JD Logistics, Inc. (2618) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the JD Logistics Second Quarter 2023 Results Conference Call. [Operator Instructions] I will now turn the call to Mr. Mao Jun, Head of Investment Relations team at JD Logistics.

Thank you, operator. Good day, ladies and gentlemen. Welcome to our second quarter 2023 results conference call. Joining us today are our Executive Director and CEO, Mr. Hu Wei, and CFO, Mr. Wu Hao. Before we start, we would like to remind you that today's discussion may contain forward-looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ materially from those mentioned in today's announcement and this discussion. The company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-IFRS financial measures for comparison purpose only. For a definition of the non-IFRS financial measures and the reconciliation of non-IFRS, key IFRS financial results, please refer to the announcement of the results for the 6 months ended June 30, '23 issued earlier today. For today's call, management will read the prepared remarks in Chinese and will only be [accepting ] questions in Chinese during the question-and-answer session. A third-party interpreter will provide simultaneous interpretation in English on a separate line for the duration of the call. To work with interpreter, the management will slow down the pace of the speech, please kindly be noted. The English translation is for convenience purposes only. In case of any discrepancy, the management statement in their original language will prevail. I'd like to turn the call over to Mr. Hu Wei. Please go ahead, sir.

Dear investors and analysts, good to see you. I am Hu Wei the CEO of the JD Logistics. Thank you for joining us today. This is the second quarter 2023 earnings call. In the second quarter of 2023, the macro economy recovery in China continued and the market demand also gradually relieved. Meanwhile, our corporate customers' operations were all gradually [ recovering ], leveraging our comprehensive network coverage, in-depth industrial insights and ever-strengthening digital and intelligence capacities. We continue to create value for our customers through our trusted supply chain services and achieved high-quality growth. Our total revenue for the second quarter 2023 reached RMB 41.0 billion, up 31.2% year-over-year. Revenue from external customers for the second quarter was RMB 28.4 billion, a year-over-year growth of 55.8%, accounting for 69.2% of total revenue. Our non-average net profit in the second quarter was RMB 830 million, a year-over-year increase of 288%, with significant net profit margin improvement year-over-year. We continue to promote the broad application of the ISC solutions and high-quality logistics services. As we continually deepen our presence across a wide range of industries, we build and enhance our industry-specific capacities and establish benchmark cases in many industries, further solidifying our leadership in the ISC logistics sales. In Q2 of 2023, revenue from ISC customers reached RMB 20.4 billion, of which revenue from external ISC customers were [ RMB 7.8 billion ], a year-over-year growth of [ 9% ], while continuing developing of industrial-specific solutions and service capacity. We continue to expand our breadth and depth of collaborations with existing customers, facilitating digital intelligent supply chain transformation for more customers. In Q2 of 23, the ARPC from external ISC customers reached RMB 149,000, rising by 31% year-over-year. This fully demonstrates our ability to constantly create value for our customers through our trusted supply chain services with our customer-first approach and ongoing efforts to cultivate our primary business in the ISC services market. We [ primarily ] focus on 6 industries, faster-moving consumer goods, home appliances, home furniture, 3C, apparel, automotive and fresh products. Among them, FMCG accounted for the highest percentage of our revenue from the external [ ISC ] customers. Leveraging our comprehensive network as well as our industrial insights, we provide customers with [ payment ] services similar to the industry and the business [ characteristics ] throughout the supply chain, ensuring their end-customer preference. For example, we have in-depth collaboration with [ Coca Cola ] beverage, providing warehousing, distribution and services for all CBL's online e-commerce channels. In addition of a comprehensive warehouse standard and professional warehousing planning, we adopted a multi-region warehousing mode to help CBL to optimize its inventory deployment. Once the CBL's end customers place an order on end of the platform, JD Logistics will choose the optimal warehouse for shipment and back [ to home ] route, leading to improved delivery efficiency and ensuring optimal [ fulfillment of ] quality. Additionally, we provided the intelligent inventory replenishment of [for covered] services, further optimizing CBL's and supply chain costs. In the process of empowering industrial customers, we have obtained