Uxin Limited

Ladies and gentlemen, thank you for standing by and welcome to UXIN's earnings conference call for the quarter ended September 30, 2020. At this time, all participants are in the listen-only mode. After management's prepared remarks, there will be a Q&A session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Nancy Song, Investor Relations Director of UXIN. Please go ahead.

Thank you, operator. Hello, everyone. Welcome to UCN's earnings conference call for the quarter ended September 30th, 2020. On the call today are DK, our founder and CEO, and Jianzeng, our CFO. DK will review business operations and company highlights, followed by Jian, who will discuss financials and guidance. They will both be available to answer questions during the Q&A session that follows. Before we start, I would like to remind you that this call may contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Detention Reform Act of 1995. These statements are based on management current knowledge and assumptions about future events that involve known or unknown risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. Yuxin does not undertake any obligations to update any forward-looking statement, except as required under applicable law. For more information about the potential risks and uncertainties, please refer to our findings with ICC. With that, I will now turn the call over to our CEO. DK, please go ahead.

Thank you, Nancy. Hello, everyone. Thank you for joining our earnings conference call today. The September quarter marked our transition to an inventory-owned model. Now, we are pleased to report that we have successfully made the transition, which gives us better control over order flow and supply chain management, with our online product and service offering being continuously optimized. We are also very pleased with the progress we may be better serving our customer as a national-wide online used car dealer. Not only have we raised the bar in delivering enhanced customer experience, but we also validated our efforts by receiving improved customer satisfaction feedback during the quarter. The completion of our shift to an inventory-owned model Coupled with our unique offering of an online used car buying experience, further strength our ability to maximize customer value through our dedicated approach, offering quarterly value-for-money used cars alongside best-in-class purchasing services. In fine-tuning our products and services, We focused on three initiatives during the September quarter in order to deliver better customer experience. First, we adjust used car quality by adopting stricter standards in selecting and inspecting cars and improve the car conditions by introducing standard and well-rounded reconditioning services. In terms of car quality, by leveraging the massive used car data gathered from our historical car inspection and through our experience in progressing car insurance claims over the past three years, we have developed an extensive and deep understanding of car performance from certain makes and models. in relation to manufactured dates of mileage. This data-driven know-how allows us to effectively exclude through type of cars with manufacturing defector of relatively high failure rates. In addition, we also raised the standards for inspecting cars to further ensure that the car's components are all in great shape. These standards enhance the quality of our overall used car inventory and allow us to gain greater customer satisfaction and trust in Yixin. In terms of car condition, an additional step of refurbishment enhance the car's like-new condition, allow us to consistently offer customer a more attractive and greater value alternative to buying a new car. Second, with the use of highly effective online communication tools and methods, we conducted and continued to refine the process of serving our customers online throughout the life cycle of our purchasing and driving of cars. Let me explain. Once a customer places a purchase order with us, there will be a dedicated service team assigned to this customer. The service team consists of an online sales consultant who is responsible for handling the purchase order, and online service consultant, sorry, for handling all paperwork, all documents for title transfer and license plate restitution. And auto financing specialist who is responsible for processing loan application related documentation if the customer finance his car. and an after sales manager who is responsible for responding to any after sales inquiries such as car maintenance for insurance clients after the customer drives away his car. As we standardize the way of delivering services at each key sales and after sales point, we significantly increased the responsiveness of our service personal and improved customer satisfaction as a result of our service deliver. Third, we shorted the waiting period between initial order and final deliver of the cars. We further improved the entire fulfillment process include optimization of logistic plan and car delivery, as well as execution of more timely title transfer. We also introduced new policies that customers are entitled to, for certain clients, if customers receive the car later than our promised delivery time. As a result of this enhancement, we saw our NITA Promoter Score, or NPS, significantly increase to 30 for the reported quarter from only 10 from the June quarter. It was mentioning as well that our NPS exceeded 45 in the month of September, indicating the increasing transition of our products and service as well as growing customer loyalty as we benefit from improved customer satisfaction and greater willingness to recommend Yuxin to others. We are confident that we can secure around 1,400 deposit required purchase order this month. dedication to offering quality value-for-money used car and best-in-class purchasing services, which are also our key growth drivers, contributed markedly to satisfying the increased demand from a new group of customers who are more willing to pay a premium for high-quality car and services. Capitalized by these two drives, the expansion of our customer base and the increase in transaction volume does present us with a different growth path. But we believe this new customer group has the potential to consistently contribute to our long-term growth and we are already starting to receive more purchase order from customer referrals. Once we hit a critical mass as our new customer base expands, we believe that customer trust and word of mouth referrals will translate into solid and sustainable long-term volume growth. For the solid in our brand and market position, We are confident that this will provide a firm foundation for our further business development and for generating more long-term value for shareholders. With that, I'd like to turn the call over our CFO to walk you through the financial results. John, please go ahead.

