Q2 2019 Earnings Call
At this point I would like to turn the call. Jim is Jesse said VIP shop director of Investor Relations. Please proceed.
Hello, everyone and thank you for joining a reality show.
Second quarter 2019 earnings conference call.
Before we begin I will read the safe Harbor.
Based on our current expectations assumptions estimates.
Protection.
Holdings limited.
Other than statements of historical facts when they make during this call <unk> looking statements.
In some cases these forward looking statements can be identified by words or phrases such as anticipate believe opinion estimate expect.
Ken It's <unk>.
Sure well aim potential.
Other similar expressions.
These forward looking statements.
Only as of the date and are subject to change at any time, and we have no obligation to update.
At this time.
[noise] good morning, and good evening, everyone welcome and thank you for joining our second quarter 2019 earnings Conference call.
I would agree with the strong operational and the financial results for the second quarter Pro two started a Nike.
During the quarter, our total active customers continue to grow at a healthy pace.
Increasing by 11% year over year.
Since we treat folks going to become a retail.
Equally both our existing and the new customer has been cool.
We are pleased to see our existing customers, becoming a lot more active while at the same time.
New customer repeat purchase rate during the quarter. After first countries has increased.
[laughter] says.
As a result of our folks all merchandising.
Since we refocused cobiz conquer pedal.
And the old topics, we have seen strong improvement in our financial results.
And the key operating metrics.
Through our strategy is a very effective.
We remain calm me.
To execute executing on our merchandising strategy and the further expanding our market share I think the discomfort patio sets are in China.
We are confident.
Yes, we can continue to deliver definitely cross we see improvement in the future, which well generally.
Sustainable long term shareholder returns.
We strive to be the ones bulk piece come to retail platform for our suppliers.
So moving or their inventory management issues in the off price segment within our ecosystem.
We have over well over a decade.
Okay experience online discovered retail and we believe in this age and the time online and off line how closely linked.
Sure, Chris well, increasing demand only trend no shopping experience.
Given that we begin to enter the overlying discover the retail segment this year and our position Oh, Samsung outlet is an important part of our new retail strategy.
Samsung outlet is a profitable business.
With a healthy operating cash flow.
Importantly, they have a top notch management team with decades of experience in managing and the old creeping outlets in China.
Well the way the VIP shortly after the acquisition.
[noise] stress the we will continue to focus on our online business.
While our health plans strategies, including our investment into Samsung outlets do you have to show offline stores and the VIP mix of lives thoughts is that come pretty much pretty well aligned to our online business.
Our goal is to help our suppliers manages their inventory cycles more effectively be a different channel within our ecosystem.
At this point, let me hand over the call Htwo CFO Donghao Yang so that he may discuss our strategy in more detail and the go over our operational and the financial results.
Thanks, Eric and Hello, everyone.
We finished the second quarter of 2019 with robust financial results our topline grew by.
About 10% year over year exceeding our expectations importantly, our non-GAAP net margin attributable to VIP shop shareholders increased by 1.9 percentage points year over year, which is the result of improved gross margin and more effective cost control.
During the quarter, we generated robust free cash flow of 1.2 billion RMB as compared with negative free cash flow of 903 million RMB in the prior year period, representing a 2.2 billion RMB increased year over year.
In the second quarter of 2019, we saw improved conversion rate and elevated customer engagement from both our existing and new customers.
As a result of that arguably grew by 11% year over year driven by the robust growth.
Core categories.
Specifically JV front apparel related category has seen 19% year over year growth, which is the fastest among all major categories. During the quarter. We made further progress in outsourcing our last mile delivery to third party corridors currently around 30% of our daily orders are delivered by third party partners.
We continue to carefully monitor the effect on customer experience.
Throughout this process and are evaluating whether or not it would be beneficial to outsource more orders, which will further reduce fulfillment cost.
We will be prudent investment in offline segments as they are more asset heavy than the online business and we need some time to getting operating experience in these new areas.
Rest assured we will be monitoring the profitability and return on the investment.
From all over all our businesses very closely.
The focus on the high margin apparel category has and will continue to enable us to deliver improvement in our gross margin and overall profitability.
Now moving on to our quarterly financial highlights before I get started I would like to clarify that all the financial numbers presented today are you then maybe amounts and all the percentage changes refer to year over year changes unless otherwise noted.
