Luckin Coffee : Second Quarter 2022 Earnings Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q2 2022 Luckin Coffee Inc Earnings Call

EVENT DATE/TIME: AUGUST 08, 2022 / 12:00PM GMT

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AUGUST 08, 2022 / 12:00PM GMT, Q2 2022 Luckin Coffee Inc Earnings Call

CORPORATE PARTICIPANTS

Bill Zima ICR, Inc. - Managing Director

Jinyi Guo Luckin Coffee - Chairman and CEO

Alicia Guo Luckin Coffee - Director of Investor Relations

Reinout Schakel Luckin Coffee - Chief Strategy Officer

PRESENTATION

Operator

Ladies and gentlemen, welcome to Luckin Coffee Second Quarter 2022 Earnings Conference Call. (Operator Instructions).

Today's conference is being recorded. At this time I would like to turn the call over to Mr. Bill Zima at ICR for opening remarks and introductions. Please go ahead, sir.

Bill Zima ICR, Inc. - Managing Director

Hello, everyone. Thank you for joining us on today's call.

Luckin Coffee announced its second 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; and Reinout Schakel, CSO of Luckin 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 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.

At this time, I would like to introduce Alicia Guo, Luckin Coffee's new Investor Relations Director.

Alicia, please go ahead.

Alicia Guo Luckin Coffee - Director of Investor Relations

Thank you, Bill. Hello, everyone. Thank you for joining today's call. My name is Alicia, and I am the IR director of Luckin Coffee. I joined the company in July and look forward to communicating with you moving forward.

Bill Zima ICR, Inc. - Managing Director

Thank you, Alicia. I would now like to turn the call over to Dr. Jinyi Guo, Chairman and CEO of Luckin Coffee. Dr. Guo, please go ahead.

Jinyi Guo Luckin Coffee - Chairman and CEO

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

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AUGUST 08, 2022 / 12:00PM GMT, Q2 2022 Luckin Coffee Inc Earnings Call

I'm Jinyi Guo, Chairman and CEO of Luckin Coffee. I'm pleased to share with you our second quarter results. The ongoing COVID-19 situation in the second quarter remains very challenging for the catering and retail industry. Many of our stores in Shanghai, Beijing and other cities in China experienced the temporary closures at different times. Despite these circumstances, Luckin Coffee still achieved the rapid growth and an improved profitability profile.

In regard to dealing with historical issues, following the successful completion of the restructuring of our financial indebtedness in the first quarter, the U.S. federal court recently granted final approval of the securities class action settlement. This marks an important milestone for Luckin Coffee as it resolves the overwhelming majority of the company's potential exposure related to the offshore class action lawsuits.

These achievements are the results of our strong focus on the coffee business, which embodies our long-term development strategy and values. We believe that the Chinese coffee market has substantial upside potential, with significant opportunities. We hope to bring Lucky moments and excellent experiences to consumers through every cup of coffee in an effort to make Luckin Coffee a part of people's everyday lives. We strive to create a world-class coffee brand by adhering to the value of Integrity, Craftsmanship, Innovation, Ownership and Cooperation.

I would first like to discuss an important update regarding our management team that we announced in a separate press release earlier today. Reinout Schakel, who has served as our Chief Financial Officer and Chief Strategy Officer since joining, will transition to the role of Chief Strategy Officer. In his new role, Reinout will be focusing on our long-term development strategy, as well as taking on other important strategic assignments.

Over the past two years, Reinout has been instrumental in helping Luckin Coffee through our darkest moments. As a core member of the senior management team, Reinout worked tirelessly to complete our overseas restructuring and solve a number of historical problems. He also led the restructuring and reorganization of our finance team and functions over that same period and paved the way for our return to normalized financial reporting. I would like to express my sincere gratitude to Reinout for his hard work and dedication. We believe Reinout will continue to play an important role in creating substantial value for Luckin Coffee.

