Baozun Inc.

Good morning, ladies and gentlemen, and thank you for standing by for BAL's first quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. As a reminder, today's conference call is being recorded. I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Investor Relations Director of BALSIN. Please proceed, Wendy.

Thank you, Operator. Hello, everyone, and thank you for joining us today. Our first quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.baozhen.com, as well as on Globe Useware Services. They have also posted a PowerPoint presentation that is a comment to the same IR website where they are available for download. On the call today from Boston, we have Mr. Vincent Chu, Chairman and Chief Executive Officer, Mr. Arthur Yu, Chief Financial Officer, and Ms. Tracy Lee, our Vice President of

Buying a home is a frustrating process. No matter how many houses you look at, chances are you're gonna have to make compromises. At Welcome Homes, we believe you should be able to go online, buy your new home, customize it just the way you'd like, and have it ready to move in in just six months. There are just three costs you need to be aware of when you're building a home with Welcome Homes. There's the cost of the land, cost of the land prep, and then there's the cost of the house itself. That's it. Those three numbers get us to your total locked-in price. First, the land. If you already own land, select that option on our website and we'll have somebody from our team reach out. If you don't own land, you can use our partial viewer to see what's available and where it's located. Select the one you want to purchase and we'll help you through the purchase process. And if you want, we can guide you through financing options as well. Next is land preparation. This includes things like clearing trees, grading your lot, adding a septic system, digging well water, paving your driveway... Everything to prepare your lot so we can start building your new home. We'll work with you so you understand exactly what will be required at your specific site and the associated costs. And finally, the house. Each one of our house models can be customized to fit your needs right on our website. You can choose exterior looks, various kitchen and bath styles, flooring options, and more. So that's it. These three steps give us the ability to give you a clear picture of what your all-in cost will be, and it won't change. Once you get your total locked-in price from us, there's no more dealing with approvals, contractors, architects, designers, endless choices, or an unknown completion cost. You'll get the home you picked at the price we promised, no compromises. Welcome Homes. Order your dream home online.

decisions are easier to make when you know what's possible at worldwide technology we have built the world's most powerful technology lab environment to help accelerate your digital transformation the wwt platform features cloud and security solutions allowing you to compare and validate technology architectures you can innovate and sharpen your skills wherever you are in the world start your transformation today at wwt.com together let's make a new world happen worldwide technology

strategic business development.

Mr. Chu will review the business operations and company highlights, followed by Mr. Yu, who will discuss financials and guidance. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference file contains forward-looking statements relating the meaning of the Security Exchange Act of 1934 and the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control. which may cause the company's actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks and certainties or factors is included in the company's filing with the US SEC and in announcements on the website of Hong Kong Stock Exchange. The company does not undertake any obligation to update any forward-looking statements except as required under applicable law. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in R&D, and the considerations are on year-over-year basis. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Chu. Vincent, please go ahead.

