ZKH Group Aktie

Ladies and gentlemen, good day, and welcome to ZKH Group Limited's First Quarter 2026 Earnings Conference Call.

Today's conference is being recorded. At this time, I would like to turn the conference over to [Daecy Xu], Head of Investor Relations. Please go ahead, ma'am.

Good morning, and welcome to ZKH First Quarter of 2026 Earnings Conference Call. With me are Mr. Eric Chen, our Founder, Chairman and CEO; and Mr. Max Lai, our CFO. Today's discussion may include forward-looking statements. Related factors are described in our today's press release, and we will also discuss certain non-GAAP financial measures for comparison purposes only. Please refer to the earnings release for definitions of these measures and a reconciliation of GAAP to non-GAAP results.

With that, I will turn the call over to Eric. Eric, please go ahead.

[Interpreted]

Hello, everyone. Thank you for joining our first quarter 2026 earnings conference call. We entered 2026 with strong momentum, building on the recovery trajectory established in the second half of last year. As our business steadily scaled, the quality of our growth also improved. In the first quarter, both GMV and revenue growth accelerated year-over-year for the second consecutive quarter. GMV returned to double-digit growth and revenue delivered its strongest year-over-year performance in recent quarters.

On the profitability front, our operating quality continued to improve. Gross margin achieved expansion sequentially, reflecting an improving trend. Driven by refined operations, improved organizational efficiency and the ongoing benefits of operating leverage, adjusted net profit was up 103% year-over-year, marking the first time we have achieved adjusted profitability in the first quarter.

Delivering these solid results during the first quarter an off-season for the MRO industry reinforces our confidence in achieving double-digit GMV growth and full year profitability in 2026. From a cash flow perspective, net cash outflow from operating activities narrowed significantly year-over-year, further enhancing our financial resilience. Overall, the strategic initiatives we have implemented over the past several quarters, focused on optimizing customer mix and operational efficiency, continue to deliver tangible results and position us for steadier, higher-quality growth going forward.

This quarter. Starting with GMV. First quarter GMV increased 12.9% year-over-year, representing a meaningful acceleration compared with both the year ago period and the prior quarter. Based on current order activity shipment trends, we expect GMV growth to accelerate further in the second quarter. This strong performance was fueled by the continued expansion of our customer base.

During the quarter, the number of transacting customers increased 11% year-over-year to 66,000, reflecting the accelerating adoption of online procurement among Chinese manufacturers. This growing customer base provides a solid foundation for our long-term sustainable growth.

Beyond overall customer growth, we also saw broad-based strength across customer segments. GMV from SME customers on the ZKH platform increased more than 20% year-over-year growth. SMEs typically have more fragmented demand and a broader range of procurement needs, making them a strong indicator of our platform's service capabilities. As online procurement adoption continues to deepen among small- and medium-sized manufacturers, we believe there is significant room to further increase penetration in this customer segment.

We also saw a more pronounced recovery among central SOE customers during the quarter, with GMV returning to double-digit year-over-year growth and improving meaningfully on both a sequential and year-over-year basis.

Performance among our industry key accounts was in line with expectations with GMV growing more than 20% year-over-year across major verticals, including electrical manufacturing, communications, electronics, new energy and steel and non-ferrous metals. We also expanded our presence in emerging sectors such as semiconductors, energy storage, optical modules, robotics and optical communications, strengthening our customer base among industry leaders in these high-growth markets.

The GBB platform also maintained strong momentum with GMV increasing more than 30% year-over-year. As a key platform serving distributors, resellers and micro and small businesses, GBB leverages a more standardized e-commerce-driven operating model to expand customer coverage and improve online conversion. More importantly, it creates strong synergies with the ZKH platform, effectively extending our service reach and providing an additional growth driver for the broader business.

Turning to our international business. We continue to expand both our customer base and geographic footprint during the quarter, delivering robust growth with revenues increasing more than sixfold year-over-year. While continuing to strengthen our end-to-end capabilities to support Chinese manufacturers expanding overseas, we also advanced our local U.S. operations through enhancements in product development, multichannel sales and fulfillment.

From an operating strategy perspective, we remain committed to high-quality growth with a strong focus on operating discipline and investment efficiency. Our goal for this year is to reach breakeven for our international business. The continued expansion of our customer base and business scale reflects our long-term investments in building core capabilities and the strong execution behind these efforts. During the quarter, with customer value at the heart of our strategy, we expanded our product portfolio, strengthened our supply chain capabilities and accelerated AI adoption across business scenarios, further enhancing our one-stop platform service capabilities.

Starting with product capabilities. We further strengthened our core product offering by sharpening our focus on high-value industries and highly specialized industrial scenarios. During the quarter, we identified 10 priority product lines, including factory automation, electrical automation, pumps, pipes and valves and cutting tools and increased resource allocation to support their growth.

By improving coordination between production and sales, optimizing bulk procurement and enhancing specialized operational capabilities, we further bolstered the competitiveness of these key product lines. Taking factory automation or FA as an example, we launched the FA Mall during the quarter, a one-stop digital procurement and technical services platform tailored to the automation value chain.

The platform offers a broad range of FA components and integrates key capabilities such as intelligent product selection, 3D modeling and technical support, helping customers address traditional procurement pain points, including complex product selection and high technical barriers.

As our key product lines continue to advance, we have also deepened customer penetration in core industries. By category, professional and high-precision MRO products such as FA components, industrial lubricants and chemical reagents, all achieved solid double-digit GMV growth, further solidifying our core competitive advantage in highly specialized industrial scenarios.

In addition, we continue to strengthen our platform's overall supply capabilities. By the end of the first quarter, the number of sellable SKUs on the platform increased to $27 million, up from $23 million at the end of the prior quarter. Building on this foundation, we further expanded our private label portfolio by accelerating new product development.

In the first quarter, we introduced more than 400 new private label SKUs, including innovative items such as lightweight breathable bump caps and anti-static [indiscernible] gloves, covering diverse scenarios from personal protection and tools to cleaning and office supplies. These efforts further enhanced the competitiveness of our private label products and expanded our customer reach. GMV from private label products grew by over 20% year-over-year and accounted for approximately 9.7% of total GMV in the first quarter of 2026.

On the fulfillment front, we continue to enhance our warehouse network and strengthen last-mile delivery capabilities, further reinforcing our multi-tier operating system. In the first quarter, the capacity of our self-operated fleet continued to grow, improving both delivery coverage and responsiveness. At the same time, our prior investments in warehouse network optimization and automation drove a 36% year-over-year improvement in warehouse utilization efficiency.

These end-to-end enhancements across warehousing, transportation and delivery contributed to a 17% year-over-year reduction in our comprehensive fulfillment expenses for the quarter. Looking ahead, as we continue upgrading warehouse operations and digitalizing fleet scheduling, we believe there is further room to drive down our comprehensive fulfillment cost ratio.

While continuing to strengthen our product and fulfillment capabilities, we are also actively forging future-proof long-term technological advantages, guided by our goal of building industry-leading full stack AI capabilities for industrial supplies, we are systematically deploying AI across key industry use cases.

At the data layer, we continue to enhance the ZKH data dictionary and industry knowledge graph capabilities, improving the structure, interconnectivity and real-world applicability of industrial product data. We also strengthened data governance through AI-powered data annotation. Together, these efforts have established a stronger data foundation for broader AI applications across our business.

In 2026, our goal is to build the industry's first knowledge graph exceeding 100 million industrial product data points and 10 million industry relations. This will further strengthen AI's ability to understand and operate in complex industrial supply scenarios. Taking the request for quote scenario as an example, while many procurement needs can be fulfilled directly through our online platform, quotation workflows remain an important customer entry point. Today, approximately 30% of material matching and product identification tasks within quotation workflows are already handled by AI. By the end of 2026, we aim to increase the overall AI-powered product identification rate to 70% with data-intensive product lines such as fasteners, pumps, pipes and valves and hand tools expected to reach 80% to 90%.

We believe these advancements will meaningfully improve quotation completion rates, inventory turnover and sales conversion rates.

At the model layer, our Hangjia Linglong MRO vertical large language model continued to evolve, further improving its ability to understand, reason and execute tasks in complex industrial supply scenarios. During the quarter, we expanded image-based training to strengthen the model's multimodal capabilities and officially launched Hangjia Huiyan, the industry's first intelligent visual search engine for MROs.

Powered by advanced image recognition, Hangjia Huiyan can rapidly identify material types and specifications and pair them with specific application context to deliver intelligent diagnostics and product recommendations. This significantly improved communication and procurement efficiency in complex industrial supply scenarios.

At the orchestration layer, we are also actively building our MRO AI developer platform by integrating proprietary models and AI tool chains, standardizing advanced AI capabilities and making them easier for cross-functional teams to access and apply. We also launched our AI for -- all initiative across the organization, encouraging teams to develop and deploy AI tools tailored to specific business scenarios and accelerating AI adoption across the company.

