ZKH Group Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 22, 2024

There are 8 speakers on the call.

Operator

Ladies and gentlemen, good day, and welcome to ZKH Group Limited Second Quarter and Fiscal Year 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.

Speaker 1

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 Chief Executive Officer and Mr.

Speaker 1

Max Lai, our Chief Financial Officer. During this call, we will discuss our future performance. These are forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act.

Speaker 1

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 Securities and Exchange Commission. 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 purpose only.

Speaker 1

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 Q2 of 2024. After the prepared remarks, we will have a Q and A session. With that, I will turn the call to Eric. Eric, please go ahead.

Speaker 2

Hello, everyone. Thank you for joining ZKH's 2nd quarter 2024 earnings conference call. Our exemplary teamwork and effective execution yielded strong results during this quarter. Despite the ongoing macro headwinds, we remain steadfast in our commitment to do the right things that position our business for long term success. We strategically stepped back from business that did not align with our sustainable competitive edge.

Speaker 2

While this may impact our short term growth, it has led to an improvement in the quality of our business. Importantly, even with these recent optimizations and business adjustments, we still achieved solid revenue growth, profitability increase and significantly improved cash flow in the 2nd quarter. Let's delve into these. Our 2nd quarter GMV reached RMB2.75 billion, up 5.6% year over year. This brought our 2nd quarter revenue to RMB2.25 billion, up 8.5% year over year.

Speaker 2

Our gross profit in the 2nd quarter increased by 14.3% year over year, reaching RMB380 1,000,000. Our gross margin based on revenue increased to 17% in the 2nd quarter, up from 16.2% in the same period last year. Driven by higher business quality, effective cost control and improved efficiency, we substantially narrowed our adjusted net loss by RMB95 1,000,000 to RMB34.86 million in the 2nd quarter, compared to RMB130 1,000,000 in the Q2 of 2023. Notably, the 2nd quarter marks our 9th consecutive quarter of year over year improvement in our adjusted net loss margin from 6.2% in the Q2 of 2023 to 1.5% in the Q2 of 2024. I'd like to add that despite the controls that we achieved, management cost, we did not lower our investment in product capabilities as well as our digital capabilities.

Speaker 2

And that is to say, the improvement in profitability is not at the price of a lower investment in these core competencies. Our substantial profitability improvements, coupled with optimized management of accounts receivables, accounts payable and inventories resulted in a net operating cash inflow of RMB120 1,000,000 in the Q2 of 2024. This positive cash flow further strengthens our cash position. Recently, we've taken undertaken comprehensive discussions and initiatives with the primary goal of reaffirming our development direction and strategic objectives, as well as aligning our entire team's mindset to ensure strategic consistency and effective execution. I'd like to add a few words here.

Speaker 2

In terms of what I mean by our development direction and strategic objectives. First, we are deeply committed to the MRO industry and we are making deep investments into product capabilities. And that means that we are not just choosing products for our customers, but we are now actively engaged in the research and development of products as well as in the coordination of manufacturing. Secondly, we're not just covering our key account customers, but now expanding our focus more to small and medium customers. And we are also developing our overseas business starting with developed countries.

Speaker 2

Thirdly, we're increasing our focus on the management of accounts receivables, inventories and cash flow. In this macro environment, we believe that this management is of extreme importance. Our goal is to become a MRO service platform of choice for our customers globally that can create value for our customers. More specifically, I will explain this in 3 areas. In terms of our organizational structure and team capabilities, as we enter a new growth stage focused on lean operations and advancing IT and digital capabilities, we are upgrading our team capabilities and synergy.

Speaker 2

And this includes bringing together and empowering our teams for customer operations, product operations and business development, as well as enhancing the management of human resources and finance. This means that we are creating a team with mature experience in the industry with great synergy in collaboration and with the ability to take on new tasks competently. And this will help us lay a solid foundation for our further growth, which is going to be more healthy and more long term. We aim to further increase our data assets and enhance our digital and intelligent service capabilities through product and customer operations, including improving digitalization in our internal operations. We aim to strengthen our business development team to attract more high quality third party marketplace suppliers, fostering both competition and synergy with our 1st party product sales and private label offerings, thereby enhancing our supply competitiveness.