Thank you, Wendy. Hello, everyone, and thank you all for joining us. As you know, Shanghai, where Baozhen is headquartered, has been on strict lockdown since mid-March 2022. It has presented unprecedented challenges to business activities in China. As of today, I'm very glad to report that we were able to minimize disruptions. Thanks to our hardworking people, best-in-class technology, and the diversified regional service centers, we are very confident that we can support our brand partners in navigating the turbulence. Let me start with sharing some progress we have made in this quarter. Please turn to slide number two. To date, 2022 has been quite unique due to the COVID lockdowns and the weak consumption sentiment in the macro environment. However, Our total GMB grew 28% to $17 billion, driven by strong growth in FMCG and electronics. Services revenue increased by 24%, whereas product sales revenues declined by 30%, as expected due to our ongoing brand portfolio optimization in recent quarters. During the quarter, we made notable progress in deepening service penetration. That's our value-added digital marketing and IT solutions generated high double-digit goals. We view this progress as an important step in our efforts to minimize macro environment risks and enhance our value-added proposition to empower brand partners. Please turn to slide number three. Our strategic business development efforts continue to bear fruits with faster brand acquisitions and accelerated progress in emerging channels. This first quarter, we won over several new brands, especially in the luxury, premium, and lifestyle sectors. Leveraging on this momentum, we have more flexibility to regionalize less profitable businesses and focus on higher business efficiency Overall, we added a net of 12 new brand partners in the first quarter, and the total number of brand partners for store operations increased to 345. Looking at the channel breakdown, this quarter, non-teemo GMB accounted for 40% of total, compared with 32% a year ago. Notably, JD, WeChat, and Douyin all developed a triple-digit growth rate. In our view, omnichannel strategies effectively help brands accrue user assets and brand equity, which is critical for sustainable growth. Our integrated digital operating platform, along with our ability to lead brand partners to set the right omnichannel strategy, enables brand partners to expand their e-commerce flexibility, and capture incremental business opportunities. With our powerful omnichannel capabilities, a brand can seamlessly offer its products and services no matter which channel consumers prefer to use. Looking at our progress in JD, during the quarter, we launched a mini program integrated store for an Italian luxury brand. and opened flagship stores for a French luxury brand and an American premium fashion brand. These cases have been widely successful and regarded as industry benchmarking business cases. We continue to view rich content initiatives and live streaming as powerful tool sets to leverage and enhance user experience. We have established three-fold service metrics composed of daily in-store live streams, content-oriented digital marketing, and a Douyin partner business. Though Douyin is still in its early phase of brand e-commerce, we set up offer of our dedicated Douyin sub-branch with over 200 staff currently serving several dozens of clients. With our omni-channel enabling populations, Our Douyin partner business has already achieved solid headway in apparel, appliance, and lifestyle categories. Now let's share with you some trends on technology innovations on slide number four. In recent quarters, the rapidly evolving e-commerce dynamics have pushed many brand partners to elevate their efforts in digital transformation. In particular, Further, the trend of omnichannel, brands want to master the digital convergence between online and offline spaces, as well as enhance customer relationship management to enrich lifetime values. For example, a few months ago, we launched a dealer transformation program for one international electronics brand partner to digitalize business flows from factories to stores and to consumers. Subsequently, the brand expanded the program to incorporate more platforms such as JD, Daojia, and the DMP to the system and widened the deployment to over 3,000 stores nationwide today and targeting to double the deployment by the end of this year. Another typical trend is brand's efforts in setting up China for China IT systems. In one of our recent China for China projects, with a leading international sportswear brand. We also launched a one-team methodology by fully integrating our e-commerce partner team, our IT team, and the brand partners team. We work together and win as one team. We focus not only on commercial and merchandise, but also on consumer privacy protection and lifetime verification. Both of these two examples successfully demonstrated or technology offerings great potential. With the increasing importance of online business to drive sales growth in China, we anticipate technology transformation will continue to play a critical role for our brand partners. Looking ahead, although our strategic progress remains healthy, we anticipate short-term turbulence due to the recent unprecedented COVID lockdown in China, continuing impact on consumer sentiment. Let me share about our prompt response to COVID as demonstrated on slide number five. As per our mission statement, technology empowers future success. Our technology assets afford us with extended capability and flexibility to help our brand partners navigate external disruptions. We leveraged our one inventory system and O2 toolkit, like ShopDoc, to seamlessly integrate online and offline inventory. Our service anywhere platform, SME or SAMI, has been a powerful backbone, enabling us to serve our brand partners from different locations with improved quality and efficiency through digital intelligence. Our regional service centers in Nantou and Hefei physically ensure flexible and reliable remote-based services, and we further expand our operations into nine additional cities across China. In logistics and supply chain, we work with our brand partners to transition from centralized warehousing to a grid-managing system and our operation team continuously monitor platform policies to adjust product and marketing strategies, nurturing brand care, and prioritizing relationship management. On top of minimizing disruptions, our integrated WeChat mini program solutions help the brand partners mitigate, migrate their offline access to online resources. This will be related their offline inventories and sales stuff, mitigating their impact from shutdown of many of their broken entire stores during the COVID lockdown. One of our luxury brands, our first program, first mini program over 50 offline stores in more than 20 cities and sustained meaningful sales goals even during the lockdown period. Overall, ensuring smooth, continuous e-commerce operations in response to unpredictable COVID lockdowns requires tremendous dedication and coordination efforts. Our ongoing efforts in category diversification, portfolio optimization, and technology innovations have greatly helped us to enhance resilience. We will continue to execute on our sustainable growth strategy and proactively explore additional growth drivers such as set forth in our medium term plan. This March, we established a subsidiary in Singapore, making a fundamental foundational milestone for expansion into Southeast Asia. With that said, despite the lockdown challenges, we will conduct our business with courage, intelligence and agility to protect the interest of the company and of all of our shareholders. At the start of this year, we launched a comprehensive compensation restructuring initiative called BBO, which stands for Balsam Business Owner, to cultivate an ownership-oriented culture and organization. Our BBO aims to tie the incentives more directly to individual contributions, empowering more entrepreneurial view and efficiency. Lastly, we would like to reiterate our commitment for sustainability. Last week, we issued our second annual ESG report, launching a new set of additional green initiatives. We are targeting a carbon emission reduction of 50% by 2030, compared to the 2021 baseline and carbon neutrality by 2050. In the longer term, we strongly believe our resilience, business innovation, and technology investments will travel and earn us trust, branding, and fortune. I will now pass the call over to Arthur to go over our financials. Thank you.