Total net revenue for the second quarter of 2019 increased.
By 9.7% to 22.7 billion from 20.7 billion in the prior year period.
Primarily driven by the growth in the number of total active customers.
[noise] gross profit for the second quarter of 2019 increased by 25.9% to 5.1 billion from 4 billion in the prior year period gross margin increased to 22.4%.
From 19.5% in the prior year period.
Fulfillment expenses for the second quarter of 2019 were 2.2 billion as compared with 1.9 billion in the prior year period.
As a percentage of total net revenue fulfillment expenses were 9.7% as compared with 9.1% in the prior year period, primarily attributable to a write down of 276 million related to the touching warehouse due to land substance during construction.
Excluding the write down fulfillment expenses as a percentage of total net revenue for the quarter were 8.5%.
Marketing expenses for the second quarter of 2019 decreased to 878 million from 900 million in the prior year period.
As a percentage of total net revenue marketing expenses decreased to 3.9%.
From 4.3% in the prior year period.
Technology and content expenses for the second quarter of 2019 decreased to 422 million from 511 million in the prior year period.
As a percentage of total net revenue technology and content expenses decreased.
9% from 2.5% in the prior year period.
General and administrative expenses for the second quarter of 2019 were 706 million as compared with 615 million in the prior year period.
As a percentage of total net revenue general and administrative expenses were 3.1% as compared with 3% in the prior period.
Our income from operations for the second quarter of 2019 increased by 141.2% to 965 million from 400 million in the prior year period operating margin increased to 4.2% from 1.9% in the prior year period.
non-GAAP income from operations, which excludes share based compensation expenses and amortization of intangible assets, resulting from business acquisitions increased by 97.6%.
The 1.2 billion from 595 million in the prior year period, non-GAAP operating income margin increased to 5.2% from 2.9% in the prior year period.
Our net income attributable to.
If you shop shareholders for the second quarter of 2019 increased by 19.3% to 814 million from 682 million in the prior year period.
Net margin attributable to VIP shop shareholders increased to 3.6% from 3.3% in the prior year period.
Net income attributable to VIP shop shareholders per diluted Adss increase to 1.21 RMB from 0.99 RMB in the prior year period.
non-GAAP net income attributable to VIP shop shareholders, which excludes share based compensation expenses amortization of intangible assets, resulting from business acquisitions and equity method investments tax effect of amortization of intangible assets, resulting from business acquisitions investment gain and revaluation of investments.
Excluding dividends.
Tax effect of investment gain and evaluation of it investments, excluding dividends and share of gain and the investment of limited partnership that is accounted for as an equity method investee increased by 84.2%.
The 1.1 billion from 577 million in the prior year period.
non-GAAP net margin attributable to VIP, south shareholders increased to 4.7%.
From 2.8% in the prior year period.
non-GAAP net income attributable to VIP shop shareholders per diluted adss increased to 1.58 RMB from 0.8.
And be in the prior year period.
As of June .
32019, our company had cash and cash equivalents.
Unrestricted cash of 7.8 billion and short term investments.
Of 238 million for the second quarter of 2019 net cash from operating activities was 3.4 billion looking at our business outlook for the third quarter of 2019, we expect our total net revenue to be between 17.8 billion RMB and 18.7 billion RMB, representing a year over year growth rate of approximately zero percent to 5%. These forecasts reflect our current and preliminary view on the market and operational conditions, which is subject to change.
With that I'd now like to open the call to Kenny.
Ladies and gentlemen, we will now begin the question answer session.
In order to be fair to all callers, who wish to ask questions.
We will take one question at a time from each caller. If you have more than one question. Please request to join the question queue again. After your first question has been addressed.
If you wish to get asked a question. Please press star one on your telephone and wait for them to be announced if you wish to cancer. You question. Please press the pound or hash key.
[noise].
Your first question comes from the line of choice Chu from Bank of America. Please ask your question.
And good evening Shen Zong don't how chassis congrats on a solid quarter. Thanks for taking my questions I have two questions. The first questions actually regarding all improvement in gross margin. This quarter I'm may we have a general sense like how much of those growth moderate improvement actually Rhonda Kate grade mix I like some high probably a highly profitable categories like taking a bigger percentage of photo G.N.V. and what part of them actually coming from other reasons, such as like we have less discount or promotions.
