Dingdong (Cayman) Ltd ADR

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to the Ding Dong Limited fourth 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 Zhang, Director of Investor Relations. Please go ahead.

Thank you. Hello, everyone, and welcome to Dingdong's fourth quarter 2022 earnings call. With us today are Mr. Changlin Liang, our founder and CEO, and Ms. Le Yu, our CISO. You can refer to our fourth 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 the 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 our earnings release and the filings with the SEC. I will now turn the call to our first speaker today, the founder and the CEO of Dingdong, Mr. Liang.

Thank you, dear friends of Dingdong Maicai. Welcome to Dingdong Maicai's Q4 Q&A in 2022. First, I would like to briefly review Dingdong Maicai's Q4 Q&A. In Q4, Dingdong Maicai previously received 6.2 billion RMB. In the last year, the growth was 13.1%, and the capital purchase market achieved 49.88 million in net profit under GAF standard. This is the first time to achieve full profit under GAF standard. Under non-GAF standard, the net profit was 1.16 billion yuan. After a year and a half of hard work, under the non-GAF standard, we have lost a quarter of our profit since the IPO. Thank you, everyone, and welcome to Dingdong's fourth quarter 2022 earnings conference call. Let's first review the quarter's operational results. Our revenue of $6.2 billion reflected 13.1% year-over-year growth,

we recorded gap net profit for the first time of 49.88 million with non-gap net profit of 116 million. Within one and a half years, we grew from a net loss margin of 37.2% to a net profit margin of 1.9%. It is a result of our dedication and validates the strategy of efficiency first with due consideration of scale.

At the same time, in Q4 of 2022, the current cash flow of the company's operating activities was 6.8 billion yuan. In 2022, the current cash flow of the company's operating activities was 6.8 billion yuan. In 2022, the current cash flow of the company's operating activities was 6.8 billion yuan. In 2022, the current cash flow of the company's operating activities was 6.8 billion yuan. Meanwhile, our operating net cash inflow in Q4 was 0.68 billion. We also achieved positive operating cash flow for the full year of 2022.

As of December 31st, 2022, our cash and cash equivalents were $1.86 billion and short-term investments were $4.64 billion. We believe that this strong cash position speaks volumes about our resilience in adversity. We also firmly believe that we will be able to realize our vision and mission, create value for our consumers and society, and create long-term and sustainable value for our shareholders.

free brands, etc. continue to build up the advantages of products, creating a flying effect. In 2022, we will continue to develop free-of-charge areas, such as organic vegetables, children's food, and health products. We have cultivated a batch of unique products with a sales volume of more than 3 million yuan per month. And we first encountered the trend of the food industry to popularize fresh label. We have developed about 320 fresh label-based products. In addition, we also advanced our product development capability through direct sourcing, contract farming, in-house R&D and production, and private labels, forming a flywheel effect.

In 2022, we kept growing existing strong categories, such as prepared food and children's food, i.e. mom's choice, forming a number of differentiated Ding Dong exclusive products with monthly sales of over 3 million RMB each. Moreover, foreseeing the clean labeling trend in the food industry, we created about 320 quality products with clean labeling attributes. We refined our customer profiling according to consumption scenarios and built the Qingyang Planet page for younger user cohorts to meet the increasingly precise needs of the millennials and Gen Zs in body management, nutrition, and health.

Next, I would like to talk a little bit about my perception and thoughts. Dingdong Grocery is a startup company that focuses on good food, focusing on food, health, deliciousness, and innovation, so that people can eat well and live a better life. We have our firm beliefs and beliefs. We believe in a better life. We have always emphasized the value of consumerism and social creation, rather than the simple and frugal game of stealing users and the market. The philosophy of our growth is fundamentalism. Although we have far-reaching ideals, we always start from scratch. At the same time, we have powerful vitality, which can counter-weakness and counter-harm. In the development of the company, we always stick to our duties, maintain discipline and normalcy. It is these beliefs and beliefs Next, I would like to share with you my thoughts and ideas. Dingdong is a startup that is dedicated to providing safe, healthy, and delicious food while innovating to improve people's lives. We firmly believe