Okay. Thank you, Vincent. And hello, everyone. Now, let me first do a quick review of financials. of the first quarter 2022. Please turn to slide number six. During the quarter, our total GMV led by FMCG and electronics increased by 28% to $17 billion. But excluding one electronic and one FMCG brand, the adjusted GMV would have declined by around 10%. mainly due to the BCI and the weakening economy impact on sports and fashion apparel sectors. Although our non-distribution GMV expanded by 33% to 16.2 billion, our distribution GMV declined by 29% to 765 million. The reduction of distribution GMV was a reflection of our continuous progress in optimizing brand portfolio to focus on high quality business in the past few quarters. Our total net revenues declined by 2% to 2 billion due to a decline of 30% in product sales revenue. Service revenue increased by 24% to 1.3 billion benefiting from solid growth in service segments, as well as new contributions from acquisitions in the past 12 months.

I love the Maybelline Superstay Concealer. It is long-wearing, full coverage, and matte. Drugstore concealer that's affordable and looks like this? I'm sold, baby.

Turn to slide number seven. As we recently streamlined our organization into four business groups, we accordingly will start providing a breakdown of our revenue stream to help bring their progress. During the quarter, revenue from our traditional online store operation business accounted for 55% of total business. Revenue for warehousing and fulfillment Digital marketing and IT solutions accounted for 26% and 19%, respectively. In this quarter, revenue from our e-commerce business declined by 19%, mainly due to a reduction in low quality product sales business. At the same time, we are glad to see our value added services have achieved double-digit growth year-over-year. We believe this validates our progress in service penetration and customer engagement. And we will continue to offer innovative products and services to expand Baldwin's share of wallet from our brand partners. Now turn to slide number eight. During the quarter, Our cost of goods sold decreased by 28% to 596 million, which was mainly due to a reduction in product sales. In the second half of March 2022, major cities such as Shanghai experienced unexpected COVID lockdown, resulting in a significant increase in undelivered goods and stagnated orders. that we reported as an increase in cost of goods sold on a conservative basis. Given that the entire second quarter to date remains in lockdown, we anticipate to see a similar trend in the second quarter. As a result of COVID lockdown impact, our growth profit margin for distribution model reduced to 12.5%, mainly due to a change in pricing strategy, an adjustment in category mix, and the increasing cost related to default and imperfect products. But if we take into account the service revenue, our overall growth margin improved by 11% to 70%, mainly due mainly driven by higher service revenues, which generate a healthy margin. Now let's turn to operating costs and expenses on slide number nine. Please note that the breakdown of operating expenses by organic business and M&A on this slide is based on the accounting management account. Fulfillment expenses were $629 million, an increase of 24%. This was primarily attributable to the incremental fulfillment cost of $117 million related to our two acquired logistics business last year. Excluding the impact from acquisitions, fulfillment expenses from organic business was $452 million, a decline of 11%. Sales and marketing expenses were $616 million, an increase of 31%. The increase was mainly due to increased BD-related staff costs to drive growth and an expansion in digital marketing services, which was partially offset by efficiency improvement. Technology and content expenses were $105 million, an increase of 13%. The increase was mainly driven by growth in GMV and the company's ongoing efforts in productization and commercialization during the quarter, which was partially offset by the company's cost control initiative and efficiency improvement. G and A expenses increased to 91 million, an increase of 14%. This increase was mainly due to rise in human resource-related expenses from acquired business last year. Now, turn to slide number 10. Based on the above-mentioned items, our non-GAAP income from operation was $4.7 million during the quarter. and our non-gap OP margins was 0.2%. Once again, we have prepared workable diagrams depicting our analysis of how our top line and bottom line evolved year over year. As a reminder, this analysis is an odyssey and should solely be used as supporting numbers to aid discussion. First, on slide number 11, this waterfall diagram shows our net revenues walk from Q1 2021 to Q1 2022. In red, you can see that distribution, logistics, and sportswear