Speaker 2

In terms of product capabilities, we believe one of our differentiators versus our competitors is that we are moving further upstream in the supply chain as we actively engage in product R and D, design and smart manufacturing to grow the research and development of our private label offerings to achieve true cost savings and high price performance. By the end of this year, our plant in Taichung, Jiangsu province will be built and our MRO innovation center there will be opened. In the Q2 of 2024, the GMV of our private label products increased by 27% year over year. Additionally, by deepening our industry and customer insights and enriching our data assets, we're well positioned to deliver curated product pools, offering industry specific features and meeting the diverse needs of our customer segments. This strategy will expedite our transition from a sales driven to a supply driven model, reducing our reliance on sales generated from ad hoc inquiries and requests for quotes.

Speaker 2

Instead, we'll focus on increasing the sales of our readily available products with a competitive advantage, particularly our private label offerings and the ZKH selection product line. This transition is poised to enhance customer experience and boost repeat purchases, ultimately improving our operating efficiency and expanding our gross margin. On the sales front, by enhancing customer operations and accumulating more customer related data, we aim to assess solutions that can help our customers reduce cost and improve efficiency, ultimately leading to better and more effective online customer acquisition, particularly small and medium sized customers. Additionally, through our localized service organizational design, we aim to further enhance on the ground services and accelerate our efforts to cover, engage and onboard regional customers. At the same time, our grid based staffing strategy is designed to boost the efficiency and effectiveness of customer visits, fostering deeper customer engagement and loyalty.

Speaker 2

As a result of these initiatives, we served over 48,000 customers in the Q2 of 2024 and more than 63,000 customers over the first half of this year, representing year over year growth of 25.8% and 32.7% respectively. We are committed to becoming a leading digital platform for MRO service with a strong focus on creating value for our customers. We firmly believe that the strategies and initiatives outlined here are critical to enhancing our product supply chain capabilities, digitalization and lean operations, all of which are key to long term business development and growth. Therefore, even though we have recently optimized and adjusted certain areas of our business, And despite the challenging external environment, we are continuing to invest in our product and digital capabilities, which may have a short term impact on the growth of revenue and profitability. Even despite all of this, our long term outlook remains unchanged, and we believe that this will help us further strengthen our core competitiveness.

Speaker 2

Ultimately, we are confident in our ability to achieve sustained steady growth and continuously unlock profitability over time. With that, I'll turn the call over to our CFO, Max Lai, to discuss our financial performance. Thank you.

Speaker 3

Thank you, Eric, and thanks, everyone, for making time to join our earnings call today. I will now provide an overview of our 2024 Q2 financial results. We are pleased with the solid performance in the Q2, driving further probability improvement despite macroeconomic headwinds. In the Q2, our GMV increased by 5.6 percent year over year to RMB2.8 billion. By platform, GMV generated from EtherCage platform increased by 4.4% year over year to RMB2.5 billion, and GMV generated from GBV platform grew 17.8% year over year to RMB274 point million.

Speaker 3

The proportion of GMV generated from the marketplace model was about 20.7% in the Q2 of 2024. Our total revenues in the Q2 of 2024 were RMB2.25 billion, representing an increase of 8.5%, mainly due to the strong increase in our customer numbers and continued growth in MRO market demand. We enhanced our customer coverage and service capabilities by optimizing the sales team structure to foster closer customer engagement. As a result, we had over 48,000 customers transacted on our platform in the Q2 of 2024, representing year over year increase of 25.8%. As a result of business quality improvement, gross profit in the Q2 grew by 14.3 percent year over year to RMB383 1,000,000, resulting in gross profit margin of 17% compared with 16.2% in the prior year period.

Speaker 3

The increase was driven by higher gross margin of product sales 1P model increased from 13.7% to 15.5% and increased takeaway of marketplace 3P models increased from 11.4% to 12.2%, partially offset by slightly lower gross margin of GBP platform. Operating expenses in the Q2 of 2024 were RMB454.2 million. Operating expenses as a percentage of net revenues were 20.2 percent compared with 22.1% in the prior year period, demonstrating our improved operating efficiency and also effectiveness of our cost control measures. Fulfillment expenses in the Q2 of 2024 were RMB99.1 million, a decrease of 7.1 percent from RMB106.7 million in the prior year period. The decrease was primarily attributable to lower employee benefit costs and warehouse rental costs, partially offset by higher distribution expenses.

