Uxin Ltd Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Earnings Conference Call for the Quarter Ended June 30, 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, Ms. Chao Yang Su. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to Uxin's earnings conference call for the quarter ended June 30, 2021. On the call today are D.K., the Founder and CEO; and John Lin, CFO. D.K. will review business operations and company highlights, followed by John, who will discuss financials and 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 better communicate with both domestic and international investors, my prepared remarks today will be in both English and Chinese. The first quarter of fiscal year 2022, which ended on June 30, has been one of the most challenging quarters we've experienced in the last 10 years. We have overcome significant capital constraints and yet maintained business growth. Encouragingly, we managed to deliver solid results despite all the challenges and achieved sustainable growth in terms of revenue and sales compared with the previous quarter. At the same time, we continue to make efforts in cost and expense control, and our operational loss substantially decreased in the quarter. In the first quarter of fiscal year 2022, although we were only able to maintain a relatively small retail inventory due to cash constraints, we still improved our fundamental capabilities in vehicle sourcing, reconditioning, sales, and delivery. All the progress we achieved this quarter has built a solid foundation for our future business expansion and the replication of our Xi’an IRC model. For vehicle sourcing, we continue to expand our used car acquisition network for the inventory-owning model. Our strong branding and supply chain resources with both individual car owners and car dealerships have enabled us to source more high-quality used vehicles at reasonable prices. In terms of car reconditioning capabilities in Xi’an IRC, we continue to refine the process by standardizing end-to-end procedures, improving flow efficiency between key steps, upgrading equipment and technologies, and optimizing production lines. After several months of operations, the quality of our reconditioned vehicles has significantly improved. This has enabled us to offer a stable supply of high-quality and value-for-money cars for our customers. Regarding vehicle sales and after-sales services, we remain focused on creating long-term value for our customers. We closely follow up on customer feedback and continuously improve each step of the customer experience from sales delivery to after-sale support. During the quarter, our sales Net Promoter Score, or NPS, increased to 44%. The continued improvement of NPS has also enabled us to achieve decent sales conversion rates despite a relatively small retail inventory, giving us great confidence to continue scaling our inventory and boosting sales. After receiving the first tranche of the new investment in July, our business has been recovering as expected and gradually returning to high-quality growth momentum through scaling up our operations in three aspects: vehicle sourcing, reconditioning capacity, and offline showroom expansion. Investments in these three key areas have improved our available inventory, offering our customers more selections and enhancing the overall purchasing experience, resulting in higher sales conversion rates. To increase inspection and reconditioning capacity in the long term, Uxin has recently entered into a strategic partnership with the Changfeng County Government of Hefei City to jointly invest in building a used car inspection and reconditioning plant, with a total investment of up to RMB2.5 billion. This plant is expected to have an annual production capacity of 60,000 to 100,000 vehicles once operational. Looking ahead, we will continue to provide high-quality products and services to our customers, fueling sales conversion through our strong supply chain capabilities and delivering steady sales growth for higher returns. This year marks Uxin's 10th anniversary, which we celebrated on September 9. Over the past decade, we have experienced both exciting and difficult times, but Uxin has become stronger because of all the challenges we have overcome as one team. It all started with the mission to make it easy for every Chinese customer to own a quality used vehicle. This serves as the solid foundation that drives our passion to provide customers with high-quality, value-for-money used cars and best-in-class services. We are confident and determined to continue contributing to the long-term healthy development of China's used car industry. With that, I'd like to turn the call over to our CFO to walk you through the financial results. John, please?

Okay. Thanks, D.K. Hello, everyone. Thanks for joining us today. As D.K. mentioned, we had a very challenging quarter regarding both business operations and financial resources for the quarter ended June 30, 2021. As you all know, we announced our agreement into a binding investment term sheet on April 1, and we received the first tranche of the financing on July 12. Therefore, from April to June, we were operating the Xi’an IRC business with very limited resources. However, we still managed to deliver continued growth in terms of both vehicle transaction volume and revenue. To achieve this progress, we made tremendous efforts to leverage our capital efficiently. Our team has successfully built effective car sourcing channels, but we were only able to maintain a relatively small retail inventory in Xi’an IRC due to capital constraints. Therefore, to balance car sourcing supply and our cash capacity, we increased the percentage of vehicles sold through our wholesale channels for the quarter ended June 30, 2021. The closing of the first tranche of the financing transactions in July significantly improved our cash position and our ability to expand the business. The daily car reconditioning productivity of our Xi’an IRC more than doubled, and we began to build up retail inventories rapidly. We expect the company's performance to continue improving in the coming quarters. During the quarter ended June 30, 2021, we continued streamlining our business process to build a lean organization. Spending where it matters most has become our management philosophy, and we are relentlessly pursuing ways to boost our operational efficiency. Let me give you an example. I joined Uxin in August of 2019, nearly two years ago. At that time, we had approximately 800 employees. Today, our employee headcount is less than 700, just to give you an idea of how determined we have been to achieve operational efficiency. Our continued efforts paid off, as the non-GAAP adjusted loss from continuing operations substantially decreased this quarter. Full details on the quarter ended June 30, 2021, are available in our earnings release. Now I will run through some key numbers. All numbers are in RMB unless otherwise stated. Transaction volume was 3,011 units this quarter compared to 1,719 units sold last quarter and 3,887 units sold in the same period last year. Retail volume was 679 units, and wholesale volume was 2,332 units. Vehicles that did not pass our retail standards were sold through our wholesale channels. As I mentioned earlier, we had to increase the proportion of vehicles sold through our wholesale channels to boost cash turnover. Total revenues were RMB278 million, compared to RMB196 million last quarter and RMB62 million in the same period last year, up by 42% quarter-over-quarter and 348% year-over-year. Retail vehicle sales revenue was RMB92 million, compared with nil in the same period last year, and wholesale vehicle sales revenue was RMB177 million. Gross margin was 4%, compared with 4.6% in the previous quarter and a negative 28.4% in the same period last year. Total operating expenses were RMB83 million, a RMB41 million drop from RMB124 million in the previous quarter and a RMB68 million drop from RMB151 million in the same period last year. Overall, labor costs and expenses, excluding severance pay, decreased by over 30% quarter-over-quarter and 72% year-over-year due to the restructuring of organizations following our business model transformation. Looking ahead, we believe that our ongoing efforts at cost savings will benefit our financials in the long term. The non-GAAP adjusted loss from continuing operations, which excludes the impact of share-based compensation, was RMB45 million for the three months ended June 30, 2021, compared with RMB98 million in the previous quarter and RMB133 million in the same period last year. The net loss from continuing operations was RMB69 million for the three months ended June 30, 2021, compared to RMB133 million in the previous quarter and RMB152 million in the same period last year. Regarding our cash position, as of June 30, 2021, we had cash and cash equivalents of RMB124 million. For our financing transactions of up to $350 million, we received the first tranche of $100 million in July, and we are well on track to close the remaining tranches. That sums up our results for the three months ended June 30, 2021. Moving on to our guidance, we expect our total revenues to be in the range of RMB310 million to RMB330 million for the three months ended September 30, 2021. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. That concludes our prepared remarks. Thanks.

