ZKH Group Q1 2024 Earnings Report

ZKH Group EPS Results

• Actual EPS: -$0.08
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

ZKH Group Revenue Results

• Actual Revenue: $257.66 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

ZKH Group Announcement Details

• Quarter: Q1 2024
• Date: 5/21/2024
• Time: N/A
• Conference Call Date: Tuesday, May 21, 2024
• Conference Call Time: 8:00AM ET

ZKH Group (NYSE:ZKH) Limited develops and operates a maintenance, repair, and operating (MRO) products trading and service platform that offers spare parts, chemicals, manufacturing parts, general consumables, and office supplies in the People's Republic of China. The company provides MRO procurement and management services; digitalized MRO procurement solutions; and logistics and warehousing services. It also engages in the production and sale of intelligent warehousing equipment. ZKH Group Limited was founded in 1998 and is based in Shanghai, the People's Republic of China.

ZKH Group Q1 2024 Earnings Call Transcript

Key Takeaways

• GMV slightly declined to RMB2.35 billion in Q1, driven by the late Chinese New Year and structural optimization, while the customer base grew 29% year-over-year to 6,000.
• Gross margin improved to 18% from 17.1%, with the 1P product sales margin rising to 16% and the 3P marketplace take rate increasing to 11.6%, leading to a narrower adjusted net loss of RMB43.1 million versus RMB87.1 million a year earlier.
• Launched its first smart automated warehouse for fasteners in Qingpu, Shanghai, expected to boost labor productivity by 30% and storage utilization by 100% while cutting forklift needs by 70%.
• Online customer acquisitions reached a record quarterly high, up 103% year-over-year, by enhancing digital marketing, intelligent lead analysis and smart outbound calling.
• Pushed ahead with global expansion via a dedicated U.S. team, local warehousing, an independent U.S. website and a curated launch of 5,000 SKUs with over 100 suppliers.

Presentation

[Operator]

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 Jin Li, Head of Investor Relations. Please go ahead.

[Jin Li, Head of Investor Relations at ZKH Group Limited]

Thank you, operator. 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 provisions. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties. Some of these risks 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's 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.

[Jin Li, Head of Investor Relations at ZKH Group Limited]

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 session. With that, I will turn the call over to Eric. Eric, please go ahead.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

Hello, and welcome to this Q1 2024 Earnings Conference Call for ZKH.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

We got off to a flying start in 2024, extending last year's growth momentum. In the first quarter, our GMV reached RMB 2.35 billion, representing a slight year-over-year decline, driven primarily by business quality and structural optimization, as well as the outsized seasonality impact of the late timing of the Chinese New Year.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

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.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

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.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

The combination of improved business quality, cost control, and increased efficiencies propelled continuous improvement in profitability. Our adjusted net loss narrowed to RMB 43 million in the first quarter of 2024, which is an improvement of approximately RMB 44 million from the eighty-seven million RMB 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.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

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

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

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.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

Furthermore, we effectively leveled up our fulfillment capabilities. In March 2024, we put into operation our first smart and automated warehousing facility for 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.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

On the digital front, in addition to continuing to build end-to-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 U.S. local team, the selection of warehouse sites, and the launch of an independent U.S. website. We aim to advance our overseas business through a model of digital innovation and a spirit of joint entrepreneurship.

[Translator]

On the product front, we'll focus on curated high-value offerings with large packages, with the goal of simplifying the supply chain, reducing costs 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.

[Translator]

Moreover, Chinese companies going global present 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'll now turn the call over to our CFO, Max Lai, to discuss our financial performance. Thank you, everyone.

[Max Lai, CFO at ZKH Group Limited]

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 RMB 2.3 billion from RMB 2.4 billion a year ago. By platform, GMV generated from ZKH platform decreased by 3.2% year-over-year to RMB 2.1 billion, and GMV generated from GBB platform grew 28.6% year-over-year to RMB 211 million. By business model, GMV of product sales model reduced, which is RMB 1.8 billion, decrease of 3.5% year-over-year. While GMV from marketplace model was about RMB 572.9 million, up 7.3% year-over-year.

[Max Lai, CFO at ZKH Group Limited]

The proportion of GMV generated from marketplace model was about 24.4% in the first quarter of 2024, compared with 22.5% in the prior year period. Our total net revenues in the first quarter of 2024 was about RMB 1.86 billion, representing a decrease of 4% from RMB 1.94 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 our total revenues, net product revenues in the first quarter of 2024 were RMB 1.78 billion, decrease of 4.9% from RMB 1.87 billion in the prior year before.

[Max Lai, CFO at ZKH Group Limited]

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 RMB 66.7 million, an increase of 12.8% from RMB 59.1 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 RMB 18.7 million, an increase of 43.8% from RMB 13 million in the prior year period, mainly attributable to higher revenues generated from our testing and repair services and warehousing and logistics services.

[Max Lai, CFO at ZKH Group Limited]

Gross profit in the first quarter of 2024 grew 1% year-over-year to RMB 334.1 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 Executive platform, and partially offset by lower gross margin of product sales on the GBB platform. Operating expenses in the first quarter of 2024 were RMB 463.7 million, a decrease of 3% from RMB 478.2 million in the prior year period.

[Max Lai, CFO at ZKH Group Limited]

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 RMB 97.3 million, a decrease of 12.2% from RMB 110.9 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.

