Luckin Coffee : First Quarter 2022 Earnings Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q1 2022 Luckin Coffee Inc Earnings Call

EVENT DATE/TIME: MAY 24, 2022 / 12:00PM GMT

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MAY 24, 2022 / 12:00PM GMT, Q1 2022 Luckin Coffee Inc Earnings Call

CORPORATE PARTICIPANTS

Bill Zima ICR - Managing Director

Jinyi Guo Luckin Coffee Inc. - Chairman and CEO

Reinout Schakel Luckin Coffee Inc. - CFO and CSO

Shan (Sam) Jiang Luckin Coffee Inc. - SVP

PRESENTATION

Operator

Ladies and gentlemen, welcome to Luckin Coffee's First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode during management's prepared remarks. Today's conference is being recorded.

At this time, I would now like to turn the call over to Mr. Bill Zima at ICR for opening remarks and introductions. Please go ahead, sir.

Bill Zima ICR - Managing Director

Hello, everyone, and thank you for joining us on today's call, the company's first Investor Conference Call in two years. Luckin Coffee announced its first quarter 2022 financial results earlier today. A press release is now available on the company's IR website at investor.lkcoffee.com.

Today, you will hear from Jinyi Guo, Chairman and CEO of Luckin Coffee, Reinout Schakel, CFO and CSO of the company and Shan Jiang, Senior Vice President. Due to time constraints, we will not have a Q&A session on this call.

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. Again, the IR website link is investor.lkcoffee.com.

During this 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. With that said, I would now like to turn the call over to Dr. Jinyi Guo, Chairman and CEO of Luckin Coffee. Please go ahead.

Jinyi Guo Luckin Coffee Inc. - Chairman and CEO

(interpreted) Hello, everyone, and welcome to today's conference call. Thank you for your ongoing interest and support of Luckin Coffee.

I'm Jinyi Guo, the Chairman and CEO of Luckin Coffee. In Chinese, my name is easy to remember. "Jin" is from the Chinese idiom (Spoken in Foreign Language) which means to be cautious in word and action. "Yi" is from the Chinese idiom (Spoken in Foreign Language), which means consistent in deed as well as in word. I obtained a PhD in Transportation Planning and Management from Beijing Jiaotong University, and I have worked for many years in scientific research, government and business. My personal hobbies include running and coffee, and it is from my love for coffee that drove me to join Luckin Coffee in 2017. I was originally responsible for product R&D and helped Luckin Coffee build the first-generation framework system of product R&D. In May 2020, during the difficult and challenging time right after our disclosure of the fabricated transactions, I was appointed by the Board as CEO of Luckin Coffee. Two months later, I was elected to become the Chairman of the Board.

The past two years have been a great challenge for both me personally and the company. Thanks to all of our united and dedicated employees as well as our loyal and enthusiastic consumers, we were able to "rise from the ashes". This is the first time we have held a conference call in the past two years and we have a lot of information to share. Therefore, due to certain constraints, we [will] (corrected

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MAY 24, 2022 / 12:00PM GMT, Q1 2022 Luckin Coffee Inc Earnings Call

by company after the call) not have a Q&A session on this call.

We look forward to engaging with you more frequently and directly down the road. I aspire to live by the Chinese idiom from which my name is derived, which is to be prudent and consistent in my word and action. We endeavor to create a transparent corporate culture and I look forward to building a long-term relationship with all of you.

In the first quarter of 2022, despite the impact of COVID-19, our performance continued its strong momentum and we achieved our first quarterly reported operating profit since our inception. This validates the Luckin Coffee business model. Now, I want to say "thank you" to our 27,000 Luckin team members for their persistent efforts, to our customers for their ongoing loyal and support and to our investors for their trust.

Over the past two years, Luckin Coffee has implemented fundamental improvements in the areas of strategy, operations, corporate governance, management structure and organizational culture. Although the company has retained the same name, Luckin Coffee has been reborn and is essentially a new company.

Over the past two years, the previous Board of Directors have helped lead us out of our darkest period and guided our turnaround. Last week, to further enhance our corporate governance and strategic capability, we made changes to our Board of Directors, including welcoming four new members. The current Board of Directors combines old and new members with experienced backgrounds in the areas of strategy, operation, finance and legal. We believe our new Board of Directors will lead Luckin Coffee to achieve new heights!

