Ladies and gentlemen and thank you for standing by and welcome to Baozun's fourth quarter and fiscal year 2019 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I must advise you that this conference is being recorded. I would now like to hand the conference over to first speaker today, Ms. Wendy Sun, IR Director. Thank you. Please go ahead.

Thank you operator. Hello everyone and thank you for joining us today. Baozun's fourth quarter 2019 earnings release was distributed earlier today and is available on our IR website at ir.baozun.com as well as on Global Newswire services. On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer, Mr. Junhua Wu, Chief Growth Officer and Mr. Robin Lu, Chief Financial Officer. Mr. Qiu will review business operations and company highlights, followed by Mr. Lu, who will discuss financial and guidance. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors are included in the company's filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead.

Thank you Wendy and thank you all for joining us. I will like to start by expressing our Deepest concerns and well wishes all those whose life has been impacted by the ongoing Coronavirus outbreak and also take the opportunity to thank our employees for their hard work, tremendous resilience and the dedication shown during this difficult period. We have always been committed to maintaining high standards of corporate social responsibility and have prioritized the health and safety of our employees and we will continue to offer our support as the fight carries on. Fortunately, for us and our brand partners, contingency plans were already in place with our IT infrastructure and the digitalization technologies already configured for seamless transition to remote working with minimal disruptions to our business during the peak of the outbreak in China. The Coronavirus outbreak has created industrywide headwinds stemming from softer consumer demands and the fulfillment shortages caused by the ongoing traffic restrictions, self-quarantine rules and the work from home directives. In general, the impact across the retail industry is significant, particularly within discretionary categories such as apparel and footwear where demand is more significantly affected by consumers spending less time outdoors. We foresee the near term growth for the wider industry will be challenged. However, we also note that this might be an opportunity. If anything, the ongoing impact of the outbreak is highlighting just how important an online is for brands and e-commerce showing significant resilience compared with offline retail. This growing need by brands to refine their digital and O2O strategies plays to our strength as a leading brand e-commerce solution provider. As a young, dynamic and adaptable company, we believe we are uniquely positioned to leverage our strong fundamentals and to capitalize on this emerging need over the long run.…

Thanks Vincent. Before providing more details about our financials, I would like to take some time to address our non-distribution model take rate which is defined as service revenue as a percentage of non-distribution GMV. As we know, this is one of key metrics used by the market to assess our performance. Even though internally we do not believe it's an appropriate measure to use for benchmarking and we do not use this terminology or metric for internal measurement purpose either. By nature, take rate by category fluctuates significantly as each category tends to exhibit different patterns and serving model. I will say that category mix could be the key factor in shaping the blended take rate over a certain period of time. During the fourth quarter, there were noteworthy structural differences by category in the growth rate. Electronics, especially [indiscernible] outperformed other sectors and was quite active during the Singles Day shopping festival, accounting for a larger proportion of our total GMV. Men's and women's clothing in general saw weaker growth. Luckily, within the apparel category, we are primarily exposed to sportswear which continues to perform well. Overall, the slowdown in non-sportswear apparel reduced its GMV component in the apparel category. In addition, we have a growing GMV component from the broader FMCG category, respectively food, health and the home which typically fell within the service fee model as well. As such, the dramatic change in category mix in the past year has actually led to a different blended take rate profile. I want to also highlight that we achieved a solid positive free cash flow for full-year 2019. Our operating cash flow totaled over RMB300 million and achieved first ever positive free cash flow. We view this as a milestone in working capital management and as a validation…

[Operator Instructions]. Your first question comes from the line of Alicia Yap. Please ask your question.

Hi. Good evening management. Thanks for taking my questions and wishing all well and safe. I have a couple of questions. Number one is that, despite the impact from the virus, we actually think the 9% to 13% net revenue guidance is actually not too bad. And so could you give us a bit color in terms of the GMV given you actually have a high base last year? If I understand correctly, last year there was this handset brand that was dropped out of since 3Q. So if we are excluding this handset brand, what would be your 1Q GMV growth looks like? And then on your revenue guidance, could you give us some colors in terms of the breakdowns of your product revenue versus the service revenue growth? And what are the brand categories that actually have negatively affected more doing this outbreak period? And brand categories actually more resilient and see still the demands on track? Thank you.

