Uxin Ltd Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Uxin's Earnings Conference Call for the Fourth Quarter ended March 2021. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a Q&A session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today's conference call, Mr. Eric Yuan. Please go ahead, sir.

Thank you, operator. Hello, everyone. Welcome to Uxin's earnings conference call for the quarter ended March 31, 2021, and the full fiscal year 2021. On the call today are D.K., the Founder and CEO; and John Lin, CFO. D.K will review business operations and the company highlights, followed by John, who will discuss financials and the guidance. They will both be available to answer your questions during the Q&A session that follows. Before we start, I would like to remind you that this call may contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on management's current knowledge and assumptions about future events that involve known or unknown risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. Uxin does not undertake any obligations to update any forward-looking statements, except as required under applicable law. For more information about the potential risks and uncertainties, please refer to our filings with the SEC. With that, I will now turn the call over to our CEO, D.K. Please go ahead, sir.

Hello, everyone. Thank you for joining our earnings conference call today. To enhance communication with both domestic and international participants, my prepared remarks will be in both English and Chinese. We are pleased to report another solid performance for the quarter ending March 31, 2021. Despite facing a slower quarter in the Chinese domestic used car market due to the Chinese New Year holiday and constraints on our working capital, we achieved our operational targets set in the previous quarter. As indicated by our guidance for the quarter ending June 2021, Uxin has returned to a robust growth trajectory following our successful transition to an inventory-only model. From October 2020 to July 12, 2021, we dealt with the challenge of maintaining sufficient working capital for our operations, which also placed significant pressure on our ability to continue as a going concern. In spite of these financial constraints, we managed to overcome numerous challenges and achieve key milestones. Primarily, we shifted our business model from being platform-based to an inventory-only model. This crucial decision was driven by the significant pressure arising from the combined effects of COVID-19 and serious capital limitations. We tackled the challenge head-on and successfully transformed our operations into a more efficient and streamlined business. As a customer-focused company, we believe that consistently improving customer satisfaction is key to creating customer value. In our used car transactions, customer satisfaction hinges on enhancing vehicle quality and providing top-notch after-sales services. By adopting an inventory-only model, we can maintain better control over vehicle quality. Our experienced team acquires used cars from over 40 cities in China, selecting only those that meet our stringent quality and value criteria for inclusion in our inventory. Customers are our priority. To support our goal of boosting customer satisfaction, we have diligently tracked our sales Net Promoter Score (NPS) since the second quarter of 2020. Our efforts over the past year have yielded impressive results. We are pleased to report that our NPS remained at 42 in the March quarter, the same level as the previous quarter despite negative impacts on vehicle deliveries during the Chinese New Year. For context, when we started monitoring this metric in the quarter ending June 2020, our NPS was just 10. Maintaining an industry-leading NPS of 42 for two consecutive quarters indicates heightened customer recognition of our premium used vehicles and services, as well as confirmation that our inventory-owning model is on the right track. Moving forward, we will conduct regular assessments and make necessary enhancements to our products and services based on customer feedback to deliver the best car purchasing experience in the industry. After more than a year of dedicated effort, we divested our loan facilitation business and resolved our remaining guarantee liability in the second half of 2020. To accommodate our customers' financial needs, we formed a new collaboration model with financial institutions to offer third-party auto loan financing options, eliminating our exposure to credit risks. We have also made ongoing efforts to optimize our operational costs, adjusting our organizational structure in line with our new business model. At the same time, we continue to refine every step of our business processes to enhance operational efficiency. In the March quarter of 2021, our operational loss declined by 40% quarter-over-quarter to RMB 98 million. In the coming quarter, we expect this operational loss to narrow further. To date, we have established refined operational models that align well with our business development goals. Even during periods of tight cash liquidity, these operational models allowed us to focus our resources and capital on delivering long-term value to our customers. Our first Inspection and Reconditioning Center (IRC) in Xi’an became operational in March 2021. This center is a vital component of our business transformation, providing services such as vehicle refurbishment, warehousing, and exhibition. Having our own IRC enhances our control and management over the front end of our supply chain. In the past six months, we have optimized our business processes related to IRC operations. As our inventory of used vehicles grows, we anticipate improved operational leverage fueled by our IRC investment. During the March quarter of 2021, we expanded our vehicle sourcing channels to include individual car owners, enriching our avenues for acquiring high-quality vehicles and enabling us to strengthen the supply chain from the outset. We implemented stringent inspection standards, ensuring that only select premium vehicles meeting our online retail criteria are refurbished and presented on our proprietary platform, while those that do not meet our standards are sold to wholesalers via offline dealerships. Vehicle wholesale represents an efficient channel for selling used cars. Even with working capital constraints, our wholesale vehicle sales business facilitated quicker cash flow while sustaining our acquisition rate of premium used vehicles. Recently, we secured key financing, which we consider a significant breakthrough for our business moving forward. We were pleased to partner with prominent investors NIO Capital and Joy Capital, who share our vision for Uxin's business strategy, entering into agreements for a total investment of up to US$315 million. We successfully closed the first tranche of this financing on July 12 and are on track to complete the remaining tranche. This additional funding addresses the urgent working capital challenges we have faced over the past six months. Looking ahead, we remain committed to our current business model and strategic direction while steadily expanding our business network. Like many great companies, we believe that the temporary challenges we have faced will ultimately make us stronger and more resilient. We will continue to learn from our experiences and adaptations even during difficult times. In response to various factors, we made several decisive yet difficult decisions that we believe will yield long-term advantages. We understand that genuine customer focus is essential for achieving sustainable growth. Our strong emphasis on product and service quality will drive organic and sustained business growth in the future. I want to express my gratitude to all our customers for their unwavering trust and support during challenging periods. I would also like to extend my thanks to the entire Uxin team for their dedication, innovative spirit, positive work ethic, and resilience over the years. With a robust customer-centric model, we have successfully guided Uxin's development in the right direction. I appreciate our new investors and shareholders for backing Uxin’s strategic transformation and for their ongoing confidence in our management team. With our liquidity issues addressed, we are excited about the promising future that lies ahead for Uxin. Going forward, we will continue to seek new opportunities to further leverage the potential of our IRCs. While ensuring the quality of our used vehicles and enhancing customer satisfaction, we will focus on growing our vehicle inventory and improving our efficiency in refurbishing used cars. Through our comprehensive initiatives, we are confident that our production capacity and business will see steady growth. We believe that our persistent efforts and investments will yield greater returns for our shareholders over the long term. Now, I will turn the call over to our CFO, John, to discuss the financial results. John, please proceed.

