Baozun Inc.

Good morning, ladies and gentlemen, and thank you for standing by for Balzone's second quarter 2023 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, Senior Director of Corporate Development and Investor Relations at Balzone. Please proceed, Wendy.

Thank you, operator. Hello, everyone, and thank you for joining us today. Our second quarter 2023 earnings release was distributed earlier before the call and is available on our IR website at ir.bozen.com, as well as on Global Newswire Services. They have also posted a PowerPoint presentation that accompanies our comments to the same IR website, where they are available for download. On the call today from Baozhen, we have Mr. Vincent Chiu, Chairman and Chief Executive Officer, Mr. Arthur Yu, Chief Financial Officer and President of Baozhen E-commerce, and Ms. Sandree Zerbeek, President of Baozhen Brand Management. Ms. Chiu will review the business strategy and company highlights, followed by Ms. Yu, who will discuss the business development of Baozhen E-commerce and about our financial outlook. and then by Ms. Zerbit to share more about thousand-branch measurements. 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 call contains forward-looking statements within the meaning of the U.S. Security Act of 1933 as a mandate. the U.S. Security Exchange Act of 1934 as amended, and the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management current expectations and current market and operating conditions and relates to events that involve no or are no risk, 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 statement. Further information regarding these and other risks and certainties or factors is included in the company's filings with the U.S. Exchange Commission and its announcement notice in the company's filings published on the website of the Stock Exchange of Hong Kong Limited. All information provided in this call is as of the date here and is based on assumptions that the company believes to be reasonable as of today. And the company does not undertake any obligation to update any forward-looking statements except as required and applicable law. Finally, please note that unless otherwise stated, all figures mentioned during this call are in RMD. In addition, we may elect to use adjusted in place of non-general accepted accounting principle or non-GAAP in order to reduce oral confusion that may arise from our discussion about financials related to the GAAP brand. 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 your time. Last quarter, we detailed our exciting transformation roadmap where we are expanding Baozhen Group into three business lines, Baozhen E-commerce, Baozhen Brand Management, and Baozhen International. As demonstrated on slide number two, these three business lines create an ecosystem in which each complements the other two, and all three concurrently promote each other. This turns Bulging Group into a one-stop ecosystem with the most comprehensive services. Today, I'm happy to share our strategic partnership with Authentic Brand Group, or ABG, which exemplifies the advantages and benefits of Bulging Group's one-stop ecosystem. Drive number four is a snapshot of ABG. ABG is a global leader in brand development, boosting a large portfolio of more than 50 iconic and world-renowned sportswear and lifestyle brands. Earlier this year, ABG's executives visited us to discuss Bosun brand management and our potential collaboration with Hunter, a British premium outdoor brand under its portfolio. They quickly recognized that Baozhen's vision and ecosystem can elevate Hunter's business in Greater China. Specifically, Baozhen's advancements in marketing technology and digitalization, as well as our game-changing new retail philosophy and a broad international reach makes us the ideal strategic partner. Accordingly, ABG has chosen Baozhen Group to become its strategic partner in Great China. We have signed a license agreement for Hunter. Beyond the typical license partnership, we are moving further and are in the process of forming up a joint venture with ABG to co-own Hunter's intellectual property in Great China and Southeast Asia. This marks another milestone in our transformation where all three business lines we will cooperate together to deliver an extraordinary suite of services to leading global brand partners. Looking forward, we anticipate the challenging macro environment in China to continue. However, we have set key objectives for each of our business lines for the rest of 2023. With a priority in higher business quality, Baozong e-commerce delivered solid growth in profits and cash flows in the first half of the year. BEC is also prepared to transition into its second growth curve to adapt to the rapidly changing dynamics of China's e-commerce market. Baozong Brand Management, or BBM, made through a smooth transition period as we have put in place the right infrastructure supply chain partners, and the seasoned team. DBM is now accelerating its China for China product offerings, featuring GAP's new local designs and marketing. For Baozun International, we continue to establish infrastructures throughout Asia, focusing on technology-enabled distribution to deliver the maximum omni-channel reach for brand partners. Currently, Baozun Asia employs around 150 employees across Singapore, Malaysia, Thailand, South Korea, the Philippines, Hong Kong, and Taiwan. Over the past 15 years in our history, I am thankful that Boson has been successful in a booming industry. We quickly expanded the business, built the best team, accumulated the best knowledge, and became the industry leaders. Now, as the e-commerce industry matures, we have updated our aspiration to focus on refinement towards extraordinary. Whereas in a booming environment, where success was built on catching the wave, we now are building future success on making a difference to create the trend. I'm pleased that in such a short term, since our acquisition of Gap, the team has already delivered notable achievements in its first five months of operations. With a solid new foundation in place, the team is accelerating its localization initiatives to drive further enhancements. Furthermore, by adding Hunter to its portfolio, BBM continues to scale, and I am confident that its success will greatly contribute to the next wave of positive success. Let me now pass the call over to Arthur for a review of our financials and updates on e-commerce business. Arthur, please proceed.

