ZKH Group Ltd (ZKH) 2024 Q1 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the ZKH Group Limited's first-quarter-2024 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to [Jean Lee], Head of Investor Relations.

Please go ahead.

Thank you, operator, and thank you, everyone.

Welcome to our call today.

Joining us today on the call are Mr. Eric Chen, our founder, Chairman and CEO; and Mr. Max Lai, our CFO.

During this call, we will discuss our future performance which are forward-looking statements made under the Safe Harbor provision.

Such statements are not guarantees of future performance and are subject to certain risks and uncertainties.

Some of these risks discussed are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release.

A number of potential risks and uncertainties are included in ZKH Group public filings with the SEC.

ZKH Group does not undertake any obligation to update this forward-looking information except as required by law.

During today's call, we will also discuss certain non-GAAP financial measures for comparison purposes only.

Please see the press release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results.

Eric and Max will share our business updates, operating highlights and financial performance for the first quarter of 2024.

After the prepared remarks, we will have a Q&A section.

With that, I will turn the call over to Eric.

Eric, please go ahead.

(spoken in foreign language) (interpreted) Hello, and welcome to this Q1-2024 earnings conference call for ZKH.

We got off to a flying start in 2024, extending last year's growth momentum.

In the first quarter, our GMV reached RMB2.35 billion, representing a slight year-over-year decline, driven primarily by business quality and structural optimization as well as the outsized seasonality impact of delayed timing of the Chinese New Year.

In the first quarter, we served more than 46,000 customers, up 29% year over year.

In terms of individual industries, we noticed promising growth trends in new energy vehicles, chemical engineering, food chemicals, property management and cultural tourism industries.

In contrast, industries such as traditional automobiles, mining, steel and coal are facing some pressure.

Product wise, we are pleased to see rapid growth in adhesives, lubricants and other chemicals as well as in industrial-grade products such as those used in factory automation as well as tools and consumables, pneumatics and hydraulics and power transmission products.

Our gross margin continued to improve in the first quarter, increasing to 18% from 17.1% in the same period last year.

Specifically for the ZKH platform, we achieved a substantial increase in the gross margin of our product sales model, 1P, which grew to 16% from 14.7% in the prior year period.

We also witnessed significant growth in the take rate of our marketplace model, 3P, which increased to 11.6% from 11.1% in the prior year period.

The combination of improved business quality, cost control and increased efficiencies propelled continuous improvement in profitability.

Our adjusted net loss narrowed to RMB43 million in the first quarter of 2024, which is an improvement of approximately RMB44 million from the RMB87 million in the prior year period.

Our loss margin improved from negative 4.5% in the first quarter of 2023 to negative 2.3% in the first quarter of this year.

The first quarter of each year is a slow season in B2B industries, accounting for approximately 18% to 20% of full-year revenues.

On top of maintaining relatively stable staffing, we were able to achieve a 50% year-on-year improvement in our bottom line in the first quarter of this year, laying the foundation for full-year profitability.

Let's take a closer look at our business progress.

Throughout the first quarter, our primary focus remained on strengthening our core competitiveness.

By consistently investing in operations, products and digitalization while further accelerating global expansion, we meaningfully enhanced services for our corporate customers.

Furthermore, we effectively leveled out our fulfillment capabilities.

In March 2024, we put into operation our first smart and automated warehousing facility for a product line of fasteners in Qingpu, Shanghai.

This automated warehouse is expected to increase labor productivity by 30% and storage utilization by 100% for this fastener product line while reducing the number of traditional forklifts needed by 70%.

The successful launch of this flagship automated warehouse marks the beginning of our transition into a new phase of integrated fulfillment, where the synergy of automation and human expertise enables us to pinpoint the optimal automation solutions for diverse MRO product categories.

On the digital front, in addition to continuing to build and end digital capabilities, we have bolstered our digital marketing initiatives and online customer acquisition capabilities.

We also have enhanced the efficiency of online lead acquisition and conversion by leveraging technologies such as intelligent lead analysis and smart outbound calling.

In the first quarter, our online customer acquisitions achieved a record quarterly high, up 103% year on year.

Regarding our globalization efforts, we have fast tracked the formation of our local US team, the selection of warehouse sites and the launch of an independent US website.

We aim to advance our overseas business through a model of digital innovation and a spirit of joint entrepreneurship.

On the product front, we'll focused on curated high-value offerings with large packages with the goal of simplifying the supply chain, reducing cost and risks in fulfillment and improving profitability as we aspire to become a Costco for MRO industry.

We have also curated 5,000 SKUs for our initial global launch, focusing on product lines such as personal protective equipment, security related products, tools, material handling and adhesives.

On the supplier side, more than 100 suppliers have joined our international operations.

We hope that the services we provide to our suppliers can serve as a gateway for MRO products from China to enter international markets.

Looking ahead, we believe that China's MRO market still holds tremendous potential despite a challenging external environment.

This is because China is the world's largest manufacturing market, and the business community has long-term demand for efficient and cost-effective online procurement.

Moreover, Chinese companies going global presents yet another opportunity.