My second question is regarding the cash flow cost, we now have generate quite a rapid.
Strong growth in in terms of cash flow do we have any plans in terms of like Capex for this year or next and.
<unk>, except from Capex are we going to have any plan such as like you know she'll buy back or like dividend pay out. Thank you.
Well.
Well, thanks very much for your question, let me take your first question about.
You know what caused the gross margin improvement in this quarter well the imagine.
The apparel as a bit or a portion of the mix some of that that's absolutely right and you know were.
Now focusing more on discount retail and more on a per category, but specifically how much of the shifting mix has contributed to the gross margin improvement I don't have that number as of now.
You know we can do that calculation for you after this.
[noise].
Doug This is old incentives.
So really I would.
Exercise of and just what are your views.
Hello.
Okay.
Well, let me take your second question well yeah.
We we do have a very strong casual right now.
With that would that kind of cash flow you know, we don't have any plans to increase our capex for the foreseeable future and I think we've got a we've told the market that you know for this year you know the total capex.
You know will be around 3 billion RMB, including you know warehouse construction and the headquarters building and as of today as of now we do not have any plans to to buyback any shares in the foreseeable future.
[noise].
Your next question comes from the line of Natalie Wu from Sea Ice Cc. Please ask your question.
Hi, Matt Thanks for taking my question. This is Jim Rose's any Natalie.
Ah first congratulation on the strong quarter, we would like to understand like firstly, what is the rationale behind the acquisition of chalet and when shall we expect Pcs energies on this deal. Thank you.
Yeah sure.
When considering talk show financial highlights.
Now Malaysian National go shopping at home at night.
Mm Hmm, Okay, do we need to work when you analyze it looks cool nights each other but more to come into the city and number of didn't get going until shouldn't somehow Lima. The moment you see a condo to suggest that she didn't show the whole nine to five touch superstore tandem and then come into the Ensign Swat teams into the Hershey's will yield the mulling when they're too soon or mature, though we like the yield full year fleet Hinson machine shop, and most important goal, creating discount retail in China's market and we have been doing this content retail online for over 10 years, and we think honestly.
Outlets by many others. So we actually think business. This acquisition is highly.
Complementary because the our offline business is growing quite fast in China and the market is currently underpenetrated on a growth rate is around 20% and customers Nowadays acquired an additional great channel to clear more inventory for our suppliers.
And venture into.
Areas, such as online offline integration smart retail and so on in the future we will be exploring different models for extending the offline.
As the business.
Including lighter asset models in which we helped manage and operate the outlets, but not necessarily becoming the asset owners of the newer elements that we will open in the future.
[noise].
Once again in order to be fair to all callers, who wish to ask questions. We will take one question at a time from each caller. If you have more than one question. Please request to join the question queue again. After your first question has been addressed and if you wish to ask a question. Please press star one on your telephone and wait for name to be announced.
Once again, if you wish to ask a question. Please press star one on your telephone and wait for name to be announced.
You have a follow up question from the line of choice Chu from Bank of America. Please ask your question.
Yeah, Hi, Jesse just have a follow up question regarding Oh acquisition was changed and I just try to understand foster we consolidate their shunshun business like how it will impact our financial numbers and my second follow up is just try to get a sense for us we see the outlook for.
Second for third quarter growth was seen like decelerating from the second quarter I'm, just wondering like if patients own cashiers. Unlike outlook in terms of scope into the second half how.
The company looking at the you know the growth rate or general like you know all I read how segment or like apparel sectors growth in the second half do we foresee a quick slowing down or a it's <unk>. It's just seasonality. Thank you.
Oh.
'cause claims he said that he is just saying sentence, how one megawatt everybody.
All right well. Thank you very much for the question, let me take your first question.
Regarding you know the impact on our overall financial financials after the consolidation of science and business.
Well first of all the impact on our top line.
It's going to be limited because.
We will.
Both.
The revenue from Chinese and on net basis.
Meaning you know the number is going to be relatively small compared to.
Our.
Total revenue.
And in terms of bottom line in a society is a profitable business. So after consolidation you know sanctions.
Number will be accretive to our overall financial results. So.
There is no need to worry about that.
Oversight.
HM.
Okay.
Sure.