Thank you, John. Operator, we would like to open the call for questions now.

Thank you. Your first question comes from the line of Eddy Wang from Morgan Stanley. Please ask your question.

Let me translate myself. I have two questions. First is about the short-term. We noticed that the shortage of auto chips has quite an active impact on China's new car sales starting from the second quarter of this year. So I want to know whether or not the shortage of auto chips in new cars will have a positive impact on the used car market. That's my first question. The second question is that, as we know, EV sales as a percentage of total new car sales in China have been increasing in the past few years, and we expect that this proportion will go even further in the next couple of years. I want to hear your view on the strong sales of EVs and their impact on the used car industry in the long term. Thank you.

I think in the short term, the shortage of chips has a boosting effect on the used car industry. It takes longer for new cars to be delivered, which drives up car prices as the supply of new cars in the market is reduced. Some of the new car buyers may decide to purchase a used car instead. However, we don't believe the shortage of chips will be a long-term issue and that it will eventually soften. Putting aside the issue of chip supply, the market size of used car sales is also rapidly growing. In China, the level of car ownership is already much higher than before, and existing vehicles in the market have started to gradually enter the used car market. Additionally, consumers have become increasingly receptive to used cars. Industry policies have also become more favorable, such as lifting restrictions on cross-region transfers, reducing value-added taxes on used cars, and adopting electronic registration. All of this provides positive tailwinds for the development of the used car industry. For Uxin, our focus is to deliver high-quality used cars and provide a full suite of best-in-class services from sales delivery to after-sale support, thereby creating good value for our customers and the industry as a whole. Regarding your second question, yes, the sales of new electric vehicles have increased rapidly in recent years. We agree that new energy vehicles will be the mainstream in the future market. After a decade of development, Uxin has established a proven and complete system that covers used vehicle sourcing, inspection, sales delivery, and after-sales support. We have already initiated work on inspection standards, reconditioning processes, and after-sales services for used EVs. We will launch related services soon, especially for used EVs and our inventory-only model. Thank you.

Your next question comes from Fei Dai from Tianfeng Securities. Please ask your question.

I repeat my question in English. Company Xi’an IRC has been in operation for nearly half a year, and you also received the first tranche of the new investments in July. It seems like everything is going in the right direction. Regarding your future plan, can you give us some insight on your strategic focus and core factors driving sales growth in the future? Thank you, D.K.

Before July, we were indeed under huge capital constraints, which limited our ability to procure vehicles on a large scale, carry out reconditioning, and build our inventory. After the funding was secured, our business recovered immediately. Now both our car procurement capability and production capacity are rapidly increasing, fully aligning with our expectations. We continue to improve our product and service capabilities, anticipating that increased inventories will naturally enhance sales conversion rates. We will further expand our production capacity and increase inventory to provide customers with more options. With improved brand reputation among customers, our IRC's regional influence has also grown. Additionally, the gradual increase in customer referral rates will drive high-quality sales growth. Therefore, the flywheel effect of our entire business model will rapidly accelerate our business growth. After nearly half a year of operation in Xi’an IRC, our operating model has matured and is ready for replication. Going forward, besides strengthening our influence and competitiveness in existing regional markets, we also intend to invest in new IRCs in additional regions to support business expansion. Additionally, our operations in Hefei will also commence soon. Thank you.

There are no further questions on the line. I would now like to hand the conference back to Chao Yang Su. Please continue.

Thank you again for joining today's call and for your continued support of Uxin. We look forward to speaking with you again soon. Thank you.

Bye-bye.

Thank you. Bye-bye.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.