ZKH

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 Dacy Shi, Head of Investor Relations. Please go ahead, ma'am.

Good morning, and welcome to ZKH's 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. 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.

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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, and 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.

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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.

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Beyond overall customer growth, we also saw broad-based strengths across customer segments. GMV from SME customers on the ZKH platform increased more than 20% year-over-year. 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 digits year-over-year growth, improving meaningfully on both a sequential and year-over-year basis.

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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 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.

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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, multi-channel 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.

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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.

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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 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.

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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.

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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.

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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 strengthen 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%-90%. We believe these advancements will meaningfully improve quotation completion rates, inventory turnover and sales conversion rates.

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At a model layer, our Hangjia Linglong MRO vertical large language model continue 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 capability 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 contexts to deliver intelligent diagnostics and product recommendations. This significantly improves communication and procurement efficiency in complex industrial supply scenarios.

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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 IT development efficiency also continue to improve. In 2026, we aim to increase our AI code generation rate from approximately 30% today to 80%.

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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.

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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 toward our goal of full-year profitability. I will 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 a 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 ongoing benefits of strategic initiatives we've been implementing 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 gain. Gross profit increased by 6.6% year-over-year to RMB 354 million, while gross margin moderated slightly year-over-year from 17.2%-16.7%. Our underlying margin trends improved sequentially, with GMV-based gross margin increase by 90 basis points. Going forward, we will continue to improve business quality through three priorities.

A more balanced customer and product mix, high 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. These improvements reflected continued reinforcement of our operating model, enhanced organizational efficiency, and more disciplined resources 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 improvements 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 -4.2%. Non-GAAP EBITDA turned positive at RMB 4.2 million compared with -RMB 52 million in the prior year period, with margin increasing to +0.2% from -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 31st, 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 activity 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 marks a strong start to 2026, with further accelerated top-line growth, continued improvement in operating efficiency, and substantial gains in profitability. Notably, we achieved our first non-GAAP adjusted 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.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Again, it is star then one to ask a question. The first question comes from Liu Chang with Deutsche Bank. Please go ahead.

Let me translate myself. Thank you management for taking my question. The first quarter, the 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? What factors could constrain further improvement in gross margin? What action has the company taken to improve gross margin? Thank you.

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Thank you for the question. I will take this question from 3 parts. Namely, category mix, customer mix, and private labels. For category mix, we have lots of SKUs and product lines, things are quite fragmented. 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. In the short run, they might drive down the overall gross margins. If they're able to still drive customer penetration, extend 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. These categories are reflecting better profit conversion efficiency, so to speak. 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. Please translate.

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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. Overall, our gross margin is pretty solid.

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For my second point about customer mix, usually the gross margin for SME customers are higher than key accounts or large customers. The share of the GMV on the part of the SME customers, that trend will impact the trend of our overall gross margins. Currently, SME customers' GMV accounts for about 30%+ of the total, while key accounts GMV accounts for about 60%. The SME customers are growing at 20% GMV-wise. From a customer mix perspective, our gross margin is improving. Please translate.

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In terms of private labels, gross margins for private labels are typically higher than non-private labels. That trend will also impact the overall gross margin trend. Private label GMV currently accounts for 9.7%, and our long-term goal for it is to reach over 30%. 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. We understand how gross margin across different product lines varies by a lot. The adjustment and changes to product portfolio for different stages of our development will impact overall gross margin.

Our long-term goal is to drive gross profits continuously by way of advantageous product lines, private labels, and the optimization of customer mix and improvement of our purchasing efficiency.

Are you ready for your next question?

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Yeah, go ahead.

The next question comes from Jing Wan with CICC. Please go ahead.

[Non-English content]. I will translate myself. We noticed that high tech manufacturing, such as communication electronics, auto manufacturing and equipment manufacturing, accelerated its growth in the first quarter and April.

Could management share more about whether we are seeing similar trend and how is our performance in these sub-sectors? Any initiatives has been introduced to expand our market share in this sector. Thanks.

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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%. For semiconductors, energy storage, optical modules, robotics and optical communication, these emerging sectors, we are accumulating more and more customer resources. Other sectors that have been growing relatively fast are steel. Specifically for steel and non-ferrous metal, if we look at the daily average order volume January through April, this metric has grown 100% for steel and non-ferrous metals. For the same metric, basically daily average order volume January through April, grew by 45% for communication electronics, and 33% for alternative energies. Refined chemicals, pharmaceuticals, electrical manufacturing have all grown very quickly.

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In terms of the measures we are 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 are building out sector-specific commodity pool and a customer-specific commodity pool for these sectors. 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. Please go ahead.

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Based on you mentioned before, the company's overseas business revenue increased by 60% year-over-year in the first quarter. Could you please introduce this year's strategy for the overseas business? Thank you.

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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 overseas business. Firstly, we are primarily serving Chinese companies going abroad. 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 is extremely important to us. We will be more focused, more laser focused in our business there. Specifically, we will be focusing on providing the categories needed for warehousing operations. We will 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. Our goal is to try to break even for overseas business this year. That concluded my answer to this question. Thank you.

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.