Okay, Chapman and she's a woman handled that Charlie you sometime soon then that two cents a hole for many years you. They are also view, we choose and what did you don't really see samples balance sheet.
So you want to the acute animal woman simply also.
As you will see the woman the way life or CT machine shop, and internal T cell show some to the accrual coaching quantum to the literature I assume I assume.
Second half e-commerce industry.
To have very healthy growth on that for us.
I swear mainly.
Currently Taylor. Thank you, it's traditionally a very light season seasonality.
Due to seasonality.
For the apparel category, therefore for us in that purchase and other operating metrics going forward.
Your next question comes from the line of Alicia Yapp from Citigroup. Please ask your question.
Ms. Alicia Yap. Your line is open you can ask your question.
Hi, sorry can you hear me okay.
Yes, we can hear you.
Yeah, Lisa Please go ahead.
Yeah, sorry about that I'm still good evening, some don't some high Jesse Thanks, what became my question. So I joined the call late so I'm not too sure. If these these are being Oh apologies in advance Oh actually happened a couple of questions on the science on outlook acquisition can management elaborate a little lumpy in terms of the near term and short term seanergy U.S. back to realized through the expansion into the physical outlet store exposure, how will that bring synergies to VIP online market cycle, both near term and short term or near term and long term.
Thank you.
[laughter].
[noise].
Good old mutual coaches, who understand that she's a concerns and.
That's what is it.
<unk> for the month.
The multi one no wasn't she says Oh push himself he shot when I was okay. I thought I saw that you do file a two cents unchanged really which is your car Mart to occur My my quick modeling one the woman she says chunky so Peter it's people generally.
I'm a cleaner machines all my colleagues I think on the Mobileye once you see it we'd probably say to discuss other holiday the Fuji film yet.
We coach which is your question.
So you can see the departures are one city to clear inventory more comprehensively.
Additionally, also offers more channels for a buyer.
And.
[noise] offline integration.
Going forward, we won't be lucky.
For shake Shack.
In the long term, we do believe that there is a lot of folks.
And showing the outlet industry in China as the market is currently quite under penetrated however, we won't be looking at more asset light model.
Which way.
We do more management for the outlets and operating side of the outlets rather than owning noting physical.
And the commercial.
[noise].
Your next question comes from the line of Sally Chan from C. O S. Eight please ask your question.
Yes, Hi, good evening management. Thank you for taking my question.
A question on the VHP reduction in China up from 16%, a 70% how should we think about the benefit to our top line and margins in the second quarter.
And how we factor in the benefit enough threeq guidance or are we planning on passing on the benefits to our customers. Thank you.
Okay, well thanks for the question let me.
Take your question.
Well the three person because I did point reduction RVP tax rate.
The impact of that along a topline is close to 3%.
And the impact on our bottom line is roughly.
0.5%, 2.6%.
All positive.
We already.
Consider the impact of the you know new V.
The impact of the new V.T. tax rate.
Oh, well, we give the guidance for Q3.
[noise].
Once again, ladies and gentlemen, if you wish to ask a question. Please press star one on your telephone and wait for name to be announced.
Your next question comes from the line of Lisa Chen from China Renaissance. Please ask your question.
Regarding.
For the third parties.
Like healthy actually back on the financial statements and when should we expect the impact thanks.
[noise].
[noise] woman said sure it's Chris So a jet you Tama number and the good news there are two other tsusaka it sounds based on the [noise] shouldn't that target.
The sense limit she says that shouldn't be a kind of a problem you sometimes some leases signed leases in the mobile and look we think she was under so once the shoes that you walk the mobile me L. King.
To subpoena and this truly unlock the materialism button.
Yeah, Okay. So aside from the pool.
Outsourcing ordered and continuing to evaluate whether or not being more beneficial to outsource more orders.
Well that's right yeah.
And.
Once again, if you wish to ask a question. Please press star one on your telephone keypad.
Once again, if you wish to ask a question. Please press star one on your telephone and wait for name to be announced.
You have a follow up question from the line of Alicia Yapp from Citigroup. Please ask your question.
Hi, Thanks for taking my follow up questions I wonder to us on <unk> orders and also the orders no book roles. It does looks like the S.P. put water is trending down and then we're supposed to order number royalties reaccelerate a bit so can we get some download into so what are some of the reasons. The attribute to that and then Oh will will we actually see that trend continue into next quarter. Thank you.
