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ZKH Group Limited American Depositary Shares, each representing thirty-five (35) Class A Ordinary Shares
Q2 2024 Earnings Conference Call
8/22/2024
Operator
Ladies and gentlemen, good day and welcome to ZKH Group Limited second quarter and fiscal year 2024 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jin Li, head of investor relations. Please go ahead.
Jin Li
Thank you, operator. Thank you, everyone. Welcome to our call today. Joining us today on the call are Mr. Eric Chen, our founder, chairman, and chief executive officer, and Mr. Max Lai, our chief financial officer. During this call, we will discuss our future performance. These are forward-looking statements made under the safe harbor provisions of the U.S. Private Security Litigation Reform Act. Such statements are not guarantees of future performance. and are subject to certain riskers and uncertainties. Some of these riskers are beyond the company control and could cause actual results to differ material from those mentioned in today's press release. A number of potential riskers and uncertainties are included in VKH Group's public filings with the Securities and Exchange Commission. BKH Group does not undertake any obligation to update this forward-looking information except as required by law. During today's call, we will also discuss certain non-GAAP financial measures for comparison purpose only. Please see the press release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. Eric and Max will share our business updates, operating highlights, and financial performance for the second quarter of 2024. After the prepared remarks, we will have a Q&A session. With that, I will turn the call to Eric. Eric, please go ahead. 大家好,欢迎各位参加赚分行。
Eric
Hello, everyone. Thank you for joining ZKH's second quarter 2024 earnings conference call.
Max Leib
Our exemplary teamwork and effective execution yielded strong results during this quarter.
Eric
Although the overall macroeconomic environment is still facing challenges, we insist on doing the right thing for the long term, actively optimizing some businesses that have no value for long-term competitiveness. Although these mistakes will have an impact on our growth in the short term, Despite the ongoing macro headwinds,
Max Leib
We remain steadfast in our commitment to do the right things that position our business for long term success. We strategically stepped back from business that did not align with our sustainable competitive edge. While this may impact our short term growth, it has led to an improvement in the quality of our business. Importantly, even with these recent optimizations and business adjustments, we still achieved solid revenue growth, profitability increase, and significantly improved cash flow in the second quarter. Let's delve into these.
Eric
First, we achieved a CME of RMB 27.5 billion, with a growth rate of 5.6%. The revenue is RMB 22.5 billion, with a growth rate of 8.5%.
Max Leib
Our second quarter GMV reached 2.75 billion RMB, up 5.6% year-over-year. This brought our second quarter revenue to 2.25 billion RMB, up 8.5% year-over-year. 二,我们的毛利额在二季度增长14.3%,
Eric
A gross profit in the second quarter increased by 14.3% year over year, reaching 380 million RMB.
Max Leib
Our gross margin based on revenue increased to 17% in the second quarter, up from 16.2% in the same period last year.
Eric
Third, due to the improvement in business quality, control of cost and efficiency improvement, and other comprehensive factors, we have adjusted the net loss to RMB3486 million. Driven by
Max Leib
higher business quality, effective cost control, and improved efficiency, we substantially narrowed our adjusted net loss by 95 million RMB to 34.86 million RMB in the second quarter, compared to 130 million RMB in the second quarter of 2023. Notably, the second quarter marks our ninth consecutive quarter of year-over-year improvement in our adjusted net loss margin from 6.2% in the second quarter of 2023 to 1.5% in the second quarter of 2024. 我想在这里补充两句的就是,虽然我们控制了
Eric
I'd like to add that despite the controls that we achieved management cost, we did not lower
Max Leib
our investment in product capabilities as well as our digital capabilities and that is to say the improvement in profitability is not at the price of a lower investment in these core competencies Our substantial profitability improvements coupled with optimized management of accounts receivables, accounts payable, and inventories resulted in a net operating cash inflow of 120 million RMB in the second quarter of 2024. This positive cash flow further strengthens our cash position.
Eric
In the past, we have done a lot of discussions and work. The main purpose is to once again clarify our development direction and strategic goals, as well as to unify all ideas to ensure that the strategy is consistent and effective.
Max Leib
Recently, we've undertaken comprehensive discussions and initiatives with the primary goal of reaffirming our development direction and strategic objectives, as well as aligning our entire team's mindset to ensure strategic consistency and effective execution.
