Dingdong (Cayman) Ltd ADR

Good morning and good evening, ladies and gentlemen. Thank you for standing by. And welcome to the Ding Dong Limited Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note that this event is being recorded. I will now turn the conference over to the first speaker today, Nikki Zeng, Director of Investor Relations. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to Dingdong Third Quarter 2022 Earnings Call. Visitors today are Mr. Changlin Liang, our founder and CEO, and Ms. Le Yu, our CFO. You can refer to our Third Quarter 2022 financial results 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. For today's call, management will provide their prepared remarks first, and then we will be hosting a question and answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call. As we will be making forward-looking statements Please note that all numbers stated in this following management prepared remarks are in RMB terms. And we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported in your earnings release and filings with the SEC. I will now turn the call to our first speaker today, the founder and the CEO of Dingdong, Mr. Liang. Mr. Liang, please go ahead.

好的,谢谢各位投资人,分析师,媒体人,谢谢各位京东买菜的好朋友。 欢迎大家来参加京东买菜2022年Q3海宝分析会。 Thank you, and welcome to Ding Dong's Q3 earnings call in 2022. Today, I would like to discuss our Q3 operational performance, some thoughts on product development capabilities, and our next steps. First, let's dive in our Q3 performance. As we expected, revenue in Q3 was 5.94 billion RMB with a non-GAAP net loss margin of 4.8%. Last year, Q3, we felt that the economic situation and the change in the entrepreneurial environment, the rapid adjustment, and the development strategy of performing efficiency-oriented, solid-scale, non-gas-standard losses have reduced from 31.9% in the same period last year to 4.8% in Q3 this year. According to the current development speed, We quickly adapted to the changing business environment in the third quarter last year and began our strategy of efficiency first with due consideration to scale.

Consequently, our non-GAAP net loss margin narrowed substantially to 4.8% from 31.9% from a year ago. With such momentum, we're confident of approaching non-GAAP break-even in the fourth quarter this year, which would be sooner than expected during our IPO. By then, Dingdong will have evolved from a startup that needed external financing to a self-sustaining company with strong survival capabilities.

The key drivers of our achievement are our commitment to product development, service upgrades, and supply chain efficiency, all of which contribute to our profitability and competitive moat. Next, I would like to share our thoughts on product development. On previous calls, I introduced our strategies and practices for enhancing product development capabilities. Today, I'll focus on the rationale behind this. First, we believe in a better life. For a long time, China's second law of e-commerce is that traffic is the king. And the easiest way to get traffic is to use low-priced products to attract users. So for a while, everyone was very superstitious about consumerism. First, we have a conviction in the pursuit of a better life. For the longest time, traffic was the only thing that mattered in China's e-commerce industry.

Low pricing was an obvious and straightforward way to acquire users. As a result, consumption downgrade became a trend. However, Ding Dong was founded to address the mothers' concerns over their children's food safety. Since day one, we have been dedicated to producing safer, healthier, and better quality food products. We have unwavering faith in pursuing a better life and will strive towards the goal.

Second, we want to create value for consumers and society. The competition of entrepreneurship often lies in the zero-sum trap that I live in. It is a limited thinking. And Dingdong jumped out of the zero-sum trap and has always emphasized the value of consumers and society. It is this infinite thinking. Our consumers are constantly changing. There is more pursuit of a better life. This gives us unlimited space to expand. It is enough to make us fight for our lives.

Second, we aim to create value for the consumer and society. Most startups are trapped in a competitive zero-sum dilemma, which is limiting. Dingdong has escaped from such a mindset and emphasized value creation instead, which is unlimited and liberating. As our consumers constantly evolve with emerging pursuit for a better life, we have infinite market opportunities to capture and demand to fulfill.

China China China China China As you know, Ding Dong has advocated the clean label of no additives unless necessary. The ingredients on the packaging of certain food products in the market outline various chemicals, flavorings, colorings, and preservatives.

sometimes written densely all over. The clean label we advocate for and implement enables more consumers to access healthy and safe food products. It also forces the entire industry to strive towards creating value for society.

Today, an increasing number of people around us are obese and even suffer from diabetes due to excessive carbohydrate and sugar intake.

This is why Ding Dong has put tremendous effort and resources into developing delicious but low-carb, low-GI food products. Over time, we expect to generate more products in this category to align with our current health and nutrition concepts.