To enhance our long-term growth prospects, we have made certain short-term adjustments and optimizations.

Although there may be some temporary impact on sales growth after implementing these modifications, we will redouble our focus on increasing core competitiveness by investing in digital and smart technologies as well as improving our product capabilities and operational efficiency.

These initiatives will be more conducive to a healthy and long-term growth.

With that, I will now turn the call over to our CFO, Max Lai, to discuss our financial performance.

Thank you, everyone.

Thank you, Eric, and thanks, everyone, for making time to join our earnings call today.

I will now provide an overview of our 2024-first-quarter financial results.

In the first quarter of 2024, our GMV decreased by 1% year over year to RMB2.3 billion from RMB2.4 billion a year ago.

By platform, GMV generated from the ZKH platform decreased by 3.2% year over year to RMB2.1 billion.

And GMV generated from GBB platform grew 28.6% year over year to RMB211 million.

By business model, GMV of product sales model reduced which is at RMB1.8 billion, a decrease of 3.5% year over year, while GMV from marketplace model was about RMB572.9 million, up 7.3% year over year.

The proportion of GMV generated from marketplace model was about 24.4% in the first quarter of 2024 compared to 22.5% in the prior year period.

Our total net revenues in the first quarter of 2024 was about RMB1.86 billion, representing a decrease of 4% from RMB1.94 billion in the prior year period, mainly due to our focus on high-quality revenues and lower seasonal demand as a result of the late timing of Chinese New Year which fell in the middle of February in 2024.

Looking at the breakdown of total revenue, net product revenues in the first quarter of 2024 were RMB1.78 billion, a decrease of 4.9% from RMB1.67 billion in the prior year before.

The decrease was mainly due to lower net product revenues generated from the ZKH platform, partially offset by higher net product revenues from the GBB platform.

Net service revenues in the first quarter of 2024 amounted to RMB66.7 million, an increase of 12.8% from RMB59.1 million in the prior year period, primarily attributable to the growth of marketplace model on the ZKH platform.

Other revenues in the first quarter of 2024 were RMB18.7 million, an increase of 43.8% from RMB13 million in the prior year period, mainly attributable to higher revenue generated from our testing and repairment services and warehousing and logistics services.

Gross profit in the first quarter of 2024 grew 1% year over year to RMB334.5 million, resulting in gross profit margin of 18% compared with 17.1% in the prior year period.

The increase was driven by higher gross margin of product sales model and higher take rate of marketplace model on the ZKH platform as well as the growth of the marketplace model on the ZKH platform and partially offset by lower gross margin of product sales on the GBB platform.

Operating expenses in the first quarter of 2024 were RMB463.7 million, a decrease of 3% from RMB478.2 million in the prior year period.

Operating expenses as percentage of net revenues were about 24.9% compared with 24.7% in the prior year period, mainly due to the increase in share-based compensation expenses.

Fulfillment expenses in the first quarter of 2024 were RMB97.3 million, a decrease of 12.2% from RMB110.9 million in the prior year period.

The decrease was primarily attributable to lower distribution expenses and employee benefit costs.

Fulfillment expenses as percentage of net revenues were about 5.2% compared to 5.7% in the prior year period.

Sales and marketing expenses in the first quarter of 2024 were about RMB164.1 million, a decrease of 8.8% from RMB179.9 million in the prior year period.

The decrease was primarily attributable to the decrease in the employee benefit costs and travel expenses.

Sales and marketing expenses as percentage of net revenues were 8.8% compared with 9.3% in the prior year period.

Research and development expenses in the first quarter of 2024 were RMB39.8 million, a decrease of 16.6% from RMB47.7 million in the prior year period.

The decrease was primarily attributable to lower employee benefit costs.

Research and development expenses as percentage of net revenues was 2.1% compared with 2.5% in the prior year period.

General and administrative expenses in the first quarter of 2024 were RMB162.4 million, an increase of 16.3% from RMB139.7 million in the prior year period.

The increase was primarily attributable to the increase in share-based compensation expenses and partially offset by a decrease in other employee benefits costs.

General and administrative expenses as percentage of net revenues was 8.7% compared with 7.2% in the prior year period.

Loss from operating expenses -- loss from operations in the first quarter of 2024was RMB129.6 million compared with RMB147.4 million in the prior year period.

Non-GAAP adjusted net loss in the first quarter of 2024 was RMB43.5 million compared with RMB66.9 million in the prior year period.

Non-GAAP adjusted net loss margin was 2.3% in the first quarter of 2024 compared with 4.5% in the prior year period.

As of March 31, 2024, we had cash and cash equivalents, restricted cash and short-term investments of RMB2.03 billion compared with RMB2.12 billion as of December 31, 2023.

Net cash used in operating activities was about RMB224.3 million in the first quarter of 2024 compared with RMB263.4 million in the prior year period.

Now, I would like to open the call to Q&A.

Operator, please go ahead.

Leo Chang, Deutsche Bank.

(spoken in foreign language) I'll translate myself.

So thank you management, for taking my questions.