In the first quarter alone, our teams developed and launched more than 60 AI agents and RPA bots driving meaningful efficiency gains and freeing up more than 2,000 human labor hours per month. Our IP development efficiency also continued to improve. In 2026, we aim to increase our AI code generation rate from approximately 30% today to 80%.

At the application layer, we have established an integrated AI ecosystem spanning core business functions, including merchandising, sales, operations and customer service. Within this ecosystem, we have developed a diverse portfolio of AI agents such as AI quotation assistant, AI material manager and ProductRecom, which are increasingly delivering tangible business value across our operations.

In 2026, as we continue to refine and scale these AI applications, we expect AI-driven sales to grow meaningfully.

As we move through 2026, we will continue investing in product capabilities, fulfillment capacity and AI innovation, further strengthening our comprehensive service offerings for complex industrial scenarios and reinforcing our long-term competitive advantages. Building on this foundation, we will remain focused on high-quality growth by driving greater operational efficiency and earnings, steadily advancing towards our goal of full year profitability.

I'll now turn the call over to our CFO, Max Lai, to present our financial results. Thank you, everyone.

Thank you, Eric, and thanks, everyone, for making time to join our earnings call today. Now let me walk you through our financial performance for the first quarter of 2026. We started the year with solid momentum across key financial metrics.

In the first quarter, we delivered accelerated top-line growth, improved operating efficiency and greatly enhanced profitability. Notably, we achieved non-GAAP adjusted profitability, marking our first profitable first quarter on an adjusted basis and a meaningful turnaround from the same period last year. These results reflect the improving quality of our growth, increasing scalability of our operating model and the ongoing benefits of strategic initiatives we've implemented over the past several quarters.

Let's now take a closer look at first quarter's financial performance, starting with the top line. During the quarter, we built on the improving trend established in the second half of last year with both GMV and revenues accelerated year-over-year for the second consecutive quarter. GMV increased by 12.9% year-over-year to RMB 2.45 billion, while total revenues grew by 9.2% year-over-year to RMB 2.11 billion, both representing our strongest quarterly growth in recent periods.

This performance was supported by the continued expansion of our customer base and stronger platform engagement. Our earnings profile also strengthened during the quarter, supported by improved operating leverage and ongoing efficiency gains. Gross profit increased by 6.6% year-over-year to RMB 354 million, while gross margin moderated slightly year-over-year from 17.2% to 16.7%. Our underlying margin trends improved sequentially with GMV-based gross margin increased by 90 basis points.

Going forward, we will continue to improve business quality through 3 priorities: a more balanced customer and product mix, higher contribution from private label products and greater supply chain efficiency. On operational efficiency, we maintained strong cost discipline while continuing to invest in capabilities that support our long-term growth.

Total operating expenses decreased by 8.8% year-over-year to RMB 376.5 million, representing 17.8% of net revenues compared with 21.3% in the same period last year. Breaking this down, fulfillment expenses decreased by 16.8% year-over-year to RMB 77.6 million. Sales and marketing expenses remained relatively stable at RMB 137.6 million. R&D expenses decreased by 25.9% year-over-year to RMB 29.3 million. General and administrative expenses decreased by 7.9% year-over-year to RMB 131.9 million. This improvement reflected continued reinforcement of our operating model, enhanced organizational efficiency and more disciplined resource allocation. During the quarter, GMV per effective employee increased by over 20% year-over-year, reflecting a meaningful improvement in our workforce productivity. In addition, as we mentioned earlier, we continue to optimize our overseas business strategy with a stronger focus on operating quality and investment efficiency. This contributed to lower overseas-related spending and further improvement in our overall expense structure.

These efficiency gains translated into significant improvement in profitability compared to the same period last year. Operating loss narrowed by 72.2% to RMB 22.5 million with operating loss margin improving to negative 1.1% from negative 4.2%. Non-GAAP EBITDA turned positive at RMB 4.2 million compared with negative RMB 52 million in the prior year period, with margin increasing to positive 0.2% from negative 2.7%.

Most notably, we achieved a non-GAAP adjusted net profit of RMB 1.7 million compared with non-GAAP adjusted net loss of RMB 50.2 million in the same period last year. This significant turnaround reflects the combined impact of top line recovery, improved operating efficiency and further operating leverage.

Turning to balance sheet. We maintained a healthy liquidity position. As of March 31, 2026, our cash and cash equivalents, restricted cash and short-term investments totaled RMB 1.84 billion, providing us with ample financial flexibility to support our business operations and strategic priorities. Operating cash flow also improved meaningfully year-over-year. Net cash used in operating activities was RMB 34 million in the first quarter compared with cash outflow of RMB 97.1 million in the same period of 2025, reflecting continued improvement in our working capital management.

To recap, the first quarter marked a strong start to 2026. We delivered accelerated top line growth continued improvement in operating efficiency and substantial gains in profitability. Notably, we achieved our first non-GAAP adjusted net profit -- net profitability in the seasonally soft first quarter. Looking ahead, our focus remains on high-quality growth and disciplined execution. This concludes our prepared remarks. Thank you.

We would now like to open the call for the questions. Operator, please go ahead.

[Operator Instructions]

The first question comes from Leo Chiang with Deutsche Bank.

[Foreign Language]

The first quarter company's gross margin improved quarter-over-quarter, but it still declined year-over-year. Could management share your view on the long-term trend of gross margin? And what factors could constrain further improvement in gross margin? And what action has the company taken to improve gross margin?

[Interpreted]

Thank you for the question. I will take this question from 3 parts. So, namely category mix, customer mix and private labels. So, for category mix, we have lots of SKUs and product lines, and so things are quite fragmented. And the gross margins of different products vary greatly. For some product lines, gross margins are lower, but the growth for their gross profits and the GMV is relatively fast. So, in the short run, they might drive down the overall gross margins. But if they are able to still drive customer penetration, expand our supply capabilities and contribute to the growth of our absolute gross profit, then there's still value in operating those categories.

At the same time, some MRO products gross margins and gross profits are going up simultaneously, especially for our advantageous product lines. By that, I mean things like PPE or personal protective equipment, cleaning, OEM fasteners, handling and storage and security, et cetera. And these categories are reflecting better profit conversion efficiency, so to speak.

And as these high-quality product lines are taking a higher share out of the entire portfolio, this will be conducive to improving our overall gross margin structure.

So, in terms of your question about Q1 being lower year-over-year, it was primarily due to the gross margin drop in categories, including diesel, transformer oil and silicon photonics wafers. And that has driven down our gross margin. But overall, our gross margin is pretty solid.

So, for my second point about customer mix, usually, the gross margin for SME customers is higher than key accounts or large customers. And so the share of the GMV on the part of SME customers, that trend will impact on the trend of our overall gross margins. So currently, SME customers' GMV accounts for about 30-plus percent of the total, while key accounts GMV accounts for about 60%. And the SME customers are growing at 20% GMV-wise. So, from a customer mix perspective, our gross margin is improving.

So, in terms of private labels, gross margins for private labels are typically higher than non-private labels. So, that trend will also impact the overall gross margin trend. And private label GMV currently accounts for 9.7% and our long-term goal for it is to reach over 30%. Overall, the gross margin -- so in terms of managing gross margin, we will not pursue the maximization of a single product or a single quarter for the gross margin to maximize, but we care more about the improvement of our overall supply capabilities, the deepening of our customer reach and the growth of our absolute gross profits.

And we understand how gross margin across different product lines varies by a lot. So, the adjustment and changes to product portfolio for different stages of our development will impact overall gross margin, but our long-term goal is to drive gross profit continuously by way of advantageous product lines, private labels and the optimization of customer mix and improvement of our purchasing efficiencies.

The next question comes from Xiaodan Zhang with CICC.

[Foreign Language]

I will translate myself. We noticed that high-tech manufacturing such as communication electronics, auto manufacturing and equipment manufacturing accelerated its growth in first quarter and in April. Could management share more about whether we are seeing a similar trend? And how does -- how is our performance in these sectors? And also any initiatives have been introduced to expand our market share in these sectors?

[Interpreted]

Thank you for the question. Indeed, we have seen how players in the advanced manufacturing sector buying more in terms of MROs. And these include sectors like electrical manufacturing, communication, electronics, alternative energy or new energy and non-ferrous metals. The GMV for the aforementioned sectors all achieved a year-over-year growth of over 20%. And for semiconductors, energy storage, optical modules, robotics and optical communication, these emerging sectors, we are accumulating more and more customer resources. And other sectors that have been growing relatively fast are steel steel -- so specifically for steel and non-ferrous metal, if we look at the daily average order volume from January through April, this metric has grown 100% for steel and non-ferrous metals.

And for the same metric, so basically daily average order volume Jan through April grew by 45% for communication electronics and 33% for alternative energies. And refined chemicals, pharmaceuticals, electrical manufacturing have all grown very quickly.

And in terms of the measures we're taking to improve our sector penetration and our share, we did 3 things. First is we have formed a sector-specific sales forces to target these customers in these specific sectors.

