ZKH Group Ltd Q3 FY2025 Earnings Call

Ladies and gentlemen, good day, and welcome to the ZKH Group Limited Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jin Li, Head of Investor Relations. Please go ahead.

Good morning, and welcome to our third quarter earnings conference call. With me are Mr. Eric Chen, our Founder, Chairman and CEO; and Max Lai, our CFO. Today's discussion may include forward-looking statements. Related factors are described in our today's press release. And we will also discuss certain non-GAAP financial measures for comparison purposes only. Please refer to the earnings release for definitions of these measures and a reconciliation of GAAP to non-GAAP results. With that, I will turn the call over to Eric. Eric, please go ahead.

Hello, everyone. Thank you for joining the Third Quarter 2025 Earnings Conference Call for ZKH Group. In the third quarter, thanks to our team's collaborative efforts, we are happy to report signs of stabilization and recovery in our business after nearly four quarters of proactive optimization. The number of active customers surpassed 70,000, reaching a new quarterly high and strengthening our foundation for future growth. Both GMV and the number of customers among key industry accounts and regional SMEs continued to grow year-over-year. Our gross margin has also been on the rise. Consequently, our GMV, revenue, and gross profit for the third quarter have largely returned to previous year's levels. From an order flow standpoint, the average weekday order value increased from about RMB 37 million in July to around RMB 52 million since November, an improvement of over 40%. This reflects a year-over-year increase of about 20%. We anticipate this positive trend in average weekday order value to persist through the end of the year, confirming that we are back on a growth path. Our total operating expenses in the third quarter decreased by 14% year-over-year to roughly RMB 420 million, contributing to a notable improvement in profitability this quarter. The operating loss, net loss, and adjusted net loss all saw significant reductions. Our adjusted net loss decreased by approximately 78% year-over-year to just RMB 14 million, with an adjusted net loss margin improving to 0.6%. Additionally, we reached monthly breakeven in September and are on schedule to achieve quarterly profitability in the fourth quarter. In terms of cash flow, we generated net cash of around RMB 100 million from operating activities during the third quarter, mainly due to the considerable reduction in losses and effective optimization of working capital management, including accounts receivable and payable. Our business growth is supported by ongoing developments in our product capabilities within AI technologies. During the third quarter, we made progress in both areas, driving business growth while boosting operational efficiency. As a comprehensive MRO procurement service platform, the variety and quality of our product offerings are crucial for our growth. We manage 32 product lines, each with a customized strategy. Some lines focus on specialization and curation, while others aim to broaden product variety and supplier networks. In the third quarter, we added over 2.3 million sellable SKUs in categories such as chemical reagents, machining, and transmission, bringing our total to more than 19 million. We also welcomed over 1,200 new suppliers, mainly OEMs, enhancing our product range and solidifying our advantage as a one-stop procurement platform. Our private label products are a vital strategic focus, aimed at providing our customers with high value-for-money options, enhancing our overall competitiveness. In the third quarter, we introduced over 600 new private label SKUs, covering categories like security products, personal protective equipment, tools, and material handling items. The GMV for our private label products continued to grow at a double-digit rate, exceeding the overall growth rate of the company. Looking ahead, we aim to gradually increase the contribution of our private label products to total GMV from around 8% currently to approximately 30%. We will concentrate on professional and industrial-grade MRO categories, including spare parts, chemicals, and manufacturing components, as these are key differentiators and value drivers that distinguish us from competitors. For product lines where we hold advantages, such as industrial lubricants and adhesives in our chemical product line, we have established a strong and reliable supply chain supported by 13 specialized chemical warehouses, three of which handle hazardous materials, and an in-house delivery fleet. We will continue to enhance our capabilities from product selection to last-mile delivery and on-site service, further strengthening our competitive edge. In the third quarter, our chemical product line experienced double-digit year-over-year GMV growth. In the field of AI, we are making strides in developing our AI infrastructure across data and application layers, concentrating on intelligent processes and data governance to systematically enhance our sales and operational efficiency. We have integrated AI into various business scenarios like material management, product recommendations, sales conversions, data standardization, and workflow automation. AI has become an essential driver for reducing costs, improving efficiency, fostering business growth, enhancing R&D productivity, and enriching data assets. At the opening of the 8th China International Import Expo in November, we officially introduced Expert Linglong, our proprietary AI large model and intelligent agent suite, designed specifically for the MRO industry. This marked a significant milestone for ZKH in utilizing AI to empower the entire MRO supply chain. Our AI Smart Workbench, a core application of Expert Linglong, automates 45 business processes, such as order creation or invoice issuance with a single prompt. This has significantly minimized cross-system manual tasks and improved overall process efficiency and productivity. In the third quarter, our customer service productivity increased by 42% year-over-year, and procurement productivity rose by 52%. Additionally, AI has become crucial for understanding customer needs and improving supply-demand matching efficacy. Our ProductRecom Agent continues to refine recommendation accuracy, generating over RMB 100 million in new sales revenue since its launch in the fourth quarter of 2024 through the end of this third quarter. Our AI tools also excel in complex business scenarios. For instance, a 300-line customer inquiry that traditionally took three hours can now be handled in 30 seconds with 98% accuracy by leveraging AI alongside expert insights. Since the beginning of the year, we have used AI to optimize our product classification models, increasing our automated classification rate from 11% to 31%. This not only minimizes manual work but also boosts product onboarding efficiency and enhances matching accuracy with customer needs. Going forward, we will continue to expand our self-service AI-driven procurement agent to expedite responses and elevate customer experience. Our Expert Linglong model is also enhancing upgrades across our R&D system, as our teams increasingly utilize AI coding tools, resulting in over 15% of our code being generated by AI, significantly improving development efficiency. Moving forward, the Expert Linglong model will remain central to our AI initiatives, driving deeper technological advancements throughout our product, supply chain, and last-mile delivery capabilities. We view AI not just as a tool, but as a transformative force for the MRO supply chain ecosystem. In conclusion, the third quarter proved to be highly productive. We made steady advancements in all our business segments, aligned with our strategic goals, generating stronger growth momentum across the board. Looking ahead, we are dedicated to furthering our goals of product excellence, AI-driven growth, and profitability improvement, delivering long-term value to our customers and shareholders. Now I will hand the call over to our CFO, Max Lai, to share our financial results. Thank you, everyone.