[Max Lai, CFO at ZKH Group Limited]

Sales and marketing expenses in the first quarter of 2024 were about RMB 164.1 million, a decrease of 8.8% from RMB 179.9 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 RMB 39.8 million, a decrease of 16.6% from RMB 47.7 million in the prior year period. The decrease was primarily attributable to lower employee benefits costs.

[Max Lai, CFO at ZKH Group Limited]

Research and development expenses as percentage of net revenues were 2.1%, compared with 2.5% in the prior year period. General and administrative expenses in the first quarter of 2024 were RMB 162.4 million, an increase of 16.3% from RMB 139.7 million in the prior year period. The increase was primarily attributable to the increase in share-based compensation expenses, and partially offset by decrease in other employee benefits costs. General and administrative expenses as percentage of net revenues were 8.7%, compared with 7.2% in the prior year period.

[Max Lai, CFO at ZKH Group Limited]

Loss from operating expenses, loss from operations in the first quarter of 2024 was RMB 129.6 million, compared with RMB 147.4 million in the prior year period. Non-GAAP adjusted net loss in the first quarter of 2024 was RMB 43.5 million, compared with RMB 66.9 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 31st, 2024, we had cash and cash equivalents, restricted cash and short-term investments of RMB 2.05 billion-RMB 2.03 billion, compared with RMB 2.12 billion as of December 31st, 2023. Net cash used in operating activities was about RMB 224.3 million in the first quarter of 2024, compared with RMB 263.4 million in the prior year period. Now I would like to open the call to Q&A.

[Max Lai, CFO at ZKH Group Limited]

Operators, please go ahead.

[Operator]

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. Our first question comes from Leo Chiang with Deutsche Bank. Please go ahead.

[Leo Chaing, Equity Research Analyst at Deutsche Bank]

[Foreign language]

[Leo Chaing, Equity Research Analyst at Deutsche Bank]

So thank you, management, for taking my questions. My first question is could management update us on the China's MRO procurement service market outlook in 2Q, second quarter 2024 and the second half 2024? My second question is, Eric Chen mentioned that GMV flattens in Q1 due to more focus on high quality revenue and lower seasonality. Could management please elaborate high quality growth and how this would affect our GMV growth in the following quarters? And also, the GMV recovery and new client sign up trends in recent months post Chinese New Year. [Foreign language]

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

Thank you very much for your question. So for your first question, manufacturing, the manufacturing sector in recent years in China has been pretty stable. Of course, you know, 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 that of the manufacturing sector. So, I believe the total demand for MRO is, has, has been and will continue to be stable. 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.

[Translator]

Because in this existing market, more and more businesses have this need to move their purchases from offline to online and make the purchase and procurement process more transparent. So that is a trend that is evolving and ongoing, and the need to optimize 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 growth margin also improved. So, these things went to show my point about the trend being very, very positive.

[Translator]

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 into the growth in March. And the impact of the RMB this year was indeed bigger than last year. So because of the manufacturing trends, factories were more slow going in terms of restarting their operations post RMB. And we have been gradually optimizing the structure of our business, and you know, focusing on more high quality business, like what, like, like I mentioned in my presentation. And for some, because with MRO, a lot of times the order volume is huge.

[Translator]

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 is 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. In terms of the number of customers served, it was 32,000.

[Translator]

So 3,800 of them were new customers, and the number last year was 1,900 new customers. So the pace at which we are growing, the number of our customers has been picking up. And we have been doing this optimization. So in terms of its impact to our GMV and top line, it will be less and less in ensuing quarters. And I believe our growth for the entire year, this year, will be still over 20%. Thank you.

[Operator]

Our next question comes from Ella Ji with China Renaissance. Please go ahead.

[Ella Ji, Managing Director of TMT Research at China Renaissance]

[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.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

So as our product competitiveness keeps improving and as our cost keeps going down, it is really necessary and important to improve our growth 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 growth margin.

[Translator]

So in terms of the growth, margin improvement this year, in 2023, it was 16.7%, and this year it will improve by 1.5-2 percentage points to 18%. So a very gradual and healthy improvement. And, in terms of our ZKH platform, 1P business, 2023 growth, margin was 14.2%, and it will be raised to 16%, so 1.5 percentage points. And in terms of ZKH 3P business, take rate will grow from 11.2% in 2023 to 12% 2024. Hold on one second。

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

Gong Bang Bang, yes, yes. OK, so GBB take rate will from 6%-7% for GBB.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

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%-25% of total GMV, and take rate will improve from 11%-12%.

[Operator]

Our next question comes from Brenda Zhao with CICC. Please go ahead.

[Brenda Zhao, Research Analyst at CICC]

[Foreign language] Hey, Long Chen, Max Lai, good evening. My question is about our strategic directions. As Mr. Chen mentioned that the private label products and the overseas expansions are two important direction for the company. Could management give updates on these two aspects? Thank you.

[Eric Chen, Founder, Chairman, and CEO at ZKH Group Limited]

[Foreign language]

[Translator]

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 RMB 540 million of revenue from private label products. This year, our goal is to double that and reach RMB 1 billion in revenue from private label products. 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 U.S. 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.

[Operator]

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.

[Jin Li, Head of Investor Relations at ZKH Group Limited]

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 questions, please feel free to contact us. Our contact information can be found in today's press release. Thank you, and have a great day.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Eric Chen, Founder, Chairman, and CEO
• Jin Li, Head of Investor Relations
• Max Lai, CFO

Analysts

• Brenda Zhao, Research Analyst at CICC
• Ella Ji, Managing Director of TMT Research at China Renaissance
• Leo Chaing, Equity Research Analyst at Deutsche Bank
• Translator