Dingdong Cayman : Limited 4Q22 Transcript

[DDL] Dingdong (Cayman) Limited

Q4 2022 Earnings Conference Call

February 13, 2022 at 08:00 AM Eastern Time

Executives:

Changlin Liang, Founder and Chief Executive Officer

Le Yu, Chief Strategy Officer

Nicky Zheng, Director of Investor Relations

Analysts:

Joyce Ju, Bank of America Securities

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 Ltd. Fourth Quarter 2022 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.

Nicky Zheng: Thank you. Hello, everyone, and welcome to Dingdong's fourth 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 fourth 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.

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 the following 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). Thank you, everyone, and welcome to Dingdong's fourth quarter 2022 earnings conference call. Let's first review the quarter's operational results.

Our revenue of 6.2 billion reflected 13.1% year-over-year growth. We recorded GAAP net profit for the first time of 49.88 million, with non-GAAP net profit of 116 million.

Within 1.5 years, we grew from a net loss margin of 37.2% to a net profit margin of 1.9%. It is a result of our dedication and validates the strategy of Efficiency First with due Consideration of Scale.

Meanwhile, our operating net cash inflow in Q4 was 0.68 billion. We also achieved positive operating cash flow for the full year of 2022. As of December 31, 2022, our cash and cash equivalents were 1.86 billion, and short-term investments were 4.64 billion. We believe that this strong cash position speaks volumes about our resilience in adversity. We also firmly believe that we will be able to realize our vision and mission, create value for our consumers and society, and create long-term and sustainable value for our shareholders.

In addition, we also advanced our product development capability through direct sourcing, contract farming, in-house R&D and production, and private labels, forming a flywheel effect.

In 2022, we kept growing existing strong categories, such as prepared food and children's food (i.e., Mom's Choice), forming a number of differentiated Dingdong-exclusive products with monthly sales of over 3 million RMB each. Moreover, foreseeing the clean labeling trend in the food industry, we created about 320 quality products with clean labeling attributes. We refined our customer profiling according to consumption scenarios and built the "Qingyang Planet" page for younger-user cohorts to meet the increasingly precise needs of the millennials and Gen Zs in body management, nutrition, and health.

Next, I would like to share with you my thoughts and ideas. Dingdong is a startup that is dedicated to providing safe, healthy, and delicious food while innovating to improve people's lives. We firmly believe in building a better life and creating value for consumers and society, instead of engaging in a zero-sum game with our peers for users and market share.

As the Seed Theory suggests, an infinite number of small things combine to create the universe. Therefore, we dream big and start small while remaining resilient to counteract vulnerability and entropy. During this process, we stay true to our roots and remain disciplined while keeping an easy mind. These beliefs and convictions go beyond profitability. They are what fuel our passion and drive us forward, guaranteeing our achievements today and in the future.

I would also like to discuss our plans for 2023. In early January, the company held its annual management meeting, where we summarized the experience and lessons we have learned since

our inception and made plans for the longer-term future. We also agreed that we would hold course on our current development strategy while remaining innovative. Specifically speaking, we will deepen our penetration into existing markets and continuously tap into our users' needs to achieve profitability. At the same time, we will emphasize innovation, particularly in food products, to develop and launch new food products catering to a broader range of users.

In 2023, given the increased demand for healthier food products post-pandemic, we plan to promote product innovations across several areas to address the changing needs. These areas include the increased use of clean labeling, nutritional upgrades, and customizing health food products for specific demographics. Specifically speaking, we will first develop healthier prepared food that is not only delicious, but cooked with little or no oil and are low in calories, salt, and sodium. We will take the lead in promoting products with clean labels.

Second, we will improve the nutritional value of foods and beverages. For example, we will bring out low-GI rice and pasta, low-carb bakery products, low-carb beer, high-fiber beverages, and low-fat and low-sodium seasonings. Third, we will develop powerful functional foods and nutrition products for children, middle-aged and senior citizens. Finally, for millennials and Gen Z who are weight-and-health conscious, we have launched the "Qingyang Planet" page that can quickly generate a healthy diet plan that matches individual needs with calculated and archived calorie data.

Another one of our goals for 2023 is to strengthen our strategic cooperation with our suppliers. In late February, we will hold a supplier conference to commend our product developers, suppliers, and service providers for their excellent products. We are highly aware that it takes a large number of exceptional companies to meet the ever-changing needs of consumers in a market as vast as China's. Dingdong is willing to be an enabler that connects great companies to create value for consumers and society.

2023 marks the end of 3 years of the pandemic. We expect drastic changes in consumer demand. Nonetheless, we will respond proactively and strengthen our capabilities in product development, service provision, and supply chain building. Based on our current operating situation, we expect to maintain non-GAAP profitability for both Q1 and the full year of 2023.

Today is February 13th, and spring has come. Everything is sprouting and growing despite the cold weather, just like the situation in China. We are fully confident in the recovery and growth potential of the post-pandemic economy in our country and in our cause.

This concludes my speech.

Next, I would like to invite Ms. Yu Le, CSO of the company, to introduce the financial results. Thank you all.

