Participants

Junyu Li; Vice President, Director; ZKH Group Ltd

Long Chen; Chairman of the Board, Chief Executive Officer; ZKH Group Ltd

Chun Lai; Chief Financial Officer; ZKH Group Ltd

Leo Chiang; Analyst; Deutsche Bank

Kai Zhao; Analyst; CICC

Ella Ji; Analyst; China Renaissance Securities Inc

Presentation

Operator

Ladies and gentlemen, good day and welcome to ZKH Group Limited's fourth quarter and fiscal year 2024 earnings conference call.
Today's conference is being recorded. At this time, I would like to turn the conference over to Jin Li, head of investor relations. Please go ahead.

Junyu Li

Thank you, operator. Thank you, everyone, and welcome to our call today.
Joining us today, I'm Mr. Eric Chen, our Founder, Chairman and Chief Executive Officer and Mr. Max Lai our Chief Financial Officer. Before turning the call over to Eric, I'd like to briefly review our safe harbor provision.
Please note that the moment the comments made during today's call represent management views as of today and may include forward-looking statements. For further details, please refer to our latest safe harbor statement in the earnest release on our IR website. We will also discuss certain non-GAAP financial measures for comparison purpose only.
Please refer to the earnings release for definitions of these measures and a reconciliation of GAAP to now get results. With that, I will now turn the call over to Eric.

Long Chen

(spoken in foreign language)
Hello everyone, thank you for joining ZKH's fourth quarter and full year 2024 earnings conference call. In Q4 we achieved a GMV of RMB2.69 billion, bringing our full year 2024 GMV to RMB10.48 billion.
While both figures show a slight decline compared to the previous year, this was primarily a result of our business optimization initiatives, excluding the impact of those optimizations, both Q4 and the full year GMV for 2024 delivered double digit year-on-year growth.
(spoken in foreign language)
In terms of profitability, we narrowed our adjusted net loss in Q4 to RMB15 million and achieved profitability in December 2024 on a single month basis. For the full year 2024, we substantially narrowed our adjusted net loss by approximately 44% year-over-year, bringing it down to RMB160 million.
Our adjusted net loss margin also improved from 3.3% in 2023 to 1.8% in 2024, reflecting a substantial enhancement in our profitability.
(spoken in foreign language)
Moving on to cash flow, in Q4, net cash inflow from operating activities reached RMB171 million, marking the third consecutive quarter of positive cash flow. For the full year 2024 net cash inflow from operating activities totalled RMB229 million, achieving positive operating cash flow for the full year for the first time, which highlights the improvement in our financial stability and resilience.
(spoken in foreign language)
As of Q4 2024, we have essentially completed the strategic optimizations of our relevant business sectors. The impact of these adjustments on revenue growth is expected to gradually diminish moving forward, and we are confident to achieve rapid growth in 2025 and achieving full year profitability for our China business.
(spoken in foreign language)
Now let's dive into our progress in customer acquisition, product capability development, and AI-driven growth, starting with customer acquisition. We remain committed to our three-pronged strategy deepening engagement with industry key account customers, prioritizing coverage in key regional markets, and expanding into overseas markets. This approach has yielded notable results.
(spoken in foreign language)
In managing our industry key accounts, we focused on thoroughly understanding and addressing application scenarios in key industries, refining our product pool and fostering closer collaboration with strategic suppliers. These efforts drove breakthroughs in cost reduction and product innovation.
Enabling us to offer industry customers more cost effective procurement solutions for the full year 2024, we achieved over 20% GMV growth in these industries electricals, electronics, and telecommunications, new energy vehicles, transportation, and public utilities.
(spoken in foreign language)
In terms of regional coverage, we implemented a grid-based strategy for deep penetration and advanced localized operations, further elevating fulfilment efficiency while extending customer reach. We also further boosted transaction conversions through precision marketing. Driven by these coordinated initiatives, the total number of our transacting customers rose to approximately 84,000 in 2024, a year-over-year increase of 26%, marking four consecutive years of rapid growth.
(spoken in foreign language)
As for overseas markets, our US independent website was officially launched at the end of last year, covering multiple product categories including personal protective equipment, hand tools, power tool accessories, and material handling and storage solutions.
Since its launch in December 2024, the US website has maintained rapid month over month growth in the number of transacting customers, demonstrating both the growth potential of the US market and the competitiveness of our products in this market.
(spoken in foreign language)
To boost our product capabilities, we have established a joint laboratory with the National Quality Supervision Authority, strengthening our R&D capabilities and the quality system of our private label products. In 2024, the GMV of our private label products increased by 29% year-over-year, now accounting for 6.7% of our total GMV, up from 4.9% in the same period of the previous year.
In addition, we have optimized our supply channels, integrated upstream resources, and enhanced cost control, driving improvements in overall gross margin.
(spoken in foreign language)
Now let's turn to AI applications leveraging our extensive product data and industry expertise. We have crafted a suite of intelligence tools that have effectively elevated operational efficiency and customer experience. For customer enablement, we focused on addressing the challenge of material standardization for our customers through an AI material manager.
Within just three months of its launch, it has enabled customers to standardize over 2 million material entries, achieving an identification accuracy rate of more than 90%, greatly improving the efficiency of material management for our customers.
(spoken in foreign language)
For internal efficiency, we have developed an AI expert assistance which automates responses to routine inquiries from customers and suppliers. To date, this tool has served over 12,000 enterprises.
In the area of process automation as of the end of February 2025, we have developed and deployed over 1,200 RPA robots covering major business processes, reducing the need for manual intervention. Thanks to the adoption of AI tools, the productivity of our customer service team members in handling order processes has increased by 23%.
(spoken in foreign language)
Looking ahead to 2025, we are committed to driving progress across these key areas, prioritizing the refinement and upgrade of our organizational structure, business workflows, and workforce management.
These efforts will elevate operational efficiency and workforce productivity, ultimately enabling us to reduce operational costs. We are confident that this approach will lead to strong revenue growth and help us achieve our full year profitability target for our China business in 2025.
Now I will turn the call over to our CFO, Max Lai to present our financial results.
Thank you everyone.