Secondly, we're building out sector sector-specific commodity pools and a customer-specific commodity pool for these sectors. And in order to embrace the growth in robotics and smart products, we have launched the FA or factory automation Mall, as was alluded to in the prepared remarks. That was my answer to this question. Thank you.

The next question comes from [Brook Wang] with CITIC.

[Foreign Language]

The company's overseas business revenue increased by sixfold year-over-year in the first quarter. Could you please introduce this year's strategy for the overseas business?

[Interpreted]

Thank you for that question. Yes, indeed, for the first few months of this year, we not only achieved the year-over-year growth, we also achieved month-over-month growth. Two things about the overseas business. Firstly, we are primarily serving Chinese companies going abroad. So, we will be relying and leveraging our existing customer relations with those Chinese customers to drive more overseas orders. We will also strengthen our last mile fulfillment capabilities when it comes to serving the different geographies overseas.

Secondly, localized operations in America are extremely important to us. So, we will be more focused, more laser-focused in our business there. And specifically, we'll be focusing on providing the categories needed for warehousing operations. We would get that done well before we branch out into other SKUs and categories.

Overall, when it comes to developing and expanding our business in overseas markets, we will focus more on the efficiency and returns of our investments and spend, and we would not spend ahead of time. And our goal is to try to break even for our overseas business this year. That concludes my answer to this question. Thank you.

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.

Thank you once again for joining us today. You can find the webcast of today's call on ir.zkh.com. 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.

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

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

Ladies and gentlemen, good day, and welcome to ZKH Group Limited's Fourth Quarter and Fiscal Year 2025 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, ma'am.

Good morning, and welcome to ZKH's Fourth Quarter and Full Year 2025 Earnings Conference Call. With me are Mr. Eric Chen, our Founder, Chairman and CEO; and Mr. Max Lai, our CFO.

Today's discussion may include forward-looking statements. Related factors are described in our today's press release. and 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 non-GAAP results.

With that, I will turn the call over to Eric. Eric, please go ahead.

[Interpreted] Hello, everyone. Thank you for joining our fourth quarter and full year 2025 earnings conference call. Throughout 2025, we advanced our strategic optimization efforts while strengthening core capabilities across product offerings and technological innovation. As these initiatives took hold, we began to see clear signs of stabilization and recovery in the second half of the year. Both GMV and revenue largely recovered to prior year levels in the third quarter, then accelerated into solid year-over-year growth in the fourth quarter.

At the same time, our earnings quality continued to strengthen. We successfully returned to profitability in the fourth quarter. With an adjusted net profit of RMB 14.8 million and achieved half year breakeven for the first time. Our cash flow profile also strengthened meaningfully. We recorded positive operating cash flow in both the fourth quarter and full year 2025, further enhancing the resilience and flexibility of our financial position. These results signal that we have moved past the transitional effects of strategic optimization and entered a healthier, more resilient phase of development.

Now let me walk you through some of the business highlights in the fourth quarter. At a fundamental level, our growth foundation has continued to strengthen. In the fourth quarter, overall GMV grew 8.5% year-over-year and approximately 11% sequentially. Based on order pipeline and shipment trends, we expect year-over-year GMV growth to accelerate into double digits in the first quarter this year. A key driver of our GMV growth was the continued expansion and deepening of our customer base.

In the fourth quarter, the number of transacting customers approached 74,000, representing a year-over-year increase of 60%, the fastest quarterly growth in recent years. By customer segment, GMV from both key accounts and SME customers on our ZKH platform maintained year-over-year growth during the quarter.

Among key accounts, we have now covered over 680 of China's top 1,000 manufacturers with several core industry verticals delivering particularly strong momentum, specifically GMV from customers in electrical equipment manufacturing, chemicals, steel and nonferrous metals as well as transportation increased by more than 20% year-over-year. Notably, certain SOE customers previously affected by strategic optimization showed clear recovery with GMV returning to year-over-year growth and expanding by over 20% sequentially.

Among SME customers, growth momentum remained strong with GMV increasing by more than 20% year-over-year in the fourth quarter. This growth was primarily driven by the continued expansion of our regional service network, the strengthening of our digital marketing capabilities and the broader application of AI tools that enhance customer identification, demand matching and conversion efficiency. Beyond reinforcing our growth trajectory, rapid SME expansion also contributes positively to our margin profile. As this segment continues to scale, we believe it will become an increasingly meaningful driver of both our overall growth and margin expansion.

Internationally, we made encouraging progress. Sequentially, GMV from this business grew by approximately 50%, while the number of customers grew by around 20%. At the same time, our fulfillment network continued to expand and now covers 17 countries. Looking ahead to 2026, we will advance our international strategy by deepening localized service capabilities and further expanding our global footprint. Underpinning this customer and market expansion is the systematic bolstering of our supply side infrastructure. During the quarter, we enhanced our platform ecosystem across product assortment, brands, supplier partnerships and fulfillment network. These efforts reinforced our product competitiveness and fulfillment capabilities, enabling us to deliver a truly one-stop procurement solution while supporting profitability improvement over time.

Starting with product assortment. We continued to strengthen our category capabilities by building long-term competitiveness in scenario-driven and standardized solutions. By the end of 2025, the number of SKUs on our platform had expanded to 23 million, up 33% from the end of 2024. This growth was primarily concentrated in highly specialized MRO categories such as factory automation, chemical reagents and instrumentation. From a product mix perspective, we further deepened our presence in technically demanding high-entry barrier MRO segments such as spare parts, industrial chemicals as well as processing and manufacturing components.

In the fourth quarter, we saw over 20% year-over-year GMV growth in several professional categories, including power transmission equipment, instrumentation and chemical reagents. These results further strengthen our moat in the specialty MRO supply market.

Our private label product business saw continued expansion in the fourth quarter with the launch of 349 new SKUs. For the full year, private label GMV rose 21% year-over-year, increasing its contribution to total GMV from 6.7% in 2024 to 8.3%. We remain committed to our long-term strategy as we steadily work toward our goal of 30% GMV share. Private label products do more than just provide customers with high-quality alternatives at a compelling value. They are also essential to building customer loyalty, enhancing supply chain control and optimizing our overall product mix. Over time, we expect this business to become a meaningful driver of our margin expansion.

Turning to our supplier ecosystem. We had established partnerships with nearly 20,000 suppliers by the end of 2025. Building on this foundation, we also established strategic partnerships with multiple leading brands and industry players on a deeper level, expanding relationships beyond simple transactions into broader collaborations across supply chain, data and market development to build a truly integrated industrial services ecosystem.

On the fulfillment front, we further strengthened our warehousing and end-to-end delivery network. Our multi-tier fulfillment infrastructure now comprises 30 distribution centers, over 100 transit warehouses and a self-operated fleet of over 200 delivery vehicles, further enhancing our last-mile delivery capabilities. At the same time, our operational efficiency improved significantly. During the quarter, our through warehouse fulfillment cost declined by around 13% year-over-year, marking this the eighth consecutive quarter of double-digit reductions.

Warehouse labor productivity and space utilization at our distribution centers also increased by around 20% year-over-year, bringing our operational efficiency to industry-leading levels. As we continue to optimize our warehouse network and in-warehouse operations, we expect our through warehouse fulfillment cost to improve further this year.

While continuing to strengthen our supply side capabilities, we have also been strengthening our AI and digital capabilities to make our value chain more efficient and intelligent. During the quarter, we deepened our AI strategy across 3 layers: data infrastructure, industry-specific models and scenario application. These measures are accelerating the translation of AI innovation into scalable business value creation. At the data layer, we have made significant strides in building our proprietary data foundation through the ZKH Data Dictionary with total data assets expanding to the petabyte level.

As AI applications were deployed more broadly across our operations and AI coding tools became increasingly integrated into our R&D workflow total token consumption doubled year-over-year in 2025. Monthly usage now exceeds 80 billion tokens. This reflects the increasing depth of AI inference, broader application scope and greater automation across our platform. Looking ahead, we expect token usage to increase by at least tenfold over the next 2 to 3 years. At the same time, our average cost per million tokens continues to decline on a year-over-year basis. As the depth, specialization and integrity of our data assets continue to improve, our AI capabilities across key operational scenarios have also strengthened significantly. In particular, we're seeing notable performance improvements in areas such as intelligent RFQ processing, precise product identification and pricing optimization.

At the model layer, we launched H-Nimble in 2025, the industry's first large language model purpose-built for the MRO sector. The model completed regulatory filing with the Cyberspace Administration of China in September and has since begun scaled deployment. In specialized industrial settings, H-Nimble is already demonstrating clear advantages in handling complex professional MRO scenarios. At the application layer, AI is increasingly embedded into our core business processes, strengthening both our platform capabilities and service efficiency.

For customer-facing services, AI is already delivering tangible value across several key operational scenarios. For example, our AI Material Management Agent has helped nearly 10,000 customers organize and standardize more than 15 million lines of material data. Previously, processing 1,000 lines of material data required roughly 15 person days of manual work. Today, AI can complete the same task in roughly 3 minutes. In product selection and recommendation, our AI ProductRecom Agent has improved supply-demand matching and conversion efficiency. In 2025 alone, this agent served more than 30,000 customers and generated over RMB 200 million in sales.