Okay, thank you, Vincent, and hello, everyone. Let me do a quick review of the financials of the second quarter of 2023, after which I will discuss our BEC business in more detail. Please note that we have prepared segment reporting to provide higher transparency as shown on slide number five. At this time, we are reporting two segments, e-commerce, which includes BEC, BZI, and group headquarters, and brand management, which includes GAAP Greater China. please turn to slide number six. We are pleased to report that our e-commerce segment achieved better year-over-year profitability and operating cash flows. This positive outcome can be attributed to our ongoing efforts in business optimization and cost reduction. Additionally, our brand management segment contributed incremental top-line growth after the inclusion of GAIP Greater China. This resulted in a 9% increase in net revenues for Baozhen Group, reaching a total of $2.3 billion during the quarter. Notably, product sales experienced a significant increase of 34%, while service revenue declined by 3% compared to the same period last year. Within the e-commerce segment, we witnessed improved top-line momentum as consumer sentiment has gradually recovered, particularly during the 618 promotion campaign. To further enhance our offerings, we prioritized value-added services in digital marketing and IT services while tactically reducing low-margin product sales in the appliance and electronics categories. Notably, the apparel sector displayed a robust recovery in the second quarter, with double-digit year-over-year growth in sportswear. Please turn to slide number seven. In this quarter, at the group level, our total gross profit increased by 8% to $1.6 billion. Our total cost of the products increased by 12% to $675 million, mainly due to the incremental cost of products for Gap China. For the quarter, product sales growth margin of e-commerce expanded by 110 base points to 14.3%, and product sales growth margin of BBM was 52%. which is ahead of our own plan for margin improvement. Our adjusted income from operation was $0.7 million during the quarter, of which e-commerce adjusted operating income grew by 29% to $61 million, reflecting our high-quality strategy and effective cost optimization. These optimization efforts included ramping up regional service centers, reforming compensation initiatives, process re-engineering, and improving working capital efficiency. On BBM, GAAP China showed a good momentum both operationally and financially, reducing its operating loss by nearly half on a year-over-year comparable basis. Our new season product launch in the recent month was quite successful and should provide a foundation for a better than expected financial results for GAAP China in the full year. Shandri will cover the details later in her part. Turning to slide number eight about our cash and cash flow status. As of June the 30th, 2023, our cash equivalents restricted cash and short-term investments grew to $3.2 billion from $2.9 billion last quarter. During the quarter, our total operating cash flow was $453 million. This is an improvement of $49 million from the same period last year, mainly due to our efforts in improving working capital efficiency. through back-end process re-engineering our inventory, billing, and cash collection management. Now let's focus on our e-commerce business. Overall, we achieved a solid set of business results in this quarter with year-over-year growth in both growth margin and operating profit. With an end to the COVID pandemic, We are delighted to witness that many brand partners are continuing to focus and invest on interactive engagement with consumers and omni-channel strategy on e-commerce. During this year's 618 promotion, Baozhun achieved an overall GMV year-over-year growth for the brands we managed. We helped many of our brand partners achieved number one rankings in their own categories, including sportswear, outdoor, and electronics. On new business development, we continue to see a healthy trend with a stronger pipeline in the second half of this year compared with last year. In this quarter, we added 41 new brands to our client portfolio, mainly from fashion apparel luxury, healthcare, and fast-moving consumer goods. We continued to make progress in our omni-channel initiatives. As demonstrated on slide number nine, 46% of our brands engaged with us on at least two channels, reaching a record high. Of those new channels' expansions, JD, WeChat, and Douyin delivered double-digit growth in revenue. Please turn to slide number 10. Value-added service remains crucial in creating value for our brand partners. In this quarter, we established the Creative Content to Commerce business unit, or called CCC business unit. to better capture the emerging needs of content creation