We rarely pay attention to the competition, but rather focus on value. We embrace infinite value creation and are unrestricted by the competitive landscape. This is the principle that drives our product development and also our proposition and faith. Third, Jindong is not only providing a meal for consumers, but also a solution for a better life. Jindong is focused on food, which is a very happy and valuable career. Food is not only the basic material needs of people, but also can bring spiritual joy. And you are worth to eat. Food is changing and shaping our every person and every family. It is also changing and shaping our society and our nation.

Third, we do not just sell food products. We provide solutions that help you improve your life. Ding Dong is in the food industry, a business that provides satisfaction and creates value for people. Eating is not only a basic physical need, but also brings psychological pleasure. Moreover, you are what you eat. Eating is changing and shaping us, our families, and the entire society and nation.

So many users buy not just a meal, but a mother who wants to give her child something to eat. Sometimes the mother can't say it clearly. She wants her child to be tall, not sick, smart, and have a good personality. So we have developed a mother-in-law selection channel. Not only by following the source of scientific nutrition, but also by adding strict quality control to the complete development system, we have completely eliminated the mother's worry about food safety.

Oftentimes, the consumer comes to us for more than just a meal. If you ask the mother how she wants to feed her child, she does not specify. All she wants is something that her child likes, that helps them grow taller, healthier, smarter, and even become a better person. That's why we curated Mom's Choice with traceability, scientific nutrition, and minimum additives. This curation meets mothers' needs and eases their concerns over food safety.

Therefore,

When we develop products, we aim to provide not only quality food for quality lives, but also solutions embedded with expertise and deep consumer insights.

最后我想简单说说进一步的展望。 在过去一年多时间,京东买菜的亏损率大幅度缩窄。 我非常有信心京东在Q4基本实现 non-GAAP标准下的盈利。 京东将成为

Lastly, I would like to discuss the next steps. Our loss ratio narrowed remarkably over the past year, giving me full confidence in nearing non-gap breakeven in Q4. When it happens, Dingdong will become a fully self-sustaining company.

Dingdong will keep investing in product development to generate more quality products, building a stronger supply chain and upgrading services. These capabilities will form our competitive modes. Moreover,

quality products naturally gain traction because consumers can trust and rely on them, bringing continuous growth in scale, while the supply chain and service capabilities are instrumental to profitability. All the above will allow Dingdong great potential and room for growth.

For people's good life struggle, not only for consumers to create value, but also for companies to create value, they must also have value. A company striving to achieve a better life and create value for the consumer has unbeatable value.

In the long term, such value will translate into premium pricing. So thank you all for your continuous support. Let's generate long-term value together. Thank you, everyone. With that, I'll hand the call over to Ms. Yu, our CSO, to go over the financials.