Chun Lai

Thank you, Eric, and thanks everyone for making time to join our earnings call today. I will now provide an overview of our 2024 fourth quarter and full year financial results.
Despite facing challenges in demand environment and the effects of our business optimization, we conclude the year we've received its results. Our total GMV reaches RMB2.7 billion in the fourth quarter and RMB10.5 billion for the full year.
Representing a year-over-year decrease of 16.1% and 5.4% respectively. If we exclude the effect of our strategic business optimization initiatives, we achieve the double digit year-over-year growth for both of the fourth quarter and the full year of 2024.
Manly attributable to the continued growth in SMB customer numbers and the increased the contribution of GMV from industry key customers driven by our enhanced service [face] capabilities. We believe that the impact of this adjustment has gradually lessened. Putting us on a stronger position towards solid and sustainable growth.
Total revenue, net revenue experienced a slight decrease of 3% in the fourth quarter, amounting to RMB2.4 billion. While full year revenue remained steady and RMB8.8 billion. This was primarily due to lower revenues from the marketplace model, resulting from optimization of our low margin and long customer credit term business.
Partially mitigated by the increased revenues from the product sales model. While we continue to refine our revenue mix. We are equally committed to enhancing operational efficiency and driving probability growth.
For gross profit, it was RMB405 million in the fourth quarter, reflecting a decrease of 2.9%. Why was profit margin held steady over the year-over-year at 17.1%. Looking at details, the gross profit margin of sales model with the [execu] platform increased from 14.4% to 16.4%. And the rate of marketplace model rose from 11.1% to 14%.
These improvements were mainly due to our business optimization efforts, reduced procurement costs and an increased the proportion of GMV from higher margin private labor products.
For the full year, gross profit was RMB1.5 billion marking an increase of 4% growth profit margin improved to 17.2% compared to 16.7% in 2023. Primarily driven by enhanced gross profit margin in the product that model with the gauge platform.
Resulting from business optimization, lower procurement costs, and higher proportion of GMV from more profitable private label products. For the operating expenses, it amounts to RMB437.6 million in the fourth quarter, representing 18.5% of net revenues.
And increased from 17.3% in the same period of 2023, maybe due to, mainly due to higher share-based compensation expenses. If we exclude share-based compensation expenses, operating expenses amount to RMB423.5 million, accounted for 17.9% of total net revenue compared to 17.1% in the prior year.
For the entire year of 2024, total operating expenses reached RMB1.85 billion, representing 21.1% of net revenues. A slight decrease from 21.2% in 2023. If we exclude share-based compensation expenses, operating expenses amounted to RMB1.74 billion constitute 19.9% of net revenues compared to 21% in 2023.
As a result, for the fourth quarter, loss from operations with RMB32.6 million. Resulting in an operating loss margin of 1.4%. For the full year of 2024, the total loss from operations amounts to RMB338.8 million compared with RMB398.7 million in 2023. Leading to an operating loss margin of 3.9% and improvement from 4.6% in 2023.
For the fourth quarter, the non-GAAP adjusted net loss was RMB15 million. Resulting in non-GAAP adjust the net loss margin of 0.6%. For the full year of 2024, the non-GAAP adjust the net loss of totalled RMB159.5 million, and improvement of 44.5% from RMB287.5 million in 2023.
With no GAAP adjusted net loss margin of 1.8% compared to 3.3% in the prior year, making us very close to and approaching to full year breakeven point. Our cash position has also strengthened as we generated net cache of RMB170.7 million from operating activities in the fourth quarter, and RMB229.1 million in 2024. Making our third consecutive quarter and our first full year of positive net cash inflow from operating activities.
