DDL - Dingdong (Cayman) Limited (DDL) CEO Changlin Liang on Q2 2022 Results - Earnings Call Transcript
Dingdong (Cayman) Limited (DDL)
Q2 2022 Earnings Conference Call
August 11, 2022 08:00 AM ET
Company Participants
Changlin Liang - Founder and CEO
Yu Le - CSO
Conference Call Participants
Joyce Ju - Bank of America
Ashley Xu - Credit Suisse
Thomas Chong - Jefferies
Robin Leung - Daiwa
Presentation
Operator
Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to the Dingdong Limited Second Quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Please note, this event is being recorded.
I will now turn the conference over to the first speaker today [Indiscernible] Senior Director of Investor Relations please go ahead sir.
Unidentified Company Representative
Thank you. Hello everyone and welcome to Dingdong’s second quarter 2022 earnings call. With us today are Mr. Changlin Liang, our Founder and CEO and Ms. Le Yu, our CSO. You can refer to our second 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.
Before today’s call, management will provide their prepared remarks first and then we will hosting our question-and-answer session. Before we continue I will like to refer to Safe Harbor statements in our earnings press release which also apply to the call as we will be making forward-looking statement. Please note that all the numbers saved in the following management for prepared remarks are in RMB terms and we will discuss non-GAAP measures today. We are more thoroughly extend and reconciled to our most comparable measures retail reported in our earnings release and the filings with SEC.
I will now turn the culture over first speaker today Founder and the CEO of Dingdong, Ms. Liang.
Changlin Liang
[Foreign Language]
Hello, everyone. Welcome to the Q2 earnings call of Dingdong Fresh in 2022. On the call today I’ll mainly cover three areas. First, I’ll briefly report our Q2 operating performance. Second, I’ll discuss our product development capabilities. And lastly, I’ll share the company’s better development plans.
[Foreign Language]
Firstly, let me report the company’s operating performance in Q2, 2022. Our Q2 revenues were 6.63 billion representing 42.8% year-over-year growth. We also achieved a non-GAAP net profit of over 20 million for the first time marking an important milestone for our development.
[Foreign Language]
Yangtze River Delta region or YRD in particular, achieved profitability with an operating margin of 3.7% in the first half of 2022. We started our business in Shanghai back in 2017 and gradually expanded to the whole YRD region and then to other cities across China. We have seen that the entire YRD has become a solid market for the company following Shanghai. We’re also confident that our product development capabilities, methodology and management talents accumulated in the YRD region will help us grow and serve more users in other cities.
[Foreign Language]
We have prioritized product development capabilities to increase users and orders ever since the adoption of the quality growth strategy in August 2021. And we have made great progress. Specifically in Q2 of all products sold, we had a total of 217 SKUs that were uniquely Dingdong and our private label accounted for 17.5% of the total GMV with the majority being developed and processed in-house in our 3S factory. We have become not only a large scale fresh grocery e-commerce leader, but also a food manufacturer with R&D and innovation capabilities.
[Foreign Language]
As we all know, Shanghai was hit by another pandemic wave from March to May 2022. During that period, we overcame various supply chain management difficulties to ensure the continuity of Shanghai residents livelihood.
[Foreign Language]
Actually, on an evening in April, one of our riders was driving through a neighborhood on his way back from delivering an order when he suddenly heard a shout of [Indiscernible], which means cheer on Dingdong in English. Then many neighbors joined in the chanting. It was the most difficult time in the fight against the pandemic. And we were exhausted every day to fulfill the market demands but the tears of our users gave us the strength to battle on.
[Foreign Language]
I also saw a picture of a Dingdong rider drawn by a primary school students. The front and back of the scooter were covered with parcels and each box was painted with a carrot, the Dingdong logo. The rider’s red cloak was flying high and the young artists had named a painting carrotman. We are proud that our riders have become heroes in eyes of the children because of their dedication to securing the supply of daily necessities in their fight against the pandemic.