and fashion apparel were the biggest drugs this quarter. Meanwhile, digital marketing, luxury, IT solutions, and others were the positive growth contributors. Next, turn to slide number 12. We also provide here an indicative walk of non-GAAP income from operations and cost streams. As shown in blue, we have positive contributions from digital marketing and IT solutions. In red, the overall macro weakness drags down the profitability of small operation business due to smaller economy of scale. For M&A, this quarter, there was a non-debt operating loss of $10 million, which was mainly related to Baobida, as its express business was significantly impacted by the COVID lockdown. And additionally, we continued to invest in people and infrastructure, which contributed to the rise in backend and strategic investments. Now turn to slide number 13. In light of the current challenging situation that contains minor uncertainties, our financial management and priority will focus on three areas. Improving operating efficiency, continue the portfolio optimization to improve working capital efficiency, and finally tightening overhead cost controls. Firstly, the Regional Service Center, or RIC, is a key component of our multi-location strategy that improves service quality, minimizes risk, and reduces operating costs. During the quarter, we enriched more functions, including operation and design, into the Regional Service Centers. We have migrated over 50% of our customer services from Shanghai to regional service center in Nantong and Hefei. As RIC keeps ramping up, we anticipate generating even more economy of scale. We also begin allocating more medium-sized brands to our business operations center in order to leverage shared mechanisms to improve efficiency. This integrated platform serves multi-brand partners, helping to optimize low-profit business and further streamline our overall business. For full year 2022, we anticipate cost savings of approximately $20 million from the initiatives. And secondly, we will continue our efforts in portfolio optimization and enhancing our working capital efficiency. In light of the current microenvironment, cash efficiency enhancement is more critical. We will evaluate inefficient and low margin brand partners to optimize and to minimize the risk. We have established a dedicated project team to focus on our billing processes in order to improve our account receivables and inventory management systems. Thirdly, we aim to further optimize our high-cost cost base and improve back-end processes. By implementing more disciplined initiatives, we expect notable process improvement and cost reduction. Now turn to slide number 14 about our cash flow. As of March 31, 2022, our cash, cash equivalent, and restricted cash reached $3.4 billion, a decrease of $1.3 billion from the previous quarter. The decrease was mainly attributable to repurchases of convertible senior notes. and our share buyback assets, which total $1.2 billion. We estimate a total savings of approximately $10 million from the retirement of convertible senior notes and its associated interest expense during the quarter. In addition, as you may have noticed from our announcement, we have fully completed the repurchase of convertible senior notes during 2024, due 2024, with a total principal amount of $275 million in early May, making our balance sheet leaner. Lastly, an update on our buyback initiatives. During the quarter, we repurchased approximately 2.3 million ADRs for approximately $20 million. Meanwhile, our board of directors also authorized an additional $18 million shared repurchase program in this March, making our remaining authorized of $17 million as of March 31, 2022. Overall, despite some turbulence in microenvironment, we are continuing to increase the resiliency and sustainability of the company. We aim to further lower the cost and target positive free cash flow for the full year. With a solid balance sheet and a strong brand pipeline, we are confident that Baldwin's business model will deliver shareholder value in the long term. And this is my financial review section that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand while we compile the Q&A roster. Our first question is from Thomas Chong with Jefferies. Your line is open.

Thank you, management, for taking my question. I have two questions. Can management comment about the impact of the pandemic and the macro-happiness to our overall business and the trend of different categories in April and March so far? And can you also share if the industry segment also gets impact? And my second question is about our expectation on the June 18th. Can you share on the updates about the expectation from the user and also from the merchants? Thank you.

Okay. Thank you for the question. Maybe for Tracy to bring some color about it. Yeah.