Eric
I would like to 我想进一步解释一下 我们的发展方向和战略目标 第一点 聚焦ML行业 深耕产品 我讲的深耕产品的意思 不仅是选择产品 也包括加强研发 和协同制造的能力 第二条 从 I'd like to add a few words here in terms of what I mean by our development direction and strategic objectives.
Max Leib
First, we're deeply committed to the MRO industry, and we are making deep investments into product capabilities. And that means that we're not just choosing products for our customers, but we are now actively engaged in the research and development of products, as well as in the coordination of manufacturing. Secondly, we're not just covering our key account customers, but now expanding our focus more to small and medium customers. And we're also developing our overseas business, starting with developed countries. 更加重视应收款、库存等现金流的管理。 Thirdly, we're increasing our focus on the management of accounts receivables, inventories, and cash flow. In this macro environment, we believe that this management is of extreme importance.
Eric
Our goal is to become a MRO service platform of choice for our customers globally that can create value for our customers.
Max Leib
More specifically, I will explain this in three areas.
Eric
In terms of organizational structure and team ability, in the new stage of development, we have raised higher requirements for the operational operation and IT digitalization capabilities. Therefore, we have made further improvements in terms of team ability and ability complementing. including building and strengthening customer operation teams, product operation teams, and recruitment teams, as well as management capabilities in human resources and finance. We hope to make the management experience more mature, and the team's ability to complement each other. Everyone can be independent.
Max Leib
In terms of our organizational structure and team capabilities, as we enter a new growth stage focused on lean operations and advancing IT and digital capabilities, we are upgrading our team capabilities and synergy And this includes bringing together and empowering our teams for customer operations, product operations, and business development, as well as enhancing the management of human resources and finance. This means that we are creating a team with mature experience in the industry, with great synergy in collaboration, and with the ability to take on new tasks competently. And this will help us lay a solid foundation for our further growth, which is going to be more healthy and more long-term.
Eric
We hope that through the operation of products and the operation of customers, we can further increase the accumulation of data
Max Leib
We aim to further increase our data assets and enhance our digital and intelligent service capabilities through product and customer operations, including improving digitalization in our internal operations.
Eric
We aim to strengthen our business development team to attract more high-quality third-party marketplace suppliers
Max Leib
fostering both competition and synergy with our first-party product sales and private label offerings, thereby enhancing our supply competitiveness.
Eric
At the product end, we believe that one of the important differences between our supply end and other suppliers is that we extend to the upstream. We are even involved in the development, design, and smart manufacturing of products. to expand the research and development power of the free brand to achieve real stability and high cost. At the end of this year, our Taichung factory will be built, and our innovation center will be officially established. In the second quarter of 2024, GMV of our free brand will grow by 27%, We will also accelerate the promotion from sales to supply-driven mode by accumulating industry and customer insights and data to speed up the promotion of products that are suitable for industry and customer output, which is to reduce the business of temporary reimbursement and increase the sales of products that are already prepared and have advantages, especially our private brand and business capital products.
Max Leib
In terms of product capabilities, we believe one of our differentiators versus our competitors is that we are moving further upstream in the supply chain as we actively engage in product R&D, design, and smart manufacturing to grow the research and development of our private label offerings to achieve true cost savings and high price performance. By the end of this year, our plant in Taichung, Jiangsu Province, will be built, and our MRO Innovation Center there will be opened. In the second quarter of 2024, the GMV of our private label products increased by 27% year-over-year. Additionally, by deepening our industry and customer insights and enriching our data assets, we're well-positioned to deliver curated product pools, offering industry-specific features, and meeting the diverse needs of our customer segments. This strategy will expedite our transition from a sales-driven to a supply-driven model, reducing our reliance on sales generated from ad hoc inquiries and requests for quotes. Instead, we'll focus on increasing the sales of our readily available products with a competitive advantage, particularly our private label offerings and the ZKH selection product lines. This transition is poised to enhance customer experience and boost repeat purchases, ultimately improving our operating efficiency and expanding our gross margin.