Thank you, Eric, and thanks, everyone, for making time to join our earnings call today. I'm pleased to walk you through our robust financial performance, driven by revenue recovery, enhanced profitability metrics, and positive operating cash flow. Let me begin with the top line. Both GMV and revenues returned to approximately last year's levels, with GMV down 2.3% year-over-year to RMB 2.62 billion and total revenues up 2.1% to RMB 2.33 billion. This performance indicates that the headwinds from our business optimization initiatives have largely cycled through, providing greater visibility for renewed top-line growth in the quarters ahead. Notably, the number of transacting customers exceeded 70,000, reaching a new quarterly high, and private label GMV grew 16.7% year-over-year, outpacing the overall business and reaching 8.2% of total GMV. Turning to business quality. Our gross margin remained healthy at 16.8% compared with 17% a year ago. On a GMV basis, our gross margin continued to improve, expanding by 41.5 basis points year-over-year to 14.9%. Specifically, gross margin for our product sales 1P model increased by 11.2 basis points to 16.2% on the ZKH Platform and 223.8 basis points to 7.7% on the GBP Platform. Additionally, our take rate in the Marketplace model rose by 47.5 basis points to 13.1% year-over-year. These gains were mainly driven by our optimized procurement costs and a high contribution from our private label products, which typically deliver high margins. On operational efficiency, our disciplined focus on streamlining the costs and enhancing productivity continues to yield tangible results. Total operating expenses decreased 14.4% year-over-year to RMB 493.8 million, representing 18.1% of net revenues, a significant improvement from 21.6% in the prior year period. Breaking this down, fulfillment expenses were RMB 90.4 million down 9.8% year-over-year, reflecting lower employee benefits and warehouse rental costs. Sales and marketing expenses declined 13.2% to RMB 145.9 million, primarily driven by lower employee benefits and travel expenses. R&D expenses decreased 19% to RMB 40.3 million, mainly attributable to lower employee benefits. General and administration expenses were RMB 145.8 million, down 17% year-over-year, driven by lower employee benefits expenses and lower credit loss allowances. Efficiency gains underpinned margin improvements and a substantial reduction in losses. Operating loss narrowed 69.3% to RMB 32.3 million, with margin improving to negative 1.4% from negative 4.6%. Non-GAAP EBITDA improved to a loss of RMB 8.5 million from RMB 62.8 million, with margin improving to negative 0.4% from negative 2.8%. Adjusted net loss narrowed to RMB 14.1 million from RMB 66.2 million and margin improved to negative 0.6% from negative 2.9%. As of 30 September 2025, our cash position remained strong at RMB 1.9 billion. Net cash generated from operating activities was RMB 105.5 million compared with net cash used in operating activities of RMB 160.5 million in the same period of 2024. To conclude, our first quarter results demonstrate clear signs of stabilization and recovery, underpinned by a more balanced customer mix, a higher-margin product portfolio driven by private label growth, and a structural efficiency gain from AI-enabled process optimization and strengthened supply chain capabilities. Looking ahead, we expect to capitalize on this momentum through disciplined investment in AI and data capabilities, continuous enhancement of our product and supply chain capabilities, and focused execution while advancing our international expansion. We remain focused on top-line growth, further margin expansion, and loss reduction on our path toward sustainable profitability. Thank you. And I would like to now open the call for Q&A. Operator, please go ahead.