in building a better life and creating value for consumers and society instead of engaging in a zero-sum game with our peers for users and market share. As the seed theory suggests, an infinite number of small things combine to create the universe. Therefore, we dream big and start small while remaining resilient to counteract vulnerability and entropy. During this process, we stay true to our roots and remain disciplined while keeping an easy mind. These beliefs and convictions go beyond profitability. They are what fuel our passion and drive us forward, guaranteeing our achievements today and in the future.

Finally, I would like to briefly talk about the plan for 2023. At the beginning of January, the company held an annual management meeting to summarize the experience and lessons we have gained since our start-up. Because we have planned for a longer-term future, we have formed a consensus that the future development strategy of e-commerce will be the first step forward. On the one hand, we will firmly do our best to have a free market, continuously dig into the needs of users, and expand the scope of implementation.

I would like to also discuss our plans for 2023. In early January, the company held its annual management meeting where we summarized the experience and lessons we have learned since our inception and made plans for the longer-term future. We also agreed that we would hold course on our current development strategy while remaining innovative. Specifically speaking, we'll deepen our penetration into existing markets and continuously tap into our users' needs to achieve profitability. At the same time, we'll emphasize innovation, particularly in food products, to develop and launch new food products catering to a broader range of users.

In 2023, we will develop new products such as healthy hand-wrapped hand-wrapped hand-wrapped hand-wrapped hand-wrapped hand-wrapped hand-wrapped China China In 2023, given the increased demand for healthier food products post-pandemic,

We plan to promote product innovations across several areas to address the changing needs. These areas include the increased use of clean labeling, nutritional upgrades, and customizing health food products for specific demographics. Specifically speaking, we'll first develop healthier, prepared food that is not only delicious but cooked with little or no oil and are low in calories, salt, and sodium. We'll take the lead in promoting products with clean labels. Second, we'll improve the nutritional value of food and beverages. For example, we'll bring out low GI rice and pasta, low carb bakery products, low carb beer, high fiber beverages, and low fat and low sodium seasonings. Third, we'll develop powerful functional foods and nutrition products for children, middle aged, and senior citizens. Finally, for millennials and Gen Zs who are weight and health conscious, we have launched the Qingyang Planet page that can quickly generate a healthy diet plan that matches individual needs with calculated and archived calorie data.

to strengthen the strategic cooperation with excellent suppliers. In February, we will hold a trade fair to praise the developers, providers, and service providers of excellent products. We deeply understand that in the face of a huge market, in the face of the constant changing needs of consumers, a large number of excellent enterprises need to work together to buy and be willing to be a supporter, connector, and an excellent enterprise together as consumers and the value of social creation.

Another one of our goals for 2023 is to strengthen our strategic cooperation with our suppliers. In late February, we'll hold a supplier conference to commend our product developers, suppliers, and service providers for their excellent products. We're highly aware that it takes a large number of exceptional companies to meet the ever-changing needs of consumers in a market as vast as China's. Dingdong is willing to be an enabler that connects great companies to create value for consumers and society.

2023 is the first year of the pandemic. Consumers' demand will change dramatically. We are actively responding, constantly strengthening the business power, service power, and industrial capability construction, while serving consumers, achieving growth, and building a supply chain. According to the current operating situation, we expect Dingdong to buy vegetables in Q1 2023, 2023 marks the end of three years of the pandemic.

We expect drastic changes in consumer demand. Nonetheless, we'll respond proactively and strengthen our capabilities in product development, service provision, and supply chain building. Based on our current operating situation, we expect to maintain non-GAAP profitability for both Q1 and the full year of 2023. Today is February the 13th, and spring has come. Everything is sprouting and growing despite the cold weather, just like the situation in China. We're fully confident in the recovery and growth potential of the post-pandemic economy in our country and in our cause. This concludes my speech. Next, I would like to invite Ms. Yu Le, CSO of the company, to introduce the financial results. Thank you all.

