Dingdong (Cayman) Ltd ADR

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the Ding Dong Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. We'll be hosting a question and answer session after management's prepared remarks. During today's call, management will give their prepared remarks in Chinese or English directly. When management speaks Chinese, a third-party interpreter will provide simultaneous translation in English on the English line. I'll now turn the conference over to the first speaker today, Karen Ji, investor relations vice president of the company. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and welcome to Dingdong's fourth quarter 2021 earnings call. With us today are Mr. Changlin Liang, our founder and CEO, and Ms. Le Yu, our CSO. You can refer to our fourth quarter 2021 financial results and presentation materials on our IR website at ir.100.me. You can also access a replay of this call on our IR website when it becomes available a few hours after its conclusion. Before we start, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor provision for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be maturely different from the results, performance, or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statement, risk factors, and the details of the company's fighting with the SEC. The company undertakes no duty to revise or update any forward-looking statements for selected events or circumstances. after the date of this conference call. Please also note that all the numbers stated in the following management prepared remarks are in RMB terms, adopting the non-GAAP measurement that excludes share-based composition expenses. During this call, we will be discussing certain non-GAAP financial measures as defined by SEC Regulation G, such as non-GAAP net loss margin and non-GAAP operating expenses. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release and presentation material, which is posted on the company's website. Now, I will turn the call over to our first speaker today, founder and CEO of Dingdong, Ms. Ter-Liang.

Hi, everyone. Friends. Today is actually the lanterns festival of China. Happy lanterns festival, everyone. Thank you so much for joining our Q4 earnings conference call. Over the past two months, our stock price performance has been much challenged. We are grateful that many investors, analysts, and media that know us and trust us continue to support us. But we also understand that there might be questions and doubts. Is Ding Dong a worthy investment? Will Ding Dong be profitable? In fact, Q4 was our best quarter since inception. making year-over-year revenue growth of over 70% and significant efficiency optimization. In December, the overall non-GAAP net loss margin narrowed to less than 13%, and Shanghai was fully profitable. At the end of Q4, we had RMB 5.2 billion in cash reserves. We are on the fast track of quality development, and we have sufficient cash to last us before full profitability in the near future. Today, I would like to explain the current state of operations, the future, and our philosophy in the following five aspects. The Q4 2021 results, Ding Dong's path to profitability, product capabilities as the primary driver, infrastructure development, and our plans for 2022. I hope that this call can clear up any doubts in your mind. First, let me briefly talk about the Q4 results. We achieved total revenue of 5.48 billion RMB, up 72% year-over-year. In addition, our efficiency has been significantly optimized for seven consecutive months, with a net loss margin of less than 13% in December 2021, and the number was 37.2% back in Q2 at the time of the IPO. Shanghai became fully profitable in December. It is the first city we enter and has continued innovating and iterating, constructing precedents and experiences for our nationwide operations. We have found a path to profitability in the city and expect the whole Yangtze River Delta to be next. And the whole company will follow suit soon. Private labels and in-house R&D and processing are also taking off. In Q4, private label sales accounted for 10.2% of GMV, and our self-developed and self-processed products accounted for 6.5% of the total GMV. Our pre-prepared meals sales also contributed to 14.9% of the total GMV as consumers began to embrace this new category. The past period has been marked by sporadic outbreaks of the COVID pandemic in certain Chinese cities. In addition, many of the fresh produce sourcing regions have been stricken by harsh weather conditions, including low temperatures, rain and snowstorms. All has happened around the Chinese New Year. However, we stepped up during these difficult times and became one of the most fundamental forces in stabilizing the grocery price and supply. essential for people's livelihood. The municipal government of Shenzhen, Tianjin, Hangzhou, Ningbo, and Tangshan have expressed their appreciation and gratitude to us for our commitment and execution. Mainstream media such as People's Daily, Xinhua News, CCTV, and Jiefang Daily have all reported our work and achievements. Before the Chinese New Year, Mr. Gong Zheng, the mayor of Shanghai, visited our frontline fulfillment stations and praised us for our full-chain digital management and quality control of food. He also encouraged us to fulfill people's longing for a quality life. The second aspect I would like to address is can Ding Dong be profitable? As I mentioned earlier, we achieved profitability in Shanghai in December with an AOV of over 66 RMB and a gross margin of over 28% per order. As a percentage of GMV, the regional processing center costs were 6% for the processing and transportation to frontline fulfillment stations. The frontline stations costs were uh 15 gna and marketing expenses were seven percent as a result shanghai became slightly profitable going forward our aov will increase as our product capabilities continue to grow in addition as both our user repurchase rate and order density increase diluting the fixed cost of the front line stations and regional centers fulfillment efficiency will significantly enhance therefore shanghai is expected to achieve a net margin of three percent to five percent Shanghai