Eric
At the sales end, on the one hand, we hope to use better customer experience to collect more customer data to study how to help customers to further reduce cost-effectiveness and achieve better, more efficient online customers, especially the burden on small and medium-sized customers. On the other hand, we hope that based on the organizational design of service regionalization, strengthen the local service to customers, accelerate the burden on regional customers, reach and acquire. At the same time, based on the network-based personnel layout, improve customer end, visit efficiency and output, enhance customer activity and connectivity, On the sales front, by enhancing customer operations
Max Leib
and accumulating more customer-related data, we aim to assess solutions that can help our customers reduce cost and improve efficiency, ultimately leading to better and more effective online customer acquisition, particularly small and medium-sized customers. Additionally, through our localized service organizational design, We aim to further enhance on-the-ground services and accelerate our efforts to cover, engage and onboard regional customers. At the same time, our grid-based staffing strategy is designed to boost the efficiency and effectiveness of customer visits, fostering deeper customer engagement and loyalty. As a result of these initiatives, We served over 48,000 customers in the second quarter of 2024 and more than 63,000 customers over the first half of this year, representing year-over-year growth of 25.8% and 32.7% respectively. We intend to become a digital industrial product service platform
Eric
focus on customer value creation. We believe that the above strategies and measures have important meanings for our product supply, digitalization, and business operation, helping us achieve long-term business development and growth. So even if we have optimized and adjusted some businesses during this period, even if the external environment is full of challenges,
Max Leib
We are committed to becoming a leading digital platform for MRO service with a strong focus on creating value for our customers. We firmly believe that the strategies and initiatives outlined here are critical to enhancing our product supply chain capabilities, digitalization, and lean operations, all of which are key to long-term business development and growth. Therefore, even though we have recently optimized and adjusted certain areas of our business, and despite the challenging external environment, we are continuing to invest in our product and digital capabilities, which may have a short-term impact on the growth of revenue and profitability. Even despite all of this, our long-term outlook remains unchanged, and we believe that this will help us further strengthen our core competitiveness. Ultimately, we are confident in our ability to achieve sustained, steady growth and continuously unlock profitability over time.
Eric
Next, please welcome our CFO, Max Leib. to introduce our financial performance. Thank you.
Max Leib
With that, I'll turn the call over to our CFO, Max Lai, to discuss our financial performance. Thank you.
Max Lai
Thank you, Eric, and thanks, everyone, for making time to join our earnings call today. I will now provide an overview of our 2024 second quarter financial results. We are pleased with the solid performance in the second quarter. driving further probability improvement despite macroeconomic headwinds. In the second quarter, our GMV increased by 5.6% year-over-year to RMB 2.8 billion. By platform, GMV generated from ETH platform increased by 4.4% year-over-year to RMB 2.5 billion. And GMV generated from GBB platform grew 17.8% year-over-year to RMB 274.7 million. The proportion of GMV generated from the marketplace model was about 20.7% in the second quarter of 2024. Our total revenues in the second quarter of 2024 were RMB 2.25 billion, representing an increase of 8.5%, mainly due to the strong increase in customer numbers and continued growth in MRO market demand. We enhanced our customer coverage and service capabilities by optimizing the sales team structure to foster closer customer engagement. As a result, we had over 48,000 customers translated on our platform in the second quarter of 2024, representing year-over-year increase of 25.8%. As a result of business quality improvement, gross profit in the second quarter grew by 14.3% year-over-year to RMB 383 million, resulting in gross profit margin of 17% compared with 16.2% in the prior year period. The increase was driven by high gross margin of product sales 1P model, increased from 13.7% to 15.5%, and increased takeaway of marketplace 3P models, increased from 11.4% to 12.2%, partially offset by slightly lower gross margin of GBP platform. Operating expenses in the second quarter of 2024 RMB 454.2 million. Operating expenses as percentage of net revenues was 20.2%, compared with 22.1% in the prior year period, demonstrating our improved operating efficiency and also effectiveness of our cost control measures. Fulfillment expenses in the second quarter of 2024 were RMB 99.1 million, a decrease of 7.1% from RMB 106.7 million in the prior year period. The decrease was primarily attributable to lower employee benefit costs and warehouse rental costs, partially offset by higher distribution expenses. Fulfillment expenses as percentage of net revenue were 4.4%, compared with 5.1% in the prior year period. Sales and marketing expenses in the second quarter of 2024 were RMB 157.7 million, a decrease of 6.5% from RMB 168.6 million in the prior year period. The decrease was mainly attributable to lower travel expenses and employee benefits costs. Sales and marketing expenses as percentage of net revenues were 7%. compared with 8.1% in the prior year period. Research and development expenses in the second quarter were