Yunji Inc. Q3 FY2021 Earnings Call

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to Yunji's Third Quarter 2021 Earnings Conference Call. With us today are Mr. Shanglue Xiao, Chairman and Chief Executive Officer; Mr. Chengqi Zhang, Vice President of Finance; and Ms. Kaye Liu, Investor Relations Director of the company. Now I would like to hand the conference over to your first speaker today, Ms. Kaye Liu, IRD of Yunji. Please go ahead, ma'am.

Hello, everyone. Welcome to our third quarter 2021 earnings call. Before we start, please note that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and current market operating conditions and related factors that involve known and unknown risks, uncertainties, and other factors of Yunji and its industry. These forward-looking statements can be identified by terminology such as will, expect, anticipate, continue, or other similar expressions. For a detailed discussion of these risks and uncertainties, please refer to our latest document filed with the U.S. SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and are expressly qualified entirely by cautionary statements, risk factors, and details of the company filing with the SEC. We do not undertake any obligation to update these statements except as required by applicable law. With that, I will now turn it over to Shanglue Xiao, Chairman and CEO of Yunji.

Hello, everyone, welcome to Yunji's third quarter 2021 earnings call. During the second quarter of this year, we successfully launched our curated product selection, Yunji 99 Special Sales Portal. This portal enhances our service focus and helps our members save time when selecting top products. After over a quarter of effort promoting Yunji 99, we have seen steady improvements in sales per display. Our live streaming business on the Yunji platform and third-party platforms is also gaining traction, with more than 100 live programs focused on food, beauty, cosmetics, apparel, and other topics each week, effectively linking sales with the time our members spend on our platform. During this year's Double Eleven shopping festival, Yunji 99 featured many major brands and products, many of which are self-developed or co-developed. Under our Yunji 99 strategy, during this phase of development, we aim to concentrate on the food category. We hope Yunji will positively influence our users, helping them discover food from all corners of China. This year, I traveled across the country to agricultural sites, sampled local cuisines, explored culinary innovation, and deepened my knowledge of the latest nutrition and preservation techniques. These experiences have reinforced my belief that food should be Yunji's primary category. Our mission is to enable our members to enjoy delicious food from around the world from the comfort of their homes while prioritizing healthy eating to enhance beauty. Focusing on the food category, we are pleased to have launched some of our meat brands, including a new private label nutrition powder for children. This product is aimed at the nourishment needs of children over six and addresses parents' requirements. Additionally, based on consumer demand and market research, we have introduced healthier private label food products. Items such as wolfberry and others have become significant hits, achieving over CNY 1 billion in sales. We are committed to enhancing these products with better formulas and advanced processing techniques. We have successfully transformed agricultural raw materials into meat and healthy food items that are easier to preserve and consume. Our pure meat product has been widely repurchased by members since its launch. Promoting healthier food is vital for helping our members eat better. We continue to solidify our private label brand strategy, focusing on food, supplements, and cosmetics, while catering to diverse household needs. Since launching Yunji Beauty in 2018, we have consistently worked to enhance the health of our members through upgraded product formulas. Our newly launched products have been well received, and we have developed second-generation private label items based on user feedback, improving both taste and design. Furthermore, we are planning to upgrade our brand to enhance its image and launch a new product line with improved formulas. To encourage a better food mindset among our users, we are utilizing short videos and e-commerce strategies to promote our private labels on our platform and third-party live streaming platforms. Our strategy integrates traffic from Yunji Food and third-party platforms, enabling us to drive food sales while promoting our content. Lastly, we are refining our operations to give our service managers a more stable income through the promotion of our private label products. We have been equipping food intelligence officers with knowledge about balanced meals and local agricultural products prior to onboarding. This training not only helps our service managers improve their eating habits but also empowers them to assist our members in enjoying food and adopting healthier lifestyles. In addition, we are establishing a nutrition development system for dietitian courses, which will help our sales managers become real professionals. With that, I will now hand the call over to Mr. Chengqi Zhang, our Vice President of Finance, to discuss the financial results.