and live streaming. We aim to integrate creative content, intellectual property, and brand building strategies with the rising trend of live streaming and short videos. To date, we have launched five live streaming studios located in Shanghai, Hangzhou, Wuhan, Hefei, and Nantong, totaling over 10,000 square meters in facilities equipped with state-of-the-art technology and run by an experienced team. Given the shift of China's e-commerce market dynamics, we view the next 12 to 18 months as a transition period for our e-commerce business into a sustainable and quality-focused growth. Now let me share our key initiatives during this transition period. Please turn to page number 11. Firstly, we will put our brand partners' needs at the center of everything we do. By staying ahead of curve and adapting our experience to the dynamic e-commerce landscape in China, we ensure that our brand partners receive the best possible support and solutions to be successful in this market. We will continue to strengthen our structured client management framework and to improve our service quality through the NPS program, which we co-developed with Nielsen IQ. This program enables us to gather valuable feedback from our brand partners and make necessary improvements to enhance their overall experience. We also actively collaborate with our brand partners to co-develop industry best practices on e-commerce. For example, we worked with a leading luxury brand to implement one-on-one live customer services. We helped a leading outdoor sports brand to implement an omni-channel CRM solution and we implemented an online-merge-offline solution with Single Infantry for a leading electronics brand. By combining our expertise of e-commerce with our brand partners' industry insights, we aim to stay at the forefront of the e-commerce innovation while delivering exceptional value to our brand partners. Secondly, we will focus on the quality of the business. Given the current challenging micro environment, we will continue our efforts in portfolio optimization. By evaluating our low margin accounts and implementing measures to minimize risk and improve working capital efficiencies, we aim to strengthen the overall quality of our client portfolio. At the same time, we will enhance our internal control and risk management, which will help us to be better equipped to navigate challenges and maintain the long-term sustainability of our business. Thirdly, we will continue to invest in building our capability to provide end-to-end services across different categories under different business models. We will strategically invest in and strengthen the categories where we have already built a competitive edge, such as apparel, sports, luxury, and electronics. At the same time, we will expand into those categories that show improving demand with low online penetration, such as health, beauty, beverage, and wine. We will continue to strengthen our value-added services, including digital marketing, IT, logistics, and warehouse, to provide a one-stop shop to brands seeking a strategic partner in e-commerce in China. We have also engaged in some early discussion to become the sole distributor for some international brands in China. On the other hand, we will continue to incubate our own brands domestically. We witnessed an early breakthrough during the quarter with our self-incubated brand, U Daily Plus, generating a sales of 22 million. Finally, we aim to enhance our cost effectiveness and efficiency through the implementation of technology and business process re-engineering. This will involve expanding our regional service centers and integrating internal efficiency and quality control technologies such as Service Anywhere and Design Anywhere . We are also actively collaborating with leading academic institutions to enhance our talent pool and provide training opportunities. at the same time decreasing our labor expenses for entry-level employees. Furthermore, we will continue to promote the Lean Six Sigma process to enhance both quality and efficiency. We are in the process to integrate AI technologies, including our self-developed automation platform ROS and AIGC, into our daily operations. We are confident that this initiative will result in improved operating efficiency and reduce the cost. We are embarking on a transition journey in the e-commerce business to adapt to the changing market dynamics. This transition program will require some time and effort to realign our people, resources, and business processes. However, we have full confidence that once this transition is successfully executed, our e-commerce business will be better positioned to drive sustainable growth and achieve even greater success in the market. Now let me turn the call over to Sandrine to elaborate more on BBM. Here we go, Sandrine.