Before I conclude, I would like to reiterate our commitment to delivering value to our shareholders. Throughout this quarter, we continue to execute our shared repurchase program as announced in the June of 2024.
This ongoing efforts underscores our strong confidence in the company's growth prospects and respects our delegation to creating long-term value for our shareholders.
With that, I would now like to open the call to Q&A. Operator, please go ahead.

Question and Answer Session

Operator

(Operator Instructions)
Leo Chiang, Deutsche Bank.

Leo Chiang

(spoken in foreign language)
Thank you management for texting my questions. I have two questions. The first one is, can management share, China's MRO industry outlook in 2025 and the long-term growth outlook? My second question is, could management share a 2025 outlook of company GMV and performance by customer verticals?

Long Chen

(spoken in foreign language)
Sure. China's manufacturing industry is enormous and now what's in front of us is this opportunity of doing business globally as well as in China. I think that is a better opportunity for us.
(spoken in foreign language)
Yes, we do have geopolitics and the tariffs are exerting some impact, but I would say the vast majority of MROs in Europe and the US are no longer produced locally. The manufacturing capabilities congregate in China or Chinese companies that have relocated to Southeast Asia.
So despite the fact that there's tariffs, the Chinese MRO companies have not lost their advantages, quite to the contrary. For those Chinese companies that have the capabilities to integrate global supply chains, this is a great time for them.
(spoken in foreign language)
And on the other hand, digitalization is only happening more rapidly in this space, and we're seeing more consolidation in the MRO space. So that is to say, for leaders in this space, we will definitely be able to enjoy longer term and sustainable growth.
(spoken in foreign language)
So we are enjoying a very good leading edge in the MRO space and we are also a leader when it comes to expanding business overseas. We are the first Chinese-based MRO company to ever set up shop in America, and we have fully prepared for having a globalized supply chain.
We have also set up a production innovation centre in Taichung, and so we are the first Chinese MRO company to ever engage in R&D and innovation to make our product offerings more competitive.
So basically we have enjoyed and we are enjoying a leadership position in the MRO space on practically all fronts.
(spoken in foreign language)
And in terms of where we are in our journey, this early stage of uncertainty of starting up a business is already behind us. In 2024, we were on the verge of profitability, and we are fully confident that we will be able to turn a profit in 2025, and our cash flow and cash reserves are both going very strongly.
So what we are going to do and what we need to do going forward is to keep improving our operational efficiency, expand our market share to enjoy a very good developmental period.
(spoken in foreign language)
So to answer your second question, as of right now, as of the first quarter of 2025, in terms of order value order GMV coming from our large clients and the regional SME clients, they have both recorded close to 20% year-on-year growth.
(spoken in foreign language)
Specifically, the GMV of purchase orders from large clients in sectors such as electrical equipment, EVs, telecommunication, electronics, new pharmaceutical materials, steel, and non-ferrous metals, and transportation has grown by over 20% year-over-year as of the first quarter.
(spoken in foreign language)
Even though the impact from the business adjustment that was mentioned earlier would continue to have about one to two months of impact, we expect the business in 2025 to grow much higher than 2024.
Just so I think that were my answers to your two questions.

