Symrise: Māori declines, demand under flavor policy still to be confirmed

Summary of Simoer's Q2 2022 Financial Report Conference Call:

Management Remarks

Analysts' Q&A

Q: The R&D cost rate reached 11% in the first half of the year. R&D investment has increased significantly. Can you share the future R&D achievements?

A: The specific implementation and landing of R&D investment in the first half of the year conform to the overall layout of the year. The R&D team has expanded in the first half of the year, and product R&D has progressed in an orderly manner. Seven research institutes have been added, covering the areas of atomization medical treatment and atomization materials.

Q: The half-yearly performance announcement mentioned that there will be a significant increase in revenue in the second half of the year compared to the first half of the year. What is the reason?

A: 1) Disposable products have shown an upward trend since the second quarter of this year, and the trend is expected to continue. 2) The overall growth in Europe is good. We believe that the fourth quarter in China will still be challenging. We hope to make up for the decline in domestic fourth-quarter revenue through overseas growth. This is our judgment on the market.

Q: When will the medical beauty business start contributing to revenue?

A: 1) Both product categories will be delivered in the second half of this year. Medical beauty products will begin small-scale trial sales to users in September. 2) The first domestically produced atomization drug delivery device has completed innovation certification. According to the plan, the entire product will be registered and enter the sales state this year. 3) The progress in establishing our entire operating team for the medical research institute in the US and our US medical subsidiary has been smooth.

Q: Outlook on gross margin for the year and in the long run

A: It depends on two factors: 1) Product differentiation and technological progress; 2) Negotiation and benefit sharing with customers.

In the long run, we will continuously increase R&D investment to create differentiated products. We hope to help customers increase revenue through innovation and, at the same time, achieve satisfactory gross margins.

In the short term, 1) The changes in different product combinations will have a certain impact on our gross margin. The current quantity of disposable products is not much. The current gross margin level is still relatively low. We hope to increase the gross margin as the volume increases and through continuous optimization of the supply chain. However, it may not reach the current gross margin level of the bag replacement type. 2) Many medical products on the market are exclusively supplied by European and American companies with very high gross margins. We hope to break the monopoly or provide affordable medical products to consumers in the domestic market to improve our gross margins. Q: The company's layout for its major customers has been for disposable electronic cigarette products, which had over double the sales growth compared to 2021. What is the outlook for sales volume and gross profit margin in the future for these disposable products?

A: In the first half of the year, disposable products generated around 300 million yuan in revenue, and our major customers have also accepted and achieved very good market performance in Europe and the UK. The order size will be larger in the second half of the year, and sales scale will also be larger than in the first half.

Q: How did our pricing performance of products with major customer British American Tobacco compare year-on-year?

A: We fully implemented automation in the first half of the year to reduce labor costs, while also supporting customers in global promotion and expanding their market share. Therefore, the year-on-year performance of product pricing is mainly reflected in automation.

Q: Has the company's relationship with British American Tobacco changed under the PMTA framework?

A: Currently, the relationship is very healthy and will deepen in the future. 1) Our automation is based on the long-term outlook and a series of consensuses reached in the quality control of production processes between the two companies, and we have partnered with British American Tobacco to launch the world's fastest tobacco bag production line, reaching a new height of cooperation between the two parties. 2) The product we launched in the first half of this year quickly occupied the second place in the UK's brand position, which also indicates that our cooperation with major clients such as British American Tobacco will become increasingly closer.

Q: After NJOY and Logic, two major clients, passed PMTA, did the overall business trend improve significantly?

A: After the two companies passed PMTA, there was a gradually increasing trend in orders, and the customers significantly enhanced their confidence in the US market.

Q: What is the reason for the year-on-year decline in revenue on the US market?

A: There are two reasons. 1) The sales volume of large clients such as British American Tobacco has not decreased, but due to automation, our sales price has decreased, so the revenue from the US market has declined in the first half of the year. 2) Last year, the logistics of our major clients changed from air transport to sea transport, resulting in an extra month of shipments to maintain safety stock. In the first half of this year, all import shipment was carried out by sea, effectively controlling the excess amount of shipment from last year. In the first half of this year, the clients reduced some shipments to control their overall inventory in the US.

Q: The reason for the veto of menthol cigarettes in the US market and the prospect of release in the future?

A: The FDA vetoed menthol cigarettes, and there is an official website news release with an explanation. Two reasons: 1) Some harmful substances and chemicals exceeded the standard; 2) Data inconsistency before and after. This is the official explanation for the veto, and it is not just about the menthol flavor.

Future direction: I cannot speculate. 1) We believe that we still need to follow the first principles. Consumers use nicotine electronic cigarettes because of their demand for nicotine, flavor is not the main factor, and the rapid rebound of remaining flavors after the US fruit flavor ban has also validated this point. 2) Europe and the US are restricting the mint flavor of traditional cigarettes, and this trend is beneficial for traditional smokers to switch to new tobacco products. Q: Why did the revenue growth in Europe and other regions of the company stand out?

A: Two reasons: 1) The contribution of large European clients, with the shift to bag-type products going from second to first place, and secondly, the importance of their disposable products in the market. 2) In the first half of the year, the performance of their open APV products was outstanding, owing to the differentiated product performance brought about by core technology releases and the development of APV's local team in the European market.

Risk disclosure and statement in this article: Dolphin Analyst Disclaimer and General Disclosure