eCargo Holdings Limited (ASX:ECG) CEO Lawrence Lun presents on the company's 2021 interim results.Lawrence Lun: Good morning, everyone. Thank you for joining today's session. It's my pleasure to give you guys an update on our first half results, plus a market update in terms of where our strategy is and what is driving our business future growth in the coming months.
For those who are joining us for the first time, eCargo simply is a business that helps our brand principals sell more in the regions that they are trying to drive sales in, specifically China and Australia. As Clive mentioned, I'm Lawrence. I'm the group's CEO. I rejoined the business back in end of September last year, and over the last few months we've made a number of changes to drive the business, which I'm prepared to show the results of those. But without further ado, I'm going to kick off the presentation.
So, I want to first start off today with what have we been able to achieve over the first six months of this year. I put a number of items here, and we'll go through each one but obviously if there's questions, please feel free to ask on the panel on the right side of your screen. One of the first metrics that we use to see growth and success is the general merchandise value that we're able to drive for our brand principals. And this really refers to the sales that we're able to support them, through our services, that's helped them in the markets that they operate in. For the first six months, we've grown for our brand principals over 139 per cent in terms of growth in sales that we were able to generate in the same period compared to last year, which translates to be about 25, really, in Australian. Now, this number only includes the sales of our brand principals on China marketplaces, as it's the easier indicator to generate just to show you guys what we're trying to do here.
What drives those are really two major contributors. The first one is our client sales, which are the same clients that I used to measure. For the first six months compared to last year, the clients that still exist with us. For those, on average, they've grown over 74 per cent in the sales that we were able to drive for them. The second contributor is our online FMCG business, which really refers to our distribution-end trading, where we take ownership of inventory and then we will sell in China on our online marketplaces. That has grown about 10 per cent to 15 per cent in the first six months compared to the same period last year, which translates to be about 5 million Australian dollars in sales. Part of our business is also a technology side of our business, and what drives that under-pillar of our technology business is our eCore OS platform, which is our proprietary system. And I'll go through that a little later in presentation.
We were able to generate about 1 million orders in the first half of this year. Now, we've been driving a lot of commercialisation around this platform. So compared to last year for the first six months, we've only generated about 150,000 orders processing through the platform. So, this year we've generated over six times growth in terms of our usage of our platform.
We've also launched our own B2B marketplace back this year around April or May. This is really our own online B2B marketplace, connecting brands from overseas to our distribution network in China. Since then we've now grown over to 30-plus distributors utilising our platform to find the products that they want to import into China for sales to their consumers.
An additional point is we also did a joint venture this year with a Hong Kong-listed company called CN Logistics. And we did a joint venture to launch Hong Kong's first cross-border wine marketplace. Purely content-driven, and direct shipping from Hong Kong to China. Basically, the platform is to allow Chinese consumers to acquire wines in the premium and fine segment, and also be able to take this wine from Hong Kong, getting it delivered directly to them, which bypasses a lot of the China requirements for importation of this wine. So, basically the broader availability of different wine types are now offered to consumers in China.
We've also signed on over ten new brands into our portfolio, and we've been kicking them off in the second half, which is already currently ongoing in China and other parts of Asia. We are also expanding into Malaysia and India, replicating our model for China into new markets. The benefit of this is we have government support in local markets, plus in Australia to help these brands grow in new markets for them.
We'll look at key financial metrics. These are some of the numbers that we use to see where our business is moving towards. One of my key KPIs for this year was to really improve our gross profit margin. So, as you can see, in the first half last year we were operating at a gross profit margin of about 30 per cent. This year for the first half, we've now grown that to 46 per cent. And really, simply put, we did two main things. One is we stopped working with low margin product categories. We just cleared out the stock out of our warehouse because we just weren't driving enough value out of this product category, specifically around food and some of the beverages that we were working with. We shifted our portfolio towards higher-margin products, and this relates to health and beauty, cosmetics, health supplements, which are still very high demand by Chinese consumers. But we work with new brands in this portfolio to drive that value into the market.
We've also seen our services margins improve significantly due to the COVID-19 recovery, both in Australia, the services that we are offering through our Amblique business, and also through the services that we're able to offer in China for brands that really want to operate their online business.