Thank you, Shanglue. Hello, everyone. Before I go through our financial results, please note that all numbers stated in the following remarks are in renminbi terms, and all comparisons and percentage changes are on a year-over-year basis, unless otherwise noted. Starting this year, we're committed to enhancing our supply chain depreciation strategy, upgrading our product selection with our new megahit product curation strategy, and refining our membership management system. More specifically, we launched a series of private label products with our depreciated supply chain. Our branded product has received a great reception from the market, reflected by our high repeat repurchase rate, which reached 80.6% in the 12 months ended September 30, 2021. In addition, we continue to improve our efficiency and employee structure, focusing on sustainable long-term growth. After several quarters of adjustments, our refined operations have resulted in significant improvements in profitability despite some fluctuations in our quarterly sales. During this quarter, we recorded an operating income of CNY 18 million compared with an operating loss of CNY 24 million a year ago. Additionally, we are delighted to see that our strategy of cultivating co-developed brands has achieved a certain level of progress, as evidenced by additional strategic investors. As a result, we recognized CNY 110 million in other non-operating income from investment in our fast-growing dairy brand campaign during this quarter. Our net income in the third quarter was CNY 61 million compared with a net loss of CNY 44 million a year ago. Now let's take a closer look at our financials. Total revenues were CNY 438 million compared to CNY 1,067 million a year ago. Revenues from sales and merchandise were CNY 366 million, and revenue from our marketplace business was CNY 65 million. We fully optimized our selection of suppliers and merchants in accordance with our long-term growth strategy, which caused a near-term revenue decrease in both our marketplace business and merchandise sales during this quarter. Nevertheless, our gross margin and operational efficiency both improved substantially, demonstrating the success of the strategic shift. Importantly, we recorded a significant increase in gross margin to 43% compared to 30% a year ago. During this quarter, we improved our operational efficiency by carefully selecting and cultivating suppliers and products while focusing on our differentiated supply chain and megahit product offerings, especially our private labels and exclusive products. A combination of these efforts produced the corresponding gross margin improvement. Turning to our operating expenses. Fulfillment expenses were CNY 41 million or 9.3% of total revenue, compared to CNY 91 million or 8.5% of total revenue a year ago. The difference was mainly attributed to reduced warehousing and logistics expenses resulting from lower merchandise sales, reduced personnel costs due to restructuring, and fuel service fees charged by third-party payment settlement platforms. Sales and marketing expenses were CNY 60 million compared to CNY 159 million a year ago. As a percentage of total revenues, sales and marketing expenses were reduced to 13.7% from 14.9% in the same period last year. The decline was due to improvements in our member management efficiency, which resulted in a decrease in business promotion expenses and management fees. Technology and content expenses were CNY 29 million or 6.5% of total revenues compared to CNY 42 million or 4% of total revenues a year ago. The decrease was mainly due to improvements in our staffing structures, resulting in reduced personnel costs as well as a decrease in server costs. General and administrative expenses were CNY 65 million or 14.8% of total revenues compared to CNY 52 million or 4.9% of total revenues a year ago. The increase was mainly due to an increase in share-based compensation expenses. Total operating expenses in the third quarter were approximately CNY 194 million. As a result, we recorded income from operations of CNY 18 million compared to a loss of CNY 21 million a year ago. Our adjusted income from operations was CNY 33 million compared to an adjusted loss from operations of CNY 17 million a year ago. Net income was CNY 61 million compared with a net loss of CNY 44 million a year ago. Adjusted net income was CNY 76 million compared with an adjusted net loss of CNY 36 million a year ago. Basic and diluted net income per share attributable to ordinary shares were both CNY 0.03 compared with basic and diluted net loss per share attributable to ordinary shareholders of CNY 0.02 in the same period of 2020. Moving on to liquidity. As of September 30, 2021, we had a total of CNY 1 billion in cash and cash equivalents, with distributable cash and short-term investments in our balance sheet. Our accounts payable reduced to CNY 298 million as of September 30, 2021, compared with CNY 502 million as of December 31, 2020. Our liquid assets were sufficient to cover our payables, and we do not hold any long-term bank loans or debt on our balance sheet. Going forward, we will continue to execute our megahit product curation strategy, expand our range of private label products, further enhance operational efficiency, and leverage our differentiated supply chain to drive long-term growth and profitability. We remain confident that our strategic directions and operational solutions will continue to deliver sustainable and healthy growth for our shareholders in the long term. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

The first question comes from Ethan Yu from First Trust Group.

Let me translate that quickly. Can you provide more details about our private label product initiatives and the steps we are taking to set them apart from our competitors? I've also noticed the company has made some progress in investments. Could you share more information about the company's investment strategy and its expectations?

Thank you for your question. We hope that we can make more efforts to promote the Yunji mindset to our customers. Over the past several years, we have maintained contact and close communication with our service suppliers. We help them profit in their cooperation with us. These will become our external communication strategies, and we will be pleased to continue this strategy in the future. We have noted that in the serious e-commerce industry, if you are going to maintain stable development, you must have good communication with customers. We have surveyed the top e-commerce platforms and found that currently, there is no first-choice food delicacy platform for our customers. We hope to improve in this area so that when customers look to buy food delicacies, they will choose Yunji as their first-choice platform. We also found that word of mouth is more important than the brands themselves. Moreover, at Yunji, we have many members who will promote our platform and food to others. Therefore, we will work hard to make Yunji the first choice for customers when selecting delicious food. We will also cooperate more with our sharing members and service providers to promote motivated food brands through our collaboration and R&D. This will be our first priority. In addition to food development, we recognize that we have a mature system for cultivating and tuning our cosmetics and supplements. In those areas, professional service for the users is necessary. At Yunji, our private label development follows a 1 plus 2 strategy. The primary focus is food, while the two additional areas are cosmetics and supplements. We are committed to developing and supporting emerging brands through our supply chain. In conclusion, after five or more years, we aim to contribute significantly to the development of the social e-commerce platform, focusing on full development of private labels in food, cosmetics, and supplements.

As there are no further questions at this time, I would now like to transfer the call back to management for any closing remarks. Please go ahead. Thank you.

Thank you for joining us today. Please do not hesitate to contact us if you have any further questions, and we look forward to talking with you next quarter. Goodbye.

Thank you. That concludes the conference for today. Thank you for your participation. You may all disconnect your lines now.