Okay. Alicia, it's Robin. Yes, I am wearing the face mask so it maybe not very clear. But I will try to speak loudly. Yes, about the Q1 outlook and the guidance, I think the first question is about the category. Yes, we do see some negative impact on the men's and women's clothing because, as you know, the offline store has been closed and the people are still at home. So there is not much demand about this stuff. But fortunately, in the meantime, we see the sportswear is not bad. And also with the newly added brands, we add up in the second half of last year, it looks better for the GMV and also for the revenue, I think is pretty in line with the GMV growth. I think that's the overall picture about Q1.

So there wasn't any non-apples-to-apples comparison on the GMV growth rate?

I think about the handset, as I remember the question, we operated two handsets in last Q1. And then this year, primarily we focused on the one handset but the growth of this handset is pretty strong since last Q4 and continuing growth in Q1. So I think primarily the handset is no big change from last Q1 to this Q1 in the GMV side.

I see. And then if I may, in terms of the margins outlook for 1Q, given the impact on revenue, could you give us some colors in terms of how we should think about for 1Q margin? Thank you.

Yes. Our margin will be dropped because we have less revenue growth and we have some costs associated with a fixed part. So our margin will be dropped, but definitely, we are in the positive range. It's not a negative margin.

Okay. Great. Thank you.

Thank you.

[Operator Instructions]. Your next question comes from the line of Thomas Chong of Jefferies. Please ask your question.

Hi. Good evening. Thanks management for taking my questions. I have a question about the full year GMV and the revenue trend. It looks that there is a lack of visibility at the moment. But can management provide us some direction qualitatively in terms of the GMV growth rate? Should we expect an acceleration starting in Q2? And in terms of the margin trend, should we expect the margin to be somewhat like stabilizing in Q3 and margin expansion will happen in Q4? I notice that quantitative is tough at this time, but any qualitative color would be great. Thank you.

Okay. Hi, it's Robin again. I mean, it's very hard to ask me to foresee the trend. Based on our internal trend and based on what we estimated in the recovery in March, we think we are still very positive about our GMV and revenue growth for this year. And we hope that Coronavirus outbreak can be disappeared very soon and we will get back to the regular growth trend. About the margin, definitely because we have some elasticity about our business, I suppose there is not much deteriorating in the outbreak, definitely we will achieve the recovery of the margin. And also we think if there is no, if the things are getting even worse, our operating margin in this year could be in the midpoint between 7% and 8% which will be recovered from the last year. Thank you.

Thank you.

Your next question comes from the line of Tina Long of Credit Suisse. Please ask your question.

Hi. Thank you management for taking my question. My question is actually on the brand pipeline. We are having or will we plan to add in 2020? And also what kind of split between the distribution versus non-distribution? A and also, we noted that in the fourth quarter distribution model revenue actually outgrow that of the service model. So based on the brand pipeline we are having for 2020, how should we look at the revenue mix and also the gross margin? Thank you.

Hi. I think I can give you some numbers, it's Robin and then I think Junhua can answer you about the outlook about this year. Yes. We don't or I should say, we are not intentionally to develop our distribution model and we have very careful selection process to decide which we can do the distribution. But back into history, I think we kept well balanced between the distribution and the non-distribution from both GMV and revenue balance. And regarding the brand, I think in Q1, we add up some like a home furnishing, a very famous global home furnishing brand and also the domestic brand but in the house products for this. But unfortunately in Q1 we see the slow acquisition of the brand because we cannot go out to discuss with the client and the partner. So I think this one will affect the whole year's new brand acquisition speed.

Yes. Now let me back to you regarding the pipeline question. So it looks to us a little bit cautiously optimistic in terms of the pipeline growth. So there are some kinds of positive signs from the COVID-19. So more and more brands, they have realized that getting online and getting digitalized their online business is getting more important. So we have been reached and touched more and more from a lot of brands, some are very strong brands. They want to switch their bases to Baozun and some undeveloped brands are going to just develop their online business with us. So we can foresee a very strong pipeline in the year 2020 and we are very optimistic about this coming up in the next quarter.

Thank you. How about the business model, like distribution versus non-distribution in terms of the new brand additions?

Just now as I said, we carefully select the distribution model. But we keep well balance in the future. I think you can take that as a about like 90% GMV coming from non-distribution and 10% GMV from distribution. It's kind of like the principle we keep.