Thank you, Mr. Liang, and hello, everyone. Before I walk you through our detailed financial results, please know that all numbers stated in the following remarks are in IMB terms. Revenue in Q3 2022 was $5.94 billion, down slightly by 4% year-over-year. However, in the first three quarters of this year, we achieved a 23.1% revenue growth, while narrowing the net worth margin by 31.7 percentage points. Our higher revenue in Q3 last year was driven by extensive subsidies and concessions granted to our users. In contrast, in Q3 this year, we were committed to enhancing product quality and order fulfillment efficiency while reducing operational costs on the strategy of efficiency first with due consideration to scale. As a result, we achieved a significant growth in gross profit, growing by 58.2% year-over-year, a testimony to our product development capabilities and operational efficiency we expect to roughly break even on a non-GAAP basis in Q4 this year, with GMV returning to our year-of-year growth trajectory. Let's take a detailed look at the Q3 performance. The GMV to revenue conversion rate was 91.3%, up 3.1 percentage points from a year ago. Growth margin for the third quarter was 30%. up 11.8 percentage points from a year ago. The improvement in growth margins has been significant over the past year, but we still anticipate more room for growth in both the short and the long term. Our fulfillment cost might to be higher than those of the traditional supermarket model because we are more deeply engaged in the supply chain. However, such a commitment also generates higher growth margins. For example, In our supply chain, we standardized and digitalized the management of fresh groceries in city clusters by introducing different storage temperatures in our regional processing centers. In contrast, most of our peers from traditional supermarkets or using online models also such processes to suppliers. As a result, our expense ratio of the regional processing centers in Q3 was In addition, we conducted a higher proportion of direct sourcing and order-based farming and kept raising standards and quality control of our products. Our extensive and far-reaching participation in the supply chain has yet to be fully reflected in our current growth margin. We expect it to translate into higher profitability as we mature. The fulfillment expense ratio for Q3 was 26.8%, down 10.5 percentage points year-over-year, primarily only to improve average order value and optimization of frontline worker efficiency. We also recorded a 25% improvement year-over-year in AOV this quarter, driven by better product development capabilities and Dingdong's brand Domino's in consumer mindshare. Our frontline fulfillment stations delivery efficiency increased by 15.8%, and in-warehouse stock efficiency improved by 29.6% year-over-year. The marketing expense ratio for the third culture was 2.1%, down 4.8 percentage points from a year ago. In addition, the customer acquisition cost per new transacting user dropped significantly by 32.6% year-over-year, driven by better product development capabilities and brand image. The GEN expense ratio declined to 2% from 2.5% a year ago. The IND expense ratio grew slightly to 4.3% from 4.2% a year ago. Going forward, we will continue our investment in food R&D, agriculture technology, and technical data algorithms while minimizing wasteful expenses at headquarters to cut costs. We believe infrastructure investment in the above three areas will strengthen our competitive advantage and create long-term value for investors. In Q3, gap net loss margin was 5.8%, narrowed by 26.7 percentage points from a year ago. The non-gap net loss margin was 4.8%, narrowed by 27.1 percentage points compared to Q3 last year, and 3 percentage points compared to Q1 this year before the COVID lockdown. Excluding a one-time expense of $52.7 million, our adjusted non-GAAP net worth margin was 3.9%. In Q3, we reduced our operating cash outflow from $407 million to $244 million by introducing supply chain finance. At the end of Q3, we had $5.9 billion in cash, cash equivalents, restricted cash, and short-term investments. In summary, since we emerged from the lockdown in Q2 and our product development capabilities gained traction, we observed a solid upward trend in our online penetration, AOV, growth margin, and operational efficiency. At the same time, we offered a higher product quality to meet consumer's growing demand for a better life. As a result, Dingdong's members or our loyal users were highly sticky, with a next month retention rate of 84.2% and a next month GMV contribution of over 400 on average. The longer these members stayed with us, the more their monthly GMV increased. We believe Dingdong is becoming an integral part of more users' lives. Going into Q4, we expect to return to our year-over-year growth trajectory and be close to non-GAAP break-even. When we achieve that, we will have lower our non-GAAP net loss margin by over 30 percentage points from 31.9% when we began the efficiency first strategy in Q3 last year. Such a notable optimization in less than one and a half years would have demonstrated the vitality and the profitability of our business model. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. When asking the question, please state your question in Chinese first, then repeat your question in English for the convenience of everyone on the call. Today's first question comes from Ashley Xu with Credit Suisse. Please go ahead.

Thank you, management, for taking my question. Just want to check, given the overall weak microenvironment, have we sensed any change in consumers' behavior and what's the key changes we have seen? Thank you.

Thank you for your question.

We all know that consumers are constantly changing, and so are our consumption habits. This is the fascinating part of our industry. Change is the only constant, and so are our efforts to serve the users.

That's right. Here are some consumption trends observed from recent user behaviors. For one, young consumers are paying more attention to health and wellness. That's why Ding Dong developed a prune enzyme drink.

With over 20 kinds of fruits and vegetable enzymes and four kinds of probiotics, it is perfect for your GI tract and became a big hit as soon as it was launched with basically all five-star reviews. Following this trend, we subsequently developed more products such as lime compound juice without added white sugar and lightly fermented mango juice, which are all very popular. Later, we curated the Qingyang Planet page to meet the needs of youngsters pursuing health and wellness. Another trend is meal for one, but it's nothing perfunctory. Instead, it's a dish with balanced nutrition. That's why we have been developing certain prepared meals, emphasizing nutritional balance at a smaller portion, which truly caters to this trend.

In addition, from their search results and purchasing behaviors, we noticed

Young consumers expect to diversify their meals with changes and surprises. We also notice that categories such as bakeries and coffee are trending up. Lastly, the ratio of processed foods, including prepared meals and packaged foods, has been increasing in our product category mix.

Ah, While it's important to identify changes, our core focus remains to address the constant demands in consumer consumption.

