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Edited Transcript of TOUR earnings conference call or presentation 28-Aug-19 12:00pm GMT

Q2 2019 Tuniu Corp Earnings Call

Nanjing Oct 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Tuniu Corp earnings conference call or presentation Wednesday, August 28, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dunde Yu

Tuniu Corporation - Founder, Chairman & CEO

* Mary Chen

Tuniu Corporation - IR Director

* Yi Xin

Tuniu Corporation - CFO

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Presentation

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Operator [1]

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Hello and thank you for standing by for Tuniu's 2019 Second Quarter Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference call, Director of Investor Relations, Mary.

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Mary Chen, Tuniu Corporation - IR Director [2]

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Thank you, Andrew, and welcome to our 2019 Second Quarter Earnings Conference Call. Joining me on the call today are Donald Yu, Tuniu's Founder, Chairman and Chief Executive Officer; and Maria Xin, Chief Financial Officer.

For today's agenda, management will discuss business updates, operation highlights and financial performance for the second quarter 2019.

Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call, as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in RMB.

I would now like to turn the call over to our Founder, Chairman and Chief Executive Officer, Donald Yu.

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Dunde Yu, Tuniu Corporation - Founder, Chairman & CEO [3]

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Thank you, Mary. Good day, everyone. Welcome to our 2019 second quarter earnings conference call. During the quarter, we remain focused on improving our products, strengthening our supply chain and expanding our distribution channels. Tuniu's long-term competitive advantage is now clearer and more defined than ever. On the product side, we offer a complete suite of top-selling Niu Tour products that captures the evolving demands of Chinese travelers. These products have a higher user satisfaction rating and potentially higher margins. We also continue to innovate new products in accordance to market demands in order to drive new customer acquisition. Tuniu's off-line retail stores were another driver during the quarter.

Our network of stores continue to be an efficient channel of acquiring new customers. Off-line retail stores contributed to approximately 22% of our packaged tour GMV during the quarter compared to 13% during the same period last year.

In terms of the user experience, our off-line stores complement our online customer service to give our customers a complete booking experience. In the second half of 2019, Tuniu will continue to expand the reach of its off-line retail stores network with an increased emphasis on efficiency of our existing stores balancing between scale and profitability. And our S2B2C model, we leveraged our well-known and established brand asset in order to achieve growth through our distribution channels and the profit through our supply chain. Historically, Tuniu's B2C channels such as our mobile applications, tour advisers and our off-line retail stores were our main distribution channels. Over the years, our distribution channel now takes on a more benefit form. Our S2B2C distributions such as Difeng and social e-commerce continue to gain traction. This helps Tuniu evolve from a B2C-centric channel into a multi-channel distribution allowing Tuniu to reach more customers in lower-tier cities at a lower user acquisition cost. I would like to now give an update on a few of our core focuses in greater detail.

Tuniu has always approached products designed and offering with the user in mind. For packaged tour products, we continue to focus this on expanding the penetration of our top-selling products in destinations where we have our competitive advantage. These products are well received by users and serves as a tool to drive customer repurchases. As a result, customers who have used Tuniu contributed approximately 67% of our overall GMV during the quarter reaching a historic high. Compared to other products on the market, our core products are highly competitive in their respective definitions both in terms of quality and cost efficiency. Tuniu's self-operated Niu Tour is a centerpiece of our strategy in product. We launched our first Niu Tour product in 2009, with the idea of designing a high-quality packaged tour product that meets the demand of China's travelers.

In terms of quality, Niu Tour is industry-leading as we package together high-quality products and the services into every one of these products. Niu Tour utilizes Tuniu's well-known brands to offer high-quality products for popular destinations. Compared to other products, Tuniu has full control over the pricing of Niu Tour. This allows us to better monetize these products. Because we designed these products specifically based on the marketing demands, these products have a higher user satisfaction rating and repurchase rate.

In order to keep Niu Tour competitive and industry-leading, we continuously update our products once they reach the later stages of their product cycle. We also actively incorporate direct procurements and our local tour operators into Niu Tour in order to lower costs while having better control over the quality.

As of the end of the second quarter, we have over 1,000 different Niu Tour products covering 240 departure cities across China. Since inception, Niu Tour has served over 5 million trips, while maintaining a user satisfaction rating of over 97%. For customers seeking quality, Niu Tour has developed to become the #1 choice for these customers.

In terms of contribution to our financials, Niu Tour contributed to approximately 20% of our packaged tour GMV, with the potential of reaching 50% in the future. While Niu Tour is fully provided by Tuniu, another brand that we recently launched is Tuniu Selective (sic) [Tuniu Selection], which is the attraction of highly rated products provided by our suppliers. We closely work with our suppliers to ensure Tuniu's flagship products are of the highest quality.

Going forward, we will also offer more Tuniu-branded products for themes such as family tours, youth tours, education tours, honeymoon and even travel photography. Our emphasis on self-guided tour products is another component of our emphasis on products. We divided the user demand into 3 types in order to better address the needs of each type of user. The first type of user are the ones that are looking for and standardize the packages. Tuniu's dynamic packaging system addresses the demand of these users by allowing them to actively piece together individual products, such as hotels, transportation and destination-based products and services.

