Earnings Call Transcript - UXIN Q2 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Uxin's First and Second Quarter of Fiscal Year 2024 Earnings Conference Call. 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 introduce your host for today's conference call, Mr. Jack Wang. Please go ahead, Jack.

Jack Wang, Host

All right. Thank you, operator. And hello, everyone. Welcome to Uxin's earnings conference call for the first and second quarters of fiscal year 2024 ended June 30, 2023, and September 30, 2023, respectively. On the call with me today we have DK, our founder and CEO, as well as Feng Lin, our CFO. DK will review business operations and company highlights, followed by John, who will discuss our financials and guidance. They will both be available to answer your questions during the Q&A session that follows. Before we proceed, I would like to remind you that this call may contain forward-looking statements which are inherently subject to risks and uncertainties that may cause actual results to differ from our current expectations. For detailed discussions of the risks and uncertainties, please refer to our filings with the SEC. Now, I will turn the call over to our CEO, DK. Please go ahead, sir.

Kun Dai, CEO

Hello, everyone. Thank you for joining our earnings call. I’m glad to reconnect with you today and facilitate communication with both domestic and international investors. I will share our company’s latest progress in Chinese and English. Due to the financing transactions with the government of Hefei City in the past month, we postponed the release of our first quarter financial results. Today, we are presenting the performance of the first and second quarters of fiscal year 2024, covering April to September 2023. I will first review the key highlights of the past two quarters and then share some of our achievements and future goals. In the first quarter of fiscal year 2024, from April to June 2023, we witnessed the end of a car buying surge initially driven by pent-up demand during the pandemic. Subsequently, aggressive pricing strategies for new cars starting in March continued to impact China's used car market. This shift resulted in consumers adopting a cautious wait-and-see approach to purchasing used cars. In line with these market dynamics, we took a prudent car acquisition strategy and maintained lower inventory levels. Consequently, our retail transaction volume in the first quarter saw a 25% decrease from the previous quarter, totaling 1,687 units. However, in the second quarter, between July and September, we strategically increased our inventory levels, leading to a significant rebound in retail transaction volume to 2,287 units, a notable 36% growth and far exceeding the industry's average growth rate of 5% in transaction volume. Throughout this period, we effectively maintained the turnover base of our vehicles on sale before 45, while simultaneously enhancing our profitability, as our gross margin expanded to 6.2% from 1.3% in the same period last year. A notable achievement in September was our Hefei superstore reaching positive EBITDA, contributing to a nearly 50% year-over-year reduction in the company's overall adjusted EBITDA loss. Additionally, we consistently maintained the industry's highest net promoter score, around 60 points for seven consecutive quarters. This performance highlights the success of our superstore model and indicates that our business operations are progressing on a strong growth path. It's also worth noting that our cutting-edge Changfeng Superstore in Hefei City began trial operations in September 2023. Covering a vast area of 450,000 square meters, the Changfeng Superstore features the most advanced used car reconditioning factory and the largest warehouse-style used car retail superstore with a capacity to showcase up to 10,000 vehicles. The expansion of our inventory at this facility is set to significantly enhance the company's business growth in the coming years. Furthermore, we signed an equity investment agreement with the local government of Hefei City at the end of September. Under this agreement, Hefei Construction Investment North City Industrial Investment will commit up to RMB1.5 billion over the next 10 years to support the operation and development of our used car superstore in Hefei. The strategic location, favorable business environment, well-established automotive industry, and robust supply chains provide substantial support for Uxin's ongoing growth. Reflecting on our experience, since the relocation and upgrade of our Xi'an superstore in December 2022, it achieved EBITDA profitability by September 2023, just 10 months into operations. Our Hefei Superstore, which began trial operations in September 2023, aims to reach adjusted EBITDA profitability by March 2024 or even earlier. By leveraging the scalable profitability of our superstores alongside ongoing efforts in cost control and optimization, we have established a clear strategy toward overall profitability, aiming to achieve this by September 2024 or sooner. Over the last two years, we have significantly improved our management capabilities and operational efficiency, surpassing industry norms and getting closer to our profitability targets. During the call today, I would like to emphasize four key areas of development. First, we have successfully completed the training of our AI-powered vehicle pricing system. This advanced system autonomously sets prices for vehicles based on factors such as condition, age, color, and mileage. It also adjusts quotes dynamically in response to customer interest, feedback from offline test drives, and market conditions. This pricing strategy strengthens our competitive position, ensuring an optimal vehicle turnover efficiency of 30 to 45 days. Second, by leveraging the efficient operation of our used car reconditioning factory, we have accelerated vehicle turnover and reduced reconditioning costs while maintaining a large supply of used cars. The integration of advanced reconditioning technologies ensures superior vehicle quality. We've implemented the industry's most advanced factory management system, facilitating integrated data transmission for inspection, diagnosis, and repair while enabling real-time monitoring of our workforce, vehicles, and materials. This system optimizes production processes, implements intelligent parallel processing of tasks, and has dramatically shortened the timeframe from vehicle intake to sales listing to just three to four days. We are committed to establishing an optimal cost strategy across various aspects of our business, highlighted by substantial cost reductions achieved through supply chain integration and large-scale vehicle reconditioning. Additionally, we have integrated advancements in operational processes with innovative technologies like 3D printing and smart repair, which have significantly improved our cost control strategies. Lastly, we have demonstrated the advantages of our offline superstores in attracting customers. Our superstores offer a vast array of vehicle options, exceptional customer service, and comprehensive after-sales support, rapidly building a strong reputation among customers in regional markets. Within just one year, our Xi'an and Hefei superstores have become leading brands in local used car market recognition. We have observed that as our offline superstores evolve, there is a marked increase in organic traffic, substantially lowering the costs associated with acquiring new customers. Our business model is now fully refined, and we are confident that the company will achieve overall profitability by or before September 2024. In our long-term strategy, we see the superstore model as quickly adaptable across various regions in China. Our expansion strategy into new cities will incorporate even more innovative approaches, ensuring enhanced cost-effectiveness and faster profitability for each superstore. With that, I would like to turn the call over to our CFO to discuss the financial results. John, please.