Internally, we are accelerating the deployment of our AI Smart Workbench and RPA Digital Workforce at scale, building a more intelligent and highly automated operational infrastructure. By the end of 2025, the number of RPA digital employees had exceeded 5,000, already surpassing the size of our full-time workforce and becoming a key pillar of our intelligent operations framework. Over the course of the year, these digital employees helped save nearly 1 million man hours. At the same time, our AI Workbench has significantly reduced the need for manual cross-system operations. This is driving a fundamental shift in our business as we move from high-touch to low-touch workflows.

In 2025, the AI Smart Workbench autonomously executed more than 520,000 system operations, delivering substantial productivity gains in process-intensive roles. For example, our productivity in customer service and procurement increased by approximately 45% and 50% year-over-year, respectively, improving labor cost efficiency in these functions. In 2026, we expect the AI Smart Workbench to further enhance the ability of our AI agents to understand and execute increasingly complex business processes. This will continue the evolution of our operating model from a low-touch to a no-touch model, unlocking further operational efficiencies and providing a stronger foundation for our scalable growth.

Looking ahead, we will continue to build on our core strengths in products, supply chain and AI. This will further reinforce our long-term competitive advantages as we work to establish ZKH as the trusted infrastructure for industrial MRO procurement. At the same time, we'll focus on improving the quality and efficiency of our core business, enhancing our organic growth drivers and further optimizing our customer mix and cost structure, positioning us to achieve full year profitability in 2026.

Now I'll turn the call over to our CFO, Max Lai, to present our financial results. Thank you, everyone.

Thank you, Eric, and thanks, everyone, for making time to join our earnings call today. I'm pleased to walk you through our financial performance for the fourth quarter and full year 2025. We concluded the year with strong momentum across key financial metrics. In the fourth quarter, we delivered accelerated top line growth, improved operational efficiency and achieved a return to profitability. These results reflect the improvement of our core business fundamentals and the growing benefits of business optimization we've implemented over the past several quarters.

Let me begin with our top line performance. In the fourth quarter, we generated a solid year-over-year and sequential growth signaling strengthening momentum in our business and robust market demand. GMV grew by 8.5% year-over-year and 11.3% sequentially to RMB 2.92 billion, while total revenues grew by 7.9% year-over-year and 9.8% sequentially to RMB 2.56 billion. This performance was supported by the continued expansion of our customer base as well as our enhanced product offering and fulfillment capabilities.

For the full year, GMV declined by 3.3% year-over-year to RMB 10.1 billion, primarily due to the impact of strategic optimization that continued to weigh on results in the first half of the year. But the company's operational performance showed clear signs of inflection points in the second half of 2025. Total revenues increased by 2.6% year-over-year to RMB 9 billion.

Turning to our margin profile. Gross profit margin in the fourth quarter was 15.5% compared with 17.1% in the same period last year, primarily reflecting temporary unfavorable change in product mix. That being said, the underlying drivers of our long-term margin expansion remains well in place. The ongoing growth of our high-margin SME customers and private label products provides a structural tailwind for our margin profile. In addition, our continued progress in procurement efficiency and supply chain capabilities is expected to further support gradual margin improvement over time.

For the full year, gross profit margin was 16.4% compared with 17.2% in 2024. The decrease was mainly due to a lower contribution from our marketplace model, which carries 100% gross profit margin under the net revenue recognition basis. However, on a GMV basis, our gross profit margin improved by roughly 15 basis points year-over-year to 14.6%. Notably, gross margin for GBB platform increased by 98.6 basis points year-over-year to 6.5%. Meanwhile, the take rate of marketplace model rose by 57.4 basis points year-over-year to 13.1%, highlighting continued monetization improvement across our platform ecosystem.

On operational efficiency, we generated solid operating leverage in the fourth quarter as cost efficiency continued to improve with scale and AI applications. Total operating expenses decreased by 3% year-over-year to RMB 424.6 million and decreased to 16.6% of net revenues compared with 18.5% in the same period last year. For the full year, total operating expenses declined by 8.7% year-over-year, while operating expenses as a percentage of net revenues improved to 18.8% from 21.1%. This operational efficiency gains translated into a meaningful improvement in profitability.

In the fourth quarter, operating loss narrowed by 13.4% year-over-year to RMB 28.2 million, with the margin improving to negative 1.1% from negative 1.4%. Non-GAAP EBITDA turned positive at RMB 19.7 million compared with a loss of RMB 13.3 million in the prior year period, with the margin improving by roughly 133 basis points. Most notably, we achieved a non-GAAP adjusted net profit of RMB 14.9 million in the fourth quarter, representing a very significant turnaround from a non-GAAP adjusted net loss of RMB 15 million in the same period last year.

For the full year, operating loss narrowed by 37% year-over-year to RMB 213.3 million, with the margin improving to negative 2.4% from negative 3.9% in 2024. Non-GAAP EBITDA improved by 58.9% to negative RMB 79.3 million, with margin improving to negative 0.9% from negative 2.2%. Adjusted net loss narrowed by 46.1% year-over-year to RMB 85.9 million, with margin improving to negative 1% from negative 1.8%.

Turning to our balance sheet and cash flow. We maintained a strong and healthy cash position. As of December 31, 2025, our cash and cash equivalents, restricted cash and short-term investments totaled RMB 1.92 billion. This provides us with ample liquidity to support ongoing operations and strategic initiatives. Operating cash flow also improved sequentially. In the fourth quarter, net cash generated from operating activities reached RMB 116.1 million, reflecting improved operating performance and disciplined working capital management.

In closing, 2025 marks a year of meaningful financial and operational progress for the company. We strengthened our financial fundamentals, improved operational efficiency and significantly narrowed loss while continuing to invest in capabilities that support long-term growth. As a result, we returned to profitability in the fourth quarter and closed the year with stronger operating leverage, renewed growth momentum. Our operational model today is structurally more resilient, supported by enhanced product and supply chain capabilities, a more disciplined cost base and deeper integration of AI across our operations.

Looking ahead, our strategic focus remains clear: continue to drive high-quality growth, expand margins and maintain disciplined execution as we advance towards sustainable profitability.

Thank you. I would now like to open the call for Q&A. Operator, please go ahead.

[Operator Instructions] The first question comes from Leo Chiang with Deutsche Bank.

[Foreign Language] I will translate myself. Congratulations on the robust 4Q results. My question is about gross margin. We noted a decline in the gross margin year-over-year in Q4. Could management please explain the reason behind this? And additionally, will the long-term goal and the trend for improving gross margin be affected?

[Interpreted] Thank you very much for that question. So to answer your question, the Q4 changes -- the gross margin changes in Q4 was primarily caused by 2 things. First is the change in product mix. As we know, there have been changes and fluctuation in the commodity prices, and that has led to some customers pulling ahead the purchasing of certain products, for example, wires and cables, right? And wires and cables use copper whose pricing has been rising. And the gross margin for these products tend to be lower, and that have driven down the overall gross margin. And the similar products include things like white oil and stuff like that.

Secondly, the percent of -- or SOE customers as a percent of total customers in terms of their business value and volume have increased slightly. But if you look through our gross margin January through March of this year, things have been improving gradually. And of course, because of the war that's ongoing in the Middle East, there's now price hikes regarding oil, petroleum. So suppliers are jacking up their prices. Of course, that needs to be considered as a double-edged sword as even though on the short run, it's going to put some downward pressure on our gross margins. But in the long run, it's going to provide opportunities for more sales and more expansive or expansion opportunities.

For the full year, if you look across all of our production lines, our goal is definitely to achieve higher margins by way of lowering costs on 3 different fronts, namely purchasing, private labels and cost optimization regarding certain sectors. And we need to understand that gross margin -- gross profit margins vary from product line to product line. What we care most about is the overall profitability, and we will try to drive that up over time. So that was my answer to this question.

The next question comes from Jin Han with CICC.

[Foreign Language] I will translate myself. The company's private label achieved a 20% growth in this year, increasing share to 8.3%. Could management please introduce the company's growth targets for private label this year? Additionally, as the company sell more private label products, how does the company manage relationship and commutation with nonprivate label suppliers?

[Interpreted] Sure. Private labels are extremely important for us. It's an extremely important driver for us. Our target for private labels in 2026 is for it to grow by another 30%. And we started investing in private labels. We doubled down on our investments into private labels last year. And our goal is to drive its share of our GMV to roughly 10% for this year, 2026. As for our relationship with non-private label suppliers, of course, first off, we won't do private labels for all categories. We will look into categories -- we will comb through all categories to identify the ones where we could provide better value by doing private labels on. And for those categories, we will have a private label version of those categories.