[Foreign Language]
Second, I would like to discuss the cultivation of our product development capabilities. Our large entrepreneur in Denver, Dingdong focus on the mother-child community. We discovered a pain point through that venture. Chinese families were constantly worried about whether their children were eating healthy and safe food. Therefore we started Dingdong to provide our users especially children with healthy and safer food products and convenience. Therefore, product quality is not only about our growth and profitability, but also the mission of our founding team.
[Foreign Language]
We have improved our product development capabilities from the following five aspects. First, we don’t compromise on product quality. Steve Jobs was taught carpentry by his stepfather who told him it is just important. It is just as important to make the backsides of cabinets and fences right, even though they’re hidden. This is what we call craftsmanship, to be meticulous where it is not seen. It is especially true in producing fresh groceries and other food products.
[Foreign Language]
For example, to avoid excessive pesticide residues in the cultivation of leeks and shallots we visited over 10 provinces in China before finally establishing a reliable planting base that fulfilled our D-gap and older base planting requirements. But these efforts and costs are hidden from consumers who only see that our products appear nicer and fresher than the others and sometimes at a lower price.
[Foreign Language]
And another example of how we have always advocated for the dream level on our products. Normally, you will see various chemicals, flavorings and preservatives densely written on the ingredient list on the product packaging, but our principle is no additives unless necessary. We call this the clean label, which we achieved through the continuous improvement of technology. Even though by doing this, our costs sometimes increase and although our clean products may not taste as savory as those with additives, we ensure the health and safety of our consumers first and foremost.
[Foreign Language]
Second, we keep developing more signature products unique to Dingdong. As mentioned earlier, we have private labels and we are increasing contribution from in house developed products. We have become a food manufacturer with proprietary R&D and innovation capabilities. In Q2 we had a total of 217 SKUs of signature products.
[Foreign Language]
For example, our 1972 Farm to Table [Indiscernible] jointly developed by Dingdong can be delivered to consumers within 24 hours of shipping from the brewery thus maintaining the beers delicate taste and ultimate freshness. Another example is that by transforming and applying the patented technology of University, we have exclusively developed the prune and find drink which is the fusion and sublimation of California prune citrus fiber, probiotic foods and vegetable enzymes. The drink achieved a refrigerated shelf of 45 days with zero preservatives, making it a delicious choice for young users to maintain a healthy intestinal tract and fit the sick.
[Foreign Language]
Our bakeries self developed Lotus Dim Sum, which combines deliciousness and oriental aesthetics coincided with the release of the heat TV series, which introduced a similar theme song from the [Indiscernible] dynasty. The strong cultural resonance between the two struck a chord with many young female consumers and was widely publicized in domestic and international media. Eating Dingdong Lotus Dim Sum while binge watching the TV drama series became trendy.
[Foreign Language]
Our prepared food category which exemplifies our progress in consumption scenario development and manufacturing efficiency continue to advance with the launch of the airfryer gourmet and vegetarian prepare foods series in response to emerging consumer trends. This has further broadened consumption scenarios, enrich the user experience of our prepared foods, set the direction for future healthy prepare foods expansion and augmented Dingdong’s leading position in the prepare food segment.
[Foreign Language]
First we have significantly strengthened our research efforts on user consumption trends, and improved the success rate of our new product development. With our strong data analysis capabilities, and loyal user base, our product research department produced 15 consumer insight reports in the first half of 2022, and organized over 10 user testing sessions with nearly 1000 participants. The consumers gave opinions on product selection and development adjustment directions, which strongly supported key products market positioning and selection and subsequent growth strategies early on, thus significantly increasing the success rate in product development.
[Foreign Language]
Fourth, we have developed more consumption scenarios to efficiently discover new consumer needs to find new product specifications and cultivate new labels. Executing our mission of making healthy food for every child and family recreated a specialty category called Mom’s choice.