From the user standpoint, we are able to customize a trip based on their needs, while also saving money through the bundled price. From Tuniu's standpoint, our dynamic packaging automatically creates the products without the need of human assistance allowing us to more efficiently create products for our customers. The second type of users pick standardized products and experience. In order to address the needs of these customers, Tuniu recommended popular and standardized destination-based products and services to these customers. Finally, the last type of users demand tailored products such as chartered tour guides and transportation-themed products such as shopping or food tours. These products typically have the highest margins because they are often tailored. As often -- as Chinese travelers become increasingly experienced and their consumption power increases, self-guided tour travelers who prefer same activities such as shopping, health care or beauty will quickly increase in numbers.

Next, I would like to talk about our efforts in developing our S2B2C model. In the travel industry, the supply chain is the vital component that connects the supply and demand. We made strong progress during the last few years in further strengthening our supply chain. We continue to consolidate procurement across the company in order to maximize our bargaining power with suppliers and minimize risk, while better sharing inventory across our various business units. On the other hand, direct procurement continues to scale reaching 60% of our packaged tour GMV during the quarter. We also further strengthened our service network with launch of 2 new local tour operators, 1 domestic and 1 international during the quarter. As well as at the end of the second quarter, we have a total of 33 local tour operators across the world. For the first half of 2019, our local tour operators served 470,000 trips, increasing more than 40% year-over-year compared to the first half of 2018.

Margins of our products using our own local tour operators continued to improve during the second quarter, increasing by approximately 3% to 5% compared to the same period last year. The utilization of centralized procurements across the company and the development of our local tour operator service networks will improve our take rates in the long run. We also continued to make strides in the distribution end of our S2B2C channel -- model during the quarter.

Social e-commerce continues to be a fast-growing segment. Based on initial results, social e-commerce is able to help Tuniu penetrate into regions and access customers that we have not reached before. These customers are generally located in lower-tier cities. As of the end of the second quarter of 2019, we have 10,000 distributors using our social e-commerce tools with conversion rates continuously growing.

Our Difeng distribution also continued to grow on pace with our expectation, with GMV increasing by double digits during the second quarter on a year-on-year basis. We continued to find new ways to help our distributors. For example, we recently introduced a tour in Difeng that allows our distributor to assemble tailored products for their customers. Going forward, Difeng's distributors will play an important role in helping Tuniu mitigate inventory risks and the lower blended procurement cost. In the second half of 2019, we will place increased emphasis on technology and notably our dynamic packaging system. For our customers, our dynamic packaging system allows them to customize their own packaged products and be able to save money on the bundle when compared to individually booking the products by themselves.

We are also making investments to increase the level of automation in our work processes in order to improve the efficiency of our employees and the overall company.

Going forward, we will also continue to develop new tours for our distributors so that they are able to leverage Tuniu's supply chain and back-end system to distribute products to their customers. We believe our commitment to the development of our service and sales network, coupled with our improving internal efficiency, will help Tuniu better capture the future growth of China's online [leisure] travel market and better position Tuniu to extract long-term value for our shareholders.

I will now turn the call to Maria Xin, our CFO for the financial highlights.

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Yi Xin, Tuniu Corporation - CFO [4]

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Thank you, Donald. Hello, everyone. Now I'll walk you through our second quarter 2019 financial results in greater detail. Please note that all the monetary amounts are in RMB unless otherwise stated. You can find the U.S. dollar equivalent of the numbers in our earnings release.

Starting from the second quarter of 2019, net revenues was CNY 520.3 million representing 1% year-over-year decrease. Revenues from packaged tours was down 2% year-over-year to CNY 429.5 million and accounted for 83% of our total net revenues for the quarter. The decrease was primarily due to the decline in demand for travel to certain destinations.

Other revenues were up 4% year-over-year to CNY 90.8 million and accounted for 17% for the total net revenue. The increase was primarily due to a raise in commission fees received from the certain travel-related products.

Gross profit was down 7% year-over-year to CNY 233 million for the second quarter of 2019. Operating expenses for the second quarter of 2019 were CNY 432.2 million, up 16% year-over-year, excluding share-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses were CNY 382.5 million, representing a year-over-year increase of 23%.

Research and product development expenses for the second quarter of 2019 were CNY 80.2 million, up 4% year-over-year. The increase was primarily due to an increase in research and product development personnel-related expenses. Sales and marketing expenses for the second quarter of 2019 were CNY 224.6 million, up 29% year-over-year. The increase was primarily due to expansion of our off-line retail stores and our strengthened promotional campaigns on certain marketing channels.

General and administrative expenses for the second quarter of 2019 were CNY 134.4 million, up 4% year-over-year. The increase was primarily due to an increase in general and administrative personnel-related expenses.

Net loss attributable to ordinary shareholders was CNY 168 million in the second quarter of 2019. Non-GAAP net loss attributable to ordinary shareholders, which excludes share-based compensation expenses and amortization of acquired intangible assets, was CNY 116.4 million in the second quarter of 2019.