Okay, thanks, DK. Hello, everyone. Thanks for joining us today. As we made the transition to an inventory-only model, we continue to enhance our operational efficiency across the board. Our focus on hand-picking used cars now enables us to allocate our inspection resources to only specific qualified cars and helps to optimize inspection costs. In addition, we are also able to reduce sales and relevant administrative expenses as we streamline our sales process by migrating every sales step online. With a fundamentally optimized cost and expenses structure in place, we believe that we will achieve better operating leverage in the long term as we achieve a scale. Strength and trust in the Yuxin brand and benefit from positive word of mouth referrals among customers. Now, let me work you through our financial details for the quarter ending in September. Please note that the results I will discuss related to the continuing operations only. All numbers are in RMB, unless otherwise stated. Also, please note that some numbers I refer to are non-GAAP number. You can find a reconciliation of these numbers at the bottom of our earnings release. In the three months in September 30th, 2020, total revenues were 76 million compared with 397 million in the same period last year. The decrease was primarily due to the decreases in the 2C transaction volume and GMV as a result of our business model transformation. We upgrade our entire used car transaction process and migrate every sales step online. Beginning in June 2020, we are now building our customer base by using online sales staff as opposed to an offline sales team. Our total 2C revenue was $61 million, compared with $334 million in the same period last year. Our online use card transaction volume was 2,653 units, with the corresponding 2C GMV being $293 million. This figure includes 308 units sold from our old inventory with corresponding to CGMV being 36 million. In comparison, to C, used car transaction volume was 23,566 million units with the corresponding GMV being 2,828 million in the same period last year. Let's now look at the three revenue streams of our 2C business, commission revenue was $13 million compared with $176 million in the same period of last year. Primarily due to the decrease in transaction volume in GMV, our commission rate decreased to 5.2% from the three months in September 30, 2020, from 6.2% in the same period last year. The decrease in the commission rate was mainly because we lowered the transaction fees across the board since August 2020, so as to offer more competitive prices to the customers. Value added service revenue was $12 million, compared with $158 million in the same period last year, primarily due to the decreases in transaction volume and GMV. VAS take rate decreased to 4.7% from 5.6% in the same period last year as a result of our reduced service fee since August 2020 in order to offer more competitive price to the customers. Vehicle sales revenue was $36 million compared with nil in the same period last year. Vehicle sales revenue is recognized on a gross base when we sell our own inventory. We shifted to an inventory-only model since September 2020, as we disclosed in the last quarter's earnings release. Looking at the business, other business, other revenue was $15 million for the three months in September 30, 2020, compared with $62 million in the same period last year. The decrease was mainly due to the divestiture of our salvage car-related business in January 2020. Cost of revenues decreased by 45% year-over-year to $93 million. The decrease was primarily due to a decrease in salaries and benefits for the employees engaged in the car inspection, quality control, customer service, and after-sales services, as well as a decrease in the fulfillment cost due to the lower transaction volume. This was partially offset, however, by an increase in the vehicle acquisition cost relating to our beginning to building the inventory in September 2020. Gross margin was an active 22.4% for the three months in September 30, 2020, compared with a gross margin of 56.9% in the same period last year. Total operating expenses was $319 million. Non-GAAP operating expenses, which exclude the impact of share-based compensation, were $334 million. Sales and marketing expenses decreased by 74% year-over-year to $76 million. The decrease was mainly due to the decrease in the salaries and benefits expenses as a result of the HICOM reduction and the lower marketing expenses. Sales and marketing expenses excluding the impact of share-based compensation were $76 million. G&A expenses decreased by 18% to $56 million. The decrease was mainly due to a reserve in