Sure. Sure. So this is Tracy speaking. I think the new wave of the pandemic has caused a great impact on China economy. And we see from the public information the total retail sales in April has dropped 11% worldwide, almost the same level of April two years before, right? And from our observation from Baozhen BI, the 11 key categories have showed over 20% decline during the March 15th to May 15th. And it is the same trend in the quantity of the consumer buying group. uh and also i think the the trend is is quite similar among category like apparel sports footwear and the cosmetics but the exception for two category one the first one is the order and also the luxury part so i will give more details about luxury later but in terms of the uh i mean the the consumer demand and the any behavior in recent two months we do see the purchase intention recover from the first week of may and you can see actually this differs by geographically in China like the Shanghai buyer actually they be significantly dropped during the past two months but the rebounded bank from the second week of May but Zhejiang and Jiangsu has recovered quickly than Shanghai and other province like Guangzhou is not that impact by pandemic and I think nationalized we see the buyer amount uh has recovered in recent two weeks almost to reach the same level of the first week of march but i think the transition is still catching up uh we uh we we right now actually uh we are working closely with our brand partner to mobilize results for 618 as you mentioned actually uh i think with the last in the past two months uh most of our uh brand partners I expect the sign of the consumption recovery in the 618. And right now, we are actually, we are trying to mobilize, utilize our resource on merchants and discounts and also marketing fees spared from the last two months. We are trying to hit the target, but it's too hard to say how much we make up for the... Maybelline Super Safe Concealer.

It's definitely crease-proof, but is it transfer-resistant?

The loss of the last two months given some of the brand is still troubled by the domestic and overseas logistics. So I think for the 618 is very unique right now because most of us are working remotely at home. And I think thanks to our regional service centers in Nantong and Hefei and also our Service Anywhere platform, we're able to work from different locations with different, but with I think the same level of the quality and the efficiency. And in terms of the category you mentioned about the luxury, I think definitely this category slowed its growth rate and showing negative in April. But from May, actually, we see the sales has returned to the growth YY thanks to actually some big campaigns such as Superbrand Days and the Haybox. We work with the top brands in this category. And also I think in the past two weeks, we actively adjusting our paid media and the content marketing direction geographically to lift the portion of other city besides Shanghai and Beijing and to the lower cities. You can see actually our portion from the middle tier of the city has leaped 20% higher than before. And also I think for the luxury part, we see some positive progress progress on their digital transformation because of the lockdown. Actually, this has accelerated their localized strategy like multi-nodes, logistics solution, one inventory from offline to online, and also the CRM system update. So we're working closely with our brand partner to capture the changes, and we believe our technology asset has afforded us with extended capability and flexibility. I hope this solved your problem. Thank you.

I would maybe just add a few more points on top of what Tracy's answer. So basically, there's a lot of uncertainty. And from a business point of view, during the uncertainty, we put cash at a very high priority. Therefore, our business is more focused on protecting the cash flow and improving the working capital efficiency. And we also are looking into optimizing our portfolio to reduce the potential risk of our existing business. And secondly, we think it's actually a good opportunity to prove Baldwin's differentiation compared with our peers, because we can provide a stable service for the logistics, for the customer service, and for the IT. And during the last month, we have proved we have that capability, and we received some really good feedback from some of our largest brand partners. And finally, given the situation in China, we're also looking at overseas expansion to try to divert this risk. Okay, thank you.

Thank you. Our next question is from Vicky Wei with Citi. Your line is open.

Good evening, management. Thanks for taking my question. I have two small questions. So would you please update about the cooperation with Chai Miao and thoughts on warehouse and logistics business? And second, would you please provide, for example, the growth and traction of non-Tmall channels? Is it fair to assume the demand from short video platforms and WeChat are more resilient than Tmall? Or are you seeing similar weakness in spending across all channels? Thank you.

okay i will uh maybe answer the first question and then uh maybe tracy can add some uh thoughts on the second one uh so in this quarter so in last quarter we completed our deal with china and this quarter we made good progress in terms of integrating the two teams and start working together in the last time we introduced the strategy of one plus x i.e using baltong's long-term capability in the sports and apparel category, try to bring new categories into Baochong with China's help. So basically, we have made good progress. From a China perspective, what China has provided to Baochong is a long list of potential kind of customers, which gave us a lot of opportunity to do business development. And secondly, China has a larger scale of economy. They have a countrywide network in terms of the warehousing and logistic network, which we utilize. And during the last two months, we were able to use that capability to reduce the impact to our customer by using China's national network. And thirdly, Chai Niao has a large economy of scale, which can bring down the procurement cost, which we were able to cut into the procurement process of Chai Niao on the material, on the warehouse equipment, which will, down the line, bring the savings to Baotong. So that's on the Chai Niao part. On Baozun part, we also can help this venture because Bolzano's customer, we actually are moving into the end-to-end series, the omni-channel series, which logistics is a very important part of that. We can sell the full end-to-end solution, which brings the Bolzano logistics into that play. And secondly, it's our technology capability, which along with China's capability, we can make a stronger technology enable football teams to think our process and to improve our service quality. So that's how we are making progress in China, and we expect we will have more progress this year. Boom shakalaka! It's the new three-for-one bundle from Xfinity. Switch today. Okay, I will pass on to Tracy for the second one.