valuable experiences and reinforced our service capacity. We actually would like to see that to the recognition of our services and capacities grow, our [ services ] scope has been expanded to more products and more geographically to multiple warehouse nationwide by strengthening the breadth and depth of our cooperation with customers. We help them to improve the supply chain efficiency of the online business and achieve the goal of reducing cost, increasing efficiency. In the auto industry, we also continue to deepen and strengthen our business cooperation with leading customers to fully [ utilize ] our advantage to build an innovative business model on ISC services for auto after-sale spare parts. By utilizing ISC data tech, we build for auto after-sales spare parts supply network, aiming to elevate supply chain efficiency, how the industry customers comprehensively optimize their business across the inventory levels, service affection rates as well as the delivery timely and operation cost. In the first half of '23, we replicated and applied this model to [ Lee Auto ] and many other new auto customers at home and abroad. We provide efficient and high-quality auto sales spare part warehousing and logistic bases, [ promptly ] meeting the time and specific requirements of different order types. Also, to comprehensive this integration, we enabled the full visibility and control abilities throughout of customer supply chains, addressing the inventory deployment, safety management and service response needs. We will continue to innovate and optimize our services to create benchmark projects for the auto industry. Main foundation, we are on reach to build our operating capacities in the auto industry while also contributing to industry development. In Q2 2023, our revenue from customers, primarily including freight delivery services, increased to RMB 20.6 billion, up by [ 85.7% ]. This increase was mainly due to our continued center efficiency improvements and [ comprehensive ] service enhancements, which drove our business volume growth in June this year. The Kunshan Asia No. 1 smart industrial park officially commenced operation. It has a court floor area of over 500,000 square meters of equipment, [ scale ] and automation level in the part, which represent what leading standards will help us further improve our operation efficiency and service capacity. Meanwhile, we together with [ Deppon ] Logistics, continue to improve our logistics infrastructure network to build a safe, reliable and highly efficient logistical supply chain system. As of June 30, 2023, we operated over 1,600 warehouses, including those managed by [ Deppon ] Logistics. The GFA of our warehouse network, including warehouse space managed through the open warehouse platform, exceeded [ 32 ] million square meters. What continuously strengthen our core competitiveness? We also remain dedicated to undertaking our social responsibilities and sustainability. In April, we jointly released the Supply Chain Emission Management Platform with the Green Supply Chain Special Committee of the All-China Environment Federation. This platform is a carbon footprint management platform, encompassing over 140 carbon-emission factors of the road transportation vehicles in China and calculate the carbon footprint of line transportation at the most granular level passible basis on the [CARES] operating trajectory, [ keeping ] carbon emission monitoring, reporting, verification on one single platform. This platform helps enterprises directly and actually track carbon emissions from logistics and transportation, tallying their carbon assets and precisely incrementing carbon reduction technologies through big data emissions. This empowers more enterprises to realize efficient cost, carbon reduction and ultimately achieve their net zero emission targets. As an example, we established a carbon monitoring for Decathlon, China's suit platform, and provided solutions for the calculation of the greenhouse gas carbon footprint and decarbonization pathways for its e-commerce business. We actually calculated is carbon footprint for Decathlon China's orders and diversified greenhouse definition reductions to meet its requirements for this precision, granularity and visualization of the carbon management. For the year, we have made persistent efforts in leveraging our supply chain infrastructure advantages, industrial [ impacts ] as well as tax rents to promote cost reduction and efficiency enhancement for the company throughout the industry value chain and core supply chain. We also proactively fulfill our social responsibilities to foster high-quality employment and carbon emission reductions in up and downstream. Going forward, we will continue to unlock our value as innovative, fair, economy-based enterprises, capitalizing on our deep roots in the [ rate ] economy to facilitate high-quality sustainable growth for the enterprises, industries and our society. . Thank you. Next, I'd like to invite Mr. Wu Hao to discuss the details of the financial performance.

