Dingdong (Cayman) Ltd (DDL) 2022 Q2 法說會逐字稿

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the Dingdong Limited Second Quarter 2022 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I will now turn the conference over to the first speaker today, [Roger Zhu], Senior Director of Investor Relations. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to Dingdong second quarter 2022 earnings call. With us today are Mr. Changlin Liang, our Founder and CEO; and Ms. Le Yu, our CSO. You can refer to our second quarter 2022 financial results on our website at ir.100.mi. You can also access a replay of this call on our IR website when it becomes available a few hours after its conclusion. For today's call, management will provide their prepared remarks first, and then we'll be hosting a question-and-answer session.

Before we continue, I would like to refer you to safe harbor statement in our earnings press release, which also apply to this call as we will be making forward-looking statements. Please note that all the numbers stated in the following management's prepared remarks are in RMB terms, and we will discuss non-GAAP measures today, which are more thoroughly extend and reconcile to our most comparable measures reported in our earnings release and filings with SEC.

I will now turn the call to our first speaker today, Founder and CEO of Dingdong, Mr. Liang.

[Interpreted] Hello, everyone. Welcome to the Q2 earnings call of Dingdong Fresh in 2022. On the call today, I'll mainly cover 3 areas. First, I'll briefly report our Q2 operating performance. Second, I'll discuss our product development capabilities. And lastly, I'll share the company's further development plans.

Firstly, let me report the company's operating performance in Q2 2022. Our Q2 revenues were RMB 6.63 billion, representing 42.8% year-over-year growth. We also achieved a non-GAAP net profit of over RMB 20 million for the first time, marking an important milestone for our development.

The Yangtze River Delta region or YRD in particular, achieved profitability with an operating margin of 3.7% in the first half of 2022. We started our business in Shanghai back in 2017 and gradually expanded to the whole YRD region and then to other cities across China. We have seen that the entire YRD has become a solid market for the company following Shanghai. We're also confident that our product development capabilities, methodology and management talent accumulated in the YRD region will help us grow and serve more users in other cities.

We have prioritized product development capabilities to increase users and orders ever since the adoption of the quality growth strategy in August 2021 and we have made great progress. Specifically, in Q2 of all products sold, we had a total of 217 SKUs that were uniquely Dingdong and our private label accounted for 17.5% of the total GMV, with the majority being developed and processed in-house in our 3F factory. We have become not only a large-scale fresh grocery e-commerce leader, but also a food manufacturer with R&D and innovation capabilities.

As we all know, Shanghai was hit by another pandemic wave from March to May 2022. During that period, we overcame various supply chain and management difficulties to ensure the continuity of Shanghai residents' livelihood.

Actually, on an evening in April, one of our riders was striving through a neighborhood on his way back from delivering an order when he suddenly heard a shout of Dingdong (foreign language), which means care on Dingdong in English. The many neighbors joined in the chanting. It was the most difficult time in the fight against the pandemic, and we were exhausted every day to fulfill the market demand. But the cheers of our users gave us the strength to go on.

I also saw a picture of a Dingdong rider drawn by a primary school students, the front and back of the scooter were covered with parcels and each box was painted with the carriage of the Dingdong logo. The riders red clove was flying high and the young artists had named the painting Carrot man. We are proud that our riders have become heroes in eyes of the children because of their dedication to securing the supply of daily necessities in their fight against the pandemic.

Second, I would like to discuss the cultivation of our product development capabilities. Our last entrepreneur in Denver before Dingdong focus on the mother-child community. We discovered a pain point through that venture. Chinese families were constantly worried about whether their children were eating healthy and safe food. Therefore, we started Dingdong to provide our users, especially children with healthy and safe food products and convenience. Therefore, product quality is not only about our growth and profitability, but also the mission of our founding team.

We have improved our product development capabilities from the following 5 aspects. First, we don't compromise on product quality. Steve Jobs was taught commentary by his step father, who told him, it is just important -- it is just as important to make the backside of cabinets and senses right, even though they're hidden. This is what we call craftsmanship to be meticulous where it is not seen. It is especially true in producing fresh groceries and other food products.

For example, to avoid excessive pesticide residues in the cultivation of leeks and salads, we visited over 10 provinces in China before finally establishing a reliable planting base that fulfills our D-gap and order-based planting requirements. But these efforts and costs are hidden from consumers who only see that our products appear nicer and fresher than the others and sometimes at a lower price.