Yeah. Yes. And for the second question is regarding to the dynamic change on the marketplace. I think right now it's still very early to give a conclusion on this because actually the data is not that comprehensive in the other platform right now. But in the past two months, given our BI track result, we do see the new channel seems to have more resonance in terms of the demand. I think we saw many categories still growing week by week in the past two months. Even apparel for wear or bags, those kind of categories, they are harmed by the pandemic. But it has only lasted two weeks. The category quickly catch up in the last week of April and surpassed the size of from May. So I think the advantage of that is they are more lower tier cities focused and much younger consumers. And on the other hand, I think majority of their players right now is small brands and even no brands. Their flexibility in terms of the manufacturing and the logistics has given them less impact by the lockdown. But I think on the other hand, we should see the dynamic changes happening too. The competition has become much worse and the advantage of first come first win almost the past. So the real stuff, I mean, the brand equity has become more and more important. So We do see other platforms like including Pinduoduo and Kuaishou all pointing they are quite aggressive to actually connecting the brands also. And we also have several important pilots will happen in those two seasons. So I think to brands to mitigate the loss of the transition is important. But to find a portfolio with a level of certainty on ROI is important too. So that is exactly our understanding on the only channel strategy. So as Vincent mentioned before, so our, I think our strategy is to enable the brand partner with our powerful capability in only channel to seamless, to provide the seamless offer where the product and the service can capture the channel consumer prefer to use no matter where it is. Yeah. Thank you.

Thank you. Our next question comes from Joyce Ju with Bank of America. Your line is open.

Joyce Ju Good evening, management. Thanks for taking my question. I have two questions. The first question is this quarter is the first quarter the company started to have a separate disclosure of digital marketing and IT solution segments providing more transparency in terms of the service revenue and also profit. Just try to understand more about this business, how we internally look at it. Could you actually share more colors in terms of our strategic plan on this revenue lines and business and how we should expect this to grow in the future? And my second question is, we all know the pandemic actually have a lot of impact on consumer demand. However, apart from the demand or from the brand perspective, In terms of, like, you know, industry competition, how we actually see the competitive landscape of our business has changed due to the pandemic. Any, like, you know, we're seeing more competition, price war, or we are actually seeing a more stabilized or, like, you know, small players kind of just squeeze out from the market. Could you share some colors? Thanks.

Okay. Thank you. I will quickly answer the first one and leaving Vincent to talk about the TP kind of the overall competition situation. I think it's the first time we split the DM and IT revenue. But that's also a key focus of the strategy of this year. So basically, in the last few quarter, we have seen the growth momentum from the traditional business, i.e. the traditional stock operation starts to slow down. However, from the customer and from our brand partners, what they are looking for is some value added service can help them to sell more online, which we internally, we have this capability from digital marketing to IT solution to help the brand partners to achieve that result. And also that expanded our service into an area where Baldwin has a very unique proposition, i.e. our technology capability. The digital marketing is around data and technology is around Baldwin's technology, infrastructure, and products. We have made a significant investment over the last few years. And by focusing on those two categories, we were able to utilize our investment and try to generate more higher margin business from our brand partners. So that's our thoughts, and that's how we organize our business, and that's how we are going to achieve our strategy. Now I pass on to Vincent for the second question. Sure. Thanks, Master.