As can be seen on Slide 3, our core management team has a total of seven members. In addition to myself, Mr. Wenbao Cao is currently in charge of company's operations. Mr. Weiming Zhou is in charge of product and supply chain. Co-founder Mr. Fei Yang is acting as the company's Chief Growth Officer, is in charge of brand, marketing and sales growth, and Mr. Gang Wu is in charge of public affairs and strategic cooperation. Mr. Reinout Schakel and Mr. Shan Jiang, who have joined me on the earnings call today, are in charge of finance and internal control and compliance, respectively. They are also the individuals responsible for solving historical issues including the restructuring of our financial indebtedness. Reinout and Sam will each provide insight into their efforts later in the call. I'm proud that we have assembled this core management team with strong academic credentials and professional experiences. This core management team has been working together during our most challenging period and will continue to work hard together for Luckin Coffee's future.

Despite the impact of COVID-19 outbreaks, we still managed to achieve strong growth in the first quarter of 2022. Total net revenue exceeded RMB2.4 billion, representing a year-over-year increase of 90%, while the first quarter same-store sales growth rate of our self-operated stores reached 42% year-over-year. The net number of new stores opened was 556, increasing by 276% year-over-year, and our operating profit turned positive for the first time in our history. Our CFO, Reinout, will share more details on the company's financial performance later on during the call.

Over the past two years, Luckin Coffee has transformed and developed into a company with an appropriate corporate governance structure led by professional managers. Our continuous efforts to strengthen our system of internal controls and compliance has enabled us to cut ties with the past.

For the past two years, our Board of Directors and management team have worked hard to think about the reshape of our culture.

Our Mission: To create lucky moments and inspire, is original intention of our business and the source of our name. We hope our products can bring luck and an enriched positive life experience to our customers. Coffee is an increasingly consumed, aspirational beverage in China, and we aim to inspire our customers to achieve a better life through coffee.

Our Vision: In our opinion, being a world-class coffee brand means achieving world-class level in all aspects of the business, including brand reputation, number of customers, cups of coffee sold, store count, and financials. Based on publicly available information, we are already the largest coffee chain in China in terms of store count, but there are still room for growth in other indicators and we will continue to strive for it.

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MAY 24, 2022 / 12:00PM GMT, Q1 2022 Luckin Coffee Inc Earnings Call

Our Values: At Luckin Coffee, our core values are part of our DNA. We have established five core values which reflect our history, our business model and the thoughts of our employees and customers alike. Integrity is the most fundamental and important criteria guiding our judgment and choice; Craftmanship, which is a consistent pursuit of Luckin Coffee; Innovation is a major driving force for our long-term growth; Ownership represents the dedication of Luckin Coffee's employees; Cooperation is the powerful bond among all Luckin Coffee stakeholders, both internal and external, who work together and create value to our society.

The focus of our transformation is to clearly and thoroughly rethink our overall strategy and business.

We believe China's coffee industry is [a large] (corrected by company after the call) market with strong growth potential, and therefore we want to focus on our core business, namely our coffee business. From an operations standpoint, we believe that technology will continue to be the driving force in building a new consumption and new retail business model supported by the three pillars of "people, products and places" to continuously provide products and services with "high quality, high affordability and high convenience".

In terms of brand, marketing and sales growth, we have built our brand based on "professionalism, youth, fashion and wellness." "Professionalism" represents our fundamental pursuit of high product quality. "Youth and fashion" is an important distinction between us and other traditional brands. We adhere to innovation, and our products and brand ambassadors are well liked, in particular by the younger generation in China. This is illustrated by our recognition as the 2021 Young Consumers Favorite Brand by China Consumer Reports. "Wellness", we continue to advocate for a healthy lifestyle. Coffee is a well-recognized drink around the world with many health benefits. Recently, we launched a new "0-calorie sugar" series of iced coffee, which is very popular because of its low-calorie and low-fat features.

We had average monthly transacting customers of nearly 16 million during the first quarter of 2022, with over 29 million subscribers to our official WeChat account. By establishing multiple self-owned user traffic pools, driven by data and technology, we have managed to reach users through multiple marketing channels and continuously attract and retain new users. In turn, this enabled us to realize effective and targeted customer engagement, further driving our performance.

These efforts have enhanced our brand recognition and reputation, catapulting Luckin Coffee into a leading coffee brand in China. In fact, in 2021, Luckin Coffee was ranked the number one in the coffee chain industry for the first time in the "Topbrands" report, a research report conducted by YiMagazine, which has evaluated the brand preferences in China for the last 13 years.

In terms of our product strategy, our focus on "professionalism" and "good flavors" is critical to our development and success.