Thank you, Mr. Liang, and hello, everyone. Before I walk you through our detailed financial results, please note that all numbers stating the following remarks are in IMD terms. Product development capability has become Dingdong's core strength and primary growth driver since we implemented a strategy of efficiency first with due consideration of scale in Q3 2021. As a result, we maintain quality growth in 2022 with annual revenue of 24.22 billion, up 20.4% year over year. Meanwhile, we significantly optimize our operating efficiency, growth margin, and net loss margin. The conversion rate from GMV to revenue was 92.3%, increasing by 3.7 percentage points from a year ago. Non-GAAP net loss margin was 2.4%, a substantial improvement of 28 percentage points year-over-year. We also achieved a positive operating cash flow for the full year of 2022. Looking ahead to 2023, we are confident that we can achieve a full-year non-GAAP breakeven. Now let's look at the financial results of Q4 2022. Our revenue reached $6.2 billion, up 13.1% year-over-year. We are also pleased to report a record positive net margin of 0.8% under GAAP and a non-GAAP net margin of 1.9%, both significantly exceeding the forecast made in Q3. Since we shifted our strategic focus to efficiency first in Q3 2021, our non-GAAP net margin has improved by 33.8 percentage points from a net loss of 31.9% to a net profit of 1.9%, which was achieved in less than a year and a half. Such a rapid and significant optimization is a testament to the vitality and profitability of the frontline fulfillment grid model in fresh grocery e-commerce. It also shows effectiveness of deeply developing and engaging our supply chain and centering on product development capability. We expect to stand by these strategies for a long time to come. In Q4, the growth margin was 32.9%. up 5.2 percentage points from a year ago, and the gross profit was $2.04 billion, up 34.2% year over year. We deepened our partnerships with many upstream producers to advance our fresh grocery products. For the non-fresh groceries, we focused on building private labels, in-house R&D, and self-production and processing in our assembly lines. We also offer the door-to-door delivery service, capturing higher downstream margins. Such extensive coverage of the whole supply chain generated a stable gross profit margin for the company. The fulfillment expense ratio in Q4 was 24.1%, down 8.5 percentage points year-over-year, reflecting Dingdong's higher operational efficiency in Q4. The sales and marketing expense ratio in Q4 was 1.5%, down 5.1 percentage points driven by our product development capability that generated continuous organic traffic. Consumers came and stayed for the differentiated Dingdong exclusive products, which also lowered the acquisition cost per new transacting user by 47.7% year-over-year and 26.1% quarter over quarter. G&A expense ratio remained stable at 2.4% compared to the same quarter last year. Benefiting from the scaling effect, we optimized the R&D expense ratio to 4.2% from 5.2% year over year. As always, we will keep investing in the infrastructure R&D, such as food development, agriculture technology, and technical data algorithms, which will forge a great advantage for the company. In Q4, we achieved a positive gap net margin of 0.8% for the first time, optimized by 20.8 percentage points from a year ago, and a non-gap net margin of 1.9%, optimized by 20.7 percentage points year over year. significantly exceeding the forecast. Additionally, COVID-19 had only mildly impact on our covered cities and regions in October and November, and our Q4 entered a trajectory of profitability in October. To break it down monthly, we achieved a positive down gap net profit in October and a positive gap net profit in November and December. It's been five years since Dingdong was founded in 2017, and we are pleased to see our efforts pay off and our business model proven. The operating cash inflow in Q4 was $682 million, and the actual operating cash inflow was increased to $906 million through the introduction of supply chain finance. As of the end of Q4, the balance of cash, cash equivalents, restricted cash, and short-term investments was $6.5 billion. According to CIC, the size of China's food and other groceries market was $11.9 trillion in 2021. Let's take Shanghai as an example. With a resident population of about 25 million, Shanghai's annual food consumption expenditure is about 10,000 per capita. In 2022, our GMV in Shanghai was over 12 billion. That translated to a 5% penetration rate in Shanghai's food consumption market. We are confident of doubling that number in the long term. generating annual revenue of over 20 billion in the city alone. In addition, the total consumption of our current cities and regions is about five times that of Shanghai, which in the long term would create 100 billion in annual revenue. That is why Dingdong has a higher growth ceiling. As we move ahead to 2023, we would like to discuss our outlook. Q1s are typically affected by seasonality, according to our track record with lower revenue and profitability. In Q1 2023, we expect a slow season for urban fresh grocery consumption due to the pent-up urge to return home and travel during the Chinese New Year. Nevertheless, despite the seasonality impact and extra frontline labor costs on holidays, We are confident of achieving non-gap break even for both Q1 and the whole year of 2023. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then one 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. When asking the question, please state your question in Chinese first, then repeat your question in English for the convenience of everyone in the call. At this time, we will pause momentarily to assemble the roster. And our first question will come from Joyce of Bank of America Securities. Please go ahead.