Okay. Thanks, D.K. Hello, everyone. Thanks for joining us today. As D.K just mentioned, Uxin underwent some significant and profound changes in the fiscal year 2021. Also, after we shifted into the inventory-owning model, the accounting treatment for revenue recognition and the structure of cost expenses were also adjusted accordingly. Therefore, the financial data in the first fiscal year 2021 was not directly comparable to the data for the fiscal year 2020. Overall speaking, our total vehicle sales in the fiscal year 2021 were lower than the prior fiscal year, but we were able to dramatically improve our operational efficiency. As you all know, in the past year, we went through a tough time. So, the company took resolute, but carefully planned actions to reduce costs and expenses. This led to a much lower operational loss in the fiscal year 2021 compared to fiscal year 2020. If you look at the results just released, our total vehicle sales in the fourth quarter were lower than the previous quarter. First, in this quarter, we had the Chinese New Year holiday. So, Q4 was traditionally the off-season for the Chinese used car market. Second, our efforts to expand our vehicle inventory were restrained by our cash constraints. But at the same time, we continued to vigorously reduce costs and expenses, and the benefit of those actions will be further reflected in our financials in the next quarter. As a result, despite lower sales volume and revenue in the fourth quarter, our operational loss decreased by RMB64 million, leading to the first time in our history that our quarterly operational loss has dropped below RMB100 million. One thing I want to mention is that on July 12th, we successfully closed the first tranche of our new financing. Also, convertible note holders converted $69 million into ordinary shares. This significantly reduced our repayment obligations. At the same time, the company entered into several payable waiver agreements. The company was exempted from the repayment of payables of approximately RMB120.4 million or about $18.7 million. These efforts have dramatically improved our cash position. Full details on our fourth quarter ended March 31st, 2021 and the annual financial results are available in our earnings release. So now I will run through some key numbers. All numbers are in RMB unless otherwise stated. Online used car transaction volume was 1,719 units this quarter. This was lower than 2,307 units sold last quarter. As I said earlier, it was a traditional off season in the Chinese used car market. Total revenues were RMB196 million. Retail vehicle sales revenue was RMB125 million, while the wholesale vehicle sales revenue was RMB51 million. As you can see, in this quarter, we broke down the revenue stream into retail and wholesale vehicle sales revenues. If the cars we acquired did not meet our quality standards to lease and sell through our proprietary online platform, we sell to wholesale dealers. In order to accelerate the cash turnover, we sometimes need to choose to sell more cars under our wholesale channels. Gross margin was 4.6% compared with 2.9% in the previous quarter. The increase was mainly due to the company's continued focus on cost management. We stayed focused on optimizing our business operations and will address our gross margin accordingly through the development strategy of the company. Total operating expenses were RMB124 million, a RMB64 million drop from the RMB188 million in the previous quarter. Overall, labor costs and expenses excluding installments paid decreased by over 40% quarter-over-quarter due to the restructuring of human resources following our business model transformation. We also significantly reduced our marketing expenses. Looking ahead, we believe our ongoing efforts at cost savings will benefit our financials in the long run. The non-GAAP adjusted loss from continuing operations, which excludes the impact of share-based compensation, was RMB98 million for the three months ended March 31, 2021, compared with RMB162 million in the previous quarter. As I mentioned earlier, this is the first quarter the loss is below RMB100 million. Net loss from continuing operations was RMB133 million for the three months ended March 31, 2021 compared with RMB173 million in the previous quarter. Then about our cash position. As of March 31, 2021, we had cash and cash equivalents of RMB193 million. That sums up our results for the three months ended March 31, 2021. Moving on to our guidance, we expect our total revenues to be in the range of RMB260 million to RMB280 million for the three months ended June 30, 2021. The non-GAAP adjusted loss from continuing operations is expected to be less than RMB50 million. This forecast reflects our current and preliminary views on the market and the operational conditions, which are subject to change. That concludes our prepared remarks today. Thanks.