And if you look across history and globally, whenever a platform grows to a certain -- grew to a certain size, private labels will emerge and some of the categories will shift and migrate towards private labels. And that is a great appeal to the business we are in. So as we scale, both private labels and branded products will coexist and thrive. So I think driving up the share of our private labels as a percent of our GMV is an important strategy for us. As offering certain kind of -- a certain degree of competition against our suppliers will definitely drive up customer satisfaction and create more value for our customers. And customer satisfaction, in my opinion, trumps all the other factors.

Okay. Was there a follow-up? Or was that the answer for the question?

That was the full answer.

The next question comes from Shen Qiang Wang with CITIC.

[Foreign Language] I will translate my questions. Could you please introduce the company's most important objectives for this year as well as the growth targets and the strategies for China domestic business?

[Interpreted] Sure. The most important objective for us in 2026 is to achieve full year profitability as alluded in the prepared remarks. Meanwhile, we will continue to build out our core competencies to lay a firm groundwork for future development. So there's 3 aspects we will try to push for in order to achieve this two-pronged objective. Firstly, we will continue to create value by digging into our product competencies or to make our products more competitive. So basically to offer better products at lower prices.

Secondly, for our medium to large customers, we will continue to dig deeper, revolving their needs so as to drive up their wallet share with us as well as gross profit margins.

On the customer front, so aside from serving key accounts well, we will be systematically doing business development with SME customers and expand our base of SME manufacturers. Specifically, we will be focusing on doing online and offline ad campaigns, content marketing and brick-and-mortar off-line promoters kind of thing to expand that coverage. And that's what we're going to focus on this year. And we will also accelerate the expansion of the overseas market, especially when it comes to serving well Chinese manufacturers that are going abroad because this trend is only accelerating, and we will need to take advantage of that very well.

Secondly, in order to ensure profitability, we need to, first and foremost, focus on the product side of things. So let me backtrack a little bit. We need to improve the quality of our business, and there's 2 things specifically that we will need to be doing. Firstly, as was alluded to in the prepared remarks, we need to focus on what we believe is the real MROs, what we were referring to as highly specialized MRO products. So specifically, through the synergy between sales and production lines, we will need to improve the quality of our customers. What I mean by that is to turn low gross margin -- gross profit margin customers into higher gross profit margin ones.

Secondly, we need to do a good job managing our cash flow and continuously optimize our account receivables and inventory management and maximize our operational efficiency to achieve better quality of operations.

Thirdly, we will continue to expand our R&D capabilities and focus on innovation. On the product front, we will be fully leveraging our R&D center in Taicang and have that work in tandem with our production base in Shenzhen to do continuous R&D and testing so as to make our MRO products more competitive. We will also continue to pay attention to the data space and the AI R&D space. We are looking to get more AI products developed and materialized this year so as to achieve a new source of growth.

Last but definitely not the least, is team build-out because a strong team, a competent team is essential to our sustainable growth. And we made quite a bit of progress last year, but there's still more room for improvement. So our goal is to build a team with high-quality talent and with a very high morale. And we will also be looking at how we distribute our personnel across different industries and geographies so as to focus our resources on the most profitable and the most efficient areas. So that was all of my -- that was my full answer. Thank you.

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.

Thank you once again for joining us today. You can find the webcast of today's call on ir.zkh.com. 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.

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

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

Ladies and gentlemen, good day, and welcome to ZKH Group Limited Third Quarter 2025 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.

Good morning, and welcome to our third quarter earnings conference call. With me are Mr. Eric Chen, our Founder, Chairman and CEO; and Max Lai, our CFO.

Today's discussion may include forward-looking statements. Related factors are described in our today's press release. And 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 non-GAAP results.

With that, I will turn the call over to Eric. Eric, please go ahead.

[Interpreted] Hello, everyone. Thank you for joining the Third Quarter 2025 Earnings Conference Call for ZKH Group. In the third quarter, thanks to our team's concerted efforts, we are pleased to see signs of stabilization and recovery in our business following nearly four quarters of proactive business optimization and adjustment.

In the third quarter, the number of transacting customers exceeded 70,000, reaching a new quarterly high and strengthening the foundation for future growth. Both GMV and the number of transacting customers among industry key accounts and regional SME customers continue to grow year-over-year. The company's gross margin continued its upward trend.

As a result, our third quarter GMV, revenue and gross profit largely recovered to their prior year levels. From an order flow perspective, average weekday order value rose from approximately RMB 37 million in July to approximately RMB 52 million November to date, representing an improvement of over 40%. Compared to the previous year, this level has also grown to about -- grown by about 20%. We expect this positive momentum in average weekday order value to continue through the remainder of the year.

Taken together, these advancements underscore that we are firmly back on a growth trajectory. In the third quarter, our total operating expenses were down by 14% year-over-year to approximately RMB 420 million.

Overall, our profitability meaningfully improved during the quarter. Operating loss, net loss and adjusted net loss all narrowed significantly. Our adjusted net loss was down by approximately 78% year-over-year to just RMB 14 million. Our adjusted net loss margin also improved to 0.6%. Moreover, we once again achieved monthly breakeven in September, and we are on track to deliver quarterly profitability in the fourth quarter.

In terms of cash flow, we generated net cash of approximately RMB 100 million from operating activities for the third quarter, primarily driven by the substantial narrowing of losses and continued optimization of working capital management, including accounts receivable and accounts payable.

Our business development is underpinned by the ongoing advancement, refinement, and application of our product capabilities in AI technologies. In the third quarter, we continued to make strides in both areas, propelling business growth, while enhancing operational efficiency. As a professional one-stop MRO procurement service platform, the breadth and depth of our product offerings are fundamental to our growth. We strategically operate 32 product lines, each with a tailored approach. Some product lines are highly specialized with an emphasis on curation, while others prioritize expanding product variety and supplier base.

In the third quarter, we added over 2.3 million sellable SKUs across categories such as chemical reagents, machining and transmission, bringing our total sellable SKUs to more than 19 million. We also onboarded over 1,200 new suppliers, primarily OEMs, further enriching our product offerings and solidifying our core advantage as a one-stop procurement platform.

Our private label products are a key strategic initiative to provide our customers with high value-for-money offerings, enhancing our overall product competitiveness.

In the third quarter, we launched over 600 new private label SKUs, spanning categories such as security-related products, personal protective equipment, tools, and material handling and storage products. The GMV of our private label products maintained double-digit growth, outpacing the company's overall growth rate.

Looking ahead, we plan to steadily increase our private label products contribution to total GMV from around 8% today to approximately 30%.

We will continue to focus on professional and industrial-grade MRO categories, that are -- that is spare parts, chemicals and manufacturing parts. These areas serve as key differentiators and value drivers that set us apart from our competitors. For product lines where we have distinct advantages, such as our chemical product line of industrial lubricants and adhesives, we have developed a robust and reliable supply chain comprised of 13 specialized chemical warehouses, three of which are dedicated to hazardous materials and an in-house fleet for distribution and delivery.

We will continue to enhance our integrated capabilities from product selection to last-mile delivery and on-site service, further reinforcing our competitive moat. In the third quarter, our chemical product line achieved double-digit year-over-year GMV growth.

In the AI realm, we are continuing to advance our AI infrastructure across both the data and application layers, focusing on intelligent business processes and data governance to systematically improve our sales and operational efficiency. We have already deeply integrated AI across various business scenarios including material cataloging and management, product recommendation, sales conversion, data standardization and workflow automation.

AI has emerged as an increasingly important driver of cost reduction, efficiency improvement, business growth, R&D productivity and data asset enhancement.

At the opening of the 8th China International Import Expo in November, we officially launched Expert Linglong, our proprietary AI large model and intelligent agent suite, specifically designed and developed for the MRO industry vertical.

Expert Linglong marked a significant milestone for ZKH in empowering the entire MRO supply chain with AI. Our AI Smart Workbench, one of Expert Linglong's core applications enables automation across 45 business process scenarios, such as creating orders or issuing invoices with a single prompt. It has significantly reduced cross-system, manual operations and enhanced process efficiency, platform-wide synergy and workforce productivity. Measured by order volume processed per employee, in the third quarter, our customer service productivity increased by 42% year-over-year, while procurement productivity increased by 52%.

Moreover, AI has become the key engine for capturing customer needs and improving supply-demand matching efficiency. Our ProductRecom Agent continues to improve product recommendation accuracy generating over RMB 100 million in new incremental sales revenue since its launch in the fourth quarter of 2024 through the end of the third quarter this year.

Our AI tools also excel in complex business scenarios. For example, processing a 300-line customer inquiry traditionally takes 3 hours. By combining AI with expert experience, this task can now be completed in 30 seconds with 98% accuracy. Since the start of the year, we have utilized AI to optimize our product classification models and system rules boosting the platform's automated product classification rate from 11% to 31%. This not only reduces manual intervention, but also increases product onboarding efficiency and improves the accuracy of matching customer needs.

Moving forward, we will continue to develop our self-service AI-driven procurement agent to speed up responses and further elevate customer experience.

Our Expert Linglong large model is also empowering upgrades across our R&D system. Our R&D teams have widely adopted AI coding tools with over 15% of our code now being generated by AI, significantly improving development efficiency.

