Caroline Dong - IR Officer Vincent Qiu - Chairman and CEO Beck Chen - CFO.

Robert Lin - Morgan Stanley Binnie Wong - Bank of America Merrill Lynch Evan Zhou - Credit Suisse Sean Zhang - 86Research.

Thank you for standing by and welcome to the Second Quarter 2016 Baozun Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. There will be presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, August 4, 2016.

I would now like to hand the conference over to your first speaker today, Ms. Caroline Dong, Investor Relations Officer. Please go ahead Ms. Dong..

Thank you, operator. Hello everyone and thank you for joining us today. Baozun's earnings release was distributed earlier today and is available on our IR website at ir.baozun.com as well as on global newswire services. On the call today from Baozun are Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr. Junhua Wu, Chief Operating Officer; and Mr.

Beck Chen, Chief Financial Officer. Mr. Qiu will review business operations and company highlights, followed by Mr. Chen who will discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows.

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, and as defined in the US Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intends, plans, believes, estimates, targets, going-forward, outlook and similar statements.

Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission.

The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under the applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer Mr. Vincent Qiu. Mr. Qiu, please go ahead..

Thank you, Caroline and thank you everyone for joining our earnings call today. We had another strong quarter of solid growth, in which we beat our quarterly guidance, as we did every quarter since our IPO in May 2015. On a year-over-year basis, total net revenues increased by 35%, while total GMV increased by over 81%.

Our growth continues to be driven by China's increasing appetite for e-commerce and upgrading in Chinese cities and consumption habits. More and more high-quality foreign brands are looking to enter this market. We are well positioned to help them flourish here. Baozun's total number of brand partners increased to 120 at the end of the second quarter.

We signed a number of new brands which have long been demanded by Chinese consumers. We are constantly in talks with a number of brands seeking to benefit from the enormous growth opportunities in China's e-commerce market.

One such example is the strategic cooperation agreement we recently signed with CJ O Shopping, a division of CJ Group, which is a Korean culture and lifestyle conglomerate. CJ manages a diverse number of highly sought after Korean brands across a number of industries.

Together we will establish an e-commerce JV that will leverage our respective resources in e-commerce operations, online marketing and logistics, to introduce these brands to Chinese consumers. The JV will act as an important channel for the introduction of Korean brand products into China and Chinese products into Korea in the future.

We look forward to working closely to create more synergies between our businesses. I'm pleased with the progress we have made during the first half of this year. We will continue to develop deep relationships with our brand partners and the business partners.

We are always working to find new ways to service our brand partners and are developing more tools that will allow them to fully benefit from China's rising consumer spending. With that, I will pass the call over to Beck who will review our financials..

Thank you, Vincent. Just a few housekeeping items before I go through the numbers. We believe year-over-year comparisons are one of the most useful ways to judge our performance. All percentage changes I am going to give will be on that basis. So to start, GMV during the quarter increased by 81% to RMB2.2 billion.

We continuously focus our efforts on growing the non-distribution model in which GMV increased by 119%. We believe the continuous optimization of our business model mix will further decrease inventory risk, improve our working capital position and increase our margin profile. Total net revenue beat our guidance by increasing 35% to RMB700 million.

Breaking down further, product sales revenue rose by 18% to RMB412 million, mainly due to increased popularity of our brand partners' products and increasingly effective promotion and marketing activities. Maikefeng accounted for RMB5 million in product sales revenues.

Services revenue rose by 87% to RMB214 million, of which Maikefeng contributed RMB2 million. The increase in services revenue was mainly due to rapid growth in our non-distribution model and, in particular, growth in sales of apparel products sold by our existing brand partners, as we expand their online presence.

Total operating expenses were RMB700 million. In particular, cost of products rose to RMB412 million, primarily due to the increase in the volume of product sales. Maikefeng accounted for RMB32 million in cost of products, including a one-time inventory write-down of RMB27.7 million due to the restructuring of the direct sales business.

Fulfillment expenses rose to RMB110 million. The increase was mainly due to the increases in GMV contribution from consignment business, more orders fulfilled by the premium delivery service provider as a percentage of the total orders, and increase in warehouse rental expenses. Maikefeng accounted for RMB1 million in fulfillment expenses.

The sales and marketing expenses rose to RMB141 million. The increase was primarily due to an increase in promotional and marketing expenses associated with our online stores. Maikefeng accounted for RMB4 million in sales and marketing expenses. Technology and content expenses rose to RMB22 million.

The increase was primarily due to the increase in technology-focused staff and the project-based variable technology expenses from brand stores. Maikefeng accounted for RMB2 million in technology and content expenses. G&A expenses rose to RMB20 million. The increase was mainly due to increase in professional services fees as a listed company.

