Participants

Nicky Zheng; Director of Investor Relations; Dingdong (Cayman) Ltd

Changlin Liang; Chief Executive Officer, Founder, Director; Dingdong (Cayman) Ltd

Song Wang; Chief Financial Officer; Dingdong (Cayman) Ltd

Thomas Chong; Analyst; Jefferies

Robin Leung; Analyst; Daiwa

Bai Yang; Analyst; CICC

Presentation

Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the Dingdong Limited, second quarter 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to the first speaker today, Mr. Nicky Zheng, Director of Investor Relations. Please go ahead, sir.

Nicky Zheng

Thank you. Hello, everyone, and welcome to the Dingdong's second quarter 2024 earnings call. With me today are Mr. Changlin Liang, our Founder and CEO; and Mr. Song Wang, our CFO. You can refer to our second quarter 2024 financial results on our IR website at ir.100.me. You can also access a replay of this call on our website when it becomes available a few hours after its conclusion.
For today's call, management will go through their prepared remarks, which will be followed by 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 make, 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 describe and discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported in our earnings. We have 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

(Foreign Language)
(Interpreted)
Hi, everyone. Thank you for joining Dingdong’s Q2 2024 earnings call. As of Q2 2024, Dingdong has achieved profitability for seven consecutive quarters based on non-GAAP standards. Additionally, after Q1 of this year, the company has again achieved GAAP profitability.
Notably, we have resumed growth since Q1 of this year. Both profits and revenue have shown positive year-over-year growth for two consecutive quarters. These achievements are mainly attributed to Dingdong’s world-leading fresh grocery supply chain capabilities, which facilitate our continued growth in scale and profits. In my speech, I’ll review our Q2 performance, discuss Dingdong’s growth drivers, and provide an outlook for future development and performance.
Let’s take a brief look at our Q2 performance. Dingdong achieved a GMV of RMB6.22 billion, a 16.8% increase year-over-year. Based on non-GAAP standards, net profit was RMB103 million, nearly 13 times more than the prior year, and net profit margin was 1.8%, up by 1.6 percentage points year-over-year. Meanwhile, in June, we saw remarkable growth with the same-stores’ GMV increasing by 21.6% year-over-year, and all regions experienced positive year-over-year growth in scale.
The hard earned growth can be attributed to the consistent increase in transacting users and ARPU. In Q2, we recorded 7.3 million transacting users monthly, up 11.7% year-over-year. Additionally, the average daily number of transacting users approached 900,000, up 17% year-over-year, with a 4.3% year-over-year increase in DAU. The company also benefited from ongoing enhancement in service capabilities and supply chain operation improvement. Consequently, the conversion rate of DAU to daily transacting users increased by 4.3 percentage points compared to the same period last year.
User loyalty and wallet share on Dingdong increased during the same period. Our users monthly ARPU increased 6% year-over-year. Specifically, members monthly ARPU raise 7.8% year-over-year, surpassing RMB500. Looking at it from a business standpoint, over the course of this year, we’ve further enhanced the assortment of products in our advantageous dining table category. This has enabled us to better cater to the purchasing needs of diverse consumer groups, providing them with a one stop shop solution to acquire all the necessary ingredients for a complete meal.
We’ve also expanded the SKUs available for the leisure scene to include fruit, dairy, alcohol, beverages, leisure products and baked goods, and the strategy achieved initial success in Q2. For example, in the leisure product category, both the number of average purchases per user and frequency of monthly purchases have increased rapidly, leading to a 24% year-over-year increase in monthly ARPU in this category.
This year, we’ve resumed expanding our station network in Jiangsu, Zhejiang, and Shanghai, continuously increasing our station network penetration in these regions. We aim to open approximately 80 new frontline stations in these regions this year, with nearly 40 already completed in the first half of this year. These new frontline stations are quickly ramping up and each station now manages an average of 800 orders daily. As I’ve just outlined our Q2 performance, I would now like to introduce several future growth drivers.
Volume from our Jiangsu, Zhejiang, and Shanghai business are expected to keep growing. In the first half of this year, Shanghai achieved a GMB year-over-year growth of 9.5%, Zhejiang 22.7%, and Jiangsu 22.6%. The increase in scale was driven by the rise in the penetration rate and the number of orders per user. Due to the large populations, high residential density and strong purchasing power in these regions, Dingdong still has significant potential for growth. We’re very confident that we’ll maintain speedy growth in these regions for a long time to come.
Expansion in the Jiangsu, Zhejiang, and Shanghai regions has helped improve our supply chain and user operation capabilities. This will benefit our operations in South China and North China, which we are expected to continue growing in scale and gradually become profitable. Additionally, we have seen sizable growth in some tier-3 and tier-4 cities, such as in Yangzhou and Huzhou, with an impressive year-over-year growth rate of over 50% in the second quarter. Given the high number of tier-3 and tier-4 cities in China, this progress will establish a robust foundation for our supply chain and operational strategies in additional regions in the future.
An overflow in our supply chain capacity facilitates rapid growth in food R&D, production and processing, creating more value for us. Our R&D manufacturing and processing of meat, grain, and bean products and prepared meals are of top quality in the Chinese consumer market, and we distribute these products to users through the Dingdong app and various retail channels.
Moreover, our products are increasingly being sold to consumers through hotel and catering channels such as [Quzhou], Jinjiang and (inaudible). By leveraging our reputation and channel logistics advantages, we aim to expand our reach to more business customers in the future, fulfilling our mission of making top quality ingredients readily accessible to everyone.
One of the ways we create value is by expanding into international markets. Over the past seven years, we've utilized our supply chain expertise to deliver food from remote areas of China to affluent regions, including Jiangsu, Zhejiang and Shanghai. This has not only satisfied the needs of people in these areas for a better quality of life, but has also generated prosperity for those in remote regions and enhanced overall productivity within society.
Considering the global perspective, there exists a significant disparity between food supply and demand. Leveraging our supply chain capabilities, we can work towards facilitating a more efficient movement of good, of food. This is our original entrepreneurial goal. By leveraging our supply chain capabilities and working hard, we aim to generate significant social and commercial value.
Finally, I'd like to give you an update on our performance outlook for the entire year of 2024 and for the third quarter. Considering our improved performance in the second quarter and also over the past few quarters, we have raised our internal forecast for profitability and scale. We anticipate a significant year-over-year increase in net profit and scale for both the year as a whole and the third quarter, and we're confident that we will continue achieving both non-GAAP and GAAP profitability. We have full confidence in the growth of scale and profits this year, and we are even more confident about the future.
This concludes my speech. Thank you all for listening. Now I'd like to invite our CFO, Wang Song to go over the company's financials.