the share-based and compensation expenses. G&A expenses excluding the impact of share-based compensation were $71 million. R&D expenses decreased by 45% to $19 million. The decrease was primarily due to a decrease in the salary and benefits expenses as a result of the high count reduction. R&D expenses excluding the impact of the share based compensation were $20 million. Loss from guarantee liabilities was nil for the three months in September 30, 2020. We incurred guarantee liabilities associated with the remaining guarantee obligation from our historical facilitated loan and were not transferred to Golden Hazard. We adopt Accounting Standard Update 2016-13, Financial Instruments-Credit Laws, Merriments of the Credit Laws of Financial Instruments on January 1st, 2020, enter a modified retrospective method Before the adoption of ASC 326, the gain or loss accounted for that related to guaranteed liabilities was greater of either of the amounts determined based on the ASC 460 or the amount determined under ASC 450 and was recorded as a gain or loss from the guaranteed liabilities. After adoption of ASC 326, expected credit loss of the contingent guarantee liabilities shall be accounted for in addition to and separately from the standard ready guarantee liabilities accounted for under ASC 460. And the probation for the contingent guarantee liabilities is currently recorded within probation for credit losses. and again released from the standard ready guarantee liability accounted for under ASC 460 is currently recorded within the other operating income. Provision for credit losses, that was 168 million for the three months in September 30th, 2020. In order to settle our remaining guarantee liabilities, on April 23rd, 2020, we entered into a supplemental agreement with one of our major financing partners with regards to our historical facilities loan. Pursuant to the supplemental agreement we signed in April, such financing partner agreed to set a cap on the amount of cash we will use to fulfill our guaranteed obligations from 2020 to 2022. As a result, a release of contingent guarantee liabilities of RMB 86 million was recognized for a quarter end June 30, 2020, representing the time value of the potential cash offload. Subsequently, on July 23, 2020, we enter into another supplemental agreement with the same financing partner to entirely title our remaining guarantee liabilities associated with the historical loan facilitated loans for such financing partner. This supplemental agreement amended and restates the agreement we signed in April. Pursuant to the agreement we signed in July, we are entitled to settle all of our remaining guaranteed liabilities under the condition that we pay the settlement amount in instruments from 2020 to 2025 based on a great schedule. As a result, the aforementioned previously recorded time value of the contingent guaranteed liabilities in the amount of RMB 84 million was reserved based on the time value determined after August 8, 2020, which was the closing day of the supplemental agreement we signed in July. Loss from continuing operations was $163 million, compared with $188 million in the same period last year. Non-GAAP adjusts the loss from continuing operations, which exclude the impact of share-based compensation was $178 million, compared with $190 million in the same period last year. Net loss from continuing operations was $259 million, compared with $202 million in the same period last year. Non-GAAP adjusted net loss from continuing operations, which excluded the impact of share based compensation, was $275 million in the quarter, compared with $204 million in the same period last year. Turning to our cash position, as of September 30, 2020, we have cash and cash equivalents of $219 million. In addition, as we complete a new round financing of $25 million in October 2020, we received the cash consideration in the same amount, which supplemented our cash position. That's some of our results for three months in September 30, 2020. Now, moving on to our guidance. With the adoption of our inventory OE model, we expect our average selling price to remain at a similar level as before. And we expect our total revenue to be in a range of RMB 275 million to RMB 290 million. And the gross margin to be positive and in a single digit percentage range for the December quarter 2020. And as we continue to improve overall operating efficiency, we also expect our adjusted loss from operations to narrow slightly from the September quarter. This forecast reflects our current and primary view on the market and operational conditions, which are subject to change. That concludes our prepared remarks.