Maikefeng accounted for RMB0.4 million in G&A expenses. Excluding Maikefeng's direct impact on revenues and expenses, non-GAAP income from operations was RMB40 million, a significant increase compared with RMB22 million in the same quarter of last year.

And the non-GAAP operating margin improved significantly to 5.7% compared with 4.4% in the same quarter of last year. The increase in our non-GAAP operating margin was driven by continuous optimization of our business model mix and improvements in the operational efficiency. In this quarter we continued to review Maikefeng's operations and strategy.

Including a one-time inventory write-down of RMB27.7 million as a result of the restructuring of its direct sales business, Maikefeng's operating loss this quarter decreased significantly by around 50% when compared to last quarter and the same period last year. We are committed to adjusting Maikefeng's strategy to the evolving Chinese market.

And we will continue to effectively control and closely monitor operations and make necessary adjustments to improve its performance. In Q2 net income rose to RMB2 million, when non-GAAP net income rose to RMB8 million.

The basic and diluted net income attributable to ordinary shareholders per ADS was RMB0.03 compared to zero during the same period last year.

The basic and diluted non-GAAP net income attributable to ordinary shareholders per ADS was RMB0.17 and RMB0.15 respectively, compared with basic and diluted non-GAAP net income attributable to ordinary shareholders per ADS of RMB0.28 and RMB0.24 respectively for the same period of last year.

As of June 30, 2016 the company had RMB738 million in cash and cash equivalents and short-term investments, a decrease from RMB837 million as of December 31, 2015, due to shares repurchase program and investment in logistics and office space. We have strong confidence in our strategy and operations.

And the better than expected first half of 2016, we are raising our previous expectation of total GMV growth for fiscal year 2016 from over 50% to over 60% year-over-year.

Our non-distribution model will continue to grow faster than our distribution model, due to the continuous strategic shift in our business towards decreasing inventory risk, improving our working capital position and increasing our margin profile.

Turning to the revenue guidance, for the third quarter of 2016 we expect total net revenue to be between RMB740 million and RMB760 million, representing a year-over-year growth rate of approximately 26% to 29%. This concludes our prepared remarks. Operator, now we would like to open the floor to question-and-answer session. Thank you..

Thank you. [Operator Instructions] We now have our first question form Robert Lin from Morgan Stanley. Please go ahead..

Hey, morning management and congratulations on very good results. Two questions from me. I guess a very probable question would be same-store sales growth.

Instead of just giving a lump sum same-store sales growth, can you also split by the distribution GMV versus non-distribution GMV? And the second question is, when you provided 26% to 29% revenue growth for the quarter, can you also do the same; split the distribution, non-distribution expectation in terms of the growth rate? And I guess the third question would be, when I think about your business, obviously your older stores, or older brands are now improving in terms of margin, versus the new brands that you're getting in might be only breaking even.

Can you talk about how we should think about from a new brand/old brand sales contribution basis and then eventually profit contribution and, I guess, the margin differential between the two? It will be helpful to get an idea how that over-ramping profitability could be over the next few quarters. Thank you..

Thank you, Robert. So in regards to the first question about the same-store sales growth generated for Q2, our same-store sales growth is about 70% year-over-year. And actually in our internal review, we don't split distribution and non-distribution metric on the same-store sales growth rate.

But generally, in the first half of this year, let me say our non-distribution model stores are increasing much faster than the distribution-model stores. This is the background. And also with regard to the revenue guidance of 26% to 29% year-over-year growth in Q3, I think we can refer to the pattern in Q2.

So in Q2 you can see that our services revenue has increased by around 80% year-over-year, while our distribution product sales has increased by 18%. So generally I think this will be the similar trend setting in Q3.

And also about the performance from, or margin improvement from the oldest -- from the existing store versus the new brands, new stores, generally as we grow up our GMV and sales volume, usually we can get a better, either sales rebate or higher margin or mark-up from the commercial terms.

But for some new stores, because for these new stores, and also usually these stores they have a -- when we negotiate for their commercial terms, usually when we have these brands on board, we can have a better commercial terms, probably since day one. So I think this is like a two-way improvement in our margin.

So one way is contributed by the improvement from the existing old stores, which is thanks to the growth of the GMV and the growth of our power. And then the other way is thanks to the mix and the contribution from new stores. The new stores usually they have a higher or better mark-up and margins for Baozun to operate.

So it's like a compound growth of the gross margin..

Could I just have a follow up on one, question one. So sales and marketing seems to be a little higher than expected. And I think in the press release you stated, associated with company operators.

So can you define what that is and how we should think about marketing spend?.

Sales and the marketing expenses are growing faster relatively, compared to the fulfillment expenses or other expenses. This is mainly because, right now we just shifted the business towards more and more services models.

For non-distribution services models, usually our sales and marketing expenses are the major contributor of operating expenses items. And also, when we provide some value-added services, such as online marketing expenses or some marketing proposal expenses, usually they will incur a higher sales and marketing expenses.