Song Wang

(Foreign Language)
(Interpreted)
Thank you, Mr. Liang and hello everyone. Before I review our financial performance for the second quarter, please note that all our figures are in RMB.
In the second quarter of 2024, Dingdong generated revenue of RMB5.6 billion, up 15.7% compared to the previous year. Non-GAAP net profit margin was 1.8%, a 1.6 percentage point increase from the previous year, with a net profit of RMB103 million, nearly a [13 fold] increase from the previous year. This is the Seventh consecutive quarter of non-GAAP profitability. The company was profitable under the GAAP standards for a second consecutive quarter with net profit margin of 1.2%, up by 2 percentage points year-over-year, and net profit of RMB67.13 million, an increase of RMB104 million year-over-year.
Operating cash flow showed a net inflow of RMB0.25 billion, marking the fourth consecutive quarter of net inflow. As of the end of June free cash flow for the past 12 months amounted to RMB0.51 billion, the highest level in recent years and reflecting a RMB0.81 billion increase from the same period last year. By the end of Q2, our actual self owned fund balance after deducting the short-term loan stood at RMB2.32 billion, a RMB0.32 billion increase from the end of last year and a RMB0.24 billion increase from the end of March.
As we've always emphasized, Dingdong has not only achieved gratifying revenue growth, but has also continued to increase its profitability. In addition, our financial capacity has been continuously improving; while the number of our frontline stations has also been growing. The number -- the above financial performance demonstrates that we are fully self sufficient and maintaining healthy growth.
Let's review the specific financials. GMV was RMB6.2 billion, up 16.8% year-over-year. Notably, Shanghai, Jiangsu and Zhejiang saw impressive year-over-year growth rate of 16.5%, 28.5% and 30.4%, respectively. This growth was attributed to our expanded coverage and penetration in these regions. Additionally, the Beijing region returned to positive growth with an 8.5% year-over-year increase.
In June all regions including Guangzhou and Shenzhen achieved year-over-year positive growth with same store growth rate achieving 21.6% nationwide. Looking ahead, we anticipate that the growth momentum in June will be sustained during the summer vacation, especially due to the impact of high temperatures. Furthermore, losses in Guangzhou, Shenzhen and Beijing are gradually narrowing each quarter, indicating the success of the company's regional strategy.
Gross profit margin was 30%, down 1 percentage point year-over-year. The decrease was due to price concessions to provide more value to consumers and maintain our competitiveness. It was partially offset by an increase in gross profit margin resulting from improvement in our entire supply chain, which includes direct sourcing, production and processing, warehousing, fulfillment and distribution.
Fulfillment cost rate was 22.4%, 1.2 percentage points lower year-over-year. The increase in order volume has led to improved operational efficiency. Our frontline fulfillment stations processed over 1,000 orders daily on average, up 29.4% compared to a year ago, with Shanghai processing over 1,500 orders daily. We're continually enhancing our service capabilities using algorithms and supply chain operation capabilities. Consequently, the average ASAP order fulfillment time in Q2 was 36 minutes, 2 minutes faster than the previous year, and the 60-minute delivery availability was 97%, an 18 percentage points year-over-year increase.
Sales and marketing cost rate was 2.3%, a 0.4 percentage point increase year-over-year. With strong financial performance and ample cash reserves, we plan to increase our marketing investments to enhance user acquisition, optimize traffic operations, expand our user base in key areas and drive overall business growth.
Total G&A and R&D expenses were 0.4 percentage points lower than in the same period last year, primarily due to economies of scale. We intend to maintain our investment in R&D for food, agricultural technology and technical data algorithm. Non-GAAP net profit margin was 1.8%, resulting in a net profit of RMB103 million. GAAP net profit margin was 1.2%.