Which then translates to when I look at the EBITDA and our net loss. Over the last three periods, you'll see in the first six months measured here, you'll see a significant improvement, specifically in EBITDA where, yes, we're still generating a loss of over 400,000 Hong Kong dollars, which translates to about 75,000 Australian, but the idea is we're seeing definitely growth in this area, especially if we look at net loss. We've now narrowed that net loss to only about 6 million Hong Kong dollars, which about, non-cash-related, will translate to be about 4.5 million of that 6 million.
So, what we've been doing here is really driving stronger cost control. We review our overhead expenses, including all the way down to our warehouses, in terms of operations. Reviewing the cost there. Driving a better cost control out of this. Also, what contributed to a bit of the loss is we drove a lot more investment in R&D for technologies. And then, because we tried to clear out stock for the lower margin products, that also drove some of our costs for the first half, which was expected.
Another metric we use is really operating ratio, is how efficient we're able to generate revenue. So, if I look at our operating ratio two years back in the same period, 2019, we're operating at 1.47. So that's, simply put, every dollar that we're driving out of revenue, it costs us about $1.50. Since then, we've really narrowed it down to about... For first half this year, we've been able to push it down to 1.07. So, basically every revenue dollar we're driving, we're generating about $0.07 additional in costs to drive that revenue. And how we're doing this is, again, I mentioned stronger cost control, driving better margins in our products, and with a better services margins that we're able to obtain from our brand principals. And this number is the one that we're trying to drive improvements on, so that we're down to the low one.
I mentioned about growing our online FMCG business. Basically, this is our distribution and trading business, where we take ownership of product, and we sell back into our distribution network or to direct to consumer. We've seen growth in this side of the business, where in the first six months of this year we generated $32 million in sales, which is about 10 per cent growth. What we're really trying to look at is really around the EBITDA contribution from this business that has grown from $1.3 million to $3.2 million the first six months of this year.
Lastly, just to look at the business performance, basically a quick summary of the numbers and the growth. You'll see that our revenue has dropped about $4 million Hong Kong, so about 5 per cent. The reason for that, it was an expected drop due to, one, mentioned, closing up our businesses, clearing out some of the old stock that we had that were not driving up enough value in our business, and also some of the operating sales in terms of brands that we were working with that we discontinue working with them that end up losing a bit of the revenue contribution. However, you'll see the improvement in gross profit, our lower operating expenses, better improved EBITDA, and also our net loss is significantly better compared to last year.
So, I want to move on to really an update on our business and what we're trying to do for eCargo. Simply put, we help brands sell more. And how we do so is we offer solutions that basically connect global brands to new markets. And what I mean by new markets is markets that they have never traded in. And, specifically in Asia, we're concurrently trading for our brand principals in China, Vietnam and Cambodia, expanding into Malaysia and India later this year. All this is supported by our own proprietary platform, which is eCore OS, which offers both, across the whole value chain, different solutions to support our brand principals, to generate sales at a more accelerated growth, and also streamline our costs. So then ultimately it generates a higher ROI for them when they're trading in these new markets.
So, looking at business models, basically there are really three in eCargo. The first layer, which we call the technology enabling, is our growth business and it's really underpinned by eCore OS, our own proprietary system, which offers an over management system that helps our brand trade on multiple platforms with utilising one system. It also offers a B2B front and B2C, which I'll go through a little later. How we drive revenue from this is through licence fees, subscriptions, and also revenue share. Now, this technology side really supports our two foundational businesses for eCargo, which generates most of our revenue. On the left side is our distribution and trading, which means that basically our work with brands on a distribution right, whether it's exclusive or as a trading partner, we take the brands and we sell into our distribution network in China or directly to consumers through our own platforms or through our own stores. We make basically trade revenue and a percentage of sales that come out of our distribution of our trading business. The other one is our traditional business, where we first started eCargo we've been offering. It's what we call e-commerce enablement, basically end-to-end services that we help brands all the way from logistics, all the way to store operations, to helping them run, to customer service, marketing, content generation, basically the whole service scope that they need to help successfully trade online. It's what our e-commerce enablement model is, a services-based model that we offer both in Australia and China. How we generate revenue from it is through service fees, which usually generate project fees one-off or through a retainer basis that we obtain on a monthly basis, and also a percentage of sales that we're able to generate for them for our brand principals.