Speaker 3

Fulfillment expenses as a percentage of net revenue were 4.4% compared to 5.1% in the prior year period. Sales and marketing expenses in the Q2 of 2024 were RMB157.7 million, a decrease of 6.5 percent from RMB168.6 million in the prior year period. The decrease was mainly attributable to lower travel expenses and employee benefits costs. Sales and marketing expenses as a percentage of net revenues were 7% compared with 8.1% in the prior year period. Research and development expenses in the Q2 were RMB38 400,000, a decrease of 16.4 percent from RMB 46,000,000 in the prior year period.

Speaker 3

The decrease was mainly attributable to lower employee benefit costs, Research and development cost expenses as a percentage of net revenues were 1.7% compared with 2.2% in the prior year period. General and administrative expenses in the Q2 of 2024 were RMB159 1,000,000, an increase of 16.1 percent from RMB136.9 million in the prior year period. The increase was primarily attributable to higher share based compensation expenses and partially offset by decrease in employee benefit costs. General and administrative expenses as a percentage of net revenues were 7.1% compared to 6.6% in the prior year period. Our non GAAP adjusted net loss in the Q2 of 2024 was RMB34.9 million compared with RMB129.5 million in the prior year period.

Speaker 3

Non GAAP adjusted net loss margin was 1.5% in the Q2 of 2024 compared with 6.2% in the prior year period, making our 9th consecutive quarter of year over year improvement. As of June 30, 2024, we had cash and cash equivalents, restricted cash and short term investments of RMB2.04 billion compared with RMB 2,120,000,000 as of December 31, 2023. Net cash generated from operating activities was RMB122.1 million in the Q2 of 2024, compared with net cash used in operating activities of RMB236.2 million in the prior year period. In June this year, we initiated share repurchase program under which we may repurchase up to US50 $1,000,000 of ADS over a 12 month period ending in June 2025. The program underscores our confidence in our business growth and future value creation potential.

Speaker 3

Moving forward, we will continue to execute our share repurchase program from time to time on the open market and market prices, and we made focus on sustaining growth and delivering long term value to our shareholders. With that, I would now like to open the call to Q and A. And operator, please go ahead. Thank you.

Operator

Thank you. We will now begin the question and answer The first question comes from Leo Chung with Deutsche Bank. Please go ahead.

Speaker 4

Myself. So thanks management for taking my questions. We saw that GMV growth still down due to macro challenges and business adjustment. On this, I have three questions. The first question, management give us an update on customers spending by industry verticals and product categories in the Q2.

Speaker 4

My second question is, could management share with us the update on China's MRO consumer service market outlook and the competition landscape in second half of twenty twenty four? My first my third question is could management give us an update on the business optimization progress? Is it largely complete or should we expect a continuous impact in the Q2? Thank you.

Speaker 5

Thank you very much for your question. So yes, from the industry perspective, indeed some industries were doing really well or at least relatively stable, but some industries have been impacted by cycles. So if you look to industries like EVs, chemicals, electric and equipment manufacturing and communications electronics, their procurement on our platform has been growing very strong, not because the downstream demand has grown significantly, but because these industries are growing at a pretty healthy pace and their digitized procurement, their migration of procurement from offline to online has been going pretty smoothly. Specifically for EV, Q2 growth has been 36% year over year. For chemicals, the growth of procurement was 36% also year over year.

Speaker 5

Electric and Equipment Manufacturing, 30% year over year growth. Communications Electronics, 29% year over year growth. So for these industries, borrowing the risks of receivables and payment collection, the growth will usually be pretty quick. But on the contrary, for example, for traditional ICE vehicles, mining, steel and coal, these industries, their procurement on the platform has been pretty flat year over year. Specifically for ICE cars, Q2 has been down procurement wise by 2% year over year, steel has been down by 1% year over year.

Speaker 5

And from the product perspective, chemicals, factory automation, fasteners, grinders and abrasives and PPEs or personal protective equipment have been growing pretty quickly year over year. Specifically for chemicals, year over year growth was 40%, 25% for factory automation, 26% for fasteners, 45% for grinders and abrasives and 23% for PPE. So from the customer's perspective, GMV from SMEs has been growing very rapidly. And so specifically the GBV platform that serves SMEs has recorded a GMV of RMB 270,000,000 unlike mom with a growth, Yovia growth of 17.8%. However, KA customers are still the key to us deeply cultivating the market and growing our market share.