At the end of Q2, our balance of cash and cash equivalent, short-term restricted funds and short-term investment amounted to RMB4.16 billion. We're continuously improving the efficiency of capital use and our financing structure. After deducting the balance of short-term loans, the actual balance of our own funds was RMB2.32 billion. In the second quarter, we achieved outstanding financial performance in line with our guidance. Considering our recent operating financial performance and balance sheet strength we're confident that we will meet our performance expectations for the third quarter and the whole year.
This concludes our speech today. Operator we can now start the question and answer session.

Question and Answer Session

Operator

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

Thomas Chong

(Spoken in Foreign Language)
Thanks Nancy, for taking my question. So, according to recent reports, from (inaudible) has restarted recruitment and construction of frontline fulfillment stations and also JD is also deploying frontline fulfillment stations and also (inaudible) is extending the station to more cities. So what are your thoughts on those developments and also how do you foresee the future competition? Thanks.

Changlin Liang

(Spoken in Foreign Language)
(Interpreted)
Thank you for your question. In the past, doubts and concerns arose about our chances of survival due to changes in the macro environment and competitive landscape. However, our consistent profitability and growing scale demonstrate that we have not only survived, but thrived, even in a slow consumption environment.
Previously, there were concerns about challenges in the frontline fulfillment station grid model or even in the fresh grocery e-commerce industry. But I believe our success in this area has encouraged peers to participate and contributed to the growth of a frontline fulfillment grid model and the fresh grocery e-commerce industry.
Now here I want to briefly share our differentiation compared to our peers, there is no right or wrong, good or bad, but only our understanding of our business model. First, there are different interpretations of the fundamental principles within the fresh grocery industry. Many in the industry adhere to the traditional retail approach, which is achieving scale by offering low prices and then leveraging that scale to drive down procurement costs and operating expenses.
However, we've realized that the first principle of traditional retailing, which has been successful since the Walmart era is not applicable to the fresh grocery industry. Instead, the first principle of success is to continuously enhance end-to-end efficiency, to achieve growth at scale, seek profitability and bolster competitiveness. It is crucial that we focus on consistently improving our supply chain capabilities. With these capabilities, we'll be able to serve a larger customer base and meet their evolving needs.
Second, in the past, as our industry developed, everybody was exploring and pursuing various changes to business models. Some constantly modify their operational methods in search of the best solution. We on the other hand focused on adapting our development strategy to accommodate changes in our environment. We always believe that strong supply chain capabilities are essential and that beyond this, the specific model and structure are not as crucial. Robust supply chain capabilities allow us to quickly and effectively adapt to evolving market conditions.
Our growth strategy is unique. Unlike our competitors who focus on retail or e-commerce, Dingdong is primarily a fresh grocery supply chain business. As our supply chain expands, we'll be able to reach more people in different regions in a more adaptable manner. We'll also be able to cater to a wider range of consumers in flexible way. We're not constrained by traditions or forms, but focus on the core elements, observe the world, work diligently, and therefore have greater opportunities and room for development.
For many years, our industry competitors have experienced ups and downs, but we have been steadily moving forward. We're not overtly concerned about competition and rarely evaluate our peers. Our focus is on our initial purpose, mission and self development. Thank you.