I think during the lockdown a lot of things have changed and also it is just like examination for all the players no matter different brands and different you know service providers in the market so I'm quite glad to see that you know even during this kind of pandemic and lockdown our capability helped the brand partners to be very resilient to the change and to stabilize the business. So it is not easy. I think three points are quite important. The first one is that during the lockdown, we can see that Baozun's technology and also logistics, multi-city warehousing planning, army channel capability. All this helped a lot of brands to sustain their business. And some of the brands even can have growth during the lockdown. So it is because, you know, during the past several years, we continue to invest into logistics and also IT capability, digital marketing. So, you know, we can help brands not only in the common days, but also the pandemic period. So today's achievement is all about, you know, we invest in all these capabilities before. So that is number one. That's why, you know, the biggest brands are, you know, supported by Baozun, powered by Baozun, and we are the most trusted partner to them. The second one is that, you know, in the past 15 years, we kept learning from the best brands, learning of the, you know, the retailing, you know, also the distribution, logistics, digital marketing, branding, all this kind of thing. And we generally cultivated this kind of knowledge into solutions. Just now we mentioned ShopDog, ShopCat, logistics, all these kind of solutions are a good response to the brand, you know, the best brands demand in the past 15 years. And we also transform all this kind of technology into a set of solutions which we can use to serve more and more brands in the future. So that's why we can see that the trend of the revenue from digital marketing, IT, and also logistics are very healthy. So we benefit from this as well. Thirdly, I think we have kind of, how to say, strategic planning. Just like several quarters ago, we shared with you the long-term and medium-term planning. So by this way, we can prepare more resources during different kinds of market scenarios. For example, today we have adequate financial resources to support the company to do more M&A, to do more investment during this period. Although the market is not good, but talking about M&A and also investment, it is actually a good theory. So in this case, these three points are integral parts of our strategy to support the company to grow and to deliver better and better service, more valuable service to the industry. Thank you.

Thanks a lot for the coverage.

Our next question comes from Sophia Tan with Credit Suisse. Your line is open.

Thanks, management, for taking my question. I have two questions on behalf of Ashley. My first question is about the outlook of second quarter and next half of this year. How should we think about the potential impact on both top line and bottom line, taking into account the pandemic situation and corresponding contaminant measures? My second question is about the cost optimization. Can management share with us what measures will we have to take this year to cut costs and OPEX? How will this apply to both gross margin and operating margin? Thank you.

Okay, thank you for the question. I think there's a lot of uncertainty and there's a lot of potential scenarios could happen with the current lockdown. So currently, we are conservative in terms of the whole year financial in terms of the top line. But we do see our GMV will continue to have a double digit growth, given we have some really good brands some really solid brands in the electronics and also in the FMCG sector.

Need additional design help at home? Our design experts will come to you for a full consultation to transform your kitchen, bathroom and more. Schedule your first appointment today. Now let's get started.

For underlying, we are concerned in terms of the apparel and some quite some sector which are impacted by the economy's slowdown. So therefore, from a revenue perspective, we think we will see a weaker revenue compared with the last outlook we have. But it's still too early to see how much impact that will be. I think a good time for us to get back to the market will be after 618. then we still cross our fingers to hope there will be a bounce back in the 618, just like what happened in 2020, the first wave of the COVID. In terms of the cost control initiative, that's actually, we made a lot of progress on that. So first of all, our initiative in terms of cost control or cost optimization is not simply on cost-cutting. What we have done is to do the process re-engineering. At the same time, to use our strong IT capability to use the system to drive automation. So that we have used in our headquarters in Shanghai and also our regional shared service center in Nantou and Hefei. So that significantly improved the operating efficiency. At the same time, after we moved about 50% of our customer service people from Shanghai to Nantong. It also reduced our labor costs due to the location difference. And secondly, we have done a review internally looking at our headcounts. We have implemented a very strict headcount control mechanism. So the foundation of that is to looking at the value creation of each role and each function and also we're looking at the profit contribution per FTE from our frontline business trying to differentiate which resource brings more profit to the company and trying to rationalize that and also we and also during that review we have highlighted some low efficient brand we are currently operating and our way to operate is to switch the low-profit brand and replaced by some high-profit new business we actively BD and finally and very simply is the overhead control and that's a culture in terms of we try to implement ie we want to spend every single penny and by double looking at both sides before we put that money on the table. So that culture has deeply implemented in every people in Belgium. And we hope with that culture and with our process re-engineering and system automation capability, we will be able to very well control our cost in the very difficult time this year. Thank you.

Thank you. Our next question comes from Charlie Chen with China Renaissance. Your line is open.

Hi, management. Thanks for taking my questions. I have two questions here. The first one is we all know that China's economy is particularly challenging for this year. So is there any noticeable change among your brand partners in terms of their willingness to spend in marketing? And is there any changes in terms of Chinese consumers' consumption downgrading instead of upgrading? So all those major changes, how do those trends impact Baozhen's decision-making process in terms of things like prioritization of your brand partners, pricing strategies with your brand partners? So that's my first question. And my second question is regarding the brand partners, especially the international brands. It seems that they are actually losing market share in some particular categories, such as apparel. So how do those international brands, looking at China's future market going forward, are they continue to spend in China, or how is there determined in Chinese market? And also, as well, if that's the case, What's the progress of your onboarding Chinese local brand partners for this year?