With this news, we are also delighted to welcome Ms. Jing An to our management team and succeed Reinout as Luckin Coffee's new Chief Financial Officer. Ms. An has extensive financial expertise and a rich professional background. She received a bachelor's degree in Economics from Renmin University of China and a master in management from Stanford University. Prior to joining Luckin Coffee, she served as the CFO of publicly listed companies, including Daojia Group, as well as previously serving as an auditor at PricewaterhouseCoopers. With Ms. An on board, I am confident that Luckin Coffee will further enhance its financial organization capabilities, further improve the level of business and financial integration and coordination and, Ms. An will help take us to a new level.

In the second quarter, despite the continuing impact from COVID-19, we achieved growth and strong results in many metrics. Total net revenue was RMB3.3 billion, representing a year-over-year increase of 72.4%. Self-operated store profit margin was 30.6% and the same-store sales growth was 41.2%. The number of net new store openings was 615. The average number of monthly transacting customers reached to 20.7 million, a year-over-year increase of 68.6%. The continuous growth in performance was mainly attributable to the ongoing launch of popular products, rapid expansion of our store footprint and an increase in the number of transacting customers.

Reinout will share more details on the company's results later during the call.

With the business back on track, we will more proactively address social responsibility and implement our sustainable development strategy. We firmly believe that the ongoing creation of both customer value and social value is an important cornerstone for the long-term development of Luckin Coffee. In July, our Board of Directors approved the establishment of our Sustainable Development Committee. I will co-chair the committee along with our director, Michael Chen, a partner at Centurium Capital. In the fourth quarter of this year, we plan to publish a report on corporate governance with the systematic review of Luckin Coffee's transformation over the past two years in terms of our corporate governance, as well as our cultural values and other important topics. This will help stakeholders better understand we have completely re-created our value and culture with improved corporate governance and internal compliance controls, among other efforts.

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AUGUST 08, 2022 / 12:00PM GMT, Q2 2022 Luckin Coffee Inc Earnings Call

We believe our technological advantage sets us apart from traditional food and beverage companies. There were two technical achievements in the second quarter I would like to share with you: The first is the "Hybrid Multi-cloud Project" that we built with

5-quarters efforts. We successfully launched this project at the end of June and achieved our target of supporting 5 million orders on a daily basis, which also has the potential to support 10 million daily orders in the near future. This is an important milestone in our technical architecture.

Second, to further improve operational and financial transparency and continuously strengthen the reliability of our operational and financial data, we are introducing blockchain technology into our operational and financial data management system. Using multi-party participation, non-tampering, traceability, and other characteristics of the blockchain, key control slots and important data are stored on a chain in real time to ensure the reliability of our operational and financial controls, while improving the effectiveness of our management. Luckin Coffee is committed to become the pioneer in introducing blockchain into operational and financial systems in the food and beverage industry.

In the second quarter, we continued to face a challenging operating environment across the country. We had an average of around 670 temporarily daily store closures in China during this quarter. In April and May, that number was around 900 stores nationwide. At the same time, the local government's restriction on transportation also brought challenges to our supply chain and logistics systems. Despite a complex and challenging environment, we continued to show strong momentum, driven by our advantages in branding, product R&D and store layout, and supported by our three pillars of "people, products and places."

From the perspective of "people", Luckin Coffee is becoming the coffee brand of choice for more and more young people. Our average monthly transacting customers have increased to about 20.7 million during the second quarter of 2022.

From the perspective of "product", Luckin Coffee continued to innovate and launch popular products. In April, we launched the Coconut Cloud Latte, which sold over 24 million cups in the second quarter and contributed RMB400 million in gross revenue across our store formats. During the pandemic, our supply chain department, are 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.

From the perspective of "places", although we experienced indoor dining restrictions during the pandemic, our "pick up" business model was less impacted. As we mainly operate through a small-scalegrab-and-go stores, combined with an advanced and intelligent store management system, we can achieve increasing efficiency in terms of store rental and labor structure.

I would like to express my most sincere gratitude to our nearly 32,000 Luckin employees who have worked so hard through challenging times and to our customers for their ongoing love and support for Luckin Coffee.