is our first city and testing ground for innovation and iteration. Of course, other Chinese cities do not share all of Shanghai's consumption habits, so the trend of consumption upgrades for the young consumers is universal. So is the longing for convenience and variety. In addition, we are popular in second- and third-tier cities with a supply shortage of quality goods, low labor costs and housing prices, and robust spending power. Therefore, the Yangtze River Delta will follow Shanghai's footsteps and become profitable soon, followed by full profitability nationwide. One of the critical concerns for our profitability is the home delivery model, leading to high fulfillment costs, which is a misconception. In fact, in Shanghai, for example, the frontline fulfillment costs accounted for roughly 15% of the GMV, which is below the fulfillment costs of most business models in the fresh grocery market, including online e-commerce and offline players, according to public data. Therefore, our frontline fulfillment grid model is highly cost-effective. Others are worried about the lack of exposure of the frontline fulfillment stations and hence no traffic. But the essence of shopping is quality goods. Quality wins over consumers and the user's repurchase rate and word of mouth are what matters. So we are never worried about lacking traffic. We would only be concerned if we could not develop better or differentiated products. The frontline fulfillment grid model eliminates the dependence on offline traffic and the need to renovate or create trendy vibes offline. It is straight to the essence of shopping by delivering quality goods straight to a doorstep. There are also concerns that our model might require continuous cash burn because it cost us significant losses early on. Indeed, there was an upfront investment and ramp-up period from building regional processing centers, from line fulfillment stations and supply chains. And we, in particular, invested aggressively in infrastructure. But these are fixed costs that can be gradually diluted as the business matures and our scale expands. As time has proven, the solid infrastructure brings greater returns and sets the foundation for long-term stable development. In addition to being profitable, the frontline fulfillment model has several other strengths. First, frontline fulfillment station model keeps perishables fresh and maintains their quality. The centralized purchasing and processing in the regional centers control the quality strictly, while our frontline fulfillment stations focus on storage capabilities and take freshness to new heights. So even if you place an order at 10 p.m., we still guarantee a timely home delivery of fresh fish and shrimp, which is something that offline grocery players and traditional e-commerce fail to do. Second, we cut out the middle links, improve supply chain efficiency, and reduce loss and waste. Our loss rate is only about 2%, whereas traditional grocery players normally have an over 10% loss rate at the retail end. Third, we improve social efficiency and save energy. Our riders in Shanghai deliver over 85 orders daily, saving 85 families from grocery trips, which significantly reduces social costs. In addition, the frontline fulfillment model offers more excellent social value in maintaining the supply of people's livelihood, especially in harsh weather, facing the pandemic or during the New Year holidays. More importantly, instant and fast delivery enabled by this model aligns with the young consumers' trend of digitalization, immediate satisfaction, home delivery, and impulsive shopping. The older generations tend to be less sensitive to the changing world, yet you cannot escape the trend of the times. After all, the future of the world belongs to the young. People wonder if I'm convinced that the frontline fulfillment model is the optimal solution or model for fresh grocery e-commerce because I'm always optimistic about the model. We would never think so. First of all, fresh grocery is a massive market with diverse user needs and allows various business models to coexist. Second, consumers are constantly changing. As a consumer-centric company, we must keep innovating and iterating, so there would never be an optimal solution or any ultimate model. The third aspect I would like to address is product capabilities, the primary driver. We have two firm beliefs, consumption upgrade and product capabilities being our primary growth driver. Many internet retailers adopt a low pricing strategy and the idea of consumption downgrade has been widespread. However, we maintain strong confidence in the consumption upgrade trend for the younger generation who pursue quality life, especially when it comes to food. Therefore, we are committed to meeting that need. In addition, in the internet industry, traffic operation was the core competitiveness in the first half of the game. As a result, several monopolistic traffic platforms were created with marketing activities such as Double 11 that marked the peak of traffic operation. But in the second half of the game, product capabilities that take us back to the nature of shopping are the primary driver of growth. Therefore, we have prioritized product capabilities since August 2021 to generate extra profit and attract users with quality products and through word of mouth. In addition, we will grow our business through an increasing repurchase rate. We improve product capabilities from four aspects. One, adjusting product structure. Products are categorized into ordinary, superb, and excellent. And we have an increasing proportion of superb and excellent ones in the mix. Two, creating various consumption scenarios. For example, we launched a mom's choice page for quality child products. My entrepreneurial venture was an online mother and child community that had served Chinese families for 13 years. We saw a particular pain point at that time. Many families had health and safety concerns over children's food. Therefore, when we started Ding Dong, we had one thing in mind. We wanted to make sure that children eat healthily and safely so that mothers can rest assured. in addition to dedicated page like mom's choice in 2022 we plan to