Operator, we are ready to take questions now. Thank you.

Certainly. Your first question comes from Eddy Wang of Morgan Stanley. Please ask your question.

I have two questions. First, regarding the used car industry, I've noticed that new car sales in the second quarter of this year were weaker than anticipated. I’m uncertain about the market conditions for used cars in China. When do you expect the used car market to potentially recover or even see an increase in transaction volume? My second question pertains to competition and the business model. As D.K mentioned, we are currently primarily using an inventory-owning model. How do you see the competition evolving among different business models utilized by various used car platforms? Why did you opt for this model, and do you believe it will become the dominant model for online used car platforms, or do you anticipate that different models will have varying success in the Chinese used car market? Thank you.

Eddy, regarding the market, we definitely see an improving trend. The existing market size is expanding, leading to an increasing number of vehicles for sale and heightened interest from potential buyers. Customers are now more open to considering used cars, especially those that offer good value for money. After thorough screening and refurbishment, the quality of used cars available on our platforms is nearly on par with new ones. They come at a significantly lower and more competitive price, providing great value to our customers. Additionally, we've observed favorable policies for this market over the past few years. In 2019, used cars could be transferred between sellers and buyers in different cities. In 2020, the government reduced VAT on used car transactions, and earlier this year, digital registrations for transactions were introduced, making the entire process much more convenient. This past July, new economic policies also supported our sector's growth. Therefore, we see this as an opportune period from a policy perspective. In terms of competition, after a decade of growth, we now recognize that the used car market in China does not follow a winner-takes-all scenario. It’s crucial to leverage our unique advantages. We must clearly understand the types of products we want to deliver and the profiles of our customers. Consistently enhancing our products and sales channels is essential. Our goal is to improve each car on our platform and ensure customer satisfaction. We believe that if other industry players focus on building consumer trust, increasing transparency, and contributing positively to the industry, we would prefer to view them as allies rather than competitors. Furthermore, real competition lies in customer service and product quality. This type of competition is advantageous for the industry as it encourages market participants to learn and continuously improve. Thank you, Eddy.

In our view, if other industry players are willing to improve consumer trust, increase transparency, and contribute positively to the overall industry, we prefer to see them as allies rather than competitors. Additionally, we believe that true competition occurs in the areas of customer service and product quality. This type of competition is advantageous for the entire industry as it encourages market participants to learn from one another and continually enhance their offerings. Thanks, Eddy.

Your next question comes from the line of an indiscernible caller. Please ask your question.

To repeat my question in English, Uxin recently raised investment from NIO Capital and Joy Capital. How will you use this money to promote the development of your new business model? Thank you.

First of all, we and our new investors have a strong consensus on strategies. NIO is a consumer-facing company that places great emphasis on customers, which aligns closely with our business philosophy. Due to our business transformation in 2020, we consider user needs, vehicle quality, and NPS as essential priorities. We have reached an agreement with our new investors regarding strategies and value propositions. Following the investment, we will collaborate on key strategic initiatives and enhance our digital and automation capabilities to further improve quality control and production efficiency. Additionally, the new financing will enable us to expand our inventory and scale our business. Thank you.

Thank you.

As there are no further questions, this will conclude today's conference call. You may now disconnect your lines. Thank you.