry is increasingly competitive. Since the market is far from saturation, taking market share has become the priority for future development. In light of this, we will continue to focus on customer value and to reduce our customers' decision-making costs and further expand our consumer base while continuously increasing consumption frequency by offering high-quality products with affordable pricing. In the third quarter, our average monthly transacting customers exceeded 58 million, marking a 133 year-on-year growth. Therefore, based on our strategic decisions to consistently reward customers and expand the market, we're satisfied with our quarterly performance. Facing the current intensified competition, as a market leader, we will continue with the current store expansion and pricing strategies and long-term returns to our customers. To further enlarge our market share, In the fourth quarter, considering seasonality and changes in product mix, raw material cost may further increase. As a result, there may be a decline in our profit margin. However, as we further strengthen and execute our core strategic goals to increase market share and attract new customers, we're confident that we can maintain and solidify our market leading position and strive for long-term value. Thank you, Dr. Guo. Let's move on to the next question. Can you please provide additional color on net income and the deferred tax asset adjustments in this quarter?
spk02: Thank you for your questions. The significant difference in net income, which was reported as RMB 988 million instead of RMB 736 million, can be attributed to key accounting adjustments related to our income tax and deferred tax assets, which results in a significant reduction in the income tax expenses. In the third quarter of 2023, we reported an income tax benefit of RMB 82.6 million compared to the income tax expenses of RMB 206.3 million in the same period of 2022. This change demonstrated a favorable shift in our income tax dynamics. As I mentioned earlier, during the third quarter of 2023, we re-evaluated the recognition of our deferred tax assets. This reassessment was based on our improved business performance as several of our operating entities transitioned from cumulative loss to cumulative profit, which in turn significantly reduced the uncertainty surrounding the future realization of these assets. In light of the improved financial performance and the brighter outlook, we made the strategic decision to reverse the recognition of about RMB 252.1 million of the valuation allowance against our deferred tax assets. This valuation allowance had initially been established to account for uncertainties regarding the realization of these deferred tax assets. This accounting adjustment reflected our improved business performance and our increased confidence in the realization of deferred tax assets. It is a positive indication of our company's financial health.
spk04: Thank you, Ms. Anne. The next question is, any updates to the company's capital market strategy?
spk03: We will continue to pay attention to the capital market, but we do not have a clear timetable for the main board listing plan.
spk04: Thanks for this question. We will continue to monitor the US capital market, but our priority is to execute our business strategy by focusing on our business operations. Right now, as we face historic development opportunities, our primary task is to implement our strategy by delivering exceptional products and services to our customers. aiming to capture a larger market share and provide sustainable long-term value to our shareholders. We will continue to monitor the capital market, but there is no specific timeline or schedule for listing on any main board market. Thank you, Dr. Guo, Ms. N. That is all the time we have for today's earnings conference call. We thank you for your participation on today's call. We look forward to providing you with regular business updates and look forward to speaking with you again next quarter.
spk01: This concludes our call today. You may now disconnect. Thank you.
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