And my first question is could management update us on China's MRO procurement service market outlook in 2Q, second-quarter 2024 and the second-half 2024?

My second question is Changxiang mentioned that GMV flattish in 1Q due to more focus on high-quality revenue and lower seasonality.

Could management please elaborate high-quality growth, and how this should affect our GMV growth in the following quarters?

And also, the GMV recovery and new clients sign-up trends in recent months post Chinese New Year?

Xiè xiè.

(spoken in foreign language) (interpreted) Thank you very much for your question.

So for your first question, the manufacturing sector in recent years in China has been pretty stable.

Of course, on it's a bifurcated situation.

For some sectors, they have been growing faster and others are more distressed.

I'm talking about sectors like automobile, construction, cement, steel.

But in terms of the MRO scale, the scale of the MRO industry is very closely correlated with the data of the manufacturing sector.

So I believe the total demand for MRO has been and will continue to be stable on.

If you look at the new MRO suppliers, so in terms of the e-commerce business model of being able to supply nationally both in China and overseas, things are going very good.

Because in this existing market, more and more businesses have this need to move their purchases from offline to online and makes the purchase and procurement process more transparent.

So that is a trend that is evolving and ongoing.

And the need to optimized costs on the part of companies in general hasn't changed.

So in terms of MRO in the e-commerce model, things are going very well, and I'm very bullish on that.

So if you look at our Q1 performance in terms of the number of our customers, it has increased, and the gross margin also improved.

So these things going to show my point about the trend being very, very positive.

The second question -- to answer the second question.

So firstly, Chinese New Year 2024 happened in February, which by historical standards was pretty late.

So the impact was more obvious in March.

So it was eating to the growth in March.

And the impact of the CNY this year will be even bigger than last year.

So because of the manufacturing trends, factories were more slow going in terms of restarting their operations post CNY.

And we have been gradually optimizing the structure of our business and focusing on more high-quality business like I mentioned in my presentation.

And because with MRO, a lot of times, the order volume is huge.

And if you use activity based costing for some orders for some business, it's not really making money for us, and sometimes, it's even loss-making.

So for those business -- for those types of business, as well as business that has long receivables, receivable risks and regulatory risks and business that are generally not helping with our bottom line, we have been eliminating this kind of business left and right to optimize and improve our bottom line.

Going into April, are things going better?

I think the answer is positive.

We have seen 17% year-over-year growth this April.

And in terms of the number of customers served, it was 32,000.

So 3,800 of them were new customers.

And the number last year was 1,900 new customers.

So the pace at which we're growing, the number of customers has been picking up.

And we have been doing this optimization.

So in terms of its impact to our GMV and the top line, it will be less than that in ensuing quarters.

And I believe our growth for the entire year this year will be still over 20%.

Thank you.

Ella Ji, China Renaissance.

(spoken in foreign language) So my question is regarding the outlook for the margin as well as the 3P marketplace take rate outlook for the subsequent quarters.

Thank you very much.

(spoken in foreign language) (interpreted) So as our product competitiveness keeps improving and as our cost keeps going down, it is really necessary and important to improve our gross margin to some extent.

However, at this point, the growth of our scale is still prioritized over the growth of our margins.

So that is to say we don't have to hastily reflect our cost advantage in the gross margin.

So in terms of the gross margin improvement this year, in 2023, it was 16.7%.

And this year, it will improve by 1.5 to 2 percentage points to 18%.

So a very gradual and healthy improvement.

And in terms of our ZKH platform 1P business, '23 gross margin was 14.2%, and it was raised too 16%, so 1.5 percentage points.

And in terms of ZKH 3P business, take rate will grow from 11.2% in '23 to 12% '24.

So GBB take rate will grow from 6% to 7% for GBB.

So for our 3P business, we won't be too fixated on improving our take rate by too much.

So because we care more about serving more partners and growing our scale, so 3P will grow a little bit to 23% to 25% of total GMV, and take rate will improve from 11% to 12%.

Brenda Zhao, CICC.

(spoken in foreign language) Good evening.

My question is about our strategic directions.

As Mr. Chen mentioned that the shelf-label products and the overseas expansions are two important direction for the company, could management give updates on these two aspects?

Thank you.

(spoken in foreign language) (interpreted) Private label is an important way for MRO players to increase their GM and also to lower cost and improve product capability and competitiveness.

In 2023, we achieved RMB540 million of revenue from private label products.

This year, our goal is to double that and reach RMB1 billion in revenue from private label products.

And in terms of R&D, we are focusing more this year on improving the quality of our private label products and further improve cost competitiveness.

We are also pursuing actively, certification of our products in the US and Europe for our overseas market, which we aim to have half of the revenue from private label products.

That will further strengthen our competitiveness as well as help to improve our GM.

And that concludes the question-and-answer session.

I would like to turn the conference back over to management for any closing -- any additional or closing comments.

Thank you.

Once again for joining us today.

You can find the webcast of today's call on ir.zkh.com. If you have any further question, please feel free to contact us.

Our contact information can be found in today's press release.

Thank you, and have a good day.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.