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Edited Transcript of TOUR earnings conference call or presentation 23-May-19 12:00pm GMT

Q1 2019 Tuniu Corp Earnings Call

Nanjing May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Tuniu Corp earnings conference call or presentation Thursday, May 23, 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 First 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 like to now 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, and welcome to our 2019 First 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 first quarter of 2019.

Before we continue, I refer you to our safe harbor statement in 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 first quarter earnings conference call. In 2019, Tuniu will focus on maintaining and expanding its long-term competitive advantage. On the supply side, we continue to consolidate and strengthen our supply chain in order to offer high quality and competitively priced products to our customers.

During the first quarter of 2019, direct procurement as a percent of our package tour, GMV, reached 68%. We also continue to refine our local tour operators in order to provide the highest quality services to our customers. As of March 31, 2019, Tuniu operates 31 local tour operators. For our sales channel, we continue to make strides in diversifying our distribution channels through our social marketing, off-line stores and B2B distribution. As of March 31, 2019, Tuniu operates 536 off-line retail stores throughout China.

We also made investments to our off-line and online experience by further integrating our professional and dedicated customer service representatives. Technology-wise, Tuniu continue to heavily invest in the development of innovative tools and the strengthening of our core systems. Over the years, Tuniu invested over RMB 2 billion in the development of those core technologies. Our dynamic packaging system continues to be industry leading, allowing our customers to dynamically package various travel products, such as air tickets, hotel booking and destination-based products into one bundled product. Overall, our service, sales and technology networks are central to our long-term ability to differentiate our sales from our peers.

This year, we will also put further emphasis on the improvement of the customer experience. Areas such as the user experience of our proprietary products, price competitiveness of our dynamic packaging system and service quality of our customer representatives will be key topics of focus. We will leverage our widely recognized brand and extensive data, our user preference to provide high-quality products through Niu Tour, which are organizing tours that are directly designed and procured by Tuniu and Tuniu Selection, which are best-selling products from our top suppliers.

During the first quarter of 2019, we also made adjustments to our corporate structure in order to better execute our strategies in the future. Our leisure travel division will primarily focus on providing high-quality service to our customers. Our Difeng division will focus on the supply chain and B2B distribution. With these adjustments in place, we are able to better align the interest of our business departments and to set more detailed strategies and goals for each division. In the long run, these changes will give Tuniu the ability to better adapt to the changing leisure travel industry in China.

I would like now to give an update on a few of our core focuses in greater detail. First, I would like to talk about product offerings. We believe Tuniu's core advantage in travel products can be categorized into 3 main compliments: diversification; quality; and price. Tuniu's proprietary direct procurement products, or Niu Tour, offers high-quality services to medium to high-end customers. Niu Tour's product is based on the market demand and primarily focus on popular destinations. Our tours are designed based of our years of experience in each destination and provide a truly unique experience for our customers.

For our suppliers, we recently launched a new category. Top products from our suppliers that have higher user ratings, repurchase rate and consistency in-service quality can be categorized as Tuniu Selection. Tuniu will provide a listing priority revision and promotions for this high-quality products.

In terms of catering to the diversifying demands of our customers, Tuniu offers a wide selection of products, SKUs, to the completement of our Niu Tour and Tuniu Selection products. Quality wise, Tuniu continues to reap the minimum requirement products. Products are required to maintain a user review score of more than 88% in order to remain listed on Tuniu. This is up from 75% previously. We have reprioritized our product offerings to focus on the best-selling products in popular destinations. This allows us to further concentrate our user traffic into the top-selling products, SKUs, improving the travel experience and increasing customer repurchase rate. Also, by collectively making procurements of these best-selling products, it allows us to improve our bargaining power and effectively increase our product margins.

By emphasizing products, we are able to maintain our competitive advantage by offering differentiated products from our peers. Additionally, by further reclassifying our products into different categories, we are able to more efficiently recommend products to our customers based on their preference and demographics.

Tuniu's dynamic packaging system, which package together individual products and services into one bundle continues to be refined. This system leverages our years of accumulation in consolidating the travel supply chain and system development. Through our dynamic packaging system, the price of 2 products bundled together is cheaper than individually purchasing the 2 products. We believe the feature is highly valuable to self-guided tours to our travelers as it provides a clear way of saving money and simplifying booking process.

Next, I would like to talk about our progress in improving Tuniu's overall user experience. We continue to refine the user experience of our off-line stores by further integrating our online dedicated and professional customer servicing to the off-line experience. Tools, such as our social marketing app, WeChat mini application and WeChat groups allow our off-line store employees, our online customer representatives and social marketing retailers the ability to effectively sell Tuniu's products and services to their respective social circles. This further enhances Tuniu's sales network into local communities, social groups and various consumption settings.