Operator

Robin Leung, Daiwa.

Robin Leung

(Spoken in Foreign Language)
Thanks management for taking my question. And during previous earnings call, management focused on supply chain capability, fielding and ways for the company to generate profits. However, today the focus seems to have shifted to future growth. So would you share what is the future revenue growth rate look like for Dingdong in the future? Thank you.

Changlin Liang

(Spoken in Foreign Language)
(Interpreted)
In our previous discussion, we highlighted four key drivers for growth. These factors are linked to the organic expansion of our fresh grocery supply chain capabilities. We’re confident that in the future, these four growth drivers will be able to expand to the same scale as our current business lines or even greater.
Additionally, we have divided Dingdong’s initial development into two stages. The first stage covers the seven-year period from our business establishment in 2017 to the present, representing the transition from zero to one. During this time, we have achieved profitability and have reached an annual revenue scale of more than RMB20 billion. Looking ahead, the second stage will encompass the next seven years, representing the transition from 1 to 10, and we aim to achieve an annual revenue scale of RMB100 billion.
Thank you.

Operator

Bai Yang, CICC

Bai Yang

(Spoken in Foreign Language)
I will translate by myself. The management just mentioned that they anticipate opening 18 new frontline stations this year. Will that increase pressure on the company’s cash flow? Thank you.

Changlin Liang

(Spoken in Foreign Language)
(Interpreted)
Thank you for your question. I’ll let our CFO, Wang Song answer it.

Song Wang

(Spoken in Foreign Language)
(Interpreted)
Thank you, Mr. Liang. I will address this question from three perspectives. First, let me provide a brief overview of our plan for the new frontline fulfillment stations. This year, we have initiated the opening of approximately 80 new stations with a focus on the Jiangsu, Zhejiang and Shanghai regions. Our primary goal is to bolster our presence in these areas to support the company’s long-term growth. As of the first half of this year, we have already achieved nearly half of our target, and the average daily orders of these newly opened stations are rapidly increasing to 800.
Second, our capital reserves are very strong. Each year in Q2, we distribute our year-end bonuses of the previous year. Even after distributing the bonuses, we achieved a net inflow of RMB0.25 billion in operating cash flow, the highest in recent years. Our free cash flow in the past 12 months was RMB0.51 billion, also the highest in recent years.
As our scale increases and profitability improves, we expect a consistent increase in operating cash flow and free cash flow. At the end of Q2, the company had RMB2.32 billion in cash on hand after repaying short-term loans, marking growth for four consecutive quarters. We estimate that the total CapEx investment for these 80 new stations will be around RMB40 million. Therefore, we have enough self-owned funds to complete their opening without impacting our daily operating funds at all.
Third, thanks to our well-established infrastructure, mature supply chain capabilities and operational expertise in Jiangsu, Zhejiang, and Shanghai. Our newly open frontline fulfillment stations have significantly improved in terms of scale and unit economics ramp up. We estimate that the new frontline fulfillment stations in Jiangsu, Zhejiang, and Shanghai can achieve operational breakeven with only 500 orders daily per station.
The ramp up period is about three to six months. Our new frontline fulfillment stations processed an average of 800 orders daily in the first half of this year, and most of them are now breaking even at the operational level. As a result of this rapid progress, the new frontline fulfillment stations will not strain the company’s operating cash. Additionally, these new stations will significantly contribute to our expansion and reach in the Jiangsu, Zhejiang, and Shanghai regions.
In summary, we have sufficient capital reserves to support our frontline fulfillment stations opening. The new stations are ramping up very quickly, so there will be no pressure on the cash flow and they will help us maintain sustained growth. Thank you.

Operator

(Operator Instructions) As there are no further questions, I’d like to turn the call back over to our management for closing remarks.

Nicky Zheng

Thank you. Thank you again for joining our call today. If you have further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next earnings call. Have a good day and have a good night.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.