Another example is how we have always advocated for the clean label on our products. Normally, you will see various chemicals, flavorings and preservatives densely written on the ingredient list on the product packaging. But our principle is no additives unless necessary. We call this the clean label, which we achieved through the continuous improvement of technology. Even though by doing this, our cost sometimes increase and although our clean products may not taste as savory as those with additives. We ensure the health and safety of our consumers, first and foremost.

Second, we keep developing more signature products unique to Dingdong. As mentioned earlier, we have private labels, and we are increasing contribution from in-house developed products. We have become a food manufacturer with proprietary R&D and innovation capabilities. In Q2, we had a total of 217 SKUs of signature products.

For example, our 1972 farm-to-table craft beer jointly developed by Dingdong and Qingdao Brewery can be delivered to consumers within 24 hours of shipping from the brewery, thus maintaining the beers delicate taste and ultimate freshness. Another example is that by transforming and applying the patented technology of Jiangnan University, we have exclusively developed the (foreign language) and fine drink, which is the fusion and sublimation of California prune, citrus fiber, probiotic foods and vegetable enzymes. The drink achieved a refrigerated shelf of 45 days with 0 preservatives, making it a delicious choice for young users to maintain a healthy intestinal tract and sick to fit.

Our bakeries self-developed lotus dim sum, which combines deliciousness and oriental aesthetics coincided with the release of the hit TV series, Menghua Lu, which introduced a simulating dim sum from the Sung dynasty. The strong cultural resonance between the 2 strike a chord with many young female consumers and was widely publicized in domestic and international media, eating Dingdong's lotus dim sum while binge watching the TV drama series became trendy.

Our prepared foods category, which exemplifies our prowess in consumption scenario development and manufacturing efficiency continue to advance with the launch of the Air Fryer Gourmet and vegetarian prepared food sales in response to emerging consumer trends. This has further broadened consumption scenarios in which the user experience of our prepared food set the direction for future healthy prepared food expansion and augmented Dingdong's leading position in the prepared foods segment.

Third, we have significantly strengthened our research efforts on user consumption trends and improved the success rate of our new product development. With our strong data analysis capabilities and loyal user base, our product research department produced 15 consumer insight report in the first half of 2022 and organized over 10 user testing sessions with nearly 1,000 participants. The consumers gave opinions on product selection and development adjustment directions, which strongly supported key products market positioning and selection and subsequent growth strategies early on, thus significantly increasing the success rate in product development.

Fourth, we have developed more consumption scenarios to efficiently discover new consumer needs to find new product specifications and cultivate new labels. Executing our mission of making healthy food for every child and family, we created a specialty category called Mom's Choice.

Products of Mom's Choice must pass through a comprehensive development system of origin traceability, scientific nutrition, minimum additives and strict quality control, which eliminates parents' worries about food safety. Dingdong also became one of the first companies to meet the low sugar content food standards. At the same time, through our recipe of the day initiative, which offers varied recipes each day of the week and our one-click ask basket app feature, parents can easily plan nutritious and delicious meals for their children. Through the growers view session, parents concerned about their children's physical development can access diverse food options and scientific nutrition knowledge. Through Mom's Choice, we have explored the fusion of product plus health services to increase user loyalty and operational profitability.

In addition to Mom's Choice, which provides superior value by integrating products with service, we have also a similar category for young people who love fitness and health and a project in the pipeline for urban seniors who want to live an elegant and healthy lifestyle. As the general consumer group changes from a family-based unit to an individual or even a label-based individual, here Dingdong keeps launching dedicated categories, selling targeted groups of loyal users and has grown into a food development and brand matrix operation company with unique advantages.

If we are strengthening our infrastructure, as we have explained in previous earnings calls, Dingdong has the largest high standard semi-automated warehouse and over 10 food factories, and we're building 3 additional large-scale 3F factories. We have also invested generously in food R&D and quality control, which are slowly paying us, ensuring that we launch more unique or industry-leading products while enhancing our product development capabilities.

Finally, I would like to touch on Dingdong's future development plans. Firstly, I want to emphasize that Dingdong will stay focused on the fresh grocery and food business. By comparison, our peers have attempted various business models in the past few years, while we upheld our commitment to the frontline fulfillment grid model for the past 5 years, despite all the struggles and challenges. We call it the clumsy spirits, which is also reflected in the fact that we have been persistent in doing fresh groceries and food, whereas our peers have branched out to other categories. Food is our lifelong passion.

