Yunji Inc. Q2 FY2022 Earnings Call

Hello, everyone. Welcome to our second quarter 2022 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 relate to events that involve known and unknown risks, uncertainties, and other factors of Yunji and its industry. These forward-looking statements can be identified by the terminologies such as will, expect, anticipate, continue, or other similar expressions. For a detailed discussion of these risks and uncertainties, please refer to our related documents 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 in their entirety by the cautionary statements, risk factors, and details of the company's filing with the SEC. Yunji does not undertake any obligation to update these statements except as required under applicable law. With that, I will now turn over to Shanglue Xiao, Chairman and CEO of Yunji.

Hello, everyone. Welcome to Yunji's second quarter 2022 earnings call. During the second quarter, we successfully navigated through the uncertainties and volatility caused by the challenging macro backdrop, widespread resurgences of the pandemic, and related control measures that affected several major cities across China. In the face of these challenges, we maintained our focus on optimizing our platform’s user experience while fulfilling our social responsibility to ensure users received excellent fulfillment services and timely delivery of urgent media orders. We agilely and proactively deployed our logistic resources. For instance, we collaborated with delivery service providers like Express who remained unaffected by the pandemic. Additionally, we optimized our inventory structure by transferring products between warehouses to ensure their timely availability for delivery to users. Our supply side was also impacted by the macro headwinds, resulting in certain products not being released by customers or shipped out from factories in regions severely affected by the pandemic. This unfortunately meant that these products were not available for promotions on our platform during the originally expected promotional period. However, we anticipate that the situation will improve this year, and our supply and cross-border logistics chain have both gradually recovered. Our private label product inventory has been delivered, securing enough stock for merchandise sales in the last two quarters. Furthermore, we've proactively taken steps to mitigate potential future COVID-related supply chain disruptions by increasing our inventories of private label products and cross-border merchandise. During the first half of this year, we continued our strategy of developing inclusive private label products, enriching our product offerings and creating a variety of fresh, user-centric products. Our retail brand contributes to the diversification and arrangement of our product categories. In the first half of 2022, we launched more than 10 original new products for weight management, skincare, and body revitalization under our private label. We also upgraded our product formulas with positive results. Our second-generation fruit and vegetable pressed candy achieved five million sales within one minute and 10 million sales within 20 minutes of its launch on June 14, 2022. In cosmetics, we executed fresh content marketing and brand development initiatives for our private label skincare brand, SUYE. As part of these efforts, we appointed a popular Chinese female celebrity as a brand spokesperson for our new product line, which features ingredients used in mesotherapy treatments. The SUYE marketing campaign included engaging short videos that successfully boosted brand awareness online and offline, attracting beauty lovers from our own and third-party platforms. We believe these increased traffic flows will serve as a solid foundation for future product commercialization. During SUYE’s 12th anniversary celebrations, we launched several new skincare products featuring ingredients used in medical aesthetics, generating over RMB21 million in sales during the promotion. Food is another strategic focus within our private label brand metrics. Our original brand concept for Gourmet Yunji is to allow users to enjoy delicious food from around the world without leaving their home. This concept is visually illustrated through our food category short video marketing, showcasing China's vast culinary diversity. We update our social media weekly with video streams highlighting a dish from my hometown to evoke nostalgia and stimulate interest in diverse cuisines. Currently, each short video on our Gourmet Yunji official account on third-party platforms consistently receives around 1 million views. We will continue to invest in content development on our own and third-party platforms, confident that our compelling marketing will substantially improve brand awareness and create business value over time. Meanwhile, the pandemic has caused shifts in consumer behavior and mindset; in an uncertain macro environment, consumers are increasingly cautious with spending. Consequently, market demand for discretionary products has declined. As a social e-commerce platform maintaining strong relationships with our users, we aim to provide valuable and trustworthy seller options. As time goes on, we continually strive to offer more authoritative services to inspire customers. We have enhanced our service system while launching additional value-added services. We have also strengthened provisions in our healthcare categories and community groups by piloting a nutritional consulting service, where users receive professional advice. For this pilot, we assigned professional nutritionists to each community group and organized live streaming group classes with professionals and sports experts. During this period, 90.6% of 12 users were successfully retained and engaged with nutritionists daily. Looking ahead, to deliver an even higher level of service to our users, we will increase investment in the development of service managers. In the second half of this year, having implemented strategic initiatives to reduce costs, improve operational efficiency, and develop private label brand products over the past year, our gross margin has significantly improved. This enhanced gross margin allows us to increase service managers’ income as an incentive to reward outstanding performance. With that, I will turn the call over to Mr. Peng 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 RMB terms, and all comparisons and percentage changes are on a year-over-year basis unless otherwise noted. During the quarter, we were once again faced with the resurgence of COVID-19 and associated lockdown measures in Shanghai and across the country. Compared to the same period last year, our repurchase rate remained relatively stable at 