Yunji Inc. Q4 FY2022 Earnings Call

Hello, everyone. Welcome to our fourth 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 or unknown risks, uncertainties and other factors of Yunji and its industry. These forward-looking statements can be identified by 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 entirely by cautionary statements, risk factors, and details of the company's filings 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 Fourth Quarter 2022 Earnings Call. During the fourth quarter, we successfully weathered the challenges caused by COVID-related restrictions and the subsequent easing of these measures. In October and November, COVID controls exerted a downward pressure on our order volume. Then in December, our fulfillment capabilities were significantly impacted as the country battled a surge in COVID cases. Although we have observed signs of broader stabilization and recovery, there remain some lingering weaknesses in household income and private consumption. Nonetheless, we are confident that our optimized cost structure will enable us to navigate through the market downturn with agility and flexibility. Over time, our enhanced capabilities and business resilience position us well to seize opportunities when the market recovers. Fortified by these solid foundations, we remain cautious and optimistic as we look to the future. I would like to summarize this year's ups and downs. During 2022, we continued to emphasize our initiatives on both product and marketing insights. For our health care brand, we introduced a wide array of fresh offerings covering weight management, skin care, and body revitalization in order to meet diverse consumer needs. The driving force behind our R&D and production processes focuses on creating high-quality, healthy, and natural products. Our efforts were well received by our users, with several of the new products generating over RMB 10 million in sales during a single sales event thanks to these unique and innovative offerings. This mindset around Yunji Healthcare continues to gradually form. Turning to our skin care brand SUYE, by refreshing and refocusing our content marketing and private label brand promotion initiatives, we further developed and strengthened the brand's public traffic. Leveraging social media and our own user community, we boosted user interaction by generating attention-grabbing, helpful content, thereby enhancing user experience and our brand's reach. For our product selection, we successfully launched our upgraded Yunji selected quality certification system, an integral component of our gourmet Yunji strategy with a main focus on the gourmet food category. The stringent certification ensures consumers receive only the highest quality products. One year after this recent launch, our platform has accumulated a wide range of well-loved products that are regularly repurchased by our users. Powered by indeed the flagship Yunji selected certified products, our repurchase rate reached an impressive 81.8% in 2022. Let's take a closer look at our marketing efforts. We continue to innovate and refine our vertical community service experience, while also launching additional value-added services. For example, we enhanced our members' perks by providing them with professional advice and nutritional insights within their loyalty and satisfaction framework. Building on these initiatives, we upgraded our consumer marketing tool from graphical content to a short video format, generating exponential growth in high-value content. By integrating these tools with our innovative features that make sharing more convenient, we create heightened brand exposure and allow our service managers to promote products more efficiently and accurately. As we move further into 2023, we have already engaged in extensive strategic planning on both the product and marketing sides. On the product side, we are witnessing evolving consumption trends. An increasing number of e-commerce companies are competing, cultivating consumers’ mindsets towards purchasing low-priced products. On the other hand, consumers are generally becoming more price-sensitive and spending more cautiously, even as they demand higher-quality products and value-for-money experiences. Against this backdrop, we are confident that our private label strategy delivers a unique consumption experience that goes beyond low prices. Following the easing of COVID-related restrictions in the fourth quarter, consumers have become more health-conscious and increased their spending in the health category accordingly. In line with these trends, this year, we are focusing on exploring the health care and nutritional therapy categories to further enhance the growth of our private label products. Our efforts to date have yielded positive results, with the proportion of our total sales accounted for by health care products increasing. Importantly, both our legacy and newly launched products proved popular with users, allowing us to maintain a healthy growth margin. As previously mentioned, the recovery of consumption is a gradual process, and we have seen the travel sector rebound most rapidly. On the marketing channel side, our goal is to expand channel penetration and build more people-to-people connections. Over the past year, certain constraints prevented us from fully engaging in offline promotional events. This, coupled with the limited number of sales managers able to attend these events, impacted our consumer mindset and brand exposure. As the external situation has improved, we have resumed our program of offline marketing events. For example, in February, we held a meeting in Changsha where we launched items from our new product range. I also took the opportunity to have one-to-one discussions with several service managers and models in attendance. Currently, we are energizing our offline marketing with a 100-day offline promotion campaign. At the same time, we will attract public traffic and boost awareness of our private label brands by rolling out more offline stores where consumers can explore and enjoy our products. The number of our service managers has now grown to 110,000. We continuously strive to improve the management of our service managers and provide them with more convenient and timely services. As such, we are developing more handy tools and features, implementing efficiency-boosting technology, and increasing the level of support they receive internally. 2023 is a year of transition, but also a year full of opportunity. We will be with our customers every step of the way to help them smoothly navigate the post-pandemic era. At the same time, we will support and help our service managers to seize fresh opportunities in the specialty retail industry. With that, I will turn the call over to Mr. Zhang, our Vice President of Finance, to go through 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. We faced a volatile macro environment during the fourth quarter with pandemic-related restrictions in October and November and COVID spread following the relaxation in December. Navigating through the pandemic, we gained valuable experience as we continue to refine our product selections, develop our private labels, optimize our product mix, and explore new business opportunities. Importantly, our repeat purchase rate increased to 81.8%, and our gross margin increased to 40.9% during the quarter. At the same time, we adapted to the macro environment by further optimizing our cost structures and adhering to our prudent cost control strategy. Thanks to these efforts, we delivered significant efficiency improvements with our operating expenses decreasing by 22% year-over-year. Our strong cash position and healthy financial condition provide the foundation for the further development of our business. Now let's take a closer look at our financials. Total revenues were RMB 289 million compared to RMB 471 million a year ago. Revenues from sales of merchandise were RMB 241 million, and revenues from our marketplace business were RMB 43 million. This decrease was primarily due to our continued strategy of refining our product selections across all categories and optimizing our selection of suppliers and merchants, causing a near-term decrease in sales. Changes in consumer confidence during the COVID-19 pandemic also contributed to the decrease. Despite these challenges, we maintained a stable gross margin at 40.9% compared to 39.6% a year ago. This was a result of sustained customer loyalty to our private labels and the effective product curation strategy. Now let's take a look at our operating expenses. Fulfillment expenses were RMB 32 million compared to RMB 47 million a year ago. This was primarily due to reduced warehousing and logistics expenses from lower merchandise sales. Sales and marketing expenses were RMB 59 million compared to RMB 78 million a year ago. This was mainly due to a reduction in personnel costs resulting from staffing structure requirements, a decrease in member management fees, and a decrease in marketplace business platform promotion expenses. Technology and content expenses were RMB 17 million compared to RMB 26 million a year ago. The decrease was mainly due to a reduction in personnel costs arising from staffing structure assignments and reduced cloud service costs. General and administrative expenses were RMB 45 million compared to RMB 44 million a year ago. Total operating expenses in the fourth quarter decreased to RMB 153 million from RMB 196 million in the same period of 2021. We recorded a loss from operations of RMB 33 million compared to income from operations of RMB 4 million a year ago. The net loss was RMB 38 million compared with net income of RMB 58 million a year ago, while our adjusted net loss was RMB 31 million compared with adjusted net income of RMB 71 million a year ago. Basic and diluted net loss per share attributable to ordinary shareholders were both RMB 0.02 compared with basic and diluted net earnings per share attributable to ordinary shareholders of RMB 0.03 in the same period of 2021. Moving on to liquidity. As of December 31, 2022, we had a total of RMB 669 million in cash and cash equivalents, restricted cash, and short-term investments on our balance sheet compared to RMB 571 million as of September 30, 2022. During the fourth quarter, we refined our operations and optimized our working capital cash flow. Our liquid assets were sufficient to cover our payable obligations, and we did not hold any long-term backlogs or debts on our balance sheet. Looking ahead, we will continue to cultivate our range of private label products and introduce more novel offerings with strong repurchase potential and customer appeal. As we navigate through the current macro challenges, we will further refine our cost structure while exploring new opportunities driven by consumption recovery in 2023. We are confident that our resilient business model and innovative strategies will deliver long-term value to our shareholders. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