Okay. Got it. Thank you very much.

Thank you.

[Operator Instructions]. Your next question comes from the line of Natalie Wu of CICC. Please ask your question.

Hi management. Thanks for my question. It's [indiscernible], on behalf of Natalie. As we see the outbreak is becoming a global issue, if the factory of overseas brands are shut down, what business impact and the financial impact will we have? And my second question is, in the prepared remarks, you mentioned that the company's positive free cash flow has reached a record high. Would you please share more color on how you improved the free cash flow? For example, is it because we are having less capital expenditure than before? Or we are having more leverages on the balance sheet? And how should we expect the trend going forward? Thank you.

Hi. Let me answer the first of the question and then Robin can do some follow answering of the questions. Up to now, we keep a very close communication with our client base. And so far, there is not a big worry and concern about the supply side. I think the part of reason is that most of the supply chain is right not in China and also Asia region, especially China. So we are seeing quite confident supply of the products and there is no big signal from the brand side telling us about the potential difficulties of the supplies in the near future. But anyway, we will be closely watching the situation and adjust our sales tactics along with that. Yes, so that's about supply.

Okay. Yes. Let me get the second question about the positive cash flow. Yes, we do have less capital expenditure in 2020, it is about like RMB50 million less. But our free cash flow is over RMB100 million, which means you know we have a very strong operating cash flow, positive operating cash flow which drive through the free cash flow positive. I mean that's what we see for the whole year last year. For example, you know, I remember we had mentioned about how we can regulate the collecting process and also the automatic billing system and also we have a new set of rules inside the company to expedite the collectibles. So that really makes the result turn to the positive for the cash flow.

Thank you.

Your next question comes from the line of Sally Chan of CLSA. Please ask your question.

Yes. Hello. Good evening management. Many thanks for taking my questions. I wish everyone good health during this period. I have two questions. Maybe I just go over the first one. First is actually on the monetization trend in 2020. I agree with management that the overall take rate is probably not meaningful because it is very heavily impacted by category mix and then brand mix, et cetera. But I am just wondering, say, if we look at this on a more granular level, say, on the per brand basis, for example when you negotiate contracts with new brands or renegotiate your renewal with existing brands, how do you see our brand partners value our new value-added services like the tools you just mentioned, like new delivery services, data, even cloud? Do you think, potentially, going forward, if we could enhance these kind of value-added services offerings, we could receive a better monetization or take rate from our brands? And then if so, how should we think about the timeline when we could start to see meaningful contribution from the monetization of these new tools? This is my first question.

Okay. It's Robin. Before I answer your question, I should give you more color about the take rate for the Q4. Maybe when you do the very quick math, you will see there are like 2% drop in the take rate, around 2% drop. And we have about 1.5% coming from the product mix change. As we mentioned, we have a 3C increase in Q4 GMV and another 0.5% coming almost evenly from less marketing spending and also less logistic service due to the slowdown of the men's and women's clothing. So that's really like a full picture of the take rate change in Q4. And also regarding this year's take rate, we think we still have a very good potential to improve our take rate. And also about the monetization, for example, the revenue guidance we can give you, which is still in the growth, I think thanks to our logistics service, we can provide more service to the partners than the other competitors. And also for the new brands, we are gradually working with them for the new added service, including both logistics and digital marketing services, for example. And we do think we have great potential to improve for this year. Thank you.

Thank you management. So I have another quick question actually is to follow-up on the sort of guidance for this year, given the impact from the outbreak because from my tracking, it seems that the January growth for our brands were quite healthy and then February we saw moderate but not that big decline in GMV growth for our key brands. And then it seems like for the March 8 promotions period, sales for some of our key brands actually rebounded very strongly. So I am just wondering if management could share how you have seen the recovery trend so far as people gradually get back to work and then supply side infrastructure like logistics also continue to recover, probably after February and March. Thank you.