The pursuit of professionalism in the coffee industry goes hand-in-hand with our continued investment in the professional coffee supply chain. In terms of procuring raw materials, we have become one of the largest importers of green coffee beans in China, importing a total of 15,808 tons of coffee beans in 2021. We source premium green coffee beans from renowned plantations around the world through the world's top coffee bean suppliers. In the first quarter of 2022, we sourced more than 3,000 tons of high-quality green coffee beans from Ethiopia, becoming the largest buyer of Ethiopia's Hambella beans in China. In April 2021, we opened our first coffee roasting facility in Fujian Province, designed with a capacity of 15,000 tons. In addition, we are currently finalizing site selection for our second roasting facility. Upstream expansion in the coffee bean supply chain allows us to stabilize the quality of raw materials in the long-run and optimize control over procurement costs of raw materials. This reduces costs while boosting efficiency. We believe continuous investment in our supply chain will help create one of our strongest competitive advantages over the long-term.

The pursuit of "good flavors" is achieved by our excellent product development team, which employs efficient digitalization in R&D mechanism and strategy. The most important work of our product development team is not simply to develop popular products, but also to establish a comprehensive, digitalized R&D framework. Therefore, we have achieved a virtuous circle of combining front-end operational data and back-end product development. Our innovative beverages such as Newer Latte, Coconut Milk Latte and Coconut Cloud Latte have enabled us to become a leading force in beverage innovation in China. By offering innovative products with unique flavor and form, we are able to continuously attract young customers.

In terms of our retail store strategy, we have become the largest coffee network in China in terms of the number of the stores at the end

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MAY 24, 2022 / 12:00PM GMT, Q1 2022 Luckin Coffee Inc Earnings Call

of 2021, based on publicly available information. As of March 31, 2022, we had 6,580 stores in total. Among them, our self-operated store network had a presence in over 50 cities across China and our partnership store network spanned over 220 cities in 27 provinces. Going forward, we will continue to maintain our store expansion strategy through a well-balanced mix of self-operated store and partnership store. While we expect to continue to expand in tier 1, tier 2 and tier 3 cities through our self-operated store model, we also intend to quickly penetrate into lower tier cities through the retail partnership model. This will further solidify our market penetration. We believe there is a great potential in China's coffee market and we are confident in our future store expansions.

Our technological advantage is what sets us apart from other traditional F&B companies. We leverage our capabilities in technology and data analytics to drive the evolution of our "people, products, places" strategy to achieve full technology coverage in every aspect of our business, including data-supported site selection, algorithm-driven supply chain procurement, automated user engagement, and IoT-based store equipment management. Such digital features allow us to quickly respond to customer demand, improve supply chain and store operation efficiency, drive research and development and enhance quality control.

We will continue to increase our investment in data algorithm, IoT and other technology initiatives, including investing in new talents, technology driven sales and marketing, smart stores and smart supply chain management system.

Since March of 2022, the outbreaks of COVID-19 in various cities have brought difficulties and uncertainties to our operations. Despite these challenges, we continued to achieve strong revenue growth this quarter and achieved for the first time quarterly reported operating profit since our inception. Much of this strong performance was fueled by our competitive advantages, including:

First, the strategic rollout of our store networks. Through our multi-store approach, self-operated store and partnership store, we can flexibly respond to evolving customer needs in different cities. In addition, our store model and location strategy can help us mitigate the challenges posed by the COVID-19 pandemic. For example, as of March 31, 2022, among our self-operated store base, 48% were located in office buildings and 12% in colleges. Generally speaking, we were able to remain normal operation in these relatively "closed off" locations except during strict city lockdowns.

Second, our reasonable cost structure. As we mainly operate through small-scalepick-up stores, combined with an advanced and intelligent store management system, we are able to achieve a more efficient store rental and labor structure.

Third, our strong brand influence. Luckin Coffee has become the coffee brand of choice for more and more young people. In 2021, our Coconut Milk Latte achieved over 100 million topic mentions on social media. In the first quarter of 2022, we recruited Olympic champion Eileen Gu to be our brand spokesperson, resulting in a successful marketing campaign for Luckin Coffee.

Fourth, our robust product development capabilities. During the first quarter, we launched 34 new beverage products, including Hambella Specialty, Walden Cheese Newer Latte and Vanilla Soufflé Flavored Velvet Latte, which all became bestsellers. Despite the challenges posed by the COVID-19 in April, our new Coconut Cloud Latte, sold over 4.95 million cups in the first week after its launch.

Lastly, our well-prepared pandemic emergency plan, facing logistical constraints during the pandemic, our supply chain department made full use of our existing grid-based warehouse network in multiple locations, quickly setting up emergency warehouses, transfer stations and other measures to ensure sufficient supply.

I would like to express my most sincere gratitude to our nearly 27,000 Luckin employees who have stuck with us during this challenging time as well as to our customers for their ongoing love and support for Luckin Coffee.

At this time, I would like to turn the call over to Reinout and Sam to discuss details relating to the restructuring of our financial indebtedness, an update on our remediation and internal control and compliance efforts and our financial performance during this quarter.

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