Thank you. Thank you, Vincent and Arthur, and thank you all for joining us today. It is my great pleasure to speak with you. Please follow us to slide number 12. Let me first re-emphasize that BBM is a holistic omni-channel partner for global brands. We focus on growing a portfolio of premium consumer lifestyle brands that we manage with a data and technology driven China for China approach. We began our journey earlier in 2023 with Gap, and we are currently underway of transforming Gap China from a discount-driven approach to one that focuses on building consumer love for our brand and product. In the second quarter of 2023, although the macro recovery was not as strong as everyone had hoped, we implemented our transition plan and successfully improved AUR average unit retail, and gross margin. Our store level operating profit after royalty fees turned positive, and we exceeded our initial forecast on the bottom line. Please turn to slide number 13. As you may recall, we took a series of quick actions to improve store efficiency, including strictly controlling discounts, updating existing store visuals with a focus on mix-and-match storytelling and enhancing sales advisors' training. Thanks to these actions, our blended gross margin reached 52%, a healthy level, even post-royalty fee. I want to highlight that this gross margin achievement is key to Gap China's success. Overall, we generated a total revenue of $324 million, a decrease of 26% year over year, largely explained by the closure of 86 stores before we took over, which is equivalent to a decline of 40% year over year on store counts. Our same store growth reached 11% in the second quarter of 2023. As you can see, Despite the disappointing micro recovery, we still managed to implement our transition plan, improve gross margin, and reduce loss. We believe the new foundation for Gap China is in place as we have successfully upgraded the supply chain and significantly increased store efficiency, as well as recruited talent for all key positions. This third quarter, we will start selling our new locally designed China for China products, and we will expand to larger product portfolio in the fourth quarter. Now that the foundation is in place, we are ready to accelerate new store opening and marketing investments. And I'm very excited about our plans for the second half of 2023. Building on the new foundation, we aim to open up to 10 stores beginning with a flagship destination store in Guangzhou. Designed with new narrative that is younger and more interactive, with prioritized product layouts, the new stores will be infused with our local design language. Walking into our stores, you will resonate with our modern preppy, urban workwear, and premium blue aesthetics. around which we have organized the product range. Walk deeper and you will discover cool co-branded designs as well as upgraded segmentation for men, women, and kids. Our improved quick response agile supply chain has enabled us to reduce our design-to-share lead time from previously three to six months to a matter of weeks. We are also rebuilding our online brand image, and upgrading our consumer base. We'll further leverage our omni-channel capabilities to amplify our channel differentiation plans. Our IT transition is on track, and we are ready to transition to Barzun-enabled systems by the end of September. In addition, our CRM will also be upgraded with effective membership systems. In marketing, we will focus on the I Am Gap and New Gap tagline to elevate brand marketing in the fall season and raise brand influence. We have actually included the I Am Gap brand theme in our presentation and I encourage you to read it to understand our upgraded DNA. We feel very good about where Gap is heading and we look forward to sharing with you more and more on our next call together. Now, let me introduce an exciting addition to the BBM portfolio. We have been very selective in narrowing down to a possible few lifestyle brands. We and our strategic partner, ABG, see Hunter as an excellent fit for BBM. Please turn to slide number 14. Hunter is a British heritage brand of original footwear and outerwear that currently sells exclusively online in China. Over the past two years, Hunter has seen rapid growth in China and has been profitable. We see Hunter as an iconic premium lifestyle brand with excellent growth potential in Greater China. aligning perfectly with BBM's mission. We believe the combination of BBM's China for China strategy combined with our technology and data-driven approach in product and consumer operations will empower Hunter for sustainable future growth. Post-COVID, the outdoor lifestyle has become a trend, and Hunter has a strong brand reputation in this dynamic segment. Like GAP, Hunter was a BEC brand partner. So we have experience with Hunter's business and we are comfortable with our ability and resources to grow its top line and bottom line in China. And like GAP, which is a long-term license, we will co-own Hunter's intellectual property in Greater China as well as Southeast Asia. Naturally, our BVI division can help to grow Hunter's business in that region. We anticipate needing to add only several additional members to full run Hunter's current business. And we have already identified the personnel. As such, we don't anticipate the addition of Hunter to our BBM portfolio will cause any disruption to our GAAP business. In conclusion, Hunter is a good addition to BBM that not only offers excellent growth potential, but also establishes our strategic partnership with ABG towards greater and deeper future collaboration. Hunter kicks off our partnership with ABG, and we aim to form up strategic alliance that broadly covers business development and planning, brand management, marketing, and public relations for ABG's brand portfolio. With all this being said, I shall now hand the call back to Arthur. Thank you.