Feng Lin, CFO

Thank you, DK. And hello, everyone. I will provide a closer look at our financial results from the first and second quarter of fiscal year 2024. DK has already provided an overview of our retail transaction volumes for these periods. In the face of the fluctuating market conditions for the first quarter of 2024, we adopted a prudent vehicle acquisition strategy and opted to maintain relatively low inventory levels. As such, our retail transaction volume in the first quarter decreased by 25% sequentially to 1,687 units. During the second quarter, we increased our inventory levels enabling us to grow our retail transaction volume by 36% to 2,287 units. Our retail sales revenue in the second quarter reached RMB249 million, representing a sequential increase of 33% from RMB187 million in the first quarter. In response to the evolving economic landscape, we diligently refined our inventory structure to align with current market demands. This strategic adjustment is reflected in the average selling price or ASP of our retail vehicles, which decreased from RMB120,000 in the same period last year to approximately RMB110,000 over the last two quarters. Our wholesale business segment remained relatively stable with a transaction volume of 1,567 units and a sales revenue of RMB95 million in the first quarter compared to 1,597 units with a sales revenue of RMB99 million in the second quarter. Overall, our total revenues for the second quarter were RMB356 million, a sequential increase of 23% from RMB298 million in the first quarter. Furthermore, we further accelerated our inventory turnover, increased the penetration rate of our value-added services and reduced the per-vehicle costs, thanks to the efficiencies gained from our modernized factory operations. As a result, we saw a substantial improvement in our gross margin. Specifically, in the first quarter and second quarters of fiscal year 2024, our gross margins were 6.1% and 6.2% respectively. This represents a year-over-year increase of 5 and 4.9 percentage points. Looking ahead, we anticipate further enhancements in our gross margins, fueled by an increase in revenues from our financial, insurance, and premium maintenance and repair services, coupled with cost reductions achieved through higher sales volume. On the front of operating expenses, the second quarter showed a slight uptick to RMB91.6 million compared to RMB87.8 million in the previous quarter. This increase was largely due to the cost associated with opening our Hefei Changfeng Superstore, including expenses related to site relocation. Despite this, we have maintained stringent control over our operating expenses, ensuring they remain stable. This disciplined approach to managing expenses is key to our strategy for achieving our projected profitability in the future. Loss from operations narrowed by 35% year-over-year to RMB63.2 million in the first quarter and 38% year-over-year to RMB66.4 million in the second quarter. As a result of the government's investment in Uxin's Hefei subsidiary and the financial leasing of the Hefei Superstore property, our Changfeng Superstore in Hefei City has recorded substantial non-cash charges, including depreciation, amortization, and financial expenses. To provide a clearer picture of our actual business performance, we have started disclosing adjusted EBITDA from this year and are using it as a key metric to evaluate our operations. Adjusted EBITDA, which removes the effects of stock-based compensation and other one-time or non-cash items from the standard EBITDA, offers a more accurate reflection of our company's profitability. The improvement in our gross margin and a continuous refinement of our cost and expense structure has led to a substantial enhancement in our profitability. A testament to this progress is our Xi'an Superstore, which achieved positive adjusted EBITDA in September this year. In the first quarter, our corporate adjusted EBITDA was a loss of RMB46.6 million, representing a reduction of RMB29.6 million, or 39%, from a loss of RMB36.3 million in the same period last year. Adjusted EBITDA in the second quarter was a loss of RMB45.9 million, representing a reduction of RMB41 million, or 47% from RMB86.9 million in the same period last year. I would like to reiterate the profit target DK just mentioned. Our aim is to reach adjusted EBITDA profitability at the store level by March 2024, and extend