Why? Because food is a necessity, fresh food is not ordinary consumer goods. We aim to ensure not only food availability but also food quality. We strive to bring happiness and passion for life to the public through food and to infuse inspiration and soulfulness into food. Only a team with unwavering wholehearted commitment and dedication can achieve this goal.

That is why we choose to go deep, while our peers choose to go broad. We will stay grounded, focused and dedicated. We'll continue strengthening our product development capabilities, reinforcing the supply chain, increasing investment in infrastructure and working tirelessly for the cores food. China's food market alone is worth over RMB 10 trillion not to mention the international space. The food market is large enough to give rise to many successful and great enterprises.

Our second development plan is to improve the user experience. Our user experience was affected during the lockdown because of the difficulties in managing the supply chain, warehouses and frontline fulfillment centers. After the lockdown, we quickly mobilized resources to improve user experiences. Going forward, we'll reconfigure our logistics and warehousing systems to establish precise warehouse location and accurate inventory. We'll optimize our service process to improve the efficiency of our staff and warehouses to serve a broader user base and expedite deliveries. At the same time, we'll strengthen the recruitment and training of frontline personnel and provide them with industry-leading remunerations and career advancement options to enhance their sense of joy and achievement as we firmly believe that happy riders lead to superior customer experiences.

Finally, I would like to conclude that the milestone profit we achieved in Q2 was partially a result of the lockdown. Looking ahead to Q3, we may expect a slight loss. However, comparing our post lockdowns and pre-lockdown numbers, we expect the net loss margin to narrow continuously while we sustain our revenue growth. And we're confident that Dingdong can be fully profitable by the end of this year.

Thank you, everyone. With that, I'll hand the call over to Ms. Yu, our CSO, to go over the financials. Thank you.

Thank you, Mr. Liang, and hello, everyone. Before I walk you through our detailed financial results. Please note that all numbers stated in the following remarks are in RMB terms. Our comparisons and percentage changes on a year-over-year basis unless otherwise noted.

In Q2 2022, we maintained quarterly growth with revenues increasing 42.8% year-over-year to RMB 6.63 billion. Our product development capabilities and operational efficiency have significantly and steadily improved since we began implementing the strategy of efficiency first with due consideration to scale at the end of August 2021. Our non-GAAP net loss margin has narrowed consistently to 37.2%, 31.9%, 18.9% and 7.8% over the past 4 quarters, respectively. This quarter, we also reached a positive non-GAAP net margin of 0.3% for the first time, up 37.5 percentage points from Q2 2021.

Now let's look at the Q2 results in detail. The company's revenue reached RMB 6.63 billion, representing year-over-year growth of 42.8%. The GMV to revenue conversion rate was 93.2%, up 6.9 percentage points from the same period last year. The gross margin in Q2 was 31.6%, up 17 percentage points year-over-year and 2.9 percentage points quarter-over-quarter. This is because we kept developing and diversifying the source of our supply.

For example, our newly developed food production and processing initiatives include our product R&D capabilities, expanded our processing scale and boosted our product sales, thus increasing our production positive contribution to gross margin. Data analytics also empowered our order-based production and reduced production inefficiency and wastage. In addition, a high percentage of direct sourcing has penetrated not only the fresh produce, but also the non-fresh produce categories. The final step of our supply chain is doorstep delivery, providing convenient, reliable and reputable value-added service to the consumers.

In summary, the long multi-linked and the deep supply chain has not only brought us differentiated products that dominated the mindshare of users, but also generated higher gross margins. The fulfillment expenses ratio in Q2 was 23.2%, down 13.2 percentage points year-over-year, mainly driven by the improvement of average order value and enhanced frontline labor efficiency.

Q2 sales and marketing expenses ratio was 2.2%, down 6.6 percentage points year-over-year. Our product development capabilities have become a new source of user traffic, reducing both online traffic acquisition expenses and offline marketing expenses significantly, while optimizing average customer acquisition cost.

Thanks to the scaling effects, our G&A expense ratio was optimized to 2.3% from 6.6% in the same period last year, down 4.3 percentage points. Our R&D expense ratio declined to 3.8% from 4.4% last year despite its absolute value increase increasing 23.7% year-over-year. Going forward, Dingdong will keep investing in food R&D and agriculture technology, technical data algorithms and other infrastructure. This investment will strengthen our competitive advantage and create a long-term return for investors. We further improved our efficiency in Q2 with a net loss margin of 0.5%, down 41.2 percentage points from last year. We also achieved a positive non-GAAP net profit margin of 0.3% for the first time.