So I also want to ask how much of our profit this quarter may have to do with the implementation of the epidemic control. At present, we know that after the epidemic stability and all aspects of the policy are released, I don't know how our company sees this year or the long-term ability of our continuous profit and the trend of continuous profit in the future. Then I will translate my question myself. Good evening, management. Congrats on the profit-making this quarter. As we all know, in the past couple months, there were actually a lot of constraint in terms of social activities because of the pandemic. Just try to understand to what extent the probability this quarter was because of the pandemic control how should we expect the profitability outlook for this year or going forward? Is it going to be a sustained trend of profit-making? Thanks a lot.

我请于乐来回答这个问题吧。好的,谢谢Joyce的提问。好的,谢谢Joyce的提问。 首先呢,我们从2021年Q3开始呢,

Dingdong has always strived to optimize efficiency and steadily sell to profit step by step. Compared to Q3 of 2021, in a short period of one and a half years, Q4 of 2022, our profit margin has been optimized by nearly 15%, and the interest rate has been optimized by more than 13%. Thank you, Joyce, for your question. First of all, since Q3 in 2021, Dingdong has been committed to efficiency.

firmly moving towards profitability step by step. Our gross profit margin in Q4 of 2022 was up nearly 15 percentage points compared with Q3 in 2021, which was achieved within one and a half years. More than 13 percentage points have been optimized in the fulfillment expense ratio and over five percentage points in the marketing spending ratio. As mentioned in the prepared remarks, our non-GAAP net profit margin went up more than 33 percentage points. The ability to optimize the P&L so efficiently has validated the vitality and profitability of Dingdong's business model.

Then we focus on Q4 data. Q4, we have more than 80% of cities have achieved positive business profits at the city level. If we look at the monthly data, In November 2022, the area covered by Dingdong was slightly affected by the pandemic. But in November, we still achieved more than 10 million profit from GAAP. And we think this kind of profitability is long-term and stable. In Q1 this year, and even this year, we can continue to achieve break-even under GAAP.

Now let's look at the Q4 results. In Q4, over 80% of our inner cities achieved positive operating profits at the city level. On a monthly basis, in November 2022, when the pandemic had a mild impact on our covered cities and regions, we achieved a gap net profit of more than 10 million. Moreover, we expect this profitability to be sustainable and stable allowing us to achieve non-gap break-even in Q1 of 2023 and even the whole year of 2023.