And our first question today comes from Ethan Yee at First Trust China.

We see that there are several competitors in the market starting to engage in subsidy work. I'm just curious about your view on this? And would you consider entering the RMB 1 billion specific campaign like Jingdong in the future?

Sorry, let me quickly translate this question.

Firstly, the consumer purchasing power is still slowly recovering, and the tendering subsidy program can indeed bring tangible benefits to consumers. We acknowledge the value of subsidies to the consumer market, especially in some standard product categories such as mobile phones and electronics. Price is of course a very important element in consumption decisions. However, the demand for product quality, customer service, and production features remains quite important and strong. We do not believe in blindly lowering prices. Our goal is to establish a mindset among our consumers that our products are not only affordable but also unique with high quality. Rather than offering client subsidies, we focus on providing value-added services and maintaining the quality of our products so that our customers feel their purchases are worthwhile. We believe that the government’s initiatives are more important, aimed at transitioning from high-speed development to high-quality development. We have a variety of private labels in healthy food, beauty, and gourmet food categories complemented by professional vertical committees for one-stop shopping and marketing. This gives us strong cost control and operational capabilities over product quality, pricing, and services. We provide users with a high value experience without relying on tendering subsidies. Thank you for your question.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

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

This concludes today's conference call. You may now disconnect your lines, and have a wonderful day.