Thank you, Mr. Hu. Hello, everyone. This is Wu Hao, CFO of JD Logistics. I'm pleased to present JD Logic's financial performance for the second quarter of 2023. China's macroeconomic conditions rebounded and continued to improve in the second quarter of 2023. Market consumption, demand and enterprise operations also gradually resumed, supporting JD Logistics high-quality growth during this quarter. In the face of the evolving consumption structure and the business environment, we started to optimize our customer mix and business structure to promote our business health. Meanwhile, we further refined our cost and expense controls, enhance operational efficiency, benefiting from economies of scale as our business expanded. In the second quarter of 2023, our profitability improved significantly compared with the same period of 2022. Furthermore, we achieved a turnaround to a net profit in the first half of 2023 from a net loss in the same period of last year. Our total revenue reached RMB 41.03 billion for the second quarter, up 31.2% year-over-year. Notably, revenue from external customers increased by 55.8% year-over-year to RMB 28.38 billion, accounting for 69.2% of the total revenue, representing a large proportion compared with the same period of 2022. It clearly reflects our success in steadily expanding our business from external customers. In the second quarter, revenue from [ ISC] customers held at RMB 20.4 billion. This includes our ISC revenue from JD Group, which amounted to [ RMB 2.65 billion ], down 3.1% year-over-year, primarily due to an adjustment in JD Group's Jingxi business. Our revenue from external general ISC customers grew by 9.0% year-over-year to [ RMB 7.05 billion ]. As we further expanded the breadth and depth of our collaborations with existing customers to create sustained value for the high-quality development, in the second quarter, our average revenue per customer continued to grow at accelerated pace of 31% year-over-year to RMB 149,000. We firmly believe that a healthy and high-quality customer and business structure is crucial for our steady and long-term development. In second quarter of 2023, revenues from other customers grew significantly, totaling RMB 20.63 billion, up 85.7% year-over-year. Our cost of revenue in the second quarter was RMB 37.64 billion, up 29.3% year-over-year. In addition to the increase in the costs incurred to support our business expansion, this increase also reflects the cost of Deppon Logistics consolidation, which were reclassified based on our cost and expense standards. Next, let's move to the main cost of revenue. First, employee benefit expenses were RMB 13.39 billion in the second quarter of 2023, up 25.7% year-over-year. In addition to Deppon Logistics consolidation, this increase was due to increase in the number of our top-line operational employees from 303,000 at the end of the second quarter of 2022 to 347,000 at the end of the second quarter of 2023. This increase in the number of operational employees was mainly due to the addition in the in-house personnel to the key operational process such as last-mile delivery, in order to ensure high-quality services and leverage our customer experiences. In Q2, total employee benefit expenses accounted for 32.2% of total revenue, down [ 1.4% ] year-over-year. Outsourcing cost, another important component of our cost of revenue, were [ RMB 14.5 billion ] in the second quarter of 2023, up 26.9% year-over-year, mainly due to Deppon Logistics consolidation, and they accounted for 35.3% of total revenue for the quarter, down 1.2% year-over-year. The decrease was largely driven by our proactive business and customer mix optimization, improved operational efficiency and post-pandemic normalization of our resource prices. Third, our total rental cost was RMB 3.3 billion in the second quarter, up 23.2% year-over-year, primarily due to an increase in the number and the floor areas of our logistics facilities such as warehouses, as well as Deppon Logistics consolidation. As of June 30, 2023, we operated over 1,600 warehouses, including warehouses managed by Deppon Logistics. The aggregate floor area of our warehouse network, including warehouse base managed by managers through the Open Warehouse Platform, exceeded 32 million square meters. Our total rental cost in the second quarter represented 8.1% of total revenue, down 0.5% from 8.6% in the same period last year. This increase was primarily attributable to Deppon Logistics lower rental cost as a percentage of its revenue, which led to a lower consolidated number. Besides the major costs mentioned above, depreciation and amortization and vehicle usage costs such as fuel costs and tolls included in other costs also rose as a percentage of revenue after consolidation, which was due to Deppon Logistics high cost related to self-owned vehicles as a percentage of its revenue. In terms of expenses, our operating expenses in the second quarter of 2023 were RMB 2.92 billion, growing 26.4% year-over-year and accounting for 7.1% of total revenue, a decline of 0.3% year-over-year. Among them, selling and marketing expenses were RMB [ 1.21 ] billion, 3.0% of the total revenue, down 0.1% year-over-year. Selling and market expenses accounted for 4.3% of revenue from external customers have declined for 1.0 percentage point year-over-year. In terms of the R&D expenses in the second quarter of 2023, were RMB 920 million, accounting for 2.2% of total revenue, essentially flat with same period of last year. Because technology innovation has always been our priority, we maintain R&D expenses relatively stable as a percentage of our revenue. This allows us to explore the development and location of pioneering technologies to boost our core competencies, laying a solid foundation for elevating of end-to-end operational efficiency, achieving refined operation and empowering external customers with our cumulated technical expertise. On general and administrative expenses, they were RMB 780 million, accounting for 1.9% of the total revenue, a decrease of 0.2% year-over-year. In terms of net profit, we recommend that you consider our non-IFRS measures, which we believe reflects our operations, given that non-IFRS profit not really excludes factors such as share-based payments, amortization of tangible/intangible assets resulting from acquisitions and fair value changes in financial assets measured at fair value through profit or loss. In the second quarter of 2023, our non-IFRS net profit was RMB 830 million at a net profit margin of 2%, up 1.3% year-over-year. In the second -- in the first half of 2023, our non-IFRS net profit was RMB 110 million, a turnaround from a net loss in the same period of last year. We also continue to monitor our cash reserves and cash flows to maintain healthy, sufficient capital to support business development and meet our operational needs. In the second quarter, our capital expenditures, both in absolute month and as a percentage of revenue, increased year-over-year. We will steadily and effectively deploy capital according to our business deployment pace and needs to enhance our capacities in the medium to long term and achieve our goals of the cost reduction and efficiency enhancement. Before I conclude, I'd like to thank all the shareholders for their enduring support for JD Logistics. Going forward, we will firmly execute our core development strategy and continue to focus on enhancing our core competitiveness and advantages. We believe that as the macro economy continues to improve, we will maintain our steady growth momentum and realize high-quality sustainable development. At the same time, the refined operations and increasing economies of scale, we will further improve our profitability, creating greater value for our shareholders. Thank you. That concludes my prepared remarks. Now we can start the Q&A session.