develop more unique products and create more consumer scenarios based on the needs of different people three expanding private label products and improving in-house r d and processing capabilities many retailers are basically developing private labels to reduce costs gain higher profits or attract users with lower prices however our primary goal with private labels is to create differentiated products. And we offer the best quality in the categories where we can differentiate ourselves. If we can achieve either of these, we consider developing lower-priced products. For example, our bakery products are available in barley, clean, labeled, and reduced sugar. Our tofu... Our tofu is available in stone grinding and iron pot textures. Our freshwater porridge is raised on a nutritious feed developed by a PhD supervisor from Shanghai Ocean University. The tomatoes with a weekly repurchase rate of over 40% are our exclusive offering. We also offer daily freshly made noodles and special noodles containing 60% of Alaska caught and a four-color veggie source. our pre-prepared meals are available in traditional marinated and low heat slow cooked we also offer pre-made soups with chicken raised on cordyceps and mushroom cultured grass the list goes on and on so again we either differentiate ourselves or be the best in class for investing more in infrastructure which is also the fourth aspect i want to talk about we have always been building robust infrastructure in five directions One, we have about 1,400 frontline fulfillment stations with a total area of approximately 500,000 square meters. We lease about 60 regional processing centers with over 400,000 square meters of space. We have been insisting on conducting in-house processing and sorting of fresh groceries for two reasons. It allows us to improve efficiency with automation and big data, and we can perform a full inspection on all fresh groceries Many of our regional centers are semi-automated. With our partners, we will continue investing in the R&D of automated equipment and data systems of our frontline stations and regional processing centers. Two, we have 10 food R&D and processing facilities, of which the Songjiang Pastry Factory received the IFS certification in 2021, one of the very few factories in China to receive this certification. In December, our self-developed and processed products, cells, already accounted for 7.2% of the total GMV. Furthermore, last year, we began our partnership with three local governments, including Kunshan in Jiangsu, and in 2022, we will start deconstruction of three large-scale modern fresh grocery complexes. As we continue enhancing in-house R&D and processing capabilities, we will develop more differentiated and quality food products for consumers. We currently own three model agricultural campuses and have partnered with 118 contract farming bases. We have launched Dingdong Good Agricultural Practice Standards, or DGAP, by applying international standards to China and are vigorously promoting it among our partner agribusinesses. Through DGAP and contract farming, we eliminated excessive pesticide and drug residues in 28 vegetables we sourced and maintain a high standard for our grocery quality. Four, we have invested heavily in quality control of fresh groceries. We are the first to propose the 7 Plus 1 Quality Control Standard, a digital management system that strengthens quality control and manages the quality of goods in seven processes, production environment, farming, harvesting, transportation, regional processing center, frontline fulfillment station, and home delivery. In addition, we hire over 500 quality control personnel and invested over 27 million RMB in fast inspection and third-party testing in 2021. Such industry-leading efforts and investment earned us a pass rate of around 99.4% when government agencies sampled and inspected over 4,000 batches of our products from Q2 to Q4 of 2021. We increased investment in R&D of cutting-edge technologies. At our last conference call, we actually, our last earnings call, we introduced our land-based antibiotics-free shrimp projects. In addition, we also started developing cooking robots and planting and picking robots. Last year, we began exploring an exciting technology, a non-destructive durian ripeness testing robot. We all know that shopping for durian is like opening a mystery box. The ripeness is always uncertain. 30% to 40% of the cost of durian cells is wasted on unripe durian. Our robot is dedicated to unraveling the mystery and improving the user experience, reducing loss and increasing efficiency. Five, our plans for 2022. We will improve product capabilities with an adjusted category mix, more consumption scenarios, private labels, and in-house R&D and processing capabilities. We'll offer consumers differentiated and quality goods that win them over. Second, we will drive the user repurchase rate up to grow our business scale. At the same time, we will strive to achieve full profitability in the Yangtze River Delta region by the end of Q2 2022 and approach profitability for the whole company in Q4 2022. Third, we will increase investment in infrastructure. In summary, 2021 has had its ups and downs and 2022 is destined to be extraordinary. We do not comment much on stock prices, but we agree with Benjamin Graham. The market was a voting machine in the short term, but a weighing machine in the long run. In this sense, Dingdong is committed to building substance. Specifically, it is substantial to develop product capabilities, win over customers with quality products, develop a supply chain and physical R&D and processing capabilities, and invest long-term in infrastructure. On the contrary, focusing on traffic operation, price wars, retail platforms, or short-term profitability is trivial. Having a couple of champion products or marketing successes is of much less substance than striving for a better life for the consumers themselves. and customers in the long run. Substantiality is what matters. It is our core competitiveness and will create long-term value. So let's be patient because time will tell. Thank you. With that, I'll hand over the call to Ms. Yu, our CSO, to go over the financials.