Okay. Sally, this is Junhua Wu. Let me get back to you about the question on Q1. So in January, we did pretty well. So we dramatically beat our internal targets here. So the whole February was a disaster, as you know. The total kind of the COVID-19 stuff, so really just lowered down the demand chain and lowered down the communication efficiency and something like that. And from the beginning of March, especially from a big campaign like Queen's Day, you mentioned about March 8. So most of our key brands are recovering very well. So I can say that they are recovering about 80% of their normal when they back to the Y-o-Y in a same campaign like this. And we are foreseeing a cautiously optimistic about the GMV and the business as well growing in the coming quarters. That was before the virus has any kind of import impacts. So now, just like Robin just mentioned, it's very hard for us with a lot of unknown kind of the criteria based on import virus effect. So yes, we can say that most of our key brands are recovering very well. The March is doing pretty well, as we can see. And we are cautiously optimistic about the coming quarter. And the demand chain has recovered already about 80% to 100% and the supply, we have more inventory and more products coming online. So yes, everything is getting better now.

Great. That's good to hear. Thank you.

Your next question comes from the line of John Choi of Daiwa. Please ask your question.

Hi. Thank you very much for taking my question. I had a couple of questions here. First of all, could you kind of talk about the latest development of the Mini programs? What the contribution to your overall business? It seems like that on Mini programs has been doing pretty well over the past year. And just quickly on a follow-up on the operating margin. I think, Robin, you mentioned hopefully you could be able to reach 7% to 8% this year. Can you kind of walk us through whether that will be driven by more on the faster topline growth in the second-half? Or pretty much more on the operating leverage on the operating expense side? I just want to have a brief sense on how you guys are going to able to drive that after things do normalize? Thank you.

Hi John. It's Robin. For the Mini program, yes, I think we made great progress especially in the Coronavirus outbreak because it's the right tool to link between online and offline. Some of the partners come to us to ask us to provide service for their offline stores so that they can easily go online. But in the both GMV and revenue, I think comparing with total number of Baozun, the Mini program is still very immature and we don't the pay much attention to the GMV and the revenue contribution. Instead, we just want to test this model so that we can figure out a way how we can ramp up our services to the brand partners and set up the brand e-commerce system in Mini program ecosystem. So that's kind of like our main focus which is not focused on GMV and revenue, comparing with the total number. So that's the first question. And about operating profit margin, I think you are right. We of course drive of this one by improving our revenue resources from our existing and new brands and also we have a very tight cost control and efficiency improvement plan in our company, so that we can drive up the operating margin.

Your next question comes from the line of Tian Hou of TH Capital. Please ask your question.

Thank you management. So my question is first, so this Coronavirus and before and after there are a lot of things changed. So from your customer side, like a brand side, I wonder have they, so when you communicate with them, do they have in terms of brand strategy, do they have any new thoughts about in the future how are they going to strategize or position their brands? In the consumer side, so as you mentioned at your remarks and to the apparel and in the handbags in this area is impacted the most. So I wonder what's changed in the customer side? And so going forward, what do you see can be the trend? So one is the supply-side and one is the consumption side. Thank you.

Okay. This is Junhua Wu. So those are very good questions. So the first one is related to the brand side. So we communicate with a lot of key brand partners and they are being very positive to the digital, especially their online business. So there are several initiatives they are going to just approach. The first one is, they are strengthened, already are emphasized on the digitalizing their business. They realize that online and e-commerce are becoming more important, especially under this overall situation of the country. And that just means that they want to lay more emphasis and they are putting more strategic efforts into digitalizing their business. The second part is in terms of the product inventory allocation. So most of our key brands are reallocating a lot of their offline, especially their exclusive offline products to online, because, as you can see that in the past several months, their offline business has been facing a lot of problems and challenges. So putting their offline resources to online is really helping the online growth. That's the second part. The third part is more about reallocating their brand marketing strategy and their marketing spending. So they realize that especially along with the development of the digital marketing, like a livestream, KOL and KOC, so more and more brands, they have realized that they want to just invest more on content management and enriching their online content development, provide more accurate content to the right consumers at the right time. I think they are more and more digital marketing spending will be reallocated to online. So that's all three approaches from the brand side. So from the consumer side, we haven't seen a lot of behavior change from the consumer side. If you just view the whole apparel category dropping down a lot, because they are basically staying at home, so it doesn't make any sense for more like women and men to purchase new apparels, because they are staying at home. So maybe that was just about or they are kind of under a big environment for now and we haven't seen any kind of changes from the consumer part. So we are seeing when everything is getting better, consumers can just freely go to the street and back to their normal life and normal lifestyle. I think the category mix and all their consuming power will be recovered soon. Thank you.