Such a long-term investment has made our net profit increase significantly. At the same time, within a year and a half, our first-line delivery efficiency has increased by more than 25%, and the first-line warehouse efficiency has increased by more than 40%. Our water and electricity costs have also dropped by more than 20%. These have also led to a rapid improvement in our fee rate. These are the fundamental reasons for the improvement of the profit table. Now if we look at the structure of our P&L, gross profit margin and fulfillment expense ratio are two key elements. Their optimization is because we have been committed to the construction of the supply chain

and our product development capability for a long time to build our strength. Such long-time investment has objectively improved our gross profit margin over time. Meanwhile, within one and a half years, the delivery rider's efficiency has increased by more than 25%. The frontline warehouse staff efficiency has grown by more than 40%. With utility bills down by more than 20% year over year, which in turn led to the rapid optimization of our fulfillment expense ratio. These are the fundamental driver of our P&L optimization. Regarding the pandemic as an impetus to the business, it was more on the overall online penetration rate. Because during the pandemic, the insufficient supply in the traditional market gave users a good opportunity to experience Dingdong's differentiated product index.

In the context of the pandemic, our operations are facing a lot of challenges. For example, the supply chain is not smooth, and recruitment will be relatively difficult. The hotel is also subject to various objective conditions, and it also needs some additional prevention costs. These difficulties will be resolved after the pandemic is stabilized. In general, we believe that the above data has verified the abundant demand for Dingdong's business model.

On the other hand, our operation experienced many challenges in the face of the pandemic control, such as the unsmooth supply chain, relatively difficult recruitment, restricted order fulfillment, and some additional expenses incurred for pandemic prevention. These difficulties will be resolved when the pandemic control loosens up. In summary, the above-mentioned results have validated that Dingdong's business model is welcome in the market and can generate value for users and society. Therefore, our profitability is sustainable. Thank you.

Thank you.

The next question comes from Ashley Zhu of Credit Suisse. Please go ahead.

We have seen it's reported that Ding Dong Gu Yu has been developing and manufacturing food products Would management share more color on this? Thank you.

Thank you for your question. Dingdong is a startup committed to providing healthy, delicious, and innovative food products to improve people's lives. We firmly believe that product development capability is our core strength. Therefore, in addition to jointly developing quality and differentiated foods with partners, Dingdong is also innovating, developing, and producing processed food products. This is what Dingdong Guoyu is doing.

The current sales of Dingdong Guoyu accounts for 11.4% of Dingdong Grocery CNV. After two years of hard work, Dingdong Guoyu has created many brands that customers love, such as Rijian, Dingdong Da Man Guan, Quan Ji Jia, Hei Zhan Shi Jia, Baolu Workshop, etc. Guoyu has been pursuing product quality. In 2022, the average sales rate of Guoyu products was 40% lower than that of Dingdong. Currently, Gu Yu's sales accounted for 11.4% of Dingdong's GMV.

For the past two years, Gu Yu has created many popular brands, such as Daily Fresh, Dingdong Da Man Guan, Boxing Crayfish, Black Diamond Family, and Bao's Bakery. Product quality has always been a priority in Guoyu. In 2022, the moderate or bad reviews on Guoyu's products were 40% less than the whole companies. Guoyu's products also had a 100% passing rate for inspection. In December 2022, Guoyu had 80 SKUs with monthly GMV exceeding 1 million each.

Compared with 2021, Gu Yu's GMV has more than doubled in 2022. Gu Yu is growing rapidly and is expected to have higher revenue, which will add greater value to the company's product development capability.

Thank you.

The next question comes from Thomas Chong of Jefferies. Please go ahead.

Can you share your experience and advice? Thank you. Thanks, management, for taking my questions. Just in the prepared remarks, management talked about and summarized the experiences and lessons that we learned since we started the business. Can management share about these experiences and lessons? Thank you.

Okay, thank you for your question. At the management meeting in January, we summarized some of the past six years of experience. We also realized that the times and the environment are changing, and the financial market has entered a different stage of development. Some of the past actions will be done in the future. We summarized our experience, mainly including, first of all, Thank you for your question. At the management meeting in January, we summarized our experience of the past six years

and realized that the times and environment were changing. Dingdong has also entered a different stage of development. We must learn from the past practices to avoid future mistakes. We have the following three conclusions. First, we have achieved a scale of sales resulting from our previous hard work. By leveraging the scale, we can serve and understand our customers better. With a deeper understanding of the consumers We can also develop and innovate foods while enabling our partners to create value for consumers and society with us together.