[Foreign Language]
Products of Mom’s choice must pass through a comprehensive development system of origin traceability, scientific nutrition, minimum additives and strict quality control, which eliminates parents worries about food safety. Dingdong also became one of the first companies to meet the low sugar content food standards. At the same time, through our recipe of the day initiative, which offers varied recipes each day of the week, and our one click add to basket app feature, parents can easily plan nutritious and delicious meals for their children. Through the growth view session, parents concerns about their children’s physical development, can access diverse food options and scientific nutrition knowledge. So amongst choice we have explored the fusion of product plus health services to increase user loyalty and operational profitability.
[Foreign Language]
In addition to Mom’s choice which provides superior value by integrating products with service, we have also a similar category for young people who love fitness and health and a project and a pipeline for urban seniors who want to live an elegant and healthy lifestyle. As the general consumer group changes from a family base unit to an individual or even a label base individual Dingdong keep launching dedicated categories setting targeted groups of loyal users and has grown into a food development and brand matrix operation company with unique advantages.
[Foreign Language]
With this we are strengthening our infrastructure. As we have explained in previous earnings calls, Dingdong has the largest high standard semi-automated warehouse and over 10 food factories, and we’re building three additional large scale 3F factories. We have also invested generously in foods R&D and quality control, which are slowly paying off ensuring that we launch more unique or industry leading products while in and enhancing our product development capabilities.
[Foreign Language]
Finally, I would like to touch on Dingdong’s future development plans. Firstly, I want to emphasize that Dingdong will stay focused on the fresh grocery and food business. By comparison, our peers have attempted various business models in the past few years, while we upheld our commitment to the frontline fulfillment grid model for the past five years. Despite all the struggles and challenges, we call it the clumsy spirits which is also reflected in the fact that we have been persistent in doing fresh groceries and food whereas our peers have branched out to other categories. Food is our lifelong passion.
[Foreign Language]
Why? Because food is a necessity. Fresh food is not ordinary consumer goods. We aim to ensure not only food availability, but also food quality. We strive to bring happiness and passion for life to the public through food, and to infuse inspiration and soulfulness into food. Only a team with unwavering, wholehearted commitment and dedication can achieve this goal.
[Foreign Language]
That is why we choose to go deep while our peers choose to go abroad. We will stay grounded, focused and dedicated. We will continue strengthening our product development capabilities, reinforcing the supply chain, increasing investment in infrastructure and working tirelessly for the course of food. China’s food market alone is worth over 10 trillion RMB not to mention the international space. The food market is large enough to give rise to many successful and great enterprises.
[Foreign Language]
Our second development plan is to improve the user experience. Our user experience was affected during the lockdown because of the difficulties in managing the supply chain, warehouses and frontline fulfillment centers. After the lockdown we quickly mobilized resources to improve user experiences. Going forward, we will reconfigure our logistics and warehousing systems to establish precise warehouse location and accurate inventory. We will optimize our service process to improve the efficiency of our staff and warehouses to serve a broader user base and expedite deliveries. At the same time, we’ll strengthen the recruitment and training of frontline personnel and provide them with industry leading remuneration and career advancement options to enhance their sense of joy and achievement as we firmly believe that happy riders lead to superior customer experiences.
[Foreign Language]
Finally, I would like to conclude that the milestone profit we achieved in Q2 was partially a result of the lockdown. Looking ahead to Q3, we may expect a slight loss. However, comparing our post-lockdown and pre-lockdown numbers, we expect the net loss margin to narrow continuously while we sustain our revenue growth. And we’re confident that Dingdong can be fully profitable by the end of this year.
[Foreign Language]
Thank you everyone. With that, I’ll hand the call over to Ms. Yu Le our CFO to go over the financials. Thank you.
Yu Le
Thank you, Mr. Lyon. And hello, everyone. Before I walk you through our detailed financial results please note that all numbers stating the following remarks are in RMB terms or comparisons on a percentage changes our year-over-year basis unless otherwise noted. In Q2, 2022 we maintain quality growth with revenues increasing 42.8% year-over-year to 6.63 billion. Our product development capabilities and operational efficiency have significantly and steadily include things that we began implementing the strategy of efficiency first, with due consideration to scare at the end of August 2021. Margins has narrowed consistently to 37.2%, 31.9%, 18.9% and 7.8% over the past four quarters, respectively. This quarter we also reached a positive non-GAAP net margin of 0.3% for the first time UP 37.5 percentage points from Q2, 2021.