Thank you so much. Thank you.

[Operator Instructions]. Your next question comes from the line of Billy Leung of Haitong International. Please ask your question.

Hi management. Thanks for taking my question. I just had, the question I want to ask is related to what Vincent mentioned during the prepared remarks. Vincent said, the 2020 focus will be on accelerated brand portfolio. I just wanted to know what that meant? Does that mean that we should expect more brand partners? Or brand partners would be larger? That's my first question. And just a housekeeping question, can management share the amounts of GMV that was from existing or same store clients for quarter one guidance and quarter four? Thank you.

Yes. It is in my prepared script. But I think Junhua is the better person to answer the question, please.

Yes. About the portfolio and larger brand potentially, so yes, we are foreseeing a very strong pipeline in the year 2020. And according to our existing enrolled brands, they are being more qualified. So this year, our strategy is very clear. We are chasing qualified GMV. So we are not really emphasized on the GMV growth or GMV amounts, but the quality of the GMV revenue and the profit what we are making from the brand partner. So as far as we can see in Q1, the brands we enrolled, including a very large brand in the home furnishing category, are very high quality brands in our portfolio. And in our strong pipeline, we have foreseen a lot of the same kind of a qualified brands coming up, yes.

So just to confirm. When you say, high quality, does that mean, it's a larger scale brand merchant? Sorry. Thank you.

So yes. What I mentioned about the qualified GMV brand, which means that we have a better take rate. We have a wider range of scope of work. We have more stickiness with the brand partnership. And we have a longer term of the contract period.

Yes. About the high quality growth, I think that's kind of like a different fit in a different scenario. In the topline, just as Junhua explained and in the costs internally, we have very strong cost reduction initiatives to create the efficiency and make our cost structure more healthy about it. So that's kind of like different scenarios we are working on. And back to your last question, I think you asked about that same store sales growth, it is the 51% in the same store sales growth in Q4.

Thank you. And what was the assumption for quarter one GMV? How much coming from same store sales growth?

We don't disclose the number yet and we will have more color in the next earnings call.

Thank you. That was really helpful.

Thank you.

Your next question comes from the line of Joyce Ju of Bank of America. Please ask your question.

Good evening Vincent, Junhua, Robin, Wendy. Thanks for taking my question. My question was also a follow-up to the previous question. Actually, I just want to clarify, because this year, especially the first half, our existing brand probably is going to suffer like demand shock. So shall we expect more of our growth actually contributed by new incremental brands? Or say we know we launched a very big home furnishing international brand this quarter, right? Should we expect primarily this year new brands will contribute bigger chunk of GMV compared to last year-end? Could you give us some qualitative color in terms of probably the take rate on margin profile of this new brand? And there is a small follow-up as I want to just get a broad sense. During the Coronavirus like period of time, we know basically all the brands or merchants kind of suffered a financial pressure. We know lot of platforms they are giving like subsidies or rebates to merchants. I am just wondering from our service provider perspective, are we going to experience any pressure in terms of expenses or services charge? Any qualitative colors would help. Thanks a lot.

Yes. It's Robin. Yes, about your first question, I think we do experience some kind of like a slowdown in the men's and women's apparel continuously in Q1, especially in February. But also we experienced the delay of the new store opening for the new brands. So in balance, we think it really depends on the specific brands who enjoy what growth rate in Q1 or the downturn in Q1. But in general, I would say our GMV will still grow at least 10%. And also that's partially contributed by the new brands that we acquired in the last year, which is less than 12 months. And the second question, roughly, yes, we do see some financial pressures in some of our brands, but not all. And at this moment, I think you know we didn't experience anything about the term change or something because they rely more on the online sales to drive up their overall prices. And additionally, about service fee, which is accounts receivable at this moment, we see some debate of the payment. But we closely monitor the collection process. And up till now, we think that's pretty normal, with the exception of some delayed payments by the partners. Thank you.

Thank you.

All right. Now I would like to hand the call back to Ms. Wendy Sun for the closing remarks.

Thank you operator. In closing, on behalf of the Baozun management team, we would like to thank you for your participation in today's call. If you require any further information or are keen to visit us in China, let us know. Thank you for joining us today. This concludes the call.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.