Le Yu: Thank you, Mr. Liang, and hello, everyone. Before I walk you through our detailed financial results, please note that all numbers stated in the following remarks are in RMB terms.

Product development capability has become Dingdong's core strength and primary growth driver since we implemented the strategy of "efficiency first, with due consideration of scale" in Q3

2021. As a result, we maintained quality growth in 2022, with annual revenue of 24.22 billion, up 20.4% year-over-year.

Meanwhile, we significantly optimized our operating efficiency, gross margin, and net loss margin. The conversion rate from GMV to revenue was 92.3%, increasing by 3.7 percentage points from a year ago.

Non-GAAP net loss margin was 2.4%, a substantial improvement of 28 percentage points year- over-year. We also achieved positive operating cash flow for the full year of 2022.

Looking ahead to 2023, we are confident that we can achieve a full-yearnon-GAAPbreak-even.

Now, let's look at the financial results of Q4 2022. Our revenue reached 6.2 billion, up 13.1% year-over-year.

We are also pleased to report a record positive net margin of 0.8% under GAAP, and a non- GAAP net margin of 1.9%, both significantly exceeding the forecast made in Q3. Since we shifted our strategic focus to Efficiency First in Q3 2021, our non-GAAP net margin has improved by 33.8 percentage points from a net loss of 31.9% to a net profit of 1.9%, which was achieved in less than a year and a half. Such a rapid and significant optimization is a testament to the vitality and profitability of the frontline fulfillment grid model in fresh grocery e-commerce. It also shows the effectiveness of deeply developing and engaging our supply chain and centering on product development capability. We expect to stand by these strategies for a long time to come.

In Q4, the gross margin was 32.9%, up 5.2 percentage points from a year ago, and the gross profit was 2.04 billion, up 34.2% year-over-year. We deepened our partnerships with many upstream producers to advance our fresh grocery products. For the non-fresh groceries, we focused on building private labels, in-house R&D, and self-production and processing in our assembly lines. We also offered door-to-door delivery services, capturing higher downstream margins. Such extensive coverage of the whole supply chain generated a stable gross profit margin for the company.

The fulfillment expense ratio in Q4 was 24.1%, down 8.5 percentage points year-over-year, reflecting Dingdong's higher operational efficiency in Q4.

The sales and marketing expense ratio in Q4 was 1.5%, down 5.1 percentage points, driven by our product development capability that generated continuous organic traffic. Consumers came and stayed for the differentiated Dingdong-exclusive products, which also lowered the acquisition cost per new transacting user by 47.7% year-over-year and 26.1% quarter-over- quarter.

G&A expense ratio remained stable at 2.4% compared to the same quarter last year. Benefiting from the scaling effect, we optimized the R&D expense ratio to 4.2% from 5.2% year-over-year. As always, we will keep investing in the infrastructure R&D, such as food development, agricultural technology, and technical data algorithms, which will forge a greater advantage for the company.

In Q4, we achieved a positive GAAP net margin of 0.8% for the first time, optimized by 20.8 percentage points from a year ago, and a non-GAAP net margin of 1.9%, optimized by 20.7 percentage points year-over-year, significantly exceeding the forecast.

Additionally, Covid-19 had only mildly impacted our covered cities and regions in October and November, and our Q4 entered a trajectory of profitability in October. To break it down monthly, we achieved a positive non-GAAP net profit in October and a positive GAAP net profit in November and December.

It's been 5 years since Dingdong was founded in 2017, and we are pleased to see our efforts pay off and our business model proven.

The operating cash inflow in Q4 was 682 million, and the actual operating cash inflow was increased to 906 million through the introduction of supply chain finance. As of the end of Q4, the balance of cash, cash equivalents, restricted cash, and short-term investments was 6.5 billion.

According to CIC, the size of China's food and other groceries market was 11.9 trillion in 2021. Let's take Shanghai as an example. With a residential population of about 25 million, Shanghai's annual food consumption expenditure is about 10,000 per capita. In 2022, our GMV in Shanghai was over 12 billion. That translated to a 5% penetration rate in Shanghai's food consumption market. We are confident of doubling that number in the long term, generating annual revenue of over 20 billion in the city alone. In addition, the total consumption of our current cities and regions is about 5x that of Shanghai, which, in the long term, would create 100 billion in annual revenue. That is why Dingdong has a high-growth ceiling.

As we move ahead to 2023, we would like to discuss our outlook. Q1s are typically affected by seasonality, according to our track record, with lower revenue and profitability. In Q1 2023, we expect a slow season for urban fresh grocery consumption due to the pent-up urge to return home and travel during the Chinese New Year. Nevertheless, despite the seasonality impact and extra frontline labor costs on holidays, we are confident of achieving non-GAAP breakeven for both Q1 and the whole year of 2023.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Questions and Answers

Operator: We will now begin the question-and-answer session. (Operator Instructions). Joyce of Bank of America Securities.

Joyce Ju: (Speaking foreign language). Congrats on the profit-making this quarter. As we all know, in the past couple of months, there were actually a lot of constraint in terms of social activities because of the pandemic. Just trying to understand to what extent the profitability this quarter was because of the pandemic control. How should we expect the profitability outlook for this year or going forward? Is this going to be at the same trend of profit making?