Thank you. Okay. Let me ask Tracy to answer the first one, and invite Vincent to answer the second one, if that's okay.

Hello. I think in terms of the investment in China, especially on the marketing part, I think right now it's too early to give a conclusion, say, if there are similar trends to minimize or reduce their investment here. But I think there were two valid points I can share with you and as a team. And the first, I think, definitely given the uncertainty in the market, to use the marketing investment smartly is definitely the direction. You can also see the trends from the recent uh i mean the policy uh also the regulation published by the like the top top talk from the alibaba in last month right they've been uh proactively to cut down some channel which lower So this is also indicating, say, for the brand part, they will definitely see the combination in the portfolio of their marketing investments between the paid media and the content marketing and also the campaign together to see what is the right and the balanced ROI for this. And secondly, I think it will actually accelerate their progress. In China, we call about the localized solutions because actually given For most of our brands, we've been working right now. Their China business already takes a significant share of the total global business. So I think the pandemic has calmed down in terms of the growth rate, but also to give their second thoughts on the strategy policy, how they will adjust their strategy in China in terms of the and also the marketing investment, especially on the local asset part, and also, I mean, the decentralized, the mix on the channel and the mix on the price level things to compete with the competitor in the market. So I think that is the two points I would like to share. And in terms of the Baozun's, I mean, how to see our directions in the next 12 or 16 months. I think quality definitely come first, no matter on the channel choice or the brand partner choice. So we always treat actually our quality of the service as our first priority. And I think in terms of our collaboration with brands, we will provide our best level of the service to work with the best of the brand. And also we will proactively adjust our category mix between the apparel and also the consumer goods, and also our channel mix between the traditional platform and the new writing platform. And also I think as I mentioned in the qualities here, we are trying to actually maximize our revenue

passion besides the commission part but also the marketing and technology and the logistic part I hope this solve most of your question for number one yeah yeah yeah I will just add two more points on the first one in terms of the selection we select our brand partner based on the value creation we can have for the brand partner as well. So basically, we are not the cheapest in the marketplace, but we provide a premium service. Therefore, we hope we can charge a higher fee based on our premium service. So we have a standard in terms of from a commercial point of view, what's the margin we need to achieve in order to decide whether or not we bring a brand partner on board. So that's the first one. The second one is during this time, we particularly looking at the cash and especially the payment term and the inventory level. So there are instance that we have rejected a very good distribution, a very famous brand with a distribution business because of the not very good payment term So in that way, we can protect our infantry risk and to improve our working capital efficiency. So that's two things I would like to add. Vincent, please. Thank you, Arthur. Thank you, Jason.

Let me quickly cover the second question. You know, given this lockdown, I think a lot of expatriates in China today will feel quite surprised, especially in Shanghai. But I think from the headquarter or strategic perspective of this brand, I think China market is still very important given the size and also it's too big to ignore. So at least I think this should be more than neutral from the brand perspective. So we are quite optimized for the international brands in China. After this round of lockdown, I think they will recover. cause we have very, very rich, you know, brand, brand assets other than the other brand. So, so for us, cause we are quite strong in this one. So, so I think this will benefit us. The second one for the, you know, domestic brands, you know, just as what I said in the past 50 years, we have already constructed reliable, you know, a breed of solutions including digital marketing, IT, logistics. Recently we also developed our RFC which can provide trustworthy customer service and also operational services to different brands. So this kind of solution right now is open to the market and also especially to the domestic local brands. So we are seeing very solid progress in different functions, including digital marketing. We are serving more and more local brands. IT, which we have very big wins too. Logistics, we are serving some other very influential sportswear, and also apparel brands in the local brands. And also, even for RCC, we have some recent wins for the local brands. So in this case, I think we are making good progress for local brands, and we think we are also optimistic for the international brands to recover. So no matter for clients or shareholders, I think the business is in good hands. Thank you.

Thank you. I would now like to turn the call back over to Wendy Sun for closing remarks.

Thank you, Operator. In closing, on behalf of the Valzun Management Team, We'd like to thank you for all your participation in today's call. If you require any further information, feel free to reach out to us. Thank you for joining us today. This concludes the call.

This concludes today's conference call. Thank you for participating. You may now disconnect.