Yunji Inc. Q2 FY2023 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Yunji's Second Quarter 2023 Earnings Conference Call. With us today are Mr. Shanglue Xiao, Chairman and Chief Executive Officer; Mr. Peng Zhang, Vice President of Finance; and Ms. Kaye Liu, Investor Relations Director of the company. As a reminder, this conference call is being recorded. Now I would like to hand the conference over to our first speaker today, Ms. Kaye Liu, Investor Relations Director of Yunji. Please go ahead, ma'am.

Hello, everyone. Welcome to our second quarter 2023 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 events that involve 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 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's filings with the SEC. Yunji does not undertake any obligation to update this statement, except as required by 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 2023 earnings call. During the first half of this year, with consumption gradually and steadily recovering, a number of notable trends emerged. First, in terms of consumption habits, the post-pandemic surge and consumer mobility triggered by a transition away from stockpiling of goods towards a preference for seasonal purchases. To capitalize on this, we will further enhance our supply chain so that we are better equipped to address seasonal consumer demand. In time, we will optimize our marketing campaigns to sharpen their focus on holidays, seasonal transitions, and social trends. In addition to that, we have also observed the resurgence of local community services in the consumption landscape and the substantial support these services have drawn from national policies. The convergence of these two trends presents exciting opportunities for our gourmet food strategy. Over the course of the second quarter, we steadily rolled out our gourmet food products in local neighborhood groups and online and offline communities in certain second-tier and third-tier cities. Our private-label meat products proved especially popular, gradually generating notable levels of repeat purchases. During the second quarter, we noted a trend where an increasing number of companies have adopted a price war strategy. As we often stimulate consumption, it is crucial to highlight that Yunji adheres to a substantial healthy and value-oriented strategy rather than merely burning money by resorting to subsidies or adopting a low-price strategy. Our prudent approach is centered around refining our operations, saving our funds for subsidies, and leveraging our highly creative product range and economies of scale to offer users parallel value. The resounding success of our private label range underpins our confidence that we can offer users cost-effective products without resorting to price wars. Lately, SUYE, our private label beauty brand, marked its 13th anniversary. We celebrated this milestone by holding an event in Shenzhen with the sale of a China peptide new attitude. During the celebration, SUYE unveiled its latest product, white peptide 3.0, marking the dawn of a new year aimed at addressing the specific skincare needs of the Chinese people. Importantly, SUYE has signed a strategic agreement with a leading domestic supplier of raw materials for cosmetics. Furthermore, SUYE released its 2023 anti-aging white paper and welcomed the first groups of customers to its offline retail stores. Recognizing the burgeoning market potential created by an aging population over the next decade, our private labels are continuously expanding their presence within the healthcare sector, delivering an enhanced consumption experience. In line with our commitment to promoting healthy lifestyles, we actively encourage users to take responsibility for their families to help nurture good habits and maintain the well-being of every family member. As a result of these efforts, our healthcare brand, Qingziyang, maintained its momentum with accumulated approved OT sales exceeding RMB200 million. In addition, our newly introduced Coenzyme Q10 product sold out within the first 31 minutes of its launch. Let's turn to our marketing initiatives. We are fully cognizant that in the age of information overload, we face a limited window for capturing users' attention. To organize our use of this precious time, it is essential to maximize the impact and efficiency of our connection with users, establishing an effective terminal. Crafting such a terminal necessitates an effective blend of high-quality content and timely distribution. To meet the challenging offer of producing high-quality content, we reported the competencies of our cutting-edge AI large-scale model technology. Going forward, we will intensify our current environment and explore innovative approaches, including AI digital humans, live streaming, and cloud solutions with virtual presenters. We have already launched our digital human live-streaming initiatives, significantly reducing labor and material costs. Our private-label products, especially those in the healthcare sector, naturally resonate with young consumers. In our experience, these products are more effectively promoted by service managers than by influencers for the marketing of healthcare products, we compete through special retail lines and more efficient information dissemination. By engaging in collaborative product research and development processes, we cultivate a thorough understanding of our products. Furthermore, by placing product origins, we can generate reach and more authentic content. This high-quality content is then disseminated to thousands of service managers, who, having undergone professional retail training, are able to engage in meaningful interaction with users. Our service managers, equipped with the high-quality content we produce and the special training we provide, are able to address the majority of user inquiries. To further empower our service managers, we have developed an AI health adviser that they can consult to tackle more specialized inquiries. This model of special lines retail, combined with AI technology, is better aligned with the needs of Chinese households and local communities. 