Thank you, Mr. Wu Hao. This concludes our prepared remarks. We would like now to open the call to your questions. Operator, please start the Q&A session when ready. As a reminder, we only accept questions in Chinese language line To ask a question, please dial in to our Chinese line [Operator Instructions].

[Operator Instructions] The first question comes from Brian Gong of Citi.

I have a quick question to you. From my cooperation in terms of the structure organization, I saw your business performance. Which parts have been improved? And what kind of adjustment are you going to take? My question is to the management. For the ISC, what's your take on that? For the first Phase 1 and Phase 3, when are you going to normalize the business and see the growth?

Thank you very much for the questions, Brian. I want to share with you my comments. In this May, we completed this adjustment of the strategy, and you have already seen the results. We've also seen a lot of fluctuations, but the good news is we have completed the change of the structure with positive outcome. We also see that over the last few years, the service capacities are improving steadily. And we are also seeing that at different levels and links both at the upstream and downstream. We are seeing the great improvement of the efficiency as well as the placement of the orders. This strategic adjustment is in line of JD Logistics' philosophy, and it is also a great measure to improve our efficiency and reduce our cost. I believe that it is a great upgrade for the strategy through the organizational structure. The business units could improve comprehensively with better efficiency. I believe that the outcomes have already been released. Meanwhile, according to our analysis of the minimum business unit, as well as establishment of the industrial part, as well as the establishment of the network of the warehousing, we will offer flat working conditions, releasing the vitality of the organization in terms of the sales. We are going to provide sustainable services to the sales customers to better be adaptive to market changes. We will offer better services to the customers to give them better services on the new organization structure. We see the granularity of the management are more clear compared to what we did previously, and we're also seeing better resource allocations. The management decision-making is being more efficient -- it has efficiently improved our efficiency of the management. The positive outcomes are released steadily, but we still need more time to see bad outcomes. We still need some time to get the full potential out. In Q4 of this year, we are looking forward to see bad outcomes. In the long run, the improvement on our business can be felt and presented. So we are going to improve the core business as well as the competitiveness of the product. We're also going to continue to move forward to optimize our strategy to offer better products to the customers. And we're also going to attract more customers with great potential. That is how we are going to work with existing customers to offer better services. And for express services and other business and ventures, we will be always there to offer them sustain the growth, and we will expand our business as we planned. For the ISC services, we will deepen our partnership with our existing customers, and we will follow the characteristics of different business to offer them specialized and customized solution. That is how we are going to embrace the customers to offer them [ polished ] services. For the Phase 1, in the 1P, we also felt the impact from the adjustment launched in the first half of 2022. And in the second half of this year, we are going to normalize and reduce those impact JD Logistics [ can ] process, JD Retail as well as the other businesses. We are going to follow the changes of the retail to upgrade our services accordingly. And we will offer the high-quality services as we promised. Thank you.

The next question is from Thomas of Jefferies.