Thank you, Mr. Zeng. Operator, we'd like to open the call for questions now.

Certainly. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star 1 on your telephone and wait for it to be announced. To cancel a request, you may press the pound or hash key. Once again, to ask a question, please press star 1 on your telephone. We have a first question coming from the line of Eddie Wong from Morgan Stanley. Please go ahead.

Hi, DK, Michael, Nancy. Thank you for taking my question. 我可能就有两个问题想跟管理层请教一下。 第一个就是说看到下半年整个新车的市场其实恢复得挺好的。 那大家其实对明年新车市场其实期待还是蛮就是这个整个量的增长还是不错。 那想问一下就是说DK和Michael怎么看明年二手车这个行业的这个整个量的发展就是是怎么样的? 这是第一个问题。 The second question is, as DK mentioned earlier, we have made a lot of efforts to improve the user reputation of NPS. I would like to ask further, if we look back from now on, will there be any other measures that will further increase the efforts of the customer and user reputation? Yes, these are the two main aspects. I will briefly translate it. Thank you for taking my question. I have two questions. The first question is about the outlook of the used car industry in next year. And the second question is that you mentioned you have been doing a lot of efforts to improve overall NPS score and the user experience. So going forward, what kind of efforts will you continue to do to further improve the user experience in terms of the NPS. Thank you.

Okay. Thank you, Eddie. All right. I will take these two questions. So first about industry. Just recently, China Auto Dealer Association has promoted and implemented several used car policies this year. In this industry environment, I think it will be a new start for the used car industry next year, that the whole sector should move forward in full compliance with relevant used car policies, further implemented and upgraded. This will enhance the entire industry to develop from a used car brokerage model toward a more organized business model. We are participating as more regulated. Currently, used car VAT tax has already been cut from 2% of sales to 0.5%. At the same time, there are also some enhancements in policies relating to vehicle temporary, preparatory, the registration, and the title transfer. And we can see Beijing introduced a new license planted allocation policies earlier this month. As a pilot city, I believe Beijing will launch and implement specific plans next year as a response to this policy's method above. So there will be favorable government policies in place and specific implementation carried out by pilot city as reference for other cities and regions to learn from. The development in regulatory compliance and the implementation of policies will bring positive change to the used car industry, including higher engagement of industry players and customers' high acceptance of buying used cars. But this change will gradually take place. From what we have seen currently, all these three policies will benefit Wuxin as we now operate as an online used car dealer. First, as a business entity, our adoption of inventory oil model will be fully supported by the policies. In addition, the used car tax cut can also help to lower our tax expenses when we are operating under the inventory-owned model. And for promoting of vehicle temporary property registration and digitization of the title transfer process, it will significantly simplify the fulfillment process as customers purchase used car online from us, which will lead a much improved delivery At the same time, relevant fulfillment cost can also be optimized correspondingly. So I think follow all of these policies, I think next year the total transaction volume could be increased. And from our forecast, it's around two digits, around 10 percent to 15 percent. So that's the answer for the first question. And the second question about NPS improvement. I think this year we really found a very efficient way to improve the NPS. I think we are mainly focused on the two aspects, quality and the condition of used cars and best-in-class purchasing services. These two things are the most sensitive to improve the MTS. So next year we are keeping to enhance all our ability and the source invested into these two areas. And we believe that we can keep to improve the customer satisfaction and also improve the MTS. I want to say some more. For example, we focused on strengthening our ability to recondition the car. So next year, we will build our own reconditioning center to enhance our refurbish ability from using ourselves and to bring the like new condition, the used car, to to our customers. Yeah, and that's the second question, the answers. Thank you, Eddie.

Thank you. Thank you, Duque. Thank you very much. Thank you.

Thank you. Thank you. I would now like to turn the call over to Nancy Song for any closing remarks. Thank you.

Thank you again for joining our call today and for your continuous support in Youxin. We look forward to speaking to you soon in the future. Thank you. Thank you. That concludes the conference for today. Thank you for your participation.

You may all disconnect your lines now. Thank you.