During the first quarter, off-line retail stores contributed 20% of our total packaged tour GMV during the quarter. Our off-line retail stores allow us to accumulate a stronger sales channel and will benefit us in the long run. This year, we will slowdown the opening of new off-line retail stores compared to last year in order to enhance the efficiencies of our existing stores. Although our off-line store model is already clearly defined, we believe this continues to give room for improvements in product offerings and store management that can further unlock the profitability potential of these stores.

Social marketing is another highlight during the quarter. We started developing our social marketing distribution tool last year in order to provide our off-line store with the ability to provide a wider range of product selection and efficiently distribute our products and services to their social network. The tool has gained strong traction with external parties, such as social marketing distributors, community influencers and travel distributors. Users of our social marketing tool have -- has an advantage during the sales process as they are able to easily distribute Tuniu's products to their social circle.

Our social marketing distribution app also launched during the quarter. The application provides a wider range of features for distributors, allowing them to more easily browse through the available products and services and to share it into various channels. As of the end of the first quarter, over 5,000 stores have been opened on our social marketing tool. During March of 2019, 70% of these stores were active. We also -- we have also interpreted the usage of our social marketing tool to improving repurchase rate of our existing customers by increasing with -- our customers through WeChat.

Lastly, I want to briefly talk about our different B2B distribution. Difeng continues to be the only travel B2B distributor in China to offer the complete suit of travel products and services. As a readout, Difeng continues to gain popular rating among suppliers and distributors. During the quarter, packaging tool, GMV, generated on Difeng increased by approximately 50% year-over-year. Because B2C travel is a relatively low frequency consumption, while B2B distribution is high frequency, we believe Difeng will help us increase the consistency of our distribution. Going forward, Difeng will continue to be a crucial part of our sales channel and in China's travel industry.

Tuniu, in 2019 will focus on maintaining and further expanding its competitive advantage. We will put increased resources in key areas, such as the improvement of our travel products and customer experience. We believe that the offering of higher quality and diversified products and providing a superior customer experience are 2 key areas that will have Tuniu truly differentiate itself from market peers.

I would now turn the call over 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 will walk you through our fourth 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 first quarter of 2019, net revenues were CNY 456.9 million, representing 5% year-over-year decrease. Revenues from packaged tours were down 9% year-over-year to CNY 365.9 million and accounted for 80% of our total net revenues for the quarter. The decrease was primarily due to the decline in certain destinations.

Other revenues were up 17% year-over-year to CNY 91 million and accounted for 20% of our total net revenues. The increase was primarily due to the increase in revenues generated from financial services and commission fees received from the certain travel-related products.

Gross profit was down 5% year-over-year to CNY 250.8 million for the fourth quarter of 2019 (sic) [first quarter of 2019]. The decrease was primarily due to the decline in revenue from packed tours.

Operating expenses for the fourth quarter 2019 (sic) first quarter of 2019 were CNY 431.4 million, up 12% year-on-year excluding share-based compensation and amortization from acquired intangible assets. Non-GAAP operating expenses were CNY 374.7 million, representing a year-over-year increase of 11%.

Research and product development expenses for the first quarter of 2019 were CNY 80 million, down 5% year-over-year. This decrease was primarily due to the increase in efficiency resulting from the economics of scale and refined management and optimization of research and product development personnel.

Sales and marketing expenses for the first quarter of 2019 were CNY 280.8 million (sic) [CNY 218.8 million], up 17.8% year-over-year. The increase was primarily due to the expansion of our off-line retail stores.

General and administrative expenses for the first quarter of 2019 were CNY 135.1 million, up 17.9% 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 150.6 million in the fourth quarter of 2019. Non-GAAP net loss attributable to shareholders, which excludes share-based compensation expenses and amortization of acquired intangible assets, was CNY 82.1 million (sic) [CNY 92.1 million] in the first quarter of 2018 -- 2019.

As of March 31, 2019, the company had cash and cash equivalents, restricted cash and short-term investments of CNY 1.8 billion. Cash flow generated from the operations for the first quarter of this year was CNY 13.5 million. In the first quarter, cash conversion cycle was negative 28 days compared to negative 22 days in the corresponding period last year.

Capital expenditures for the first quarter of this year was CNY 34.3 million.

Tuniu currently expects to generate CNY 472.7 million to CNY 499 million of net revenue for the second quarter of 2019, which represents 5% to 10% year-over-year decrease. Please note that, this forecast reflects Tuniu's current and 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) And the first question today comes from [Elaine Hi], a private investor.

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Unidentified Participant, [2]

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I was wondering if management can share the reason for the negative growth for this quarter as well as the negative guidance for the next quarter? Also, can you provide with full year guidance for 2019?