[noise].
[noise].
[noise].
[noise] HM two women need to be done to couldn't just let you take it anymore.
Because the woman told you good.
Number coming she said my because <unk> field.
Creeping down due to the shift.
Good luck is a woman she told she has to do with John Malone, which I hope to see you soon.
Number two the couldn't do we get the Sun going in one or two woman door. So what piece I'm, Okay hi.
Woman Genovese home shopping in the city and Im a junior into our spot the Magellan to fund its good to see some lumpiness and the second reason is starting from the end of last year I wrote out a note bundling policies.
[laughter] no longer have to buy.
Item to get free shipping.
88.
And this holiday.
I wanted to get some discount this policy means that they will tend to order what they like that to find additional items to get an incremental 10, 15%.
It does [laughter] ticket side, but it also includes the shopping experience and reduces the returns.
Hi, Adam just to get a discount and lastly, Ah our marketplace contribution has increased year over year.
In the second quarter of 2018.
In the second quarter of 2019.
Orders in the marketplace tend to be smaller order size and their ships separately from our lucky it adds a lot more orders.
[noise] marketplace contribution, however, I, regardless of the ticket size equally because the orders have grown very strongly our ARPU remained healthy that's it's a good.
So that means shopping shoppers are shopping more frequently on our platform so going forward.
We'll continue to balance the ticket size and the shopping frequency. We don't believe that ticket size should fall a lot more as these.
Various factors evened out on a year over year basis likely around 41 next year.
Your next question comes from the line of FISA Zhao from 80 Sixresearch. Please ask your question.
Uh huh.
Thank you for taking my congratulations.
Hi, My question is about that.
Supply so according to the Mds data growth of the apparel sector has been very slow this year and that's wrong, what I see and there are financial reporting or the issuer Uh huh.
Companies, the branded apparel and a lot of branded apparel companies are also facing a lot of pressure, particularly and the inventory level. So I want to understand what's the implication for that.
Well that helps you obtain better merchandise and they'll grow your top line growth.
Thank you.
[laughter].
[noise].
Okay.
Sure.
Well it was good to see if that come up to see you we wouldn't drill smokes, what's wrong with them a junction the quick.
She spent some jobs so much as just a woman. She is a television show them. A we've shown you couldn't do that could swing them a good either to a cold my view on the shelf feature.
[noise] <unk>. We are also looking at the the nacco very closely because were mainly apparel retailers focused on the discount apparel seconds.
We are actually seeing more inventory to be sold to the off price channel. Therefore, we will continue to execute on our merchandising strategy, bringing deep discounted products to our customers.
Your next question comes from the line of Thomas Chong from Jefferies. Please ask your question.
Hi, Good evening, Thanks management for taking my questions, Oh, Oh, Oh, Oh my strategies over the next.
I mean, yes.
Should we expect.
We would we invest our better than expected earnings into the Oh My sentiments. So asked it depend our integration between online and offline. Thank you.
Thomas.
Uh huh.
Linda [laughter].
Hoping to hold on to the other so im sure they need them.
Don't have to worry about it wasn't leaving the 27 figure to let's say Oh I think the comments he does a wonderful woman so to kind of independent.
Okay.
Let me say that just say Nick a woman she just kindly machines out there because its a weeping question just yet, but what's the kind that goes on when she and I always I'm sure.
Sure.
So Thomas they have to have offline stores that we have opened in the past year onetime <unk> VIP shop, Oh alert or their open in the mall and we have opened up slightly over 100 stores and the other times it could be actually Matt. It's mostly opening the communities have a lower position than the VIP shop offline stores. We have opened a few dozen yadkin Mac stores.
Oh Boy I focused on the apparel category and discounted retail in apparel currently where only experimenting and exploring the offline segments are therefore, the revenue contribution to our overall business is still quite small no matter.
Your next question comes from the line of T N Ho from T.H. capital. Please ask your question.
Ah, Yes in zone, and Oh and Jessie. The question is not sure. He has been answered just if a and if you can answer then I moved to the next one is that your acquisition of the search engine calmer and yeah I want to know what the synergy between Oh, we have he shops on my end I should mention so that piece. So one of the question. The second question is we saw the the bigger commerce vendors Babar JV as well as the indoor dual they all go to a offline and in lower tier cities. That's there a sort of a common approach I wonder what's the VIP shop approach going forward in terms of customer acquisition thinking that's two questions.
