Dingdong Cayman : Limited 2Q23 Transcript

[DDL] Dingdong (Cayman) Limited

Q2 2023 Earnings Conference Call

September 1, 2023 at 08:00 AM ET.

Executives:

Nicky Zheng, Director of Investor Relations

Changlin Liang, Founder and CEO

Song Wang, Senior Vice President, Head of Finance

Analysts:

Thomas Chong, Jefferies

Joyce Ju, Bank of America

Robin Leung, Daiwa

Jiajing Chen, CICC

Presentation

Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the Dingdong Ltd. Second Quarter 2023 Earnings Conference Call. (Operator Instructions). Please note that this event is being recorded.

I will now turn the conference over to the first speaker today, Nicky Zheng, Director of Investor Relations. Please go ahead, sir.

Nicky Zheng: Thank you. Hello, everyone, and welcome to Dingdong's second quarter 2023 earnings call. With us today are Mr. Changlin Liang, our founder and CEO, and Mr. Song Wang, our Senior Vice President.

You can refer to our second quarter 2023 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 later 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 thefollowing management's 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 filings with the SEC.

I will now turn the call to our first speaker today, the founder and CEO of Dingdong, Mr. Liang.

Changlin Liang: (Speaking foreign language).

(Translated). Hello, everyone, and welcome to Dingdong's 2023 second quarter earnings call. I'll start by providing a brief overview of our operating performance in Q2 2023.

In the second quarter, we recorded 4.84 billion RMB in revenue, with a non-GAAP net profit margin of 0.2%. If excluding one-time expenses, we were profitable on a GAAP basis. At the same time, if we exclude the impact of year-end bonuses issued in Q2, we were operating cash flow positive. This strong performance reflects our steadfast commitment to our Efficiency First with due Consideration of Scale approach, which has resulted in 3 consecutive quarters of non- GAAP profitability.

Our GMV reached 5.32 billion RMB in Q2. A year ago, at the height of the pandemic, we successfully met surging consumer demand by quickly adapting to difficulties across our supply chain and operations, which resulted in a strong operational performance. Despite the high base effect set in Q2 last year, we managed to achieve a 5% year-on-year increase in monthly order frequency, surpassing 4x per month for the first time.

In addition, our ARPU increased by 8% year-on-year, and our member penetration rate improved greatly, with members contributing 54% of the total GMV. This is a 10-percentage point year- on-year increase.

Thanks to our product development capabilities and full-chain operational capacity, we also made continuous improvements to overall order quality and user stickiness, even with the retail environment normalized post-pandemic. This reflects our commitment to optimizing operational efficiency to meet the evolving needs of our users.

Next, let me review our progress on the product front. Our exceptional product development capabilities are a key growth driver, enabling us to establish robust competitive advantages. We have developed numerous products that are unique to Dingdong, and our brand is gaining popularity among users. This quarter, we launched the Delicious Kylin Ranking, which highlights top-rated products that have been reviewed by experts and select users assessing everything, including deliciousness, uniqueness, and the amount of additives. This feature is creating significant growth opportunities for our outstanding products.

Since Free-Range Silkie Chicken was added to the Delicious Kylin Ranking in April, we have seen a remarkable increase in exposure, transaction volume, and customer loyalty. Our average monthly exposure has surged by 200%, while monthly average transaction volumes have skyrocketed by 360%. Additionally, the 30-day repurchase rate increased by 5.4 percentage points.

Another product that has grown, thanks to the Delicious Kylin Ranking, is our private label Striped Mochi Roll by Bao's Bakery. In the space of just 1 month, its average weekly exposure increased by 80% and its average weekly revenue more than doubled. Fueled by this new promotional channel, we are confident that more and more customers will discover and appreciate our high-quality products in the future.

We are constantly striving to improve the user experience for our valued members. Our team has been hard at work customizing nearly 100 high-quality products exclusively to meet the unique needs of our members in East China. Our existing member benefits, such as free dishes, member- exclusive products, member-exclusive discounts, and super-member days, are just the beginning. We will continue introducing even more benefits to incentivize and reward our loyal members.

We are proud to share that in the second quarter of this year, member GMV increased by 10 percentage points year-on-year and 2.4 percentage points sequentially, while their order frequency increased by 9% year-on-year and 5.2% sequentially. Despite the high base effect created by the pandemic last year, quarterly member ARPU increased by more than 10% year- on-year.

Next, I would like to update you on the progress we have made in our supply chain. Our supply chain improvements have been a key driver of our recent profitability, alongside our product development capabilities. We have always adopted a long-term approach to every aspect of our operations. Through sustained investment in R&D and technology and continuous upgrades to every link in the supply chain, we can now digitally manage procurement, production, processing, warehousing, fulfillment, and distribution, covering everything from people, goods, logistics, and warehousing.

Our proprietary algorithms enable us to predict order size with AI technology, perform category planning, optimize pricing, provide search recommendations, replenish supplies, and manage inventory. Even with thousands of frontline fulfillment stations processing millions of FDC- SKUs daily, we still managed to upgrade our algorithm to drive consistent improvements in operational efficiency, resulting in a decrease of nearly 1 percentage point in the full chain loss rate of all categories in each of the past 3 years.