this to the entire company by September 2024. We are confident in our trajectory towards high-quality sustainable development and our strong financial position is a cornerstone for future business growth and profitability objectives. In September, we entered into an equity investment agreement with the Hefei local government's investment platform. Under this agreement, they have committed to investing up to RMB1.5 billion in Uxin's Hefei subsidiary over the next decade, with the first tranche of roughly RMB150 million essentially completed. Additionally, we have arranged with our investors to finalize the remaining disbursement of nearly $30 million from previous funding rounds before the end of the year. Moreover, we recently secured new inventory financing from two financial institutions amounting to a total credit line of close to RMB300 million. For the third quarter of fiscal year 2024, between October and December 2023, we anticipate a return to steady growth in sales as market conditions improve and inventory levels increase. Our retail transaction volume is expected to be around 3,100 units, while the ASP for retail vehicles is expected to be around RMB105,000. We also expect our wholesale transaction volume to be around 1,400 units, with ASP expected to be around RMB67,000. We estimate that our total revenues, including retail vehicle sales revenue, wholesale vehicle sales revenue, and value-added services revenue to be in the range of RMB410 million to RMB430 million. And that concludes our prepared remarks today. Operator, we're now ready for questions.

Operator, Operator

Thank you. Today's first question comes from Kai Qian with CITIC Securities. Please go ahead.

Unidentified Analyst, Analyst

I have another question regarding changes in the gross profit margin. In the second quarter of 2023, from April to September, we made significant progress in our gross profit recovery. As we are now in the third quarter of 2023, we recognize that various factors are influencing this rebound. Could you provide more detailed information about the impact of different factors, particularly the contribution from the Xi'an IRC operation?

Feng Lin, CFO

Hi, this is John and I'll address that question. Our gross profit margin has notably improved, increasing from 1.3% during the same period last year to 6.2% this quarter. The growth in gross profit for a retail vehicle primarily comes from vehicle sales and value-added services. Last quarter, the year-over-year improvement in gross profit was about 70% driven by vehicle sales and 30% by value-added services. The rise in gross profit from vehicle sales is due to the success of our large superstore model. This success results in more accurate risk pricing, enhanced sales efficiency, and quicker inventory turnover. Also, as the market stabilizes, the price spread in our used car sales has significantly improved compared to the previous year. At Uxin, we utilize our superstores and factories to offer a wide range of value-added services, including finance, insurance, extended warranties, accessories, maintenance, and repairs. This business model gives us a natural advantage over traditional used car dealers. We can provide customers with more appropriate finance and insurance products, cost-effective accessories, and achieve sales conversions through an offline superstore experience that outperforms traditional used car marketplaces. We are consistently enhancing the penetration rate of our value-added services, and we believe there is still significant potential for further growth. With our Xi'an IRC now operational, the reduction in reconditioning costs has indeed had a noticeable effect on gross margin improvement. Our transparent factory system, which includes the world's most advanced used car reconditioning factory, enables integrated end-to-end process management for inspection, diagnosis, and repair. This has greatly increased vehicle turnover efficiency and lowered costs. At the same time, we are continuing to introduce advanced reconditioning equipment and processes, such as 3D printing and smart repairs, while also integrating the spare parts supply system. Consequently, the reconditioning cost per vehicle is more than 50% lower than a year ago. The optimization of the reconditioning process alone contributed about 1.5 percentage points to the improvement in our gross profit margin. That is my answer to your question.