RMB 38.4 million, a decrease of 16.4% from RMB 46 million in the prior year period. The decrease was mainly attributable to lower employee benefits cost. Research and development cost expenses as percentage of net revenues were 1.7% compared with 2.2% in the prior year period. General and administrative expenses in the second quarter of 2024 were RMB 159 million, an increase of 16.1% from RMB 136.9 million in the prior year period. The increase was primarily attributable to higher share-based compensation expenses. and partially offset by decrease in employee benefit costs. General and administrative expenses as percentage of net revenues were 7.1% compared to 6.6% in the prior year period. Our non-GAAP adjusted net loss in the second quarter of 2024 was RMB 34.9 million compared with RMB 129.5 million in the prior year period. non-GAAP adjusted net loss margin was 1.5% in the second quarter of 2024 compared with 6.2% in the prior year period, making our ninth consecutive quarter of year-over-year improvement. As of June 30, 2024, we had cash and cash recruitment, restricted cash, and short-term investments of RMB $2.04 billion compared with RMB 2.12 billion as of December 31st, 2023. Net cash generated from operating activities with RMB 122.1 million in the second quarter of 2024 compared with net cash used in operating activities of RMB 236.2 million in the prior year period. In June this year, we initiated share repurchase program under which we may repurchase up to $50 million of ADS over a 12-month period ending in June 2025. The program underscores our confidence in our business growth and future value creation potential. Moving forward, we will continue to execute our share repurchase program from time to time on the open market and market prices. and remain focused on sustaining growth and delivering long-term value to all shareholders. With that, I would now like to open the call to Q&A, and operators, please go ahead. Thank you.
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, Please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Again, it is star then one to ask a question. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately Repeat your question in English. At this time, we will pause momentarily to assemble our roster. The first question comes from Leo Chung with Deutsche Bank. Please go ahead.
Leo Chung
We see that this year's 2Q and the first half of this year's GMV rates have dropped. The reasons include the impact of the red line economy and the adjustment of the company's own business structure. So I have three questions for you. The first is the GMV of this year's 2Q. If we look at it from the industry and the product category, what is the situation? I will translate myself. So thanks management for taking my questions. We saw that GMV growth fell down due to macro challenges and different adjustments. On this, I have three questions. The first question, management gave us an update on customer spending by industry verticals and product categories in the employer. My second question is, management showed us the updates on China's MRO, Consumer Service Market Outlook, and the competition landscape in second half of 2024. My numbers, my third question is could management give us an update on business optimization progress? Is it largely complete or should we expect a continuous impact in second quarter? Thank you.
Eric
Okay. Thank you. The first question, if from From the perspective of the industry, there are indeed some industries that have developed well in the past, or relatively stable. Some industries may indeed be affected by some periodicity. For example, new energy vehicles, chemical engineering, electronics, equipment manufacturing, and telecommunications industries. and continue to maintain a relatively strong growth. Of course, this growth is not because their total demand has increased, but because these enterprises are relatively healthy. At the same time, they have progressed relatively smoothly in promoting digital procurement. I will give some specific examples. For example, in the new year automotive industry, our second quarter grew by 36%. In the chemical industry, The same growth is also 36% Electricity and equipment The same growth is 30% The telecommunications and electronic industry grows by 29% That is to say If this industry does not have the impact of collection and other aspects Then often our growth speed It's all faster Traditional cars mine Steel and other industries Purchase is Thank you very much for your question.
Purchase
Thank you very much for your question. So, yes, from the industry perspective, indeed, some industries were doing really well or at least relatively stable, but some industries have been impacted by cycles. So if you look to industries like EVs, chemicals, electric and equipment manufacturing, and communications electronics, their procurement on our platform has been growing very strong, not because the downstream demand has grown significantly, but because these industries are growing at a pretty healthy pace, and their digitized procurement, their migration of procurement from offline to online has been going pretty smoothly. Specifically for EV, Q2 growth has been 36% year-over-year. For chemicals, the growth of procurement was 36% also year-over-year. Electric and equipment manufacturing, 30% year-over-year growth. Communications electronics, 29% year-over-year growth. So for these industries, barring the risks of receivables and payment collection, the growth will usually be pretty quick. But on the contrary, For example, for traditional ICE vehicles, mining, steel, and coal, these industries, their procurement on the platform has been pretty flat year-over-year. Specifically for ICE cars, Q2 has been down procurement-wise by 2% year-over-year. Steel has been down by 1% year-over-year.