My question is on the external customers ISC about the number, and in following quarters, what will be the trend, and what will be the response? And in your prediction, when you are going to see the growth? That's my first question. For the second question, at different vertical industries, at which area you are going to strengthen your efforts? Or are you going to penetrate into new industries to expand your footprint?

Thank you, Thomas, for the question. They are great questions. For the external customers ISC development, what will be the future deployments and what are our strategies ahead? First of all, we concentrate on the service provision to the ISC external customers. We will work with the core industries and offer them better solutions. Through our continued improvement of the services and different tools, we will help our customers to address their difficulties as well as the challenges ahead. We will empower customers to build up efficient solutions. All in all, we are going to create greater value to our customers. In terms of the customer growth, we will follow the characteristics of the industries, of the customers. We will offer the high-quality ISC as we always did, such as the networking of the warehousing and other tools and [ weapons ] will be launched one after another to meet all their demand. The networking of the warehouse will be one of the most important step to attribute to the entire sector and industry. In the long run, we will offer them cost optimization as well as our advantages on that sector for the major customers, including the tourism customers. We will never stop our service provision. Additionally, we will also optimize the product portfolio in the long run to drive the growth of our business. For the retail customers as well as the industrial [ logistics ], we will provide the distributed warehouses again and again. We will work with different cities, especially the first-tier cities, to follow the characteristics of the geography. Two, work with the transportation, the networking of the warehouses to improve the efficiency in general. In terms of industrial deployment, we'll focus on the core industries as well as our capacity building. We'll first understand the demands of the customers, as well as those two business deployments for our warehousing capacities. We are also working with the industrial partners. Right now we also see the big fruits in the future, we will also work with the auto industry. The after-sale market in terms of ISC service provision will never be stopped. We will also work with the auto sale part to increase our advantageous strengths. For the brands in China as well as in the other world, the new energy auto brands will be our potential customers. The spare part as well as the standardized operational model will be set up for the upcoming years and months. That is how we are going to deepen our innovation as well as create new models to serve our customers. JD Logistics will be serving the auto industry to create benchmark cases as we promised. That is how we could help our customers to improve the overall operational efficiency, and that is how we could create a world for the sustainable development. Thank you very much for the questions.

The next question comes from [ Tao Yin Fan ] of American Bank.

My question is about your cost management. As you have already shared with us about the cost structure as well as all the changes accordingly, you have always talked about the tools, your methods of cost management. Over the last 2 years, you are always saying about the outcome out of the cost control. But in upcoming years and in the long-term future, in terms of the cost management and reduction, what is your take on that? Do you have any specific methods to control the cost such as the cost of the cash flow? And what are the major areas you can go to further decrease your cost?

At present, on the macroeconomic situation, cost control and cost reduction is one of the [ mark ] from the JD Logistics, and it is also a requirement from our customers. Some of the customers complain that the logistics companies are having too high cost. That is why we are going to go forward and to make something substantially different. JD Logistics, we'll save the resources, optimize our procurement price and to optimize the structure in a general network to control the cost. That is how we could improve our operational efficiency in the long run. First of all, we could consistently improve our operational efficiency, starting from the first step of resource saving and price control. For instance, we have a streamlined operational business model. In the warehouses, we will evaluate efficiency to save the cost in the supply chain, as well as in automation systems. We are also seeing the great improvement on the operational efficiency. Apart from that, at present, we will also maximize our strengths as well as our scales of economy. When we are having the bargaining power to deal with the procurement, we are also gaining advantages in having preferred bargaining power. In working with our R&D team, we could smartly adjust and deploy our resources, as well as our operational frontline staff to improve their general working conditions. The optimization of the first frontline vehicles as well as operational staff is also one of the components for us to improve the cost control. Furthermore, we are also working with our collaborators. In the big network, the network infusion or the integration of the network together with our collaborators, that also offers opportunities for us to improve our resource optimization efficiency. That is also a key step for us to optimize our efficiency of resource optimization as well as our service capacities. I have already shared with you we are still in the process of adjusting and optimizing the customer mix to ensure that all the customers are at a healthy level. We are certain that high-quality services and upsell services will help the customer to grow and to ensure our long-term and healthy growth. Thank you for your question again.

Due to time constraints, now we are going to conclude our question-and-answer session. Now, I'm going to turn the conference back to our team for additional remarks.

Thank you once again for joining us. If you have any further questions, please contact our RI team directly -- IR team directly. Thank you.