Looking ahead, the Expert Linglong large model will remain at the core of our AI development, driving deeper technological empowerment across our product, supply chain and last-mile delivery capabilities. We believe that AI is more than the tool. It is a key force reshaping the MRO supply chain ecosystem.

In summary, the third quarter was highly productive. We drove steady progress in all of our business segments, in line with our strategic road map, building stronger growth momentum across the board.

Looking ahead, we remain committed to advancing our development goals of product excellence, AI-driven growth and profitability improvement, delivering long-term value to our customers and shareholders.

Now I will turn the call over to our CFO, Max Lai, to present our financial results. Thank you, everyone.

Thank you, Eric, and thanks, everyone, for making time to join our earnings call today. I'm pleased to walk you through our robust financial performance, driven by revenue recovery, enhanced profitability metrics and possible operating cash flow.

Let me begin with the top line. Both GMV and revenues returned to approximately last year's levels, with GMV down 2.3% year-over-year to RMB 2.62 billion and total revenues up 2.1% to RMB 2.33 billion. This performance indicates that the headwinds from our business optimization initiatives has largely cycled through, providing greater visibility for renewed top line growth in the quarters ahead.

Notably, the number of transacting customers exceed 70,000 reaching a new quarterly high and private label GMV grew 16.7% year-over-year, outpacing the overall business and reaching 8.2% of total GMV.

Turning to business quality. Our gross margin remained healthy at 16.8% compared with 17% a year ago. On a GMV basis, our gross margin continued to improve, expanding by 41.5 basis points year-over-year to 14.9%.

Specifically, gross margin for our product sales 1P model increased by 11.2 basis points to 16.2 percentage on ZKH Platform and 223.8 basis points to 7.7% on the GBP Platform. Additionally, we take our take rate of Marketplace model rose by 47.5 basis points to 13.1% year-over-year. These gains were mainly driven by our optimized procurement costs and a high contribution from our private label products, which typically deliver high margins.

On operational efficiency, our disciplined focus on streamlining the costs and enhancing productivity continue to yield tangible results. Total operating expenses decreased 14.4% year-over-year to RMB 493.8 million, representing 18.1% of net revenues, a significant improvement from 21.6% in the prior year period.

Breaking this down, fulfillment expenses were RMB 90.4 million down 9.8% year-over-year, reflecting lower employee benefits and warehouse rental costs.

Sales and marketing expenses declined 13.2% to RMB 145.9 million primarily driven by lower employee benefits and travel expenses.

R&D expenses decreased 19% to RMB 40.3 million mainly attributable to lower employee benefits. And general and administration expenses were RMB 145.8 million, down 17% year-over-year, driven by lower employee benefits expenses and lower credit loss allowances.

Efficiency gains underpinned margin improvements and a substantial reduction in losses. Operating loss narrowed 69.3% to RMB 32.3 million, with margin improving to negative 1.4% from negative 4.6%.

Non-GAAP EBITDA improved to a loss of RMB 8.5 million from RMB 62.8 million, with margin improving to negative 0.4% from negative 2.8%. Adjusted net loss narrowed to RMB 14.1 million from RMB 66.2 million and margin improved to negative 0.6% from negative 2.9%. As of 30 September 2025, our cash position remained strong at RMB 1.9 billion. Net cash generated from operating activity was RMB 105.5 million compared with net cash used in operating activity of RMB 160.5 million in the same period of 2024.

To conclude, our first quarter results demonstrate clear signs of stabilization and recovery, underpinned by a more balanced customer mix, a higher-margin product portfolio driven by private label growth and a structural efficiency gain from AI-enabled process optimization and strengthened supply chain capabilities.

Looking ahead, we expect to capitalize on this momentum through disciplined investment in AI and data capabilities, continuous enhancement of our product and supply chain capabilities and focused execution while advancing our international expansion. We remain focused on top line growth, further margin expansion and loss reduction on our path towards sustainable profitability.

Thank you. And I would like to now open the call for Q&A. Operator, please go ahead.

[Operator Instructions] The first question comes from Xiaodan Zhang with CICC.

[Foreign Language] So, according to publicly available information, JD Industrial is preparing for an IPO in Hong Kong. So could management share your views on the competitive landscape of MRO market in China?

[Interpreted] So I believe this JD MRO looking to get listed is a very good thing for ZKH and for the industry at large. Because it's very good in terms of spreading this idea of doing one stop purchasing on e-commerce platforms. And it's definitely an opportunity that our times have afforded us. China being the #1 manufacturer in the world is actually big enough for leading MRO companies to exist. And these MRO companies cannot only serve Chinese manufacturers, but also benefit global ones.

And in the MRO space, we have seen different kinds of players, including those players traditionally engaged in supplying office supplies. As ZKH, we started out in serving and selling chemicals and industrial-grade MROs. So, we are really specialized -- we specialize in selling spare parts, chemicals and manufactured goods. And we have built an innovation center in Taichung. This goes to show how we are committed to be deeply involved and integrating our services.

And so, in terms of R&D, testing, product selection and comparison, and we would like to use the specialty of ours to help our customers better. We have also built our own warehouses and last-mile delivery capabilities. So, this supply chain capability can not only serve the whole of China, but also the rest of the world.

And in terms of the competitive landscape, I would say, over the years, things have really stabilized and as leaders in the space, our advantages are becoming increasingly marked. And the fact that we are able to have acquired lots and lots of SMEs goes to show that there has been a great improvement to our supply chain capabilities. So basically, at the end of the day, we are committed and focused on beefing up and enhancing our supply chain capabilities in the MRO space. That was my answer to your question. Thank you.

Are you ready for your next question? The next question comes from Leo Chiang with Deutsche Bank.

[Foreign Language] Let me translate myself. Management just mentioned in the prepared remarks that the company will commit to advancing development goals of profitability improvement. What are the reasons the company has not been profitable so far? And how does the company consider and balance between profitability and the mid- to long-term development investment?

[Interpreted] So, we got lots of investment and funding along our journey. As a start-up -- start-ups have different phases, right? In early days, we were more focused on the health of our cash flow. So, more of the funds were used and spent on infrastructure build-out and the build-out of our core capabilities and the competencies. So, we were suffering losses primarily due to these investments that we made in order to beef up our core competencies. But I believe we are entering a new phase now. This is a phase marked by profitability, and we're going to use some of the profits and spend the profits to further build our core competencies.

Now that we are profitable, one thing that is clear is we are having an increasingly strong operating leverage. Specifically, our expense ratio keeps dropping, while our fulfillment gross margin keeps rising. And our profitability is getting better. And this is very much in line with our original plan for our development.

In terms of specific profit and losses, '21, we made a loss of RMB 910 million due to the loss and loss of investments that we made. 2022, we made a loss of RMB 630 million. '23 losses were RMB 290 million. '24, RMB 160 million. '25, we saw losses greatly narrowed and in Q4, we are very likely to turn a profit.

So we are pretty certain that our GMV growth year-over-year could reach 15% to 20% per year going forward. In terms of how we're going to go about striking a balance between profitability and long-term growth, I think, it comes down a lot to control of expenses. So, we will continue to improve our efficiency and control our expenses as well as enhancing our capabilities of customer acquisition. We will also keep investing in our core competencies, while ensuring profitability. So these core competencies include R&D when it comes to AI, R&D when it comes to product capabilities and our overseas business expansion. So, we will not only make sure that our profitability is sustainable, but also we will enhance it while ensuring long-term growth.

The next question comes from Ruchen Tang with CITIC.

[Foreign Language] So, let me quickly translate the question first. So, looking for -- looking out on your latest developments and the future plans for overseas expansion, could you talk us a little bit about how you think about developing your business in the States versus serving Chinese companies as they go abroad?

[Interpreted] Overall, when it comes to going abroad, there's two parts. One is serving Chinese companies as they go abroad as there's lots and lots of Chinese companies that are currently taking their business globally. Also, we're going to develop business in the U.S. Mainland and Europe, we're actually already actively doing that. But after a period of testing things out, we have made some adjustments as well. So firstly, we still highly value Chinese companies going abroad. And because investments there on our part are pretty limited, and the certainty of this business is very high.

So in Q3, for example, we have already finished the MRO purchasing and delivery for some of our customers for quite a few Chinese customers rather in Thailand, Malaysia, Indonesia and Mexico, for their local factories. And we have finished things like product certification, customers' clearance, et cetera. As for our business in the U.S., we believe that's going to be a mid- to long-term play. So because it's going to take longer time in terms of product prep getting to market, so we decided to control -- we have decided to control our investment pace and cadence in the U.S. And overall, we believe our overseas business will achieve breakeven in the whole of 2026.

So that was actually all of my answer to this question.

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.

Thank you once again for joining us today. You can find the webcast of today's call on ir.zkh.com. 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.

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

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

Ladies and gentlemen, good day and welcome to ZKH Group Limited Second Quarter 2025 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.