In terms of brand, marketing and sales growth, we have built our brand based on "professionalism, youth, fashion and wellness." In the second quarter, we successfully introduced our popular Coconut Cloud Latte and attracted more new customers with our "Summer Ice Coffee Season" campaign. For the second quarter, the number of new transacting customers exceeded 10 million. At the same time, our official account has over 30 million subscribers and over 28 million users in our private traffic pool. By establishing multiple self-owned 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 return, this has allowed us to more effectively increase customer engagement, further driving our strong performance.

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

The pursuit of professionalism in the coffee industry goes hand-in-hand with our ongoing investment in the professional coffee supply chain. In the second quarter, we signed an investment agreement for our second coffee roasting facility in Kunshan, designed for a capacity of 30,000 tons and is expected to start construction at the end of 2022. By launching "Yunnan Specialty Coffee", we have significantly raised the popularity of China's Pu'er coffee, and Luckin became one of the most important buyers of Yunnan green coffee beans. The ongoing investment to expand the coffee bean supply chain is conducive to maintain raw material quality and effectively

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AUGUST 08, 2022 / 12:00PM GMT, Q2 2022 Luckin Coffee Inc Earnings Call

improving cost control capabilities, which is expected to be one of our greatest competitive advantages in the long term.

The pursuit of "good flavors" is illustrated by our accelerating digitalization of R&D mechanism and strategy. Through a comprehensive digital R&D framework, we have achieved a virtuous circle of combining front-end operational data and back-end product development, increasing our ability to offer innovative, and popular products and attract young customers.

Based on publicly available information, Luckin coffee has become one of the largest coffee networks in China in terms of the number of stores and keeps growing. As of June 30, 2022, we had 7,195 stores in total with 615 stores newly opened during the second quarter. We saw strong performance from our newly opened self-operated stores in newly entered cities such as Yinchuan and Xining. Going forward, we will continue to maintain our store expansion strategy through a balanced mix of self-operated stores and partnership stores. While we expect to continue our expansion into top-tier cities through our self-operated stores, we also intend to quickly enter lower-tier cities through our partnership store model. We believe there is a great potential in China's coffee market, and we are confident in our future store expansion.

At this time, I would like to turn the call over to Reinout to discuss our financial performance during this quarter.

Reinout Schakel Luckin Coffee - Chief Strategy Officer

Thank you, Jinyi, and also thank you for your kind words.

Welcome everyone to today's call. I would like to start today by welcoming Ms. An as our new Chief Financial Officer of Luckin Coffee. We're all very excited to have an executive of her caliber on Board, and I believe her appointment comes at the exact right time in the company's evolution.

Ms. An brings over 17 years of corporate finance and management experience to Luckin Coffee, and with her wealth of experience, she is the right person to lead our finance team going forward and bring Luckin Coffee to an even higher level. I look forward to working closely together with Ms. An to ensure a smooth transition of finance and accounting responsibilities as I move into my new role as Chief Strategy Officer.

I feel incredibly privileged that I was given the opportunity to lead the reorganization of our finance team and functions as well as our offshore financial restructuring, which now have been both successfully completed. I would like to thank Jinyi, our Board, our management team, and our shareholders for their trust and support.

Our outstanding Luckin employees continue to deliver every day, including our Finance, Internal Audit, Legal and Compliance, Internal Controls and Investor Relations teams, who have shown exceptional dedication, perseverance and hard work. For all of us that have been on this journey together, we know it has been a great challenge. But I think we can be incredibly proud of what we have achieved so far. I certainly know I am.

Now that we place the company back in a path towards sustainable long-term growth, we believe the company is now in a position of strength, with significant growth opportunities ahead. In my role as Chief Strategy Officer, I will strive to continue to support Luckin Coffee in reaching more important milestones, principally focusing on long-term strategic planning, helping identify and execute growth opportunities and leading the execution of Luckin Coffee's capital market strategy.

I will now turn to our Q2 performance. Like last quarter, I would like to provide some context on the current COVID-19 situation in China and the impact on our business.

During the second quarter, the negative impact of the COVID-19 pandemic on the company has gradually lessened. In particular, follow the lifting of COVID-19 related restrictions in Shanghai starting June 1st.

To provide some perspectives, we had an average of 900 temporary daily store closures during April and May '22. And this number reduced to just over 150 temporary daily store closures during June and even further decreased to around just under 100 during the

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