We achieved a net profit in Shanghai back in December 2021. Today, we are pleased to report that our P&L has turned positive for the entire Yangtze River Delta region in both Q1 and Q2 this year. Meanwhile, in the first half this year, the Yangtze River Delta region achieved 47.9% year-over-year revenue growth. Such quality growth and the rate optimization of our unit economics is a strong testament to the profitability of Dingdong's business model and the responsiveness of our organization.

In Q2, we had RMB 220 million cash inflow from operating activities. By incorporating supply chain finance into our cash management, we attained RMB 818 million actual operating cash inflow. As of the end of Q2, we had RMB 6.1 billion in cash, cash equivalents, restricted cash and short-term investments. The pandemic has led to many uncertainties that increased our operational difficulties greatly. However, we outlook these challenges and enhance our organizational capabilities, supply chain capabilities and responsiveness. This improvement will remain our most variable assets, driven by the growing product development capabilities, we also realized the quality growth and a non-GAAP positive net margin in Q2.

As we established good amount on our product development capabilities among consumers comparing our pre-lockdown and post-lockdown performance this year, we also saw a significant increase in the AOV post-lockdown and an improvement in our operational efficiency, which validated our efficiency first with due consideration to scale strategy. Looking ahead to Q3, we expect the quality revenue growth with narrowing losses compared to the pre-lockdown Q1 this year. We also expect to achieve a single amount non-GAAP breakeven in December this year.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

(Operator Instructions) And our first question will come from Joyce Ju of Bank of America.

(foreign language) I will translate my questions by myself. Recently, we noted, there is a close competitor of the company who was reportedly having some difficulties in terms of cash flows and also a shrinkage in operations. We wonder, like could management share some colors in terms of your viewing in the market competitive landscape, how this company's business or like situations will actually affect the Dingdong in terms of like competitive landscape in terms of capabilities, in terms of relationship with the customer and also the suppliers?

[Interpreted] Okay. Thank you for your question. Indeed, the news has triggered heated discussions recently. First of all, we rarely comment on our peers. It's more important to focus on what we do than to point fingers. Also, some people think that the whole industry is doomed when they see one company in trouble. We strongly disagree with such a simple, linear way of thinking.

Even in the same industry, the differences between companies can be drastic. Dingdong is very unique in our industry. We have always been focused on one thing, always paid more attention to the needs of our users and then pushed ourselves to progress. We don't cut corners. We don't compromise. We are committed to developing product development capabilities, which has gained us love and trust from our users. Any company loved by its users is a promising company.

We also hope that the society can be more tolerant towards entrepreneurs, and we wish entrepreneurs who encounter difficulties will persevere in the moment of darkness and usher in a bright future. That's all for my answer.

The next question comes from Ashley Xu of Credit Suisse.

(foreign language) Just want to check during the lockdown period other than our revenue growth, any other improvement or development, especially in terms of our operation or supply chain that is worth sharing?

[Interpreted] Okay. Thank you for this particularly good question. In addition to our revenue growth, Dingdong has grown in 3 areas after the lockdown. First, we have established a more flexible and adaptive supply chain and build a responsive organization. During the lockdown, we faced various problems, including supply disruption, logistic blockages, regional warehouses and frontline centers being locked down and personnel management difficulties.

However, we adopted and created new supply models, for example, using direct delivery by merchants and neighborhood good buys, not only ensure supply during the lockdown, but also comprises and sharpen our supply system to hold the basic duty of securing supply in case of unexpected incidents.

Second, we have improved the cohesiveness of the team. During the lockdown, the workload was heavy, life was tough and there was the risk of being quarantined at any time. We were under unprecedented pressure and we all -- but we all took it upon ourselves to maintain supplies for local residents, creating plenty of heroic stories. But everyone here at Dingdong could also feel the sense of accomplishment from setting our users. After the lockdown, we, as a team, became more united.

Third, Dingdong has been with our customers throughout the lockdown, keeping supplies and prices stable. And as a result, we are loved by more customers than ever before, whether it's routine consumption or lockdown purchases, Dingdong is always a destination that you can trust without a doubt.