Good morning, and welcome to our call today. With me are Mr. Eric Chen, our Founder, Chairman and CEO, and Max Lai, our CFO. Today's discussion may include forward-looking statements. Related factors are described in our today's press release. And 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 non-GAAP results.

With that, I will turn the call over to Eric, please go ahead.

[Interpreted] Hello, everyone. Thank you for joining our second quarter 2025 earnings conference call for ZKH. Despite ongoing macroeconomic challenges, we achieved solid business development in the second quarter through strategic focus and strong execution. Customer activity on our platform remained high with a number of customers reaching a new quality record, driven by growth in new customer acquisition and a sustained increase in repeat purchases from existing customers, due to the business optimization initiative related to state-owned enterprise or SOE and central SOE customers in the second half of last year.

Our GMV for the second quarter declined year-over-year to RMB 2.42 billion. However, excluding the impact from this initiative on the total GMV base, our underlying GMV still demonstrated year-over-year growth. The quality of our business also continued to improve.

In the second quarter, our gross margin on a GMV basis reached 14.8%, representing a 0.8 percentage point year-over-year increase. This marked our sixth consecutive quarter of year-over-year gross margin expansion, driven by procurement cost optimizations and our high-margin private label products robust GMV growth.

In terms of profitability, our net loss narrowed to approximately RMB 53 million in the second quarter, a 20% year-over-year reduction. Notably, we once again achieved monthly breakeven in June following our first monthly breakeven in March this year. What's even more impressive is that we attained this milestone while continuing to invest in strengthening our core competencies, including product capabilities, AI and last mile delivery as well as expanding our overseas business.

While maintaining our forward-looking investments to support our medium- to long-term growth, we have also optimized our organizational structure, streamlined processes and promoted the adoption of AI tools to enhance overall operational and workforce efficiency, all aimed at bolstering profitability. For example, in the second quarter, the average number of orders processed per customer service representatives grew by 48% year-over-year, through warehouse fulfillment cost decreased by approximately 18%.

Our warehouse fulfillment efficiency and cost management have now reached industry-leading levels.

Next, I would like to provide a detailed update on our domestic and global business performance in the second quarter. Starting with our domestic business. Our dual platform model continued to generate strong synergies. The ZKH platform remains focused on serving large and medium-sized enterprise customers, while the GBB platform empowered SME and micro enterprise customers, enabling us to meet the needs of a diverse customer base.

First, let's discuss the ZKH platform. From a customer perspective, in the second quarter, GMV from industry key accounts rose by approximately 11% year-over-year, and a number of these transacting customers increased by around 22% year-over-year. Notably, GMV in sectors such as automotive, new energy, electrical equipment manufacturing and property management and tourism grew by more than 15%.

These results were driven by our ongoing efforts to curate and refine industry-specific and customer-specific product pools. Leveraging AI technologies to gain deeper insights into customer needs and provide tailored product selection and recommendations, that's further increasing customer wallet share. For regional SME customers, our region-based service and grid-based staffing strategy continued to yield strong results.

In the second quarter, GMV from regional SME customers grew by approximately 7% year-over-year, and the number of these transacting customers grew 13% year-over-year. Key regions, including Guangdong, Anhui, Henan, Shanghai, Jiangsu and Zhejiang each saw GMV growth of over 10%. This achievement stems from our efforts to enhance our service capabilities for regional customers, accelerating both coverage and customer acquisition. For SOE and central SOE customers, GMV in the second quarter declined by over 50% year-over-year, primarily due to a high comparison base from business optimizations in the second half of last year. As mentioned in previous earnings calls, these business adjustments are now complete, and their impact is subsiding. Our SOE and central SOE business recorded sequential growth in the second quarter. We remain confident that building on our supply chain advantages and the proven value we deliver to customers. This business segment will gradually regain growth momentum.

Turning to the GBB platform. We drove continued scale growth with a rapidly increasing number of transacting customers in the second quarter. Profitability also improved, thanks to broader coverage of SMEs and micro enterprises and our strategic focus on higher-margin MRO categories. The GBB platform's gross margin expanded by 1.4 percentage points year-over-year and gross profit rose by more than 23%. Recently, we have been further sharpening GBB's strategic focus, placing greater emphasis on construction materials and hardware, a large and underserved market. By leveraging our online marketing channels and supply chain advantages, we aim to deliver high-quality, competitively priced construction materials and hardware products to both B2B microenterprise customers and B2C individual consumers.

In the second quarter, we have also achieved significant progress in product and AI capabilities. In terms of product capabilities, we launched our smart manufacturing base in Taicang, Suzhou as an integral part of our strategic smart manufacturing initiatives, this facility will further enhance our capabilities in product research and development, testing and production. We believe it will serve as a key driver in strengthening our private label product development capabilities and their competitiveness.

During the quarter, GMV from private label products rose to RMB 210 million, a growth of 25% year-over-year and its contribution to our total GMV increased to 8.7%. Looking ahead, we remain committed to our long-term target of increasing the share of private label products in total GMV to approximately 30%.

Moving on to AI. We've seen that AI is becoming an increasingly important driver of growth across various business metrics, including material management, product selection and recommendation, sales conversion, data standardization and process efficiency improvement.

In the second quarter, we continued to advance our AI infrastructure with a particular focus on data development. We are consistently improving the quality of our product data by enriching attribute parameters, standardizing attribute rules and optimizing image quality. And we've completed high-quality annotation for over 1 million product data points.

In combination with our deep optimization of LLMs and algorithms, these annulated data sets have led to significant improvement in business -- in key business metrics.

Furthermore, we are building a comprehensive product data management platform that spans the entire data life cycle from collection and allocation to governance and application. Our goal is to achieve substantial growth in the generation of high-quality product data this year and to establish the industry's most comprehensive and advanced large-scale database for MROs, which we call the ZKH data dictionary, providing our industrial customers with highly specialized data services.

Turning to our overseas business. We have adopted a localized operating strategy in both the U.S. and European markets, capitalizing on our supply chain strength, a curated portfolio of high-quality and cost-efficient products and innovative technologies to accelerate market entry. By the end of June, our U.S. stand-alone website, NorthSky had attracted approximately 6,000 registered customers with around 600 SKUs launched across a dozen product lines.

In the second half of the year, we will expand this SKU base to enhance product coverage and customer experience. In terms of sales performance, our U.S. revenue grew by 260% in the second quarter from the first quarter.

We are also actively preparing for our entry into the European market with our European business operations and stand-alone website expected to launch by the end of this year. Beyond the U.S. and Europe, we are pursuing a strategy of partnering with major Chinese customers to support their overseas expansions in regions such as Southeast Asia, South America, Africa and the Middle East, providing targeted services to fulfill their MRO procurement needs in local factories.

To date, we have begun receiving orders from these Chinese customers overseas plants in 10 countries, including Thailand, Indonesia, Malaysia, Mexico and the UAE. To provide global customers with a high-quality, reliable supply of MROs, we are actively diversifying our supplier network. Currently, 70% of our suppliers for overseas business are based outside of China, creating a more balanced and resilient supply chain and mitigating potential geopolitical risks. This achievement marks meaningful progress in the development of our global sourcing system.

In summary, we have sustained steady growth despite recent quarter's business adjustments. We have continued to strengthen profitability in our domestic operations while driving meaningful progress in our overseas business. Demonstrating our ability to execute and the inherent resilience of the MRO industry.

Looking ahead, we will remain focused on advancing our core capabilities across products, digitalization and fulfillment, while also accelerating the expansion of our global footprint. These efforts will support our company's long-term sustainable growth and deliver enduring value to our shareholders.

Now I'll turn the call over to our CFO, Max Lai, to present our financial results. Thank you, everyone.

Thank you, Eric, and thanks, everyone, for making time to join our second quarter earnings call today. I'm pleased to walk you through our solid financial performance, highlighted by enhanced revenue quality and optimized operational efficiency.

Let me start with the top line performance. Both GMV and revenues came under pressure in the quarter, with GMV declining by 12.1% year-over-year to RMB 2.42 billion and total revenues decreasing by 3.7% to RMB 2.17 billion. This was largely due to last year's high comparison base which includes low-margin business from SOE and central SOE customers with extended credit terms that we have seen optimized.

However, excluding these factors, our underlying GMV's do show year-on-year growth. We anticipate these challenges will continue to ease, setting the stage for a potential turnaround in top line growth in the second half of this year.

Turning to business quality. Our business quality remains strong and healthy. Our gross margin was at 16.5%, slightly down from 17% in the previous year, primarily due to lower revenues from our marketplace model, which carries a 100% gross margin under the net revenue recognition basis.

However, on a GMV basis, our gross profit margin continued to improve, expanding by 84.6 basis points year-over-year to 14.8%. Specifically, gross profit margin for our product sales 1P model increased by 45.2 basis points to 16% on ZKH platform and 137.6 basis points to 7% on GBP platform.

Additionally, the takeaway of marketplace model, 3P model rose by 206.7 basis points to 14.2% year-over-year. These gains reflect our successful business optimization, procurement efficiency and focus on high-margin private label products.