[noise].
[noise] [laughter].
[laughter].
Discount retail operating.
For 10 years.
We do see that there's still a lot of opportunities offline.
[laughter] growing quite fast and around 20%.
Okay.
Offline.
To satisfy their shopping the man.
Therefore, we do see a lot of energy, especially on the supplier side.
We will launch our bargaining power with a lot of her key suppliers because span over that.
And we will gain more channels.
Inventory more effectively.
She was.
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<unk> <unk> <unk> <unk> number that you want mission. They go to the trunking system due to cost them a woman she says.
She is a woman high Sutron Bush Im a little switching it could be a that's the <unk> centers. The milling wonder what she told me I Love This show.
Continue to act.
Got it.
[noise].
Your next question comes from the line of Jamie Feldman from Bank of China International. Please ask your question.
Hi, I just have a very quick follow up on the acquisition of share owners.
Along with the existing stores I think there are still a few new ones to be opening in the future and are usually like for offline retail all those it will take some time for the for the operation and profitability level to ramp up so I, just wonder where there be any financial impact, though we should be taking into account related to new store openings. Thank you.
Oh, Okay, well thanks for a quick question, let me take here to take your question.
Sometimes management team is.
Oh actually you know we mentioned in our script top notch management in China is a you know I'll industry you know pay.
Yeah, It's a great track record in turning a new store or into a profitable one within a very short period of time.
So you know in the past to eight to nine years, they've opened five stores already.
And you know.
On average it took them 18 months to turn a store a profitable. So we're very confident and you know in the future.
You know.
And they continue to open more stores and they will still be able to turn the new stores into profitable ones within a relatively short period of time and the day and since they've already got five big stores that are already on a profitable.
We believe that going forward, even with the plan to open more stores.
The consolidation of Sanchez financials to our VIP shop, I will be accretive in terms of no bottom line.
Once again, if you wish to ask a question. Please press star one on your telephone and wait for name to be announced.
Your next question comes from the line of Hans True.
From Keybanc capital markets. Please ask your question.
Thanks for taking my question and congratulation on strong results. So just a quick question.
Regarding the gross margins, though I know.
The pretty good gross margin this quarter as might be driven by.
The higher growth you know a payroll I know so perhaps the V.A.T. reform.
May contribute a little bit and just going forward, how should we think about gross margin.
In second half and next year and is of course a margin.
Neenah second quarter, it could be a new base and then and then how many upside from here going forward. Thank you.
Well. Thank you for your question or.
Well the biggest reason why Q2 gross margin went up so substantially compared to ER last year or this Q1. It's past Q1 was you know our refocused on discount retail in apparel.
The impact of.
The new lower H.T. tax rate on a gross margins roughly a <unk> 0.52, 0.6% or so.
Compared to.
The you know the the ships are on apparel that is both are relatively small. So that's why you know we are confident that if we continue to execute our new strategy of focusing.
Online discount retail and apparel, you know, we'll be able to continue to deliver a steady improvement in our gross margin.
You have a follow up question from the line of Kian House from T.H. capital. Please ask your question.
Assumption zones, Ohio, Jess its a follow up question is I do realize 10 cents and JB do you have some you know options to buy up a more a bit he shops shares I wonder what's going to happen in that from an old so well for shanshan. If they continue to open more.
Outlets it is that going to cause of if he shops more capex. So that's the two questions. Thank you.
[noise].
[noise] [noise].
[noise].
Bob.
Oh sure.
[laughter] bye.
12% <unk> and if they do buy incremental shares.
[noise] filing.
Yeah.
Good day, everyone hear them say Hello.
So what is your pricing did or who want to get too.
Got it together.
Oh.
Okay. She was the you would have to sort of how that kind of drama that she will be a kind of come into it.
Just a thought.
Social media.
On the other.
That's a good.
Josh.
Yes so.
We like to change.
Somebody in those questions is yes.
There are no further questions at this time I would like to have the conference back at least presenters. Please continue.
Thank you for taking the time to join US and we look forward to speaking with you next quarter. Thank you very much.
[noise], ladies and gentlemen that does conclude our conference for today. Thank you for participating you may now disconnect.