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Yi Xin, Tuniu Corporation - CFO [3]

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Okay. Thank you for your questions. So let me answer your questions. The negative growth during the first quarter of 2019 was primarily due to number of external factors in certain destinations and also the macro economic slowdown, which impact our packed tours revenue during this quarter. For the destination side, such as Middle East, cruise and certain islands impact us a lot as we also moved out the lower certification rate product in the first quarter, which also impacted total transaction volume sharply during last quarter. So we are seeing a improvement following the Chinese New Year, so the recovery will benefit packaged tours revenues during the second quarter.

To answer your questions on the guidance for the next quarter, the negative guidance is primarily due to the decline in cruise products because in this year, the supply side in China is decreasing. As we have strengthened our products of the Niu Tour and Tuniu Selections, we have start to improve our take rate during the second quarter, which will have positive impact in the second half this year. Excluding the impact of our cruise product, our packaged tours revenue is expected to have a positive growth next quarter. Unfortunately, we don't offer the full year guidance. Thank you for your questions.

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Unidentified Participant, [4]

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Understand. I have a follow-up question. Can you also share us with the breakdown of the GMV by destination during the first quarter?

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Yi Xin, Tuniu Corporation - CFO [5]

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Okay. In terms of the GMV breakdown during the quarter, domestic tours accounted for about 30% of our total GMVs. Southeast Asia was about 15%, Japan around 10%. Europe 10% and Middle East and Africa around 10%. Maldives and other islands both around 5% each. Thank you.

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Operator [6]

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(Operator Instructions) Our next question today comes from [William Yang] with Bluesky Capital.

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Unidentified Analyst, [7]

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Can you share with us some key drivers for growth in the future? Also, what are some key initiatives that we are taking in order to improve product experience for customers?

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Dunde Yu, Tuniu Corporation - Founder, Chairman & CEO [8]

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[Interpreted] Okay. We have 2 main areas that we are going to focus in addition to our current business.

Interpreted Social marketing will be one of our core focuses going forward. We have -- based on some research, we have noticed that our target market demographic is very similar to the audience reached by social marketing tools. So we have tested a number of products and services through -- distribution through social marketing tools, products such as (foreign language) and certain destination-based products have been very well received within the communities.

Interpreted We have invested in the R&D for the social marketing tools in the past quarter, few quarters. We have perfected a number of tools for our distributors so that they are more easily and -- able to distribute products and services from Tuniu through outreach to their social circles to their chat groups and to their local communities.

Interpreted We will -- for social marketing, we will leverage well established social marketing platforms as well as develop our own social marketing channels. So overall, we'll utilize both of these to reach into the local communities.

Interpreted Our focus on top-selling products and our years of accumulation on -- in the travel supply chain will allow us to better serve our customers through social marketing.

Interpreted The second main focus here is to push our dynamic packaging system which allows users to bundle products at a discounted price.

Interpreted For our dynamic packaging system, we recently launched a new application version for our APP, and we have prioritized our dynamic packaging system into a fun spot, features such as air tickets plus hotel, hotel plus and various combinations of these products allow users to bundle products at a discounted price compared to booking them separately or everything individually.

Interpreted By using our newly formed dynamic packaging system, users could experience up to 30% discount when compared to booking these products separately. So in order to have this dynamic packaging system, we have our -- there is very a high demand for our system. Our current system allows us to have a clear pricing system for both our hotels booking and air ticketing.

Interpreted As you know, Tuniu's revenue consists of packaged tour revenues and it is one of the largest components of our revenue. So to Tuniu bundling is a very important component of our business. So our dynamic packaging system allows us to differentiate ourselves from many of our competitors that usually provide single or -- air ticketing or hotel booking solutions directly.

Interpreted For our dynamic packaging system, the system and technology is actually core. We have started investing in the research and development of this system starting from 2010. We have accumulated years of experience in developing this technology. So every day, there is over 100 billion various data points being calculated and over 20,000 bundles are being made each day.

Interpreted In conclusion, so the 2 main components are social marketing and dynamic packaging. Thank you.

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Unidentified Analyst, [9]

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I have got follow-up questions regarding your off-line retail stores. Since your peers are expanding their off-line stores, eventually how much contribution did these stores contribute during the quarter? What's your strategy for off-line stores this year?

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Yi Xin, Tuniu Corporation - CFO [10]

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Off-line store in this quarter contributed us around 20% of the total GMV's projection volume. So for the strategy side, so...

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Dunde Yu, Tuniu Corporation - Founder, Chairman & CEO [11]

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[Interpreted] We continue to open directly operated stores this year. Last year -- as you know, last year, we opened a relatively large amount of stores. This year, we will be focusing on increasing the efficiencies of each store as well as -- and for this year's time, we will open store with relatively more caution and slowdown the pace a bit.

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Operator [12]

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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 [13]

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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.

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Operator [14]

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