Now, let’s look at the Q2 results in detail. The company’s revenue reached 6.63 billion representing year-over-year growth of 42.8%. The GMV to revenue conversion rate was 93.2% at 6.9 percentage points from the same period last year. The growth margin in Q2 was 31.6%, up 17 percentage points year-over-year and the 2.9 percentage points quarter-over-quarter. This is because we kept the developing and diversifying the source of our supply.
For example, our newly developed food production and processing initiative include our product R&D capabilities, expanded our processing scale, and boosted our product sales, thus increasing our production positive contributions to gross margin. Data analytics also empowered our order to production and reduce the production efficiencies and wastage. In addition, a high percentage of direct sourcing has penetrated not only the fresh produce, but also the non-fresh produce categories. The final step of our supply chain is doorstep delivery, providing convenient, reliable and reputable value added service to the consumers.
In summary the long multilink and a deep supply chain has not only brought us differentiated products that dominated the mindshare of users, but also generated higher gross margins. The fulfillment experiences ratio in Q2 was 23.2% down 13.2 percentage points year-over-year mainly driven by the improvement of average order value and enhance the frontline labor efficiency. Q2 sales and marketing expenses ratio was 2.2% down 6.6 percentage points year-over-year.
Our product development capabilities have become a new source of user traffic, reducing both online traffic acquisition expenses and offline marketing expenses significantly while optimizing average customer acquisition costs. Thanks to the scary effect, our generic chances ratio was optimized to 2.3% cents from 6.6% in the same period last year, down 4.3 percentage points.
Our R&D expenses ratio declined to 3.8% from 4.4% last year, despite its absolute value increase, increasing 23.7% year-over-year. Going forward Dingdong work keep investing in food R&D and we’re culture technology, technical data algorithms and other infrastructure. This investment will strengthen our competitive advantage and create a long term return for investors. We further improved our efficiency in Q2 with a net loss margin of 0.5% down 41.2 percentage points from last year. We also achieved a positive non-GAAP net profit margin of 0.3% for the first time. We achieved a net profit in Shanghai back in December 2021.
Today we are pleased to report that our PNL has turned positive for the entire Yangtze River Delta region in both Q1 and Q2 this year. Meanwhile, in the first half of this year, the Yangtze River Delta region achieved a 47.9% year-over-year revenue growth. Such quality growth and the rapid optimization of our unit economics is a strong testament to the profitability of the Dingdong business model and the responsiveness of our organization. In Q2, we had a 220 million cash inflow from operating activities by incorporating supply chain finance into our cash flow in the demand, we attend 118 million actual operating cash inflow.
As of the end of Q2, we had 6.1 billion in cash, cash equivalents, restricted cash and short term investments. The pandemic has led to many uncertainties that increased our operational difficulties greatly. However, we are true to these challenges and enhance our organizational capabilities, supply chain adaptability and the responsiveness. These improvements will remain our most valuable assets driven by the growing product development capabilities. We also realize the quality growth and a non-GAAP positive net margin in Q2. As we establish amount of our product development capabilities among consumers, comparing our pre-lockdown and post-lockdown performance this year, we also saw a significant increase in the ALV post-lockdown and an improvement in our operational efficiency, which validated our efficiency first with due consideration to scale strategy.
Looking ahead to Q3, we expect a quality revenue growth with narrow -- compare that to the pre-lockdown Q1 this year. We also expect to achieve a single amount non-GAAP events in December this year.
This concludes our prepared remarks for today. Operator, we are now ready to take questions.
Question-and-Answer Session
Operator
We will now begin the question and answer session. [Operator Instructions] Our first question will come from Joyce Ju of Bank of America. Please go ahead.