Unidentified Analyst, Analyst

The retail transaction volume from July to September has been stable. Looking ahead to the fourth quarter, do you think this trend can continue without significant pressure on the new car market? Consequently, we anticipate that our retail transaction volume will rebound in 2024 and maintain its momentum into the following year. Thank you.

Kun Dai, CEO

Hi. This is DK. I will start by discussing the sales perspective of your question. From July to September 2023, as new car prices stabilized, the used car market gradually returned to normal. Our sales volume began to recover in July, showing a 35% growth in the September quarter compared to the June quarter. During the same time, the domestic used car market saw an average sequential transaction volume growth rate of only 5%. Thus, our performance significantly outpaced the market. Regarding the average selling price of retail vehicles, it remained stable at around RMB110,000 in both the September and June quarters. At the beginning of the year, it was around RMB120,000, and in the same period last year, it was about RMB140,000. The average selling price experienced a slight decline, mainly due to our proactive optimization of the inventory structure to align with current economic conditions and market demands. After adjusting our vehicle structure, our inventory now primarily consists of used cars aged three to eight years. Overall, the impact of the new car market on us has reduced. Starting in October, new cars underwent another round of price reductions, but our average selling price has remained relatively stable. That's my answer to your question.

Operator, Operator

Thank you. And our next question today comes from Fei Dai with TF Securities. Please go ahead.

Fei Dai, Analyst

Given that current economic conditions are quite challenging, from the company’s perspective, are there any changes in market trends and consumer behavior? How is the company addressing the impact of the changes in the economy? That is my first question. Thank you.

Kun Dai, CEO

Hi, this is DK, and I will answer that question. So for us, attaining profitability really centers around three key aspects. Firstly, it entails consistently evaluating inventory levels through reasonable pricing. Secondly, it necessitates maintaining the current efficiency of sales turnover. And thirdly, it involves an ongoing commitment to drive cost reduction and enhance efficiency. So the most notable potential impact that we observe is the market volatility stemming from the continuous reduction in new car prices. On the vehicle acquisition side, the increasingly competitive pricing strategies in the new car market this year had repercussions in the used car market, lowering the acquisition prices for used cars. Leveraging our AI-driven digital pricing system, we can determine the most reasonable acquisition prices. Customers selling their cars may require some time to adjust their price expectations, potentially influencing the pace of inventory increase. And on the sales front, as evident from the market response during the new car price reduction wave in March, customers may adopt a wait-and-see approach to purchasing used cars. However, we are confident in continuously expanding inventory and maintaining a healthy sales turnover within 45 days by leveraging our retail competitiveness model for vehicle selection, dynamically adjusting inventory structure, utilizing AI systems for digital pricing with timely market feedback, and benefiting from the high sales conversion efficiency driven by our leading brand influence and reputation in regions that we operate. Furthermore, we anticipate the new car market to return to a new stable level. The price reductions are definitely not sustainable. And we also expect the supply and demand in the used car market to normalize. We're confident in achieving our profitability goals. That will be the answer to your question.

Fei Dai, Analyst

Thank you.

Operator, Operator

Thank you. This concludes our question and answer session. I'd like to hand the call back to management for any closing remarks.

Jack Wang, Host

Thank you all again for joining today's call and for your continued support in Uxin. We look forward to speaking with you again in the future.

Operator, Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.