Eric
From a product perspective, chemical products, factory automation, MOU, molding and molding, and personal protection, both maintain a relatively high rate of growth. Chemical products, including basic chemical products and chemicals, grow by 40%, factory automation grows by 25%, MOU's automation grows by 26%, molding and molding,
Purchase
And from the product perspective, chemicals, factory automation, fasteners, grinders, and abrasives, and PPEs, or personal protective equipment, have been growing pretty quickly year over year. Specifically for chemicals, year over year growth was 40%. 25% for factory automation, 26% for fasteners, 45% for grinders and abrasives, and 23% for PPE.
Eric
From the perspective of the customer group, our small and medium-sized enterprise customers grow relatively quickly. Among them, the small and medium-sized customers, the Dongbangbang platform, has achieved 2.7 billion RMB in GMV,
Purchase
So from the customer's perspective, GMB from SMEs has been growing very rapidly. And so specifically, the GBV platform that serves SMEs has recorded a GMB of 270 million RMB. with a growth, Yovia growth of 17.8%. However, TA customers are still the key to us deeply cultivating the market and growing our market share. And in terms of the number of our customers, this number grew by 32.7% in the first half this year, meaning we're covering more and more clients and customers due to our increasing product competitiveness?
Eric
The second question, although the overall macroeconomic situation is challenging, China's manufacturing industry is still the largest in the world. The MR industry
Purchase
So to your second question, despite the macro headwinds like you referred to, the Chinese manufacturing sector is still the largest in the world. And when it comes to MRO, it is still, it remains an inelastic demand by the manufacturing sector. That's why the potential, market potential, for MRO is huge.
Eric
Currently, the proportion of online purchases is still relatively low, and the trend of digitalized e-commerce purchases is accelerating. Moreover, this trend is irreversible. The more And currently, if you look at the penetration of the digitized procurement on the part of the companies, the penetration is still pretty low. And this trend of companies moving to online to do their procurement
Purchase
is only accelerating and this trend is irreversible. And during economic hardships, the companies will have even a stronger need to minimize their costs and maximize their proficiency or efficiency rather. And that's why more and more companies are willing to adopt e-commerce as their way to procure their items.
Eric
The whole market competition, we think the overall area is rational, which is not like the previous years. This is a very intense competition. In general, we think it is rational. And now the top position and competitive advantage of top companies, I think it will be more evident. Another point, The competition is not only in the domestic market, but I believe that the overseas market, especially the market of developed countries, is a better opportunity for our Chinese industrial products. I think at this point, the US business that we are about to start will bring us a very good leading advantage.
Purchase
And competition-wise, it's getting increasingly rational. The fierce competition in the past is now non-existent. And as a leader in this space, and leaders in this space will have even more marked position, and their advantages will become even more conspicuous. And, of course, competition not only exists in China, it also exists in overseas markets, especially developed markets. And I would say that developed markets offer better opportunities for Chinese MRO. And in this sense, our presence and the foray into the U.S. market will give us even a better edge or better leg up.
Eric
For example, the first one is that there may be a risk of collection of money. For the safety of this cash flow, we need to make good planning and management in advance. The second one is that especially for some platform-based businesses, 3P-based businesses, if these products are not competitive, or even if the price is not competitive, or if the quality of the product has a certain potential risk, We are determined to optimize this type of business, because we think that these businesses, in the short term, although they have increased GMV, but in the long term, for our customers, it is not a very valuable thing. So we will also be determined to clean it up. We think that a very important way to create value for customers is to have better quality products,
Purchase
And to answer your third question, so I would like to further explain what we mean by optimization and how we go about it. So firstly, we would like to optimize business where there's a payment collection risk. So we do that in order to better guard our cash flow. So we manage that kind of business in advance. And also, when it comes to 3P or platform type of business, And especially in cases where products are not competitive, either price-wise or quality-wise, we're determined to optimize and let go of those. Because in the short term, even though those kinds of products will add to our GMV, in the long term, we don't think they offer much value to our customers. And we believe an important way to create value for our customer is to offer better quality and lower costs for them.
Eric
This adjustment will probably affect the first to second quarter. I will probably judge that it will affect the third quarter. This kind of impact will disappear slowly. But because these products have been replaced by our competitive products, so from the fourth quarter or in the future, our business will have a chance to grow better and healthier.