Joyce Ju
[Foreign Language]
I will translate my questions myself. Recently we noted there is a close competitor of the company was reportedly having some difficulties in terms of cash flows. And also a shrinkage in operations. We wonder like could management share some colors in terms of your viewing in the market competitive landscape? How this company’s business or like situations will actually affect Dingdong in terms of like competitive landscape in terms of capabilities in terms of relationship with the customer and also their suppliers? Many thanks.
Unidentified Company Representative
[Foreign Language]
Okay, thank you for your question. Indeed, the news has triggered heated discussions recently. First of all, we rarely comment on our peers. It’s more important to focus on what we do than to point fingers. Also, some people think that the whole industry is doomed when they see one company in trouble. We strongly disagree with such a simple linear way of thinking. Even in the same industry the differences between companies can be drastic. Dingdong is very unique in our industry. We have always been focused on one thing, always paid more attention to the needs of our users, and then push ourselves to progress. We don’t cut corners. We don’t compromise. We are committed to developing product development capabilities, which has gained us love and trust from our users. Any company loved by users is a promising company.
[Foreign Language]
We also hope that a society can be more tolerant towards entrepreneurs and we wish entrepreneurs who encountered difficulties will persevere in a moment of darkness and usher in a brighter future.
[Foreign Language]
Alright. That’s all for my answer. Thank you.
Operator
The next question comes from Ashley Xu of Credit Suisse. Please go ahead.
Ashley Xu
[Foreign Language]
Thanks management for taking my question. Just want to check during the lockdown period other than our revenue growth and other improvement or development especially in terms of our operation or supply chain that is worth sharing. Thank you.
Unidentified Company Representative
[Foreign Language]
Okay, thank you for this particularly good question. In addition to our revenue growth, Dingdong has grown in three areas after the lockdown. First, we have established a more flexible and adaptive supply chain and build a responsive organization. During the lockdown we faced various problems including supply disruption, logistic blockages, regional warehouses and frontline centers being locked down and personnel management difficulties. However, we adopted and created new supply models for example, using direct delivery by merchants and neighborhood -- not only ensure supply during the lockdown, but also calms prices and sharpen our supplying system to hold the basic duty of securing supply in case of unexpected incidents.
[Foreign Language]
Second, we have improved the cohesiveness of the team. During the lockdown the workload was heavy, life was tough, and there was the risk of being quarantined at any time. We were under unprecedented pressure. And we all took it upon ourselves to maintain supplies for local residents creating plenty of heroic stories. But everyone here at Dingdong could also feel the sense of accomplishment from setting our users. After the lockdown we as a team became more united.
[Foreign Language]
Third, Dingdong have been with our customers throughout the lockdown keeping supplies and prices stable. And as a result, we are loved by more customers than ever before. Whether it’s routine consumption or lockdown purchases Dingdong is always a destination that you can trust without a doubt.
[Foreign Language]
Finally, I would like to highlight that we have been complying with the government’s pandemic control requirements, and fulfilling our basic duties as a daily supply company for the general public. We also wish that the pandemic. We hope that the pandemic will end soon and that everyone can enjoy a healthy and stable life. Thank you. That’s all for my answer.
Operator
The next question comes from Thomas Chong of Jefferies. Please go ahead.
Thomas Chong
[Foreign Language]
Thanks management for taking my questions. We have seen we have a very good job in achieving profitability in Q2. How should we think about the situation in Q3 and Q4 and when should we expect full year profitability? And also before we reach our full year profitability how should we think about our cash flow? Would there be any issues apparent?
Unidentified Company Representative
[Foreign Language]
All right, our CFO Ms. Le will take your question.