Okay, thank you, Sandrine. In summary, we have achieved another milestone in our transformation where all three business lines will cooperate together to deliver an extraordinary suite of services to our brand partners BEC continues to benefit from business and cost optimization and is transitioning itself into a second wave of growth. BBM has put in place a new foundation for Gap China and accelerating its China for China strategy. Baozhen International is on track to build infrastructure and expand its mission. That concludes our presentation. Prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question today comes from Alicia Yap with Citi. Please go ahead.

Hi. Thank you. Good evening, management. Thanks for taking my questions. I have two questions. First, can management share with us the latest consumption sentiment you have seen for July and August so far? What are the spending sentiment by brands, if you can give some color, and any major difference in terms of the international brands versus the domestic brands in terms of the ad budget spend willingness? And then second question is, can management help us to update on the store traffic for Gap China? with more offline activity post reopening? Have you seen meaningful traffic improvement since taking over the business? Thank you.

Okay. Hello, Alicia. It's Arthur here. So I will take the first question and then I will hand over to Sandrine for the second one. So for the first one, As we all know, in the quarter two, with the 618 promotion, the overall consumption is in a pretty positive recovery trend. But unfortunately, in July, what we witnessed is the trend has stopped with both Tmall and JD into a negative territory in terms of the growth. But the good thing is in August, we have seen some recover, even though it's still slightly below our expectation, but it's on the trend to recover. So hopefully, with the summer holiday ended, we will see that continue. People will start to spend. In terms of the category, so far we have seen some good momentum in the third quarter to date on luxury, on jewelry. and also tribal related products. So for example, the outdoor and also the suitcase. So those we have seen experiencing a double digit growth. In your final question about the domestic and the international brands, we actually see both the international brands and domestic brands have the willingness to spend if the ROI is good. So which leads to the quality of operations for both Tmall and JD. So that's where we see the customer, either international or domestic, are looking for the good quality and stable team. They're looking for data analytics. They're looking for technology to help them, which gave Bodrum a strength to stand out from our peers. So that's why I mentioned in the second half of the year, we'll have a stronger pipeline than the past year. So after the COVID, the brands, both international and domestic, are starting to spend their money wisely. Therefore, the capability of Baldwin can play a big part in this area. So I will hand over to Sandrine for the second question on GAP.

OK. So Alicia, to answer your second question, let me stress the fact that our same store growth for the Q2 is 11%. And now if I look at August, it has picked up to more than 30%. And if I look at year to date, as of today, we are close to 30%. So all in all, this is very positive. And it's actually the combination of increased traffic, to answer more directly your question, and increased conversion in spite of stopping or at least drastically reducing the discounts in store and therefore actually increasing our margin quite significantly. So all in all, yes, we see traffic, and I insist, and conversion picking up very significantly and momentum continuing to go up until today in August. And we expect that the last four months will be continuing on this trend and potentially even accelerating, because this is when we're going to really start accelerating not only store opening, but also marketing investments with the IMGap and NewGap campaigns, as well as launching the new products that are designed China for China. I'm done with my reply.

Okay, thank you so much.

Thank you. And the next question comes from Thomas Chong with Jefferies.

Hi, good evening. Thanks, management, for taking my questions. My first question is regarding the growth outlook for non-PMO channels. Can management comment about how it is trending and its contribution to GMV in the future? And my second question is about our international strategies. Can management comment about any strategic updates and our thoughts in second half and next year? Thank you.

Okay, thank you, Thomas. I will take the first one, then I will hand over to Vincent for the international expansion. In terms of the non-TMO channels, as I mentioned in the early prepared remark, we actually have seen an increased trend that the clients are looking for omni-channel. Therefore, our T-Mall contributes, it's actually come down in terms of the total GMV. And now T-Mall is representing 34% of the overall GMV for quarter two. And that trend is continuing with the clients looking for the omni-channel strategy. And in terms of in Baozhen, we have 47% of our entire portfolio, the clients are using more than one channel. So that number has increased by about 5% over the last few quarters. So we are seeing that trend to continue. Okay, let me hand over to Vincent for the second question, yeah?