Purchase
So in terms of impact and the duration of it, I think the first two quarters have been impacted, and my gauge is the third quarter will also be impacted to some extent. Then the impact will gradually start to fade away. And because we have already replaced those products with less advantage and competitiveness with our advantage and competitive products, so we have effectively infused fresh blood into the system. So we believe going forward, Q4 and beyond, the quality of the business will definitely improve. So that was my answers to your three questions. Thank you.
Operator
The next question. comes from Colin Liu with China Renaissance. Please go ahead.
Colin Liu
Some of the colors of the entire business prospects, including whether there will be some specific guidance, which may also include what the current time point of our profit will be, and what will be our growth and profit driver behind it. And then my second question is actually about the Gongbangbang platform. Mr. Guan, can you talk about the whole prospects of the Gongbangbang platform? I'll just translate for myself. Thanks, management, for the opportunity. So I have three questions, and they're mainly about the outlook. The first one is about the second half outlook. So I really appreciate management can provide some guidance on top-line growth of second half, potential break-even timing, and what are the drivers behind the revenue growth and the break-even of profit growth. And my second question is about GBV platform, and I would like management to provide some updates, if there are any, on GBP platform outlook. And then my last question is about 3P model. Well, Benjamin just explained, you know, the revenue decline, sorry, the revenue contribution decline from 3P model in the quarter. So I want to ask about how should we think about the revenue contributions from this model going into the next few quarters. Thank you very much.
Eric
The first question is about the growth of the second half of the year. In summary, the growth and growth of the whole year, except for the part that is optimized, our other businesses in the second quarter basically remain at a growth level of more than 15%. In July, we are also continuing this growth trend. It is expected that the growth of the whole year In high-density to low-density, there is no problem. Third, we will continue to increase the profit margin. The annual growth is 15% to 20%. In 2023, the annual profit margin will be 14.5 billion RMB. Basically, the annual profit-loss balance will have a certain profit. The overall growth situation is like this.
Purchase
So in terms of the whole year growth and profitability outlook, excluding the optimized portions of our business, the rest of the business remained a growth of 15% in Q2, and July continued this trend. It's estimated that for the whole year, our growth will be either high single digit or low double digit. And the gross profit will continue to improve. The over the whole year growth will be 15% to 20%. And specifically the whole year gross profit will be about 1.45 billion RMB. And sorry, the 1.45 billion refer to gross profit in 2023. we expect this year to break even with some slight profits.
Eric
Regarding the business of Gong Bang Bang, in the second quarter of this year, it increased by 17.8%. This is still growing in the original mode. Recently, regarding the future development of Gong Bang Bang, we have done So second question regarding GBB,
Purchase
Growth in terms of their GMB in Q2 this year was 17.8% year-over-year under the existing model. And with regards to its outlook, we did a hard and thorough look at GBB, and we have made a very firm determination, which is we are determined to turn GBB into a truly digitized platform dedicated to serving the SMEs.
Eric
In order to better support the development of Gongbangbang, we believe that Gongbangbang should become a real technical company. So we recently recruited the original head of the Taobao industrial product platform to join Gongbangbang and become the new head of Gongbangbang. We hope that Gongbangbang will be able to And in order to better support the growth of GBB, we wanted to become a truly technological company. And to that end, we recently recruited
Purchase
the former head of the MRO platform on Taobao to become the head of GBB. And hopefully, with this person at the helm, GBB can truly become a MRO platform that serves large quantities of SMEs under the backdrop of this smart era we're in. 关于第三个问题,3P的业务。
Eric
有所下降呢 最主要的原因 就是我们前面讲到的 对生意的优化 我们会优化什么样的生意呢 比如说 一些 典型的贸易公司 他不是原厂 也不是正式的代理 等等这些类型的 3P的业务呢 我们会逐渐的清理掉 我们希望引进的 The 3P business must be in the original factory. It has the competitiveness of the product. The product quality is guaranteed. So if we say that the 3P business has dropped this year, or the optimization business mentioned earlier, the most important thing is this aspect. This year's balance will be around 20%. The long-term goal
Purchase
So when it comes to 3P, it has to do with our intentional optimization that I referred to earlier. So the 3P, mind you, the 3P business we are trying to get rid of is, for example, typical trading companies that are neither original manufacturers nor formal agents of any brands. And for those, we will eliminate gradually. But for 3P business that is original manufacturer and that can guarantee the competitiveness of their products and has quality assurance, those we will keep. So the decrease from 3P is primarily from those non-original manufacturer 3Ps. This year, the share of 3P for GMV will be about 20%. Long-term, longer term, it will be about 30%.