Leo Chiang

Thank you.

Operator

Kai Zhao, CICC.

Kai Zhao

(spoken in foreign language)
So I have two questions here. First, could you provide some updates on overseas and US, business operations since the independent website launch in December and in the color on 2025 overseas business outlook will be great?
And the second one is, could you share some views on tariff impacts on the company's overseas business and any progress on replacing the domestic suppliers with overseas suppliers?

Long Chen

(spoken in foreign language)
Now So, when it comes to developing our business overseas, there's two things we primarily consider. Firstly, we follow Chinese, companies, large Chinese companies wherever they go. So when Chinese companies go to Southeast Asia or Europe to set up shop there, we will follow them.
And we have already registered a subsidiary in Thailand, and very soon this company will be able to, or this subsidiary of ours will be able to serve Chinese companies there and some local companies in Southeast Asian countries including Thailand and Malaysia.
Second point is we always track where high value, high margins, high prices like, and our conclusion is when it comes to the MRO market, those high margin products tend to exist in markets where there's no existing manufacturing capacity.
And specifically I'm talking about markets like Europe, the US, Japan. So basically, those developing markets. So, we have decided and have already gone to those, we decided to go to those markets, and we will be setting up a local company, a local brand, and localized team and manufacturer and the supply our MRO products to those the customers in those markets and we have already done that and are doing that in the US and we plan to replicate once we, succeed in the US, we plan to replicate that success in the European market as well.
(spoken in foreign language)
Specifically for our strategy in the US market, our goal is to become a Costco in the MRO space. And given the local realities, given the local supply chain capabilities, it is impractical for us to replicate our model in China. So we decided to cherry pick MRO SKUs in the US market.
And so far we have made 412 SKUs available in our in the US market and 1,300 SKUs are yet to be launched and we have covered sectors including PPE, hand tools, power tools, and accessories, packaging, HVAC, and the refrigeration equipment and office supplies.
And of course, we'll be adding more SKUs as our business evolves.
(spoken in foreign language)
In terms of our US e-commerce website, it was launched in December 2024, and since its launch, the number of registered customers has exceeded 1,500, and both weekly and monthly customer orders have seen rapid growth.
(spoken in foreign language)
To further improve our product quality and the technological capabilities and competitiveness, we have set up an innovation R&D centre in Titan as was alluded to earlier, and we're working with research institutions, companies, and suppliers, and this centre integrates R&D testing, prototyping, production, and warehousing functionalities for a wide range of product categories.
So we are able to continually or continuously deliver internationally competitive MRO products and I believe China is the only country that has such a large, vast engineering or engineers, dividend. And as long as we work really hard and achieve a lot in terms of R&D, we will be able to have a lot of say in the global supply chain.
(spoken in foreign language)
So to answer your second question, R&D in China enjoys very high efficiency and low cost. So, yes, there might be tariffs and the different restrictions imposed on where we can manufacture products. But we can always do R&D in China. So manufacturing locations can be restricted, but we will stay nimble and adjust according to the realities and policies.
(spoken in foreign language)
So we have established a global sourcing team and this team is allowing us to diversify our supply chain risks and expand our product categories. And as of now, approximately 40% of SKUs supplied to the US market can be sourced from suppliers from outside of mainland China, including South Korea, Vietnam, and Malaysia, and even if we factor into tariffs, factoring tariffs and factor in the possibility and the reality of shifting to suppliers outside of China, ZKH's products still enjoy a significant price advantages in the US market.
(spoken in foreign language)
That was all from me for your two questions.