Yu Le
[Foreign Language]
Okay. Thank you, Thomas, for your question. First of all, Q2 was a very difficult period for the company. And the operational headwinds were tremendous under the influence of macro factors. However, the good thing is that the company staff were united to battle the challenges and we finally achieved quarterly positive profits in Q2. We also observed very positive progress post lockdown and compare it to pre-lockdown periods, both in terms of product development capabilities and user satisfaction, which are the aspects that we care about most, and also about core performance indicators such as the AOB and penetration rate, we also achieved a very positive progress as well. Therefore, we believe that our non-GAAP net loss will be down at least three percentage points in Q3 compared to the pre-lockdown Q1 and Q4 will be further optimized on the basis of Q3.
[Foreign Language]
Second, in January this year when we will all still completely in the dark about the subsequent lockdown, the management had already set the goal of achieving a single month break even by the end of the year. A goal that we have never changed and we are still convinced that we will achieve this goal.
[Foreign Language]
Finally, although there is no change in the timing of us achieving full profitability, the Q2 results objectively optimize our loss ratio and cash outflow for the year. So for Q3 and Q4 this year, our loss and cash outflow will be significantly optimized compared to the same period last year. Next year, we forecast that the company will still be cash flow positive. And as of the end of Q2, our cash balance was 6.06 billion RMB. Banks have been working more closely with the company with short term bank borrowings increasing to 890 million RMB. In Q2, many banks have given us higher credit limits on loans after renewal at the end of the term. In short, we don’t have many capital spending needs at the moment and the balance on the books is still quite sufficient. So we think that the company is not at any cash flow risk. Thank you. That’s all from answer.
Operator
Next question comes from Robin Leung of Daiwa. Please go ahead.
Robin Leung
[Foreign Language]
Thanks management for taking my question and congratulations on the strong set of results. Some investors have concern on the [Indiscernible] warehouse models given what happened to -- also some competitors in the local retail industry explicitly said [Indiscernible] warehouse is not going to work. Could management share your thoughts on that? Thanks.
Unidentified Company Representative
[Foreign Language]
Well, thank you for your question. First of all, I would like to draw your attention to the fact that excluding the three months during the pandemic, when the lockdown hit hard, Dingdong has been able to continue improving as loss ratio for 10 consecutive months. And we are very confident that we will achieve full and sustained profitability by the end of this year. Therefore, we have a strong belief in the frontline fulfillment grid model. There are many analysis of this model on the market and they are up for you to judge. But we often forget that the most important criteria to assess the pros and cons of a model are whether it really meets the needs of the users and whether it is in lined with the changing trend of user consumption behavior. Only the users’ choice can determine the success or failure of a business model.
[Foreign Language]
The frontline fulfillment grid model enjoys the highest efficiency, the fastest delivery and can better control the quality of fresh food. This model meets the needs of consumers for a better life and caters to the younger generation of new consumption habits. With that we firmly believe that this is a business model with the bright future, and we in turn push ourselves to strive for progress.
When people think that the gross margin of fresh groceries is low, we improve it by making the supply chain deeper and stronger. When people criticize the losses and the high loss rate in fresh groceries, we improve it by enhancing our order density and improving our prediction and product recommendation technologies. As a result, our recommendation is excellent today and our loss rate is far lower than the traditional fresh produce peers. When people think that the quality control of non-standardized or non-standard products is difficult, we standardize the process and we increase human resources and technology investment. As a result our quality control nowadays is industry leading in the entire fresh grocery industry.
[Foreign Language]
Our way of thinking is identifying the user’s needs and then pushing ourselves to improve accordingly. Some people see problems and immediately they try to be smart and announce to the world that they know everything. Others, on the other hand, keep their heads down in solving problems. In fact, entrepreneurship is the process of problem solving. Why do we need entrepreneurs if there is this a perfect industry with a huge highly lucrative market with no problems or difficulties? Thank you.
Operator
This concludes our question and answer session. I’d like to hand the conference back to our management for closing remarks.
Unidentified Company Representative
Thank you again for joining our call today. If you have any further questions, please feel free to contact us or request through IR website. We look forward to speaking with everyone in our next earning call. Have a good day.
Operator
The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect.
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Dingdong (Cayman) Limited (DDL) CEO Changlin Liang on Q2 2022 Results - Earnings Call Transcript