Operator
Colin, did that answer your questions? Yes.
Colin Liu
Since I didn't mention, you know, that's really helpful.
Operator
The next question comes from Li Ping Zhao with CICC. Please go ahead.
Li Ping Zhao
Hi, Mr. Chen, Mr. Max. Good evening. Thank you for answering my question. First of all, congratulations to the company. This year, the labor force has been greatly improved. In fact, I think our labor force also performed very well during E2. Good evening, management. Thanks for taking my questions. We noticed that the graph margin for year-over-year expansion in both first quarter and second quarter and what's the gross margin outlook for the whole year and what is the key drivers of the margin expansion and second question could you please give us latest updates on a company's u.s expansion thank you
Eric
We should have a chance to increase by 1% to 1.5%. I think there will be an increase of 1.5% or so every year. I think we have this confidence. I think this increase in net profit is mainly due to three aspects. The first aspect is due to the scale of growth, the impact capacity of the upstream, or the upstream's greater support for us. This process will become more and more obvious in the future. This is the first one, quantity. The second one is that we have to gradually extend to the upstream. Our suppliers must be the original factory and strategic suppliers. In this way, our cost will also have better advantages. The third one is that we continue to launch free brand products. The profit margin of these products is often higher. Answer this question in three aspects.
Max Leib
Sure. To your first question regarding margin, we believe that for this year, our gross margin will increase by about 1.5 percentage points. And we are confident that in the years to come, we will continue to grow our gross margin at this rate. This margin growth will be driven by three main sources. First, the continuous expansion of our business scale means that we have greater bargaining power with our upstream suppliers. We will receive further support from our suppliers as we aggregate more demand despite the fact that quantity tend to be smaller in the MRO industry for different types of items. We are already past that initial stage of smaller quantities and now we are enjoying the benefits brought by this aggregated larger demand and we believe that in the future this advantage will only increase. The second margin driver comes from our efforts at integrating the upstream, which means that we are sourcing directly from manufacturers, turning them into our strategic partners that will help us further reduce cost. The third margin driver comes from our private label offerings. It is now helping us to further increase our gross margin by reducing cost.
Eric
Regarding overseas business, our development strategy is also very clear. In developed countries, including the United States, Europe, and other developed countries, we use localization to accelerate business development. In developing countries, such as Southeast Asia and other regions, our method is to cooperate with local companies, establish joint companies, or develop local sales in the form of代理公司, or develop local sales. I think the main difference here is the decision made based on the transparency and compliance of the local market. Second, we already have the first customer in the US business. I think in the US business, we have customers on both sides. On the one hand, there are big customers. Some companies, American companies, are our customers in China. So we have a chance to continue to provide them with products in the US. The second is a large number of small and medium-sized customers. We will be in the US, In terms of storage and supply chain, we mainly use 3PL. We hope that we can do this more easily. However, we hope to do more in terms of product capability and digitalization capability. In other words, we hope to rely on the competitiveness of products to speed up the development of American business with the online customer capability. Thank you
Max Leib
Regarding your second question on our overseas business strategy, our strategy is very clear. It is two-pronged for the developed markets such as the US and Europe. Our approach is to establish our companies, our entities locally and use a localized business approach. whereas in developing markets such as those in southeast asia our approach is to collaborate with existing companies in the local region and establish joint ventures or create agents to facilitate local sales these two different approaches is based on the level of level of transparency and compliance in different markets. We made this decision based on that difference. Specifically for the U.S. market, we have already won our first client in the U.S., and I believe that in the U.S. we will be working with two main types of customers. is larger key account customers who will be U.S. companies who are already our customers in the China market. And we will be able to now continue to provide for them in their home market. The second type of customers will be small and medium enterprises. Our approach for warehousing and supply chain will be very asset light. meaning that we'll be using 3PL model, whereas we'll heavily invest in our product capabilities and digital capabilities to improve our online customer acquisition and product competitiveness. I hope that answers your question.
Li Ping Zhao
Yes, thanks. That's very helpful. Thank you.
Operator
And that concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.
Jin Li
Thank you, operator, and thanks, everyone, for joining us today. You can find the webcast of today's call on ir.vk.com. If you have any further questions, please feel free to contact us. Our contact information can be found in today's press release.
Operator
Thank you, and have a great day. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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