Kai Zhao

Thank you.

Operator

Ella Ji, China Renaissance Securities Inc.

Ella Ji

(spoken in foreign language)
So two questions from me as well. First, can management discuss the 2025 outlook of the company's gross profit margin?
Second question is, can management discuss the top three focus and the targets of the company and the CEO for year 2025?

Long Chen

(spoken in foreign language)
To your first question regarding gross margin, our ZKH 1P ZKH platform in the next few years, our gross margin is likely to increase by 1% to 1.5% points annually, and we are able to exceed a 20% gross margin, and we are confident to achieve that.
In terms, and actually last year in terms of GMV, our gross margin in the 1P platform grew by 1.4% points. If we look at the GKH platform for our 3P business, our take rate is likely to be steady at around 11%, and we hope to work with more high-quality third-party merchants. Speaking of our GBB platform focused on serving smaller businesses, we also have an opportunity to further increase its gross margin to over 10%.
Our long-term profitability growth is going to be driven by mainly three factors. First, as our scale growth, we are likely to receive more supplier support, thus helping us improving margin. And secondly, our private label products is another strong driver of gross margin.
Currently, private label only accounts for about 6% of our total sales, and our goal is to increase it to over 30%. And this high margin product category or business category is to further drive our overall profit margin. And finally, but also importantly, as we expand globally, the US and the European markets will become further stronger drivers for gross margin as we increase sales in those markets.
(spoken in foreign language)
We have already established our top three priorities for this year in terms of our company's work. The first one is to further strengthen our product competitiveness. I believe that this is the most important. Core competitiveness for our company, especially in this age of AI and digital technologies, customers are going to place a higher demand on our product quality and product capabilities.
And I believe with our stronger R&D capabilities and further growth in private label products as well as driving costs lower and margin higher, we are confident that our product capabilities will further improve going forward and that will help us transform our business truly from a sales-driven one to a supply-driven one.
(spoken in foreign language)
Our second top priority for this year is to increase our market share. We will on the one hand, further increase our wallet share with our existing customers. Given the enormous scale or size of the MRO market, we believe that there is still ample space for us to further increase wallet share with our existing customers. On the other hand, we will also continue to rapidly acquire new customers, and that will help us further expand our market share.
(spoken in foreign language)
Our third top priority for this year is to further improve our operational efficiency, and this is also going to be achieved through three main ways. Number 1, to leverage new technologies including AI and intelligent technologies and advancement in these areas to further improve efficiency.
And number 2, our talents, we will in the past year we have already done a lot of work to improve the capabilities of our people, and this is going to be an ongoing effort.
And the third driver for operational efficiency is again our management, the overall management of the company and our management capabilities. I believe that with these three initiatives going on in 2025, we are hopeful that our operational efficiency will further improve, and our cost will go down further. And we will be able to nurture a disciplined and highly capable team, talent team ready for the future growth and long term growth of our company.
(spoken in foreign language)
That's my response to your questions.

Operator

And that concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Junyu Li

Thank you once again for joining us today. You can find the webcast of today's call on our IR website. If you have any further questions, please feel free to contact us. Our contact information can be found in today's press release.
Thank you and have a great day.

Operator

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