Second, unlike our peers,

We have never been indecisive regarding specific business models. While our peers constantly doubted their existing model, switching things up and trying to find the optimal solution, we knew that the essence of our business was to serve consumers more conveniently with better products. So we adopted the simplest and most convenient frontline fulfillment grid model. Sometimes the best way is the most straightforward, not the strangest, on the most surprising one.

Third, as far as the development model is concerned, we have been working closely with the public sector, including the R&D and order agriculture, the processing of the food industry, the construction of the selection center, and the establishment of the supply and demand mechanism, etc. These public sector's construction cycle is longer and the land is larger. It may not be able to show its advantages in the short term, but if we look at it in the long term, it will be able to boost our ability to serve consumers and also help us to build a supply chain.

Third, based on the understanding of our business model, we have been deeply engaging the supply chain. These efforts include direct sourcing, contract farming, food R&D and processing, building regional centers, establishing a quality control mechanism, and so on. The construction of the supply chain is time consuming, and the investment is relatively large, so it may not be able to produce outcomes immediately. However, in the long run, it will allow us to serve consumers better and form a competitive mode.

At the same time, we have also summed up the mistakes to avoid, which were born out of an aggressive user base and scale expansion by using low prices and excessive marketing to attract bargain hunters.

These activities brought false prosperity to the company that didn't last. Haste makes waste. The business we are engaged in is very grounded and requires us to be more patient. We need to cultivate the supply chain and product development capability for the longer run without haste.

Thank you. Thank you.

Thank you.

The next question comes from Robin Leung of Daiwa. Please go ahead.

Hi. Thanks, management, for taking my question. Management mentioned in the prepared remarks that LinkedIn will strengthen the collaboration with our partners. Could management share more on these partnerships? Thank you.

Okay, thank you for your question. In the face of a huge market, in the face of the demand for consumer change, We need to work together with more partners to create value for consumers. We will greatly break through the relationship between traditional suppliers and distributors, and hope to be able to cooperate with each other. In the commercial model, we will open certain categories and cooperate with partners. From there, we will make use of the advantages of both parties. In terms of technology, we will actively contribute to the advantages of our big data IT technology to improve cooperation efficiency. In terms of capital, we will support and innovate public finance to help our partners. At the same time, we will also consider how to invest in some excellent partners. In the huge market with ever-changing consumer needs, we need to expand our partnerships to create value for users. Therefore, we will break through the traditional Party A and Party B relationship between suppliers and retailers,

and support each other in depth. Regarding the business model, we'll allow joint operation on certain categories with our partners to leverage everyone's strengths. On the technology side, we'll actively contribute to big data and IT technology to improve cooperation, efficiency, and the partnership. Furthermore, we'll develop and innovate supply chain finance more vigorously at a financial level to support our partners. At the same time, we'll proactively consider investing in certain excellent partners. In addition, Dingdong itself is a startup that has always been innovative. That's why we plan to support actively innovating partners in areas such as user surveys, testing, initial product iterations, and marketing, among others.

In the past six years of Bindong's entrepreneurship, we have also established a good relationship with many excellent companies. We have the same values, trust, support, and responsibility. Especially in the three years of the epidemic, to fulfill the promises made to consumers, customers are in great difficulty. These excellent partners are Bindong's continuous improvement of reliable insurance, which is also the wealth of our six years of entrepreneurship. In 2023, we will cooperate with more excellent companies globally. Thank you.

In the nearly six years of Dingdong's operation, we have also established very good cooperative relationships with many excellent companies. This is because we share similar values, mutual trust, support, and responsibility. Especially during the three years of the pandemic, we overcame many difficulties together to fulfill the promise to consumers. These excellent partners are a reliable guarantee for Dingdong's continuous progress and they are also valuable resources that we have accumulated in the past six years. In 2023, we'll partner with more exceptional companies around the world. Thank you.

Thank you.

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

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