Okay, okay. Thank you Thomas for your questions. I'm here for the second question about the Bulge International overseas strategies. Of course Bulge International is of course a key element of our strategy and I think in the past one and a half years we have finished constructioning the infrastructures, including the team building capability and also territory coverage. So we have, you know, several offices in different countries with a ground team to help us to contact not only brand e-commerce business, but also brand management business. So with the additions, just now St. John mentioned that we have a new member, a very capable guy joined us for the BBM expansion in the region. So for the strategies, I think one thing is about the localization. We want the local team can do the BD, service provisioning, and also all the other elements of the e-commerce business themselves in the region. So that is localization. And we also have another keyword called lending. It means that both the international team will help our global e-commerce clients or brand management clients to land in that area. So there's two key elements. Right now, I think we are doing quite the job. Also, this year we'll start to conduct the Hunter business integration after the jump venture and license agreement. And also next year, we have some other strong brands in our pipeline. So early next year, we'll have a lot more management business in the region. So I think it's quite promising. Thank you, Thomas.

Thank you.

Thank you. And the next question comes from Sophie Wong with CMB Bank International.

Okay, thank you for taking my question. I have two questions here. The first one is regarding live streaming commerce update. Last time, you stated the plan to enhance live streaming commerce capacity. So would you like to share more color on live streaming update and what is the feedback and performance of brands engaged? The second question is about the counter-aggression. What is the rationale behind this fear, and how do we look at the symmetry and financial impact from counter-aggression going forward? Thank you.

Yeah. Hi, Sophie. I will take the first one on the live streaming, and then I will pass to Sanjay for the second one. In terms of the live streaming, I think Hover's idea is to combine the best of version capability which is for a long time we have been strong in terms of the content creation and also operations with the world-class facility and operations which we are starting to build. Those two things can combine together to achieve a very good kind of model for our brand partner to find the new growth area in terms of the e-commerce. So this is a new area that Boldrinets gets into, but our strength in terms of the connection with the brand and also the content creation will help us to stand out. So far this year, in the first half of the year, we have seen some good progress. In terms of some luxury brands, we start to perform the Douyin, which has achieved a very good result. And also very recently, only this month, we launched a new Douyin GQ show on Douyin, which has achieved a very good result. So if you look at Douyin, you can find in terms of the details on that one. I'm not going through the detail. But what's that proof is Baldwin's capability plus our investment into the live streaming can create a good result for our clients. OK. Now I will hand over to Sandrine. Yeah.

Okay, so Hunter, what's the rationale to add Hunter to the portfolio? So second brand in the portfolio. The first reason is that it really fits the philosophy of how we want to build this portfolio because Hunter is a premium lifestyle brand by essence, I would say, or in essence. It has a strong DNA. It has very iconic products. That's the second reason. On top of this, it's in a category which is like urban outdoor, which has a lot of momentum. And especially after COVID, we have seen a lot of growth. Then to add to this, we know the brand. We know the brand because we've been its e-commerce partner for a couple of years. We therefore saw it growing very fast in the last two years. and also being in China at least a profitable brand. All these are actually positive reasons to go this direction. On top of this, also among the criteria which are important for us, it's a brand that sells strongly online. Actually, for the time being in China, it's only online. Online potential is very strong. It's a brand that we believe that we can do China for China to expand the product portfolio in an efficient way. So all this combined together made us think that it's actually a good brand for our portfolio. And in addition to this, this time we can have some ownership over the brand, which makes a big difference versus a pure license. And then in terms of financial impact, At the beginning, it's relatively marginal. We plan to grow this brand significantly in Greater China, but also in Southeast Asia because we have the IP in Southeast Asia as well. And the good thing is that, as we said, it's a brand which is operationally positive from the very beginning. So, of course, at the beginning, we will have to add some royalties. But overall, it's the brand which is operationally positive from day one, which is not a turnaround like we have experienced previously.

Okay. Thank you. Very clear.

Thank you. And once again, please press star, then 1 if you would like to ask a question. And the next question comes from Janet Young with Bank of America.