As of June 30, 2019, the company had cash and cash equivalents, restricted cash and short-term investments of CNY 2 billion. Cash flow generated from operations for the second quarter of 2019 was CNY 235 million. In the second quarter, cash conversion cycle was negative 34 days compared to negative 27 days in the corresponding period last year.

Capital expenditures for the second quarter of this year was CNY 28 million. Tuniu currently expects to generate CNY 763.1 million to CNY 801.3 million of net revenue for the third quarter of 2019, which represents 0% to 5% year-over-year increase. Please note that, all the forecast reflects Tuniu's current and the preliminary view on the industry and its operations, which is subject to change. Thank you for listening. We are now ready for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes [Elaine Hi], a private investor.

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Unidentified Participant, [2]

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I have 2 questions. First, can management share with us the revenue breakdown by destinations for this quarter? The second question, what is the reason for the increased expenses during this quarter? Are you expecting the increase in expense to be a trend going forward?

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Yi Xin, Tuniu Corporation - CFO [3]

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Thank you for your questions. In term of the destinations, we are continuing to be affected by the [various] external events such as tariff tax and internal trade tensions. According to the official travel, specifics (inaudible) we are seeing decline in Chinese travelers in a number of destinations.

Now in terms of the gross booking breakdown for this quarter, domestic tours contributed to Tuniu about 30%; and the Europe contributed 20%; Japan and South Korea together, 10%; Southeast Asia, 10% and the islands and both the Maldives together, 10%; and Americas, about 5%. So to answer your second question about the expenses during this quarter, as of the second half last year, we opened a lot of new off-line stores. Compared to same period last year, we have more than 300 off-line stores opened during the second half 2018. So this is a result of the expenses increase in this year compared with the same period last year. So -- but in second half of this year, so this increasing will be reduced. So going forward, we will continue to optimize our off-line store's efficiency and increase our employee's sales in the off-line stores and unlock Tuniu's profitability potential. Thank you.

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Operator [4]

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(Operator Instructions) The next question comes from [William Wan] of [Bluesky Capital].

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Unidentified Analyst, [5]

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You mentioned the S2B2C in your opening remarks. Can you elaborate a little bit how it's different from our previous strategy?

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Dunde Yu, Tuniu Corporation - Founder, Chairman & CEO [6]

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[Interpreted] This is the first time that we mentioned S2B2C model. So in the past few years, we have been focusing on diversifying our sales channels, and we are able to effectively lower our user acquisition cost. And this can be seen through our financials.

Previously, Tuniu has primarily focused on B2C distribution. However, as we really scaled, the marginal user acquisition costs also increased rather significantly. So in the past few years, we've been trying to diversify our channels, and one of the ways we really focus on raising the amount of repeat customers and their repurchases on Tuniu as well as we started opening a number of off-line retail stores in order to really diversify our channels.

As we really diversify our sales channels, we're trying to leverage ways to acquire new users through other means. For our overall company, we are trying to control the user acquisition cost to suitable amounts as well as we're trying to minimize our loss, while also balancing growth.

So our off-line stores growing scale, we have accumulated a rather large amount of experience in operating these off-line stores. So we're seeing a number of our off-line stores are breaking even and a certain amount are rather profitable. These stores are generally located in first- and second-tier cities. So overall, we are very confident in the health and state of these off-line retail stores.

So on the supply chain side, Tuniu has always focused on penetrating deeper into the supply chain. We started our Niu Tour products 10 years ago. So we have a lot of experience running these products. In 2016, we also started launching a number of local tour operators across the world. As of now, we have 33 in the world. So by using our local tour operator as well as being very penetrated into the supply chain, we were able to offer good services and also to increase the amount of repurchases among our customers as well as having the possibility of growing our gross margins.

In addition to our Niu Tour products, we recently also launched our Tuniu Selection. We worked with a number of high-quality suppliers that we have a long historic working relationship with. And then we're able to recommend these products to our customers.

So internally, we are -- we have consolidated our procurements among the different departments. This way, we are able to really scale our purchases and be able to have a strong bargaining power when we meet with our suppliers.

So this consolidation of our procurements, we really started this during the second quarter of 2019. So we expect there to be a lot more in terms of a procurement potential through this.

By focusing on our products, we are able to provide our distributors with high-quality products. So by having our own Tuniu brand of products as well as having our own local top tour operators and doing good direct procurements, we can provide all of our distributors, which includes B2C social distributors, B2B enterprises, all these channels with high-quality products so they are able to grow.

We are transitioning from a really B2C-centric model, where we have somewhat scattered procurement among -- within the company. Now we have -- are dedicating more resources into other channels as well as collectively procuring products and services. We believe our strategies here will help us unlock growth potential as well as profitability potential. Thank you.

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Operator [7]

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(Operator Instructions) We are now approaching the end of the conference call. I will now turn the call over to Tuniu's CFO, Maria Xin for closing remarks.

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Yi Xin, Tuniu Corporation - CFO [8]

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Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support and we look forward to speaking with you in the coming months. Thank you.

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Operator [9]

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Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]