So basically that is why sales and marketing expenses increase fast. But if you look at the gross margin, and also if we can exclude the one-time inventory provision, inventory write-down from MKF, so the gross margins increased dramatically by 8% year-over-year.

So the higher gross margin can easily cover all the related expense and generate higher operating margin in the bottom line..

Thank you. Congratulations again..

We will now take our next question is from Binnie Wong from Merrill Lynch. Please go ahead..

Thank you. Hi, management. Thank you for taking my questions and congratulations on a very strong quarter. My first question is on the guidance. I saw that you have revised up your full-year guidance from 50% full-year to 60% on the GMV.

So I just wonder what is our assumptions on the non-distribution GMV, given this is one of our key growth drivers? And I heard that, in your opening remarks, you mentioned about the strong growth in the apparel non-distribution GMV.

So wonder what are our strategy; how is our strategy different this quarter versus maybe in the past and how should we see that will sustain to support our revised full-year guidance? That's one question.

And then second question, continuing on that, is that basically, if we see that the non-distribution GMV, which is of higher margin, will grow faster, but then offsetting also the impact from the Maikefeng, right, which is also dragging down our overall margins, the overall reported margins.

How should we think about the margin trend for the year? And I'll have a follow up after, thank you..

Thank you Binnie. Thank you for the question. I will take the first two questions. So the first one is about the guidance; right we raised up the guidance from over 50% to 60%, which is based on our strong first half of the year results.

And also generally we just foresee the second half of this year we will still keep the at the same higher growth rate. And also the non-distribution model is increasing very faster than the distribution model. So, as you can see, in Q2, our non-distribution model has increased by over 100%, 119%.

And actually for the past -- for example, for the past six quarters in a row, especially our consignment model increased over 100% for the past six quarters. So this is a strong contributor to our non-distribution model increase. So in the next few quarters, in Q3 and Q4 this year, we do estimate we will keep on the same pattern of the growth rate.

And also especially in consignment model. And also apparel category is growing faster and apparently faster in all the categories. When we say apparel generates, so this is apparel including sportswear. So, as we always said in the past, we focus on some specific categories, especially apparel and sportswear categories.

We foresee that right now, for sportswear, we see a great demand from the consumers in China, that they just want healthy and sports products. While in the apparel products we just see that consumers just want their own lifestyle to represent their own, individual personalities. So that's why we just follow the trend of the consumer type.

And also in regard to the MKF future, so right now, as you can see, as we exclude one-time inventory write-down of MKF, our MKF daily operating our NPS daily operating laws is decreased dramatically by 50% either compared to Q1 this year or Q2 last year.

So in Q3 and Q4 we don't expect any more material because we just made it furthermore because we just made it one time during this quarter. So we can either expect that in MKF laws for Q3 and Q4 will never be a drag factor of the overall profitability of Baozun..

Thank you, Beck. Just a quick follow-up here because the apparel like the overall even on offline might not be growing as large right. But then I was thinking that apparel actually did better -- much, much better than the market and the overall industry.

Just wondering is it because our -- is there any like in terms of our strategy is there any differences or is it because our value at the services to them as a brand new ecommerce solutions provider has being seeing any differences.

So can you comment on that as well? So to support a stronger growth in non-distribution GMV and something that if we look forward we can expect this to continue. How should we -- like what are the things that our company, like in terms of the core competency has been improving. Can you just maybe share with us more on this? Thank you..

Yes, Vincent here. Yes, as we expected the apparel is growing very fast as even this year end and also that's why our non-distribution model is growing fast as well. We think the trend, turning from the offline business to online, I mean the consumer habits is few are turning from an offline purchase to online.

So this gives us a very good opportunity to develop our business. Also with our technology team and apparel team are developing a branch of Omni Channel and online/offline integration tools, to also have the offline business to perform better in the future.

So but we will continue to be an integrated omni-channel and an all-to-all solution provider to the either apparel industries and help them not only develop the online business but also offline business.

And also accelerate the transformation of the supply chain IT strategy and omni-channel, help them to share all the inventory enable a better efficiency in their operation in all portal, not only online. So that is our strategy. Apparel industry is quite important for us. Thank you..

Thank you. Yes, and also just one final last question is on the -- I saw your press release highlighted the strategic cooperation with CJ O Shopping, which is the Korean e-commerce joint venture you guys developed with them.

Can you just give us more color on that one and how should we think about that to support our overall growth? Is it more like a non-distribution GMV? How is the co-operation works with them? Thank you..

Okay, the JV with CJ is quite important thing this year, and it is part of our strategy to deepen our efforts in some of the categories. So we take the Korean brands and market as a strategic area of our businesses development. CJ O have a lot of experience in products, brands and also entertainment and media.