Finally, I would like to highlight that we have been complying with the government's pandemic control requirements and fulfilling our basic duties as a daily supply company for the general public. We also wish that the pandemic -- we hope that the pandemic will end soon and that everyone can enjoy a healthy and stable life. That's all for my answer.

The next question comes from Thomas Chong of Jefferies.

(foreign language) We have seen we have done very good job in achieving profitability in Q2. How should we think about the situation in Q3 and Q4? And when should we expect full year profitability? And also before we reach full year profitability, how should we think about our cash flow? Would there be any issues?

[Interpreted] All right. Our CFO, Ms. Yu, will take your question.

[Interpreted] Thank you, Thomas, for your question. First of all, Q2 was a very difficult period for the company and the operational headwinds were tremendous under the influence of macro factors. However, the good thing is that the company staff were united to battle the challenges, and we finally achieved quarterly positive profit in Q2. We also observed very positive progress post lockdown compared to pre-lockdown period, both in terms of product development capabilities and user satisfaction, which are the aspects that we care about most. And also about core performance indicators such as the AOV and penetration rate, we also achieved very positive progress as well. Therefore, we believe that our non-GAAP net loss will be down at least 3 percentage points in Q3 compared to the pre-lockdown Q1 and Q4 will be further optimized on the basis of Q3.

Second, in January this year, when we were all still completely in the dark about the subsequent lockdown, the management had already set the goal of achieving a single month breakeven by the end of the year, a goal that we have never changed, and we are still convinced that we will achieve this goal.

Finally, although there is no change in the timing of us achieving full profitability, the Q2 results objectively optimize our loss ratio and cash outflow for the year. So for Q3 and Q4 this year, our loss and cash outflow will be significantly optimized compared to the same period last year. Next year, we forecast that the company will still be cash flow positive. And as of the end of Q2, our cash balance was RMB 6.06 billion.

Banks have been working more closely with the company with short-term bank borrowings increasing to RMB 890 million. In Q2, many banks have given us higher credit limits on loans after renewal at the end of the term. In short, we don't have many capital spending needs at the moment and the balance on the books is still quite significant -- quite sufficient. So we think that the company is not at any cash flow risk. That's all for my answer.

The next question comes from Robin Leung of Daiwa.

(foreign language) Congratulations on the strong set of results. Some investors have concern on the frontline warehouse models given what happened to Missfresh. Also some competitors in the local retail industry explicitly said that frontline warehouse is not going to work. Could management share your thoughts on that?

[Interpreted] First of all, I would like to draw your attention to the fact that excluding the 3 months during the pandemic, when the lockdown hit hard, Dingdong has been able to continue improving its loss ratio for 10 consecutive months. And we are very confident that we will achieve full and sustained profitability by the end of this year. Therefore, we have a strong belief in the frontline fulfillment grid model. There are many analyses of this model on the market, and they are up for you to judge. But we often forget that the most important criteria to assess the pros and cons of the model are whether it really meets the needs of the users and whether it is in line with the changing trend of user consumption behavior. Only the users' choice can determine the success or failure of a business model.

The frontline fulfillment grid model enjoys the highest efficiency, the fastest delivery and can better control the quality of fresh food. This model meets the needs of consumers for a better life and caters to the younger generation of new consumption habits. With that, we firmly believe that this is a business model with the bright future, and we, in turn, push ourselves to strive for progress.

When people think that the gross margin of fresh groceries is low, we improve it by making the supply chain deeper and stronger. When people criticize the losses and the high loss rate in fresh groceries, we improve it by enhancing our order density and improving our prediction and product recommendation technologies. As a result, our recommendation is excellent today, and our loss rate is far lower than the traditional fresh produce peers.

When people think that the quality control of non-standardized or non-standard product is difficult, we standardize the process and we increase human resources and technology investments. As a result, our quality control now is industry-leading in the entire fresh grocery industry.

Our way of thinking is identifying the users' needs and then pushing ourselves to improve accordingly. Some people see problems and immediately, they try to be smart and announce to the world that they know everything. Others, on the other hand, keep their heads down in solving problems. In fact, entrepreneurship is the process of problem-solving. Why do we need entrepreneurs if there is this perfect industry with a huge, highly lucrative market with no problems or difficulties?

This concludes our question-and-answer session. I'd like to hand the conference back to our management for closing remarks.

Thank you again for joining our call today. If you have any further questions, please feel free to contact us or request to our IR website. We look forward to speaking with everyone in our next earnings call. Have a good day.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]