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. The macro-environment continues to present challenges that demand our careful attention and adaptability. Consumer sentiment and purchasing power still need additional momentum before they completely recover. Meanwhile, consumer preference is evolving swiftly. Based on our existing marketing data, our strategic effort towards healthcare and nutritional products has yielded promising results. This shift has not only aligned us with changing consumer preferences but also bolstered our financial performance. We are dedicated to expanding our product selection and nurturing our private label offerings, ensuring that we stay at the forefront of marketing trends and maintain a competitive edge. We remain committed to optimizing our cost structure and enhancing operational efficiency. By doing so, we will fortify our resilience against economic fluctuations, reinforce our capacity to weather uncertainties, and prosper regardless of the economic cycle. Now let's take a closer look at our financials. Total revenues were RMB167 million compared to RMB284 million a year ago. Revenues from sales of merchandise were RMB131 million and revenues from our marketplace business were RMB34 million. The main driver behind the change was our consistent improvements to our product range across all categories, coupled with the optimization of our supplier and merchant network, which led to a short-term impact on sales. Despite these challenges, we improved our gross margin to 51.6% compared to 40.6% a year ago. This was a result of sustained customer loyalty to our private labels and our effective product duration strategy. Now let's take a look at our operating expenses. Fulfillment expenses were RMB30 million compared to RMB43 million a year ago. This was primarily due to decreased warehousing and logistics expenses because of lower merchandise sales and lower personnel costs due to staffing structural refinements. Sales and marketing expenses were RMB33 million compared to RMB58 million a year ago. This was primarily a result of streamlining staffing structures, leading to reduced personnel costs aligned with the decline in member management fees and a decrease in business promotion expenses. Technology and content expenses were RMB14 million compared to RMB24 million a year ago. The decrease was mainly due to a reduction in personnel costs as a result of staffing structural requirements. General and administrative expenses were RMB33 million compared to RMB32 million a year ago. This was mainly due to a higher allowance for credit losses, partially mitigated by lower personnel costs resulting from staffing structure refinements, as well as a decrease in share-based compensation expenses. Total operating expenses in the second quarter decreased to RMB111 million from RMB157 million in the same period of 2022. Loss from operations was RMB12 million compared to RMB30 million a year ago. Net loss was RMB42 million compared with RMB25 million a year ago. While adjusted net loss was RMB40 million compared with RMB17 million a year ago. Basic and diluted net loss per share attributable to ordinary shareholders were both RMB0.02 compared with RMB0.01 in the same period of 2022. Moving on to liquidity. As of June 30, 2023, we had a total of RMB583 million in cash and cash equivalents, restricted cash, and short-term investments on our balance sheet, compared to RMB669 million as of December 31, 2022. Our liquid assets were sufficient to cover our payable obligations, and we did not hold any long-term bank loans or debt on our balance sheet. In the near future, we are proactively exploring investment opportunities and have enhanced our supply chain capabilities. To conclude, amidst mixed macro-environment dynamics, we are pleased to witness the growing synergies between offline and online retail opportunities during the post-COVID era, which we believe provides an excellent opportunity for us to develop our private labels. As we continue to optimize our cost structure, we are confident in our ability to thrive and navigate a variety of economic cycles. I would also like to let you know that I have submitted my resignation, and my last working day will be August 25, 2023. I have chosen to step down due to personal reasons, and my responsibilities will be transitioned to Yeqing, our Senior Financial Director. My journey with Yunji has been five years, during which I have experienced significant personal growth. I have full confidence in Yeqing's exceptional abilities in managing complex financial operations and strategic planning. To ensure a seamless transition, I will continue to serve as a consultant. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

And our first question comes from Ethan Yu of First Trust. Please go ahead.

Thanks for taking my question. The Chinese government has repeatedly given some policies to stimulate offline transactions. I'm wondering what's the management's perspective on this issue. And does it have any impact on our business? Thank you.

Thank you for your question. We are delighted to see consumers gradually regaining their vitality and pursuing a better life. We certainly support national policies and hope to contribute to the recovery of offline consumption. Currently, we have made adjustments in line with consumer trends such as increasing the buy seasonal new products, in-house sales, tailored to the specific scenarios and improving our ability to fulfill services. Furthermore, we have hosted various offline events, including origin tracing equity and loan gathering, allowing our service managers to gain a deeper understanding of the products. This in turn makes our product descriptions more authentic, persuasive and enhances the consumer experience. Yunji is more than just an online sales platform. We have many private labels, which provide us with greater flexibility. Our sales rate depends beyond the online market as we manage our network of over 100,000 service managers across cities nationwide, which corresponds to a robust local sales team. We look forward to exploring new facilities offline in the future. Thank you.

This concludes our question-and-answer session. 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 look forward to talking with you next quarter. Bye.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.