On operational efficiency, we made solid progress. Operating expenses decreased by 5.6% year-over-year to RMB 454.2 million, making up 19.8% of total revenues, down from 20.2% in the prior year period. This improvement was achieved even with approximately RMB 25 million in overseas business-related expenses, which were almost absent in the prior year period.

Breaking this down further. Fulfillment expenses were RMB 90.8 million, down 8.4% year-over-year, reflecting lower employee benefits and warehouse rental costs. Sales and marketing expenses declined by 5.3% to RMB 149.3 million, primarily driven by lower employee benefits and travel expenses. R&D expenses increased by 7.9% to RMB 41.5 million, primarily attributable to higher employee benefit expenses. General and administrative expenses were RMB 147.3 million, down 7.3% year-over-year, mainly due to lower share-based compensation and credit loss allowance partially offset by higher employee benefits.

It is worth noting that our G&A expenses also include salaries for product line personnel and other related costs, which supports the development and enhancement of our product competitiveness.

Turning to profitability metrics. While our loss from operations increased modestly to RMB 72 million, we see positive signs of improvement. Non-GAAP EBITDA loss narrowed to RMB 38.7 million from RMB 47.1 million, with margin improving to negative 1.8% from negative 2.1%. Net loss decreased to RMB 53.5 million from RMB 66.3 million with the net loss margin improved to 2.5% from 2.9%.

Lastly, an update on our share buyback activity. On the 13th of June 2025, our Board approved a new share repurchase program, operating up to USD 50 million for the buyback of ADS. As of 20 August 2025, we have repurchased approximately 2.65 million ADS for about USD 9.18 million under the 2 programs. We remain committed to actively buying back shares, subject to market conditions and other considerations as part of our ongoing commitment to returning value to our shareholders.

In conclusion, the shift towards high-margin private label products combined with gradual easing of prior challenges, positions us for a return to top line growth in the second half of this year. Our investment in AI and process optimization are already delivering tangible improvements and gains. Recent interest from capital markets highlights growing confidence in our business model and long-term potential.

For instance, around 8 million ADS were traded through blockchain on the 7th and 8th of August 2025, between new institutional investors and IPO shareholder, reflecting a significant endorsement of our market positioning. This transaction also represents a disciplined and professional full exit by this pre-IPO shareholder, structured to facilitate ordinary price discovery and address technical overhang. Looking ahead, our priorities remain focused on maintaining financial stability and achieving near-term profitability in our domestic operations in China, while positioning us for sustainable long-term growth. Thank you.

I would like to open the call to Q&A. Operator, please go ahead.

[Operator Instructions] The first question comes from Leo Chiang and Deutsche Bank.

[Interpreted] So my question is regarding growth strategy. The Chinese MRO market is huge and online penetration is still in its early stage, suggesting significant room for growth. However, we have observed that the company's business growth has been under pressure in the past few quarters, primarily due to the optimization and the adjustment of business from SOE. As the impact of this adjustment gradually diminish, what strategy that the company had for short, mid- and long-term business growth.

Also, can management provide an overview of the company's business outlook for the second half of this year?

[Interpreted] Yes, indeed, our performance for the last few quarters has been under a lot of pressure, primarily due to the aforementioned business adjustment and optimization, and we decided to optimize this part of the business, because we didn't believe it was going to be very valuable and meaningful for our long-term competitiveness.

So -- and this part of the business used to account for more than 20% of our total GMV. So as we were phasing out of this 20% of GMV, the reason our total GMV didn't decline severely was primarily due to the fact that we added a lot of new large customers as well as SMEs. And the business from these 2 groups have more than made up for the -- have made up for the loss from the adjusted and optimized the business. So it's been very clear that our business has been driven primarily by these 2 groups of customers, and we are greatly increasing the number of SMEs, thanks to our online technologies and capabilities. And we're also trying to cover more key KAs or key accounts, large customers.

Out of the top 1,000 manufacturer customers in China, we have already covered 670 of them, and we are proactively increasing our water share with them. And so there's a lot of potential to tap in there. And we are proactively reaching out to penetrate the other 300 as well.

So in terms of another aspect, which is GBB, our GBB platform has been focusing more on construction materials and hardware in order to serve the needs of SMEs and consumers better. And of course, from our perspective, in order to grow more sustainably and strongly in the mid- to long term, a lot of the growth drivers will come from overseas markets, including Europe and America.

So our investment efforts in those overseas markets, I believe, will start to show effect starting the second half of this year. And starting June and July this year, the -- our performance from the central SOEs and local SOEs have pretty much bottomed out in June and July. And starting August, we have seen from data that things started to turn around and rebound. So we are very, very confident that recovery and the growth -- positive growth for the second half is very likely.

The next question comes from Xiaodan Zhang and CICC.

[Interpreted] So in the increasingly competitive landscape of platforms, there is significant concern about the long-term competitive advantages of enterprises. Beyond scale, what do you believe are the true competitive barriers or moats that ZKH has built in the China's MRO sector that are difficult to imitate or surpass. The company has consistently emphasized the construction and investment in the long-term competitiveness. Please share specific investments made in these areas as well as the impact and results on that business develop.

[Interpreted] Okay. So compared to traditional trading companies and hardware stores, we have absolute advantages when it comes to things like our product capabilities, our IT capabilities and our nationwide supply chain as well as our talent reserves. I'm not going to delve into the details. But compared to other MRO e-commerce marketplaces, I would like to focus on 3 areas where we have an edge.

First is our product capabilities. Due to historical reasons, we are very versed when it comes to real industrial-grade MROs. So these are real MROs by definition. And specifically, we have an absolute advantage when it comes to things like spare parts, chemicals and manufacturing.

Second, we have a 600 strong persons of product expert team. And we absolutely take a lead in the industry, and they are very specialized -- have specialized know-how about various industries and products.

Thirdly, we have very strong R&D capabilities and our Taicang factory is definitely going to increase our advantage. So this plant in Taicang enables us to do innovation of products as well as product selection, testing and recommendations.

The second point I would like to stress is our digitization and AI capabilities. We have a data dictionary built based on 17 million SKUs of MRO. And this database is still quickly expanding. And I believe firmly that in the future, in order to have success in the MRO space, having a highly sophisticated and large database for the MRO vertical definitely lays the groundwork.

And we also have a very large MRO IT team, about 200-something people, they include algorithm engineers, data engineers, development engineers from both front and back end and system maintenance engineers. So among the MRO companies in China, we have one of the largest IT teams. So with these 2 aforementioned points, we will be able to build a very strong edge when it comes to AI product capabilities and digitization. And this will propel us to become an MRO company, and it's not an MRO company in its traditional sense, but rather an MRO company that is truly digitized and smart and AI enabled.

So my third point is our capabilities when it comes to expanding our business overseas in overseas markets. So we are the first, the Chinese MRO company that set up shop in the U.S. and we are soon going to do that in Europe as well. And we have built our abilities to source products globally. And we are also tracking large Chinese companies and follow them wherever they go to serve them locally there. And so we are soon going to become the first Chinese company that is going to become a truly global MRO company, thanks to our advantages in talent.

And so based on these aforementioned three points, we are truly upholding long termism, and we are creating value for our customers and we truly value talent. So these points are our true moat, and we believe these are very difficult to emulate and be surpassed.

The next question comes from Ella Ji with China Renaissance.

[Interpreted] So my question is regarding your overseas business. Your U.S. business has been running for over half a year. And you also plan to expand to the European and Southeast Asia market. What are the main competitive advantages of ZKH comparing to the local players? What are the biggest challenges as well as the strategies to counter with those challenges. And then lastly, is there a timetable for the revenue and maybe profit of overseas operations?

[Interpreted] Thank you very much for your question. So when it comes to our overseas expansion, we primarily adopted 2 models, which were mentioned in my presentation earlier.

First is to go into advanced economies and to do localized operations there, namely to set up our own e-commerce marketplaces.

Second is to follow Chinese large customers wherever they go, like was mentioned earlier, we already started receiving orders from plants of Chinese customers that have set up shop in geographies such as Thailand Indonesia, Malaysia and Mexico. But I believe, relatively speaking, out of the 2 models, model 1 is the more challenging one because we have to build our own brand there, right? And being a new start-up from China.

Our reputation locally, we have to build that from scratch. And the learning curve is going to be pretty steep. So it's going to take some time for us to learn about the local cultures and the customers. But our advantages come from different places, primarily because we have a strong supply chain and a relatively low cost, but another factor which is equally important and cannot be neglected is entrepreneurship from being Chinese.

And so being Chinese and being the Chinese start-up, we have the high efficiency, and we are very quick to react to things, and these things make us stand out among companies globally. And we have already past some learning periods, and we are already entering a phase of acceleration.

So I believe in the second half of this year, both models, Model 1 and Model 2 will start to pick up some pace and truly accelerate.

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.

Thank you once again for joining us today. You can find the webcast of today's call on ir.zkh.com. 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.

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

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