Hi. Thank you, Vincent, Arthur, Sandrine, Wendy, for taking the time. My question is regarding the product sales. Since you have mentioned that the optimization of product distribution model and time portfolio has put some pressure, downward pressure, on our product sales. It has been going on for a while. Can you give us an update on the progress? And looking into the future, how long do you think it will last and what product categories still have much room to improve. And can you give a sense of how much further impact you could potentially have on the product sales and margins? Thank you.

Okay. Thank you, Jenny. And I think, as I mentioned in the earlier call, our focus of the BEC business is on quality and on the operating cash flow. And the rationalization has made a good contribution to our portfolio. And the quality of the portfolio has enhanced. Therefore, you see the result is in quarter two, we have a fairly healthy positive cash inflow of $450 million, which is a very good result. And a lot of these come down to rationalization of product sales portfolio. As you may remember, we started this journey about a year ago and now it's coming to the point that our product sales portfolio has significantly improved. So we will continue our journey in terms of improving the quality and we will add on new good quality product sales like the sole distributor model I talked about earlier to our product sales portfolio. We think from quarter four this year, you will see a positive trend in terms of the growth from this area.

Thank you very much.

Okay. Thank you.

Thank you. And the next question comes from Andre Chang with J.P. Morgan.

Thank you, management, for taking my question. I have a follow-up question on Hunter, the deal and the company's strategy on BBM going forward. So it's a relatively short interval from us doing the deal of Gap and now the deal with Hunter. And we also talk about like potential more cooperation with the authentic brands group. So can management help us understand how we consider the, you know, how far we can go based on our current financial resources and how to think about the opportunity cost. Say we are doing several deals in a short period of time. What about the potential going forward? And what's the reason for us to have the confidence to accelerate the progress on the BBM front? Thank you.

Go ahead, Sandrine.

Do you want to start off? No, no. Okay. Well, I'll go ahead and I'll let you compliment if you feel, especially on the resource question. Actually, we started working on BBM even before the GAAP deal, so we've been looking and selecting brands very carefully, and we continue to be extremely selective. For one hunter, we have looked at dozens and dozens of brands. So we're not rushing. In any manner, we're not rushing. However, going forward, what we want is indeed to build a portfolio that brings significant revenue and profit and value to Baozong groups. So we will continue to be extremely selective, but we will continue to look at the best opportunities, especially when they fit the portfolio philosophy so well, when they are positive operationally from the beginning, have a marginal impact financially, and enable us to also create value by acquiring ownership and not only being in a licensed mode. So that's the way I would summarize, but I'm sure that Arthur wants to compliment on this.

Yeah, I think I totally agree, Sandrine. Just one more point I would like to add, Andrea, is we have been operating as the TP, as the HEMO partner, for Hunter over the last two years. And we know this brand operationally and financially. So the same as Skype. As a result, you can see we managed to turn the situation around only after five months. And we have confidence, given the information we know about Hunter, to make a significant improvement in the short term, given where we are by utilizing the resource and platform and capability of Baozhen Group. So that's why we go ahead to make this deal. And also, this is open another cooperation model with the ABG Group, who owns more than 50 different brands in China that owns IP. And through that cooperation, we may explore all different venues of cooperation with the ABG Group. So that will help us to grow both the BPM and the EC business as well.

Yeah, some more color from my side of the incident here is that, you know, for the positioning angle, we are positioning the premium fashion in this category. So no matter Gap or Hunter is totally within this positioning. Secondly, I think it's going more upstream because Hunter represents co-ownership of brands. And thirdly, I think, as always, we think financial fundamentals or the strengths of our financials is very important. So in the meantime, we will carefully evaluate our financial capabilities. So 100 decisions made, you know, consider all these kind of aspects. So I think it's quite mature and solid and careful selection.

Thank you. Thank you. And this does conclude the question and answer session. I would like to return the floor to management for any closing comments.

Okay. Thank you, operator. On behalf of the housing management team, we would like to thank you for 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.

Thank you. As mentioned, the conference has concluded. Thank you for attending today's presentation. May the others connect your lines.

Okay, thank you, everyone. Thank you. Thank you.

Thank you, everyone.