The first question comes from Xiaodan Zhang with CICC.

According to publicly available information, JD Industrial is preparing for an IPO in Hong Kong. Could management share your views on the competitive landscape of the MRO market in China?

I believe that JD MRO seeking to go public is beneficial for ZKH and the industry as a whole. It promotes the concept of one-stop purchasing on e-commerce platforms, which is a timely opportunity. China, being the largest manufacturer globally, is capable of sustaining leading MRO companies that serve both domestic and international manufacturers. In the MRO sector, we see various players, including those historically focused on office supply distribution. ZKH began by selling chemicals and industrial-grade MRO products, specializing in spare parts, chemicals, and manufactured goods. We have also established an innovation center in Taichung, highlighting our commitment to integrating our services. In terms of research and development, testing, product selection, and comparison, we aim to leverage our expertise to assist our customers effectively. Our investments include building warehouses and last-mile delivery capabilities, allowing our supply chain to serve not just China, but the global market as well. Over the years, the competitive landscape has stabilized, and our advantages as industry leaders are becoming more evident. Our acquisitions of numerous SMEs demonstrate significant improvements in our supply chain capabilities. Ultimately, we are dedicated to enhancing our supply chain strengths in the MRO sector. Thank you.

Are you ready for your next question? The next question comes from Leo Chiang with Deutsche Bank.

Let me translate myself. Management just mentioned in the prepared remarks that the company will commit to advancing development goals of profitability improvement. What are the reasons the company has not been profitable so far? And how does the company consider and balance between profitability and the mid- to long-term development investment?

We have received significant investment and funding throughout our journey. As a start-up, we have experienced different phases. During the early days, our main focus was on ensuring healthy cash flow, which meant a substantial portion of our funds was allocated to building infrastructure and strengthening our core capabilities. As a result, we experienced losses primarily due to these investments aimed at enhancing our core competencies. However, I believe we are now entering a new phase characterized by profitability, where we plan to reinvest some of our profits to further develop our core competencies. With our current profitability, it’s evident that we are achieving stronger operating leverage, as our expense ratio continues to decline while our fulfillment gross margin increases. This aligns well with our original development plan. Regarding our specific profit and losses, we recorded a loss of RMB 910 million in 2021 due to our investments. In 2022, the loss was RMB 630 million, and in 2023, it decreased to RMB 290 million. In 2024, the loss was RMB 160 million. By 2025, we expect the losses to significantly reduce, and we are likely to turn a profit in Q4. We are confident that our year-over-year GMV growth could reach 15% to 20% moving forward. To balance profitability with long-term growth, it largely depends on managing expenses. We will continue to focus on improving efficiency, controlling expenses, and enhancing our customer acquisition capabilities. Our investments in core competencies will continue, which include R&D for AI, product capabilities, and expanding our overseas business. Our goal is to not only maintain sustainable profitability but also to enhance it while ensuring long-term growth.

The next question comes from Ruchen Tang with CITIC.

Let me quickly translate the question first. Looking for your latest developments and future plans for overseas expansion, could you discuss your approach to developing your business in the United States compared to serving Chinese companies as they expand internationally?

Overall, when it comes to going abroad, there are two parts. One is serving Chinese companies as they expand globally, as many are currently taking their business international. We are also focused on developing business in the U.S. mainland and Europe, which we are already actively pursuing. After a period of testing, we have made some adjustments. We still highly value the potential of Chinese companies going abroad due to the limited nature of our investments and the high certainty of this business. In Q3, for example, we completed the MRO purchasing and delivery for several Chinese customers in Thailand, Malaysia, Indonesia, and Mexico for their local factories, including product certification and customer clearance. Regarding our business in the U.S., we see this as a mid- to long-term opportunity that will require additional time for product preparation before entering the market. Therefore, we have chosen to carefully manage our investment pace in the U.S. Overall, we expect our overseas operations to break even by the end of 2026. That summarizes my response to this question.

And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments.

Thank you once again for joining us today. You can find the webcast of today's call on ir.zkh.com. If you have any further questions, please feel free to contact us. Our contact information can be found in today's press release. Thank you, and have a great day.

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