Our loss rate of [unusableunsalable]goods has been carefully managed down to less than 0.5%, a rare achievement in the fresh food e-commerce industry.

Our order volume was up 2.3% sequentially. We are confident that there is still room for additional growth in the East China region, and are working hard to optimize the network layout of our existing frontline fulfillment stations. Our frontline fulfillment stations in East China saw a 5% increase in average daily order volume sequentially. In the first half of this year, we upgraded, split, and optimized the layout of nearly 100 frontline fulfillment stations in East China, which has improved both our out-of-stock rate and fulfillment efficiency.

We are confident that we can achieve full-yearnon-GAAP profitability in 2023, and that we will maintain healthy and high-quality growth throughout the year.

Thank you all. That concludes my remarks.

Next, I would like to invite Wang Song, our Senior Vice President and Head of Finance, to review the company's financial performance.

Song Wang: (Speaking foreign language).

(Translated). Thank you, Mr. Liang. Hello, everyone. Before I review our financial performance, please note that all our figures are in RMB.

During Q2, we remained committed to achieving high-quality growth by following our Efficiency First with due Consideration of Scale strategy. We have achieved non-GAAP profitability for 3 consecutive quarters through our ongoing efforts to improve operational efficiency and optimize costs and expenses.

We also achieved a non-GAAP net profit margin of 0.2%. Additionally, if we exclude one-time expenses, we were profitable on a GAAP basis.

Now let's dive in. In Q2, GMV was 5.32 billion RMB, a decrease of 25.2% from the same time last year, while revenue was 4.84 billion RMB, a drop of 27%. As previously mentioned by Mr. Liang, the primary reason for the decrease was the high base effect created during the same period last year, when the pandemic restrictions were impacting Shanghai and other regions. During that period, we successfully navigated supply chain and operational challenges to fulfill the surge in consumer demand.

Given the base effect and short-term macro headwinds, we experienced a decrease in average order value or AOV on a year-on-year and sequential basis. However, we remain confident that with the continued optimization of our product offerings and a gradually improving macroeconomic environment, AOV still has substantial room for growth.

Although gross margin decreased by 0.6 percentage points year-on-year in Q2, it remained stable overall at 31%. To achieve sustainable growth, we plan to continue focusing on product development as our core driver and deepen our supply chain engagement. Upgrading and optimizing our systems and algorithms will help improve operational efficiency in our supply chain, lower costs, and increase profitability. We aim to establish this as our competitive advantage, resulting in stronger profitability in the long term.

Fulfillment expense ratio increased by 0.4 percentage points year-on-year to 23.7%. This was due to last year's pandemic, which created a high AOV base effect. Despite this, our average order fulfillment cost decreased by 7.8% year-on-year, indicating continued improvement in our efficiency on the fulfillment side.

We are committed to enhancing efficiency across every aspect of the fulfillment process, which is reflected in the significantly improved efficiency of our mainline logistics and transportation unit. Average mainline logistics cost per order dropped by 8.4% year-on-year.

Additionally, we are passionate about conservation and environmental protection, and achieved a 17.6% year-on-year reduction in the cost of packaging consumables per order.

Marketing expense ratio was 1.8%, down 0.4 percentage points compared to the same time last year. This highlights our success in using product development as our main source of traffic by creating distinctive and unique products that attract a greater number of target customers and boost user retention.

We are also pleased to report that our G&A expense ratio decreased by 0.5 percentage points compared to last year, and is now at 1.8%.

While our R&D expense ratio increased by 0.3 percentage points year-on-year to 4.2%, we remain committed to investing in food R&D, agricultural technology, and our algorithms, while advocating for our conservation and environmental protection. These investments will strengthen our competitive advantage in the long run.

Our infrastructure investment in these areas has already yielded significant efficiency improvements, and we have also adopted cloud computing, big data, e-commerce, and supply chain applications to optimize our systems and reduce costs. As a result, our IT service costs decreased by 23.7% year-on-year in Q2, while maintaining consistent service quality and system stability.

During Q2, we achieved a non-GAAP net profit margin of 0.2%. As previously mentioned, after excluding one-time expenses, we were profitable on a GAAP basis. This demonstrates that we can continuously improve our product development and full-chain capabilities, leading to better operational efficiency and profitability, even in the post-pandemic environment.

Operating cash outflow was 178 million. We achieved positive operating cash flow when excluding the payment of year-end bonuses for 2022. Our cash and cash equivalents, short-term restricted cash, and short-term investments totaled 5.52 billion at the end of Q2.

We proactively optimized our financing structure by reducing short-term and supply-chain financial loans, which decreased the loan balance by 127 million. Although this was the main reason for the decrease in our balance of cash, we have ensured sufficient operating funds to serve our suppliers with supply chain finance.

We are highly confident in our ability to attain non-GAAP profitability in the remaining quarters and for the full year of 2023.

This concludes our speeches today. Operator, now we can enter the QA session.

Questions and Answers

Operator: We will now begin the question-and-answer session. (Operator Instructions). Thomas Chong with Jefferies.

Thomas Chong: (Speaking foreign language). Hello, Mr. Liang, congratulations on achieving 3 consecutive quarters of non-GAAP profitability. Can you introduce the current development of the company in different regions? What is your specific focus in different regions?

Changlin Liang: (Speaking foreign language).