First, it's a common hope for all to enjoy better quality, taste, and nutrition in food. Second, it's desirable to have varied innovative categories. In addition, fast delivery is expected. People want instant gratification. Finally, consumers expect reasonable pricing. To sum up, people expect quality, diversity, speed, and affordability. To meet the ever-changing needs of users, we need to have better product development, supply chain, and service capabilities. All of these are the core competitiveness that Ding Dong has always been focused on.

Thank you.

Thank you. And our next question today comes from Thomas Chong at Jefferies. Please go ahead.

Thanks management for taking my questions. We have been talking about our since last quarter. Just want to ask management about the strategy in this area And how's the operation so far? Thank you. Thank you for your question.

Mother's needs have always been important to us. Offering nutritious and tasty meal solutions to children of various age groups based on our understanding of mother's needs really aligns with our founding motivation, which is to provide healthy food products to children and ease families' concerns over food safety.

uh uh We saw more than 88 million average monthly GMV of mom's choice products nationwide. Half of it actually came from Shanghai where we kicked off this program.

And also, mom's choice on the operational level, mom's choice GMV on average is higher than the GMV gross profit margin across the country in terms of the national average. Regarding our product offering, we have best-selling SKUs that exceeded millions in sales each, such as Salmon for Kids and Twisty Rolls with minced pork. Our exclusive orange bun and banana bun customized to appeal to children are also very popular among mothers. At the same time, we enhanced the readability of our ingredient list to highlight high protein, low fat, low sugar, and other key nutritional facts that are important to mothers.

Going forward, we'll develop scientific and nutritious food solutions for children based on our understanding of different families' needs.

Our goal is to cultivate children's love for food so that they grow up healthy and strong and their mothers have peace of mind. Thank you.

Thank you. And ladies and gentlemen, our next question today comes from Robin Long with Daiwa. Please go ahead.

Hi. Thanks, management, for taking my question. Could management provide some updates on the competitive landscape, especially competition with community purchase or other on-demand players? Thank you for answering my question. Can you share with us about the current competitive situation, especially with Thank you, Robin, for your question. Dingdong does not focus on competition.

Rather, we prioritize value creation.

We're not limited by the competitive landscape. We embrace the infinite opportunities in the space.

In addition, in terms of industry, freshness and food is a market worth 100 billion yuan in China. As long as the user has a valuable business model, there will be value. And more in line with the consumer trend, the user will have a more valuable business model and will have more space in the future. It can also go through the cycle. From an industry perspective, fresh groceries and food products are a $10 trillion market in China, and a business model that is valuable to users can stay.

Business models that align with user consumption trends and create more benefits for users will have a brighter future and survive economic cycles. Although the online penetration rate of the fresh grocery category remains low, it is going up fast and strong. At the same time, industry competition has become more benign and rational.

Our long-term strategies are to enhance our product development, supply chain and service capabilities. We're not doing it for competition purposes, but consequently, these efforts allow us to gain competitive advantages. From a product point of view, the supply end of fresh and multi-fruits is scattered and backward. We are deep in the supply chain, promoting the ability of product self-sufficiency, and actively developing differentiated products that meet the consumer trend. It is very difficult to expand the ability of free production and processing, but these are friends of time. The use of fresh produce is very strong, and the value of long-term value is also very high. First, regarding building product development capabilities,

Since the suppliers of fresh groceries and most foods are scattered and technologically backward, we're determined to go deep into the source of the supply chain, improving our in-house product R&D, actively developing differentiated products that aligned with consumption trends and expanding our product and process capabilities. Such heavy liftings will pay off over time with a strong first mover advantage and long-term value. We are in the era of surplus. and our supplies have been extremely enriched. That's why customized, differentiated SKUs that meet the needs of consumers can provide a better product experience, which can greatly improve our users' stickiness. Pingdong's long supply chain involvement can also bring higher gross profit margins, stronger profitability, and self-sustainability.

From the point of view of welfare, we continue to optimize the layout and more detailed management of front-end warehouses. At the same time, we will clarify the storage information and make the data transparent. In this way, it allows single front-end warehouses to accommodate more SQ and commodity components. It can provide greater space for single-storey commodity abundance and daily rise. At the same time, front-end warehouses are distributed organizations. It is difficult to manage. We choose to use corporate values. In terms of developing services, as the Chinese saying goes, a crossman must sharpen its tool to do his job.