79% and our gross margin improved even in the face of this headwind. We intensified our focus on optimizing cost structures and developing our private label brands, enabling our business to navigate safely through the current macro uncertainties. Furthermore, we invested in our fulfillment partner base to ensure the delivery of products even within areas under strict pandemic control measures. Our cash position remains strong enough for us to successfully weather the current market downturn and adverse economic environment. We will continue to reward our shareholders through share buybacks. Now let's take a closer look at our financials. Total revenue was 284 million compared to 571 million a year ago. Revenues from sales of merchandise were 237 million, and revenues from our marketplace business were 42 million. This decline in revenues was primarily the result of continued COVID outbreaks, particularly during April and May. The pandemic-related lockdowns disrupted our supply chain, with our third-party suppliers, merchants, and logistics service providers being particularly affected. Consumers’ willingness to spend was also impacted by the uncertain macro conditions, fostering a desire among consumers to save rather than spend. These factors combined to create merchandise strategies, logistical delays, and stagnating consumer demand, which negatively affected our operations during the first half of 2022. Their continued impact depends upon the future direction of the pandemic. Though we are seeing signs that the worst of the pandemic is behind us, we will remain vigilant and respond nimbly to further developments. Despite these challenges, we improved our gross margin to 40.6% compared to 35.1% a year ago as a result of sustained customer loyalty to our private labels and effective product curation strategies. Now let's take a look at our operating expenses. Fulfillment expenses were 43 million compared to 50 million a year ago. This was primarily due to lower warehousing and logistics costs resulting from a reduction in the quantity of merchandise sales as well as reduced service fees from third-party payment settlement platforms. These savings offset heightened logistic costs resulting from us maintaining our supply chain flexibility during the pandemic lockdown period. Sales and marketing expenses were 58 million compared to 61 million a year ago, mainly due to a decrease in member management fees, which was partially mitigated by increased private label promotion expenses. Technology and content expenses were 24 million compared to 32 million a year ago. The decrease was mainly due to a reduction in personnel costs as a result of staffing structure refinements and reduced server costs. General and administrative expenses were 32 million compared to 43 million a year ago. This was primarily due to reduced personnel costs as a result of refinements to our staffing structure and professional service fees. Total operating expenses in the second quarter decreased to 157 million from 187 million in the same period of 2021. We recorded a loss from operations of 30 million, compared to an income of 16 million a year ago. Net loss was 25 million compared with net income of 17 million a year ago, while adjusted net loss was 17 million compared with adjusted net income of 24 million a year ago. Basic and diluted net loss per share attributable to ordinary shareholders were both RMB0.01 compared with basic and diluted net earnings per share attributable to ordinary shareholders of RMB0.01 in the same period of 2021. Moving on to liquidity. As of June 30, 2022, we had a total of 645 million in cash and cash equivalents, restricted cash, and short-term investments on our balance sheet. Compared to 743 million as of March 31, 2022, the decrease was partially caused by cash used in our share repurchase program. Our liquid assets were sufficient to cover our payable obligations, and we did not hold any long-term bank loans or debts on our balance sheet. On March 17, 2022, we announced our 2022 share repurchase program. As of June 30, 2022, we have repurchased over 6 million American depository shares, representing over 60 million Class A ordinary shares from the open market for an aggregate amount of approximately 7 million. Furthermore, our Board of Directors has approved an extension of the repurchase program for another six months. We intend to continue to be opportunistic in repurchasing shares when we view our stock price as disconnected from the underlying fundamentals of the business. While we faced significant macro challenges in the first half of 2022, we are confident that our resilience and flexible business model, updated supply chain, improved product curation, and optimized cost structure will drive growth regardless of future uncertainties. We have achieved solid progress and we expect to carry the optimized cost structure into the post-pandemic years, which we believe will bring long-term value to our shareholders. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Ethan Yu from First Trust, China. Please go ahead.

Thanks for taking my question. Currently, following the promotions from June 18, we are witnessing rapid growth in GMVs through short videos and live gaming. Could you share some insights on this trend? Thank you.

Thank you for your question. Live streaming is not a new format, and we have done a lot of it in the past. For us, live streaming is more about content marketing than direct sales, especially for private label promotions. Marketing comes in many forms, and we believe that high-value content and supply chain are the cornerstones of sales. In fact, content marketing is what Yunji has been doing since our establishment. We have focused a lot on this area. Whether it’s photos or articles, they are important channels for us to deliver information. We have a group of loyal users and service managers who love to share shopping experiences. That is also a kind of content sharing; live streaming and short videos make sharing more vivid. We are pleased to see our official account on third-party platforms grow rapidly. The account offers interesting content every week and features many short videos that receive around 1 million views consistently. Later, we will also try to organize live streaming sales on these accounts to promote private label products, leveraging the high-quality supply chain that Yunji has. We hope that these high-quality contents and efficient live streaming can actually bring more value to our platform and users. Thank you.

Thank you. There are no further questions at this time; I'd like to hand the conference back to management for closing remarks.

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

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.