So we also as a company we want to incorporate all this kind of capabilities in our company. We believe that the majority of the business will be conducted through a non-distribution model. So I think the pattern is quite similar to what we have today in the whole company.

With a very strong team from both companies we believe these JV can deliver a very strong result to the group. Thank you..

Thank you..

One more Binnie. So for the JV when we say the JV is like the joint venture that changed both companies and actually we hold the majority of the shares and financially we will consolidate the JV spend [ph] in the future..

All right, got it. Thank you..

[Operator Instructions] We will now take our next question from Evan Zhou from Credit Suisse. Please go ahead..

Hi good morning Vince and Beck. Thanks for taking my questions. Congrats on a very strong quarter and the revised guidance. Just two questions from me. First is that in terms of category migration we've been pretty successful in growing our apparel sportswear category.

I was wondering like looking forward within your pipeline is there any other new categories that you are looking forward to adding much more on.

I think specifically we've been seeing some more recent trend especially on Alibaba they've been putting a lot of effort in increasing the grocery or FMCG product categories and some partly through the Tmall Supermarket. I was wondering like whether you guys have any plans on that category down the road. So that would be the first question.

Second one is on costs, on human costs. So it looks like we are still within the processes of ramping up the new warehouse capacity, plus using the more premium delivery service provider.

I was wondering like whether you can give us some outlook and color on how that trend will last and how should we expect the fulfillment expense as a percent revenue down the road?.

Okay, talking about the category expansion, right now we already have a lot of categories in hand and that why we call us a full service and full category company. In the future we still believe several of the sectors can be a big potential.

Right now we are talking about the starting and investigating healthcare, mother and baby products and so on, a lot of categories. But right now our team is still focused on the existing categories especially like the apparel and also electronics.

We are preparing for the future and also we believe that different categories can now get benefit from our capabilities and experiences. So in the future we believe the healthcare, health and products can be a potential category. The second one is about costs..

Yes, so about the procurement costs so we are leveraged on the third party Korean companies to deliver the packages to the consumer end.

So right now during the past two years we just see the change as more and more a premium service -- and a premium delivery service provider will be utilized by our services, which means for example for basically premium service delivery companies, and in Q2 last year they contributed to our -- like contributed 35% of our total orders.

But during Q2 this year they contributed about 55% of the total orders delivered, so like 20% increase. Usually we will -- for us about and usually we will charge the brand partners based on a total package and then we will negotiate with the premium service provider with deep discounted prices.

So which means that although the delivery cost -- delivery expenses is increased but actually we have more fulfillment and delivery revenues generated in the top line which also contributed to the growth of the operating margin and operating profit. So in our view this is a very good way to scale and benefits and the leverage on the scalability..

Understood. Thanks a lot, Vince and Beck for the color..

We will now take our next question from Sean Zhang from 86Research. Please go ahead..

Good morning, management. Thank you for taking my question. Very congratulations on a strong result. So first of all I think we have a focus shift to a service model and our apparel customer category going well.

So does management see a trend of we're seeing a higher reliance on the top of Tmall channel instead of other channels or are we also using other verticals such as VIP Shop? Just any color there. It seems like our apparel category is going well. Just want to know our sales strategy a little bit.

Also in terms of the -- the second question will be in terms of the logistic services. Are we required to use Sanyo Network, including warehouses and last mile delivery services for our Tmall stores? Thank you..

Yes, thanks for the questions. Actually Baozun [ph] is omni-channel solution provider to all the consumer brands. So we are now only helping them do business on Tmall platform but also others. Recently we have already helped the brands establish their official web stores that you may know.

Recently we are also helping the brands to do business on WeChat Store as well. The other efforts will be on the channel integration, outward integration. So generally these four directions is very important for us. Today Tmall represents a big share of the other channels. The other channels are still growing very fast.

So generally we are conducting business across different platforms. The most important value from Baozun is to integrate all these channels together to benefit the brands. So that is the first question about the channel expansion.

The other one is some of the categories today we work closely with Sanyo to use their logistic capabilities especially those that require a fast delivery lead time including the appliance. We use a lot of Sanyo's capability.

In the future we will be working more and more closely with Sanyo not only use them as the delivery partner but also integrate the system and capability warehouses together to enable an integrated delivery network to benefit us and the brand from the cost and the efficiency perspective..

Thank you Vince.

So you are saying our warehouse and logistics could be consolidating to Sanyo in the future?.

Yes, we are trying to do this and we're talking and working closely with Sanyo today..

Great. Thank you very much..

Thank you..

[Operator Instructions] Ladies and gentlemen that concludes today's question-and-answer session. I'd now like to turn the call back to Ms. Caroline Dong, Investor Relations Officer for closing remarks..

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

Ladies and gentlemen that will conclude today's conference call. You may now disconnect..