We iteratively optimize the layout of the frontline fulfillment stations and manage inventory stocking with granularity and transparency so that each frontline fulfillment station can accommodate more SKUs and items. This brings abundance in our product diversity and enhances the upper limit of daily GMV. At the same time, the frontline fulfillment stations are distributed across the country, which takes work to manage. We adopt dual standardization in our management, leveraging corporate values and our granular SOP. We'll keep strengthening training and make data transparent to each action in the SOP so the SOP can be effectively implemented. To sum up, although we do not focus on competition, our long-term strategies build competitiveness and create high value, allowing us to gain an advantage in the future. Thank you.

Thank you. And our next question comes from Amy Chen at Delta Investments. Please go ahead.

Thank you, Guanli Chen, for accepting my question. 我的问题是,丁东的成绩仓模式到底能够引力吗? I'm going to try to answer my question myself. Thank you for answering my question. I want to know if the front line for film station business model could really make profit. And if yes, when will Ding Dong achieve profit? Thank you. 我想请娱乐来回答这个问题。

Thank you. Thank you for your question. Currently, our plan is to implement the break-even under the Gap Code in Q4 this year. We think whether a business model can make a profit depends on whether it creates value for the user. In Dingdong, we have established the original supply chain capability. According to the user's All right, our CSO, Ms. Gila, will take this question.

Thank you for your question. We expect to roughly achieve non-gap break even in Q4. We believe that whether a business model is profitable or not depends on whether it creates value for users. We have built our supply chain capabilities to customize, research, and produce differentiated products based on user demand. We operate in high consumption frequency categories that are difficult to manage, and we deliver these products quickly to users' doorstep, all of which are valuable.

Secondly, whether a business model can be profitable depends on whether the overall industry has a space for profit. The price gap between the producer and the user is still very large. However, the spread and decline of the supply and demand will cause the overall trade volume to not be very high. After gradually opening the supply chain, we can see that Dingdong's trade volume is growing rapidly in the past period of time.

Secondly, whether a business model can be profitable depends on the profit margins of the industry. The price markup of fresh groceries from the origin to the user is significant, but the dispersion and inefficiency of the supply side lead to low gross margins for the industry. After gradually breaking through the bottleneck of the supply chain, we managed to raise the gross profit margin of Ding Dong very rapidly.

Third, where a business model can make money depends on their engagement in the supply chain. The width and depth of our expansion in the supply chain are second to none in the industry. In the starting point of the supply chain, the proportion of raw materials is very high in the raw materials category. And it is gradually increasing and the farm owners of large and medium-sized farms are directly involved in the order agriculture. We also choose to standardize and inform the raw materials in the selection center. In the non-raw food category, we personally established the ability to produce and process by ourselves.

Firstly, let's look at the upstream. In the fresh food category, we have a high proportion of direct sourcing from the starting point of the supply chain, and we are gradually increasing the share of order-based production directly signed with large and medium-sized farmers. We choose to carry out the standardization and informatization of fresh food in the regional processing centers while establishing our in-house production and processing capabilities in the non-fresh food category. Regarding the downstream, the user only needs to place an order on a mobile phone before we deliver the goods to their doorsteps in about half an hour, which is extremely convenient.

China China China China China China China China The GDP margin has increased by more than 11%. Fulfillment has increased by more than 10%. The loss rate has increased by more than 26%. Such rapid reduction in losses is not only rare in our industry, but also very rare in other industries. This shows that Dingdong can achieve profit without hesitation.

Thank you. DingDong not only creates value for its users, but also operates in an industry with great profit margin potential. In addition, it has been more deeply involved in the supply chain than its peers do. All of the above will naturally translate into stronger financial performance. Since we adopted the efficiency first strategy in Q3 last year, our gross margin has gone up over 11 percentage points from a year ago. Fulfillment expense is down 10 percentage points, and the loss ratio narrows by over 26 percentage points. Such a rapid reduction of losses is not only unique in the industry, but also rare in other industries. There is no doubt that Ding Dong can achieve profitability. Thank you.

Thank you. And as there are no further questions at this time, I'd like to hand the conference back to our management for closing remarks.

Thank you again for joining our call today. If you have further questions, please feel free to contact us or request through our website. We look forward to speaking with everyone in our next earnings call. Have a good day.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.