Speaker 5

And in terms of the number of our customers, this number grew by 32.7% in the first half this year, meaning we're covering more and more clients and customers due to our increasing product competitiveness. So to your second question, despite the macro headwinds like you referred to, the Chinese manufacturing sector is still the largest in the world. And when it comes to MRO, it is still it remains the an inelastic demand by the manufacturing sector. That's why the potential market potential for MRO is huge. And currently, if you look at the penetration of the digitized procurement on the part of the companies, the penetration is still pretty low.

Speaker 5

And this trend of companies moving to online to do their procurement is only accelerating and this trend is irreversible. And during economic hardships, the companies will have even a stronger need to minimize their costs and maximize their proficiency or efficiency rather. And that's why more and more companies are willing to adopt e commerce as their way to procure their items. And competition wise, it's getting increasingly rational. The fierce competition in the past is now non existent.

Speaker 5

And as a leader in this space and leaders in this space will have even more marked position and their advantages will become even more conspicuous. And of course competition not only exists in China, it also exists in overseas markets, especially developed markets. And I would say that developed markets offer better opportunities for Chinese MRO. And in this sense, our presence and foray into the U. S.

Speaker 5

Market will give us even a better edge or better leg up. And to answer your third question, so I would like to further explain what we mean by optimization and how we go about it. So firstly, we would like to optimize business where there is a payment collection risk. So we do that in order to better guard our cash flow. So we manage that kind of business in advance.

Speaker 5

And also when it comes to 3P or platform type of business, and especially in cases where products are not competitive either price wise or quality wise, we're determined to optimize and let go of those. Because in the short term, even though those kinds of products will add to our GMV, in the long term, we don't think they offer much value to our customers. And we believe an important way to create value for our customer is to offer better quality and lower costs for them. So in terms of impact and the duration of it, I think the first two quarters have been impacted and I gauge it the 3rd quarter will also be impacted to some extent then the impact will gradually start to fade away. And because we have already replaced those products with less advantage and competitiveness with our advantage and competitive products.

Speaker 5

So we have effectively infused fresh blood into the system. So we believe going forward Q4 and beyond, the quality of the business will

Speaker 6

definitely

Speaker 5

improve. So that was my answers to your three questions. Thank you.

Operator

The next question comes from Colin Liu with China Renaissance. Please go ahead.

Speaker 6

I'll just translate for myself. Thanks management for the opportunity. So I have three questions and mainly about the outlook. The first one is about the second half outlook. So I really appreciate if management can provide some guidance on top line growth of second half, potential breakeven timing and what are the drivers behind the revenue growth and the breakeven or profit growth?

Speaker 6

And then my second question is about GBV platform and I would like management to provide some updates if there are any, on GBB platform outage? And then my last question is about 3P model. Well, management just explained the revenue decline sorry, the revenue contribution decline from 3P model in the quarter. So I want to ask about how should we think about the revenue contributions from this model going into the next few quarters? Thank you very much.

Speaker 5

So in terms of the whole year growth and profitability outlook, excluding the optimized portions of our business. The rest of the business remained a growth of 15% in Q2 and July continued this trend. It's estimated that for the whole year, our growth will be either high single digit or low double digit. And the gross profit will continue to improve. The whole year growth will be 15% to 20% and specifically the whole year gross profit will be about RMB1.45 billion.

Speaker 5

And sorry, the RMB1.45 billion refer to gross profit in 2023 and we expect this year to breakeven with some slight profits. So second question regarding GBB. Growth in terms of their GMV in Q2 this year was 17.8% year over year under the existing model. And with regards to its outlook, we did a hard and thorough look at GBB and we have made a very firm determination, which is we are determined to turn GBB into a truly digital type of platform dedicated to serving the SMEs. And in order to better support the growth of GBB, we wanted to become a truly technological company.

Speaker 5

And to that end, we recently recruited the former Head of the MRO platform on Taobao to become the head of GBB. And hopefully with this person at the helm, GBB can truly become a MRO platform that serves large quantities of SMEs under the backdrop of this smart error we're in. So when it comes to 3P, it has to do with our intentional optimization that I referred to earlier. So the 3P, mind you, the 3P business we are trying to get rid of is, for example, typical trading companies that are neither original manufacturers nor formal agents of any brands. And for those, we will eliminate gradually.

Speaker 5

But for 3P business, that is original manufacturer and that can guarantee the competitiveness of their products and has quality assurance, those we will keep. So the decrease from 3P is primarily from those non original manufacturer 3Ps. And this year, the share of 3P for GMV will be about 20%, long term, longer term it will be about 30%.

Operator

Colin, did that answer your questions?

Speaker 6

Yes. Thanks, management. That's really helpful.

Operator

The next question comes from Liping Zhao with CICC. Please go ahead.

Speaker 7

Good evening, management. Thanks for taking my questions. We noticed that the gross margin saw year over year expansion in both Q1 and Q2. And what's the gross margin outlook for the whole year? And what is the key drivers of the margin expansion?

Speaker 7

And second question, could you please give us latest updates on company's U. S. Expansion? Thank you.

Speaker 2

Sure. To your first question regarding margin, we believe that for this year, our gross margin will increase by about 1.5 percentage points. And we are confident that in the years to come, we will continue to grow our gross margin at this rate. This margin growth will be driven by 3 main sources. 1st, the continuous expansion of our business scale means that we have greater bargaining power with our upstream suppliers.

Speaker 2

We will receive further support from our suppliers as we aggregate more demand despite the fact that quantity tends to be smaller in the MRO industry for different types of items. We are already past that initial stage of smaller quantities and now we are enjoying the benefits brought by this aggregated larger demand. And we believe that in the future, this advantage will only increase. The second margin driver comes from our efforts at integrating the upstream, which means that we are sourcing directly from manufacturers, turning them into our strategic partners that will help us further reduce cost. The 3rd margin driver comes from our private label offerings.

Speaker 2

It is now helping us to further increase our gross margin by reducing cost. Regarding your second question on our overseas business strategy, our strategy is very clear. It is too prone for the developed markets such as the U. S. And Europe.

Speaker 2

Our approach is to establish our companies, our existing companies in the local region, existing companies in the local region and establish joint ventures or create agents to facilitate local sales. These two different approaches is based on the level of transparency and compliance in different markets. We made this decision based on that difference. Specifically for the U. S.

Speaker 2

Market, we have already won our first client in the U. S. And I believe that in the U. S. We will be working with 2 main types of customers.

Speaker 2

1 is larger key account customers who will be U. S. Companies who are already our customers in the China market and we will be able to now continue to provide for them in their home market. The second type of customers will be small and medium enterprises. Our approach for warehousing and supply chain will be very asset light, meaning that we'll be using 3PL model, whereas we'll heavily invest in our product capabilities and digital capabilities to improve our online customer acquisition and product competitiveness.

Speaker 2

I hope that answers your question.

Speaker 7

Yes, thanks. That's very helpful. Thank you.

Operator

And that concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Speaker 1

Thank you, operator, and thanks, everyone, for joining us today. You can find the webcast of today's call on ir.zkeshi.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 has now concluded. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • In Q2, ZKH Group delivered GMV of RMB2.75 billion (up 5.6% YoY) and revenue of RMB2.25 billion (up 8.5% YoY), while gross profit rose 14.3% to RMB380 million, lifting the gross margin to 17%.
  • The company narrowed its non-GAAP adjusted net loss by RMB95 million to RMB34.9 million, marking its ninth consecutive quarter of year-over-year improvement in adjusted net loss margin from 6.2% to 1.5%.
  • Enhanced working capital management drove a net operating cash inflow of RMB120 million in Q2, and ZKH initiated a US$50 million ADS share repurchase program to underscore confidence in future value creation.
  • ZKH is deepening its MRO leadership through upstream integration and private-label R&D, with private label GMV up 27% YoY and a new Taichung innovation center set to open by year-end.
  • The platform served over 48,000 customers in Q2 (up 25.8% YoY) and more than 63,000 in H1 (up 32.7%), as it expands focus on SMEs and launches efforts in developed overseas markets.
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Earnings Conference Call
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