If I quickly go through an update on these two businesses for the first half of this year, distribution trading side, some of the new brands that we've signed on that were announced starting to trade in the second half this year includes Ella's Kitchen, which is a brand from the UK. It's in a baby and mum category. It's an existing brand, been trading for many years now in China. We have now taken the exclusive rights for this brand to operate for them in the greater China market. We also signed an exclusivity with Australian Natural Care, short-form ANC, which has their collagen products from Australia where we're able to now bring into China to help them operate. This includes an operator team for their global store to B2B offline distributions. We've also launched our JJX platform, which I'll touch a little bit on, which is our B2B marketplace. Now with over a hundred brands on the platform, 30 distributors utilising the platform to place their orders to acquire new products that they can bring into China.
Shift over to e-commerce enablement business, for the first six months in China we've signed on a new brand called Bauer. Basically, Bauer's the number one hockey equipment brand globally, and we helped them set up their e-commerce platforms in China and now helping them trade. Officially launched this month in August. Australia, our Amblique business launched multiple sites, including sites for BBQ Galore, Jeans West, Fisher & Paykel. So, the service model, and we've seen a significant improvement in these client services margins, and also project margins given the recovery for a lot of these online retailers in Australia. And what also we have been able to drive success, I mentioned before, was we drive the usability in our eCore OS platform was a significant growth compared to the year previous.
So, our ongoing 2021 strategy, I basically put a simple four things that we're trying to do. One is digitalisation of our processes. Traditionally, our business has always been a very services model, manual, but we want to use technology to really drive scale and accelerate our revenue and contribution down to the bottom line. Second is really improving our margins across the business, ensuring that every business is showing strong growth in the margins that they're able to generate, driving additional value out of other pure brand principals or other trading products under our portfolio. Regional expansion, replicating what we've been able to build in China, but into other parts of the world, specifically in Asia and Southeast Asia, so that we're able to generate more value for our brand principals.
Lastly, it's really around supply chain technology and really commercialising our eCore OS platform. It's a platform that we've been using internally for many years now, but now we want to push towards market to drive additional revenue for the group.
So, if I quickly go through each point, digitalisation of our processes, how we obtain success out of here is really putting our current B2B trading model in China, meaning we have over 2,000 retail point-of-sale locations across 20 provinces in China, which takes very manual work, whether it's talking to customers through the phone, WeChat, emails, etc, to conduct deals, and put everything into a platform so that our distributors are able to then utilise and see the most updated products, updated pricing, updated minimum order quantity and are able to place the order directly, whether themselves or through a group model, meaning multiple distributors can place smaller orders so that they can meet the requirement to import the product into China. Now, the benefit of what I mean by digitalisation is distributors can utilise the platform themselves and then they can identify products themselves. But eCargo still provides the services in between, which includes the logistics, the payment handling, onshore and offshore, and then also the due diligence of the brands and also the distributors. So, all of this is basically conducted online, and JJX's platform is built on top of eCore OS, which was the platform I've been talking about.
In terms of improving margins, really it's shifting our product category towards health, higher-margin products, including hair care, beauty, cosmetics, mum and baby, personal care. And then also there's a CBD category that we're expanding into other parts of Asia, given the rise of the demand in this category by consumers in multiple regions. We completely stopped selling, as I mentioned before, low-margin products, which basically what I mean by low margins is any margins that were below 10 per cent, we just completely stop in terms of our trading for those products, and we shift out of our warehouse.
We closed the unprofitable businesses in the first half. We saw some businesses that were not generating enough success, enough contribution to the bottom line, but also drives a lot of maybe perhaps cost into the business, so we completely closed off those businesses. And then we've seen a service margin improvement through our project implementations, whether that's setting up our own e-commerce platforms for our partners or helping them service them through a continuous operational method and also marketing for those brands to drive sales online.
These on the right side are some of the brands that we've signed on the first six months, and also for brands that includes launches into Australia and also into China. Regional expansion, one of our key initiatives this year is really to grow to other markets, and I'm highlighting here specifically Malaysia and India. Our method to grow into other parts isn't to really necessary do it ourselves, it's through joint venture models and working with existing distributors. So, we're already currently replicating that model already into Vietnam and Cambodia, we've been doing this since last year. We have a joint venture partner in those markets that we bring our existing brand portfolio, and we work with those partners, which their expertise in that market and we drive further sales for our brand principals in these areas.
Now, the benefit of doing this and why we chose to expand into Malaysia and India was one, through Australia there are a lot of government support into helping brands expand into other markets, given the recent situation between China and Australia, so we're able to now expand into those markets with government support. Plus local markets are also looking for oversea brands, especially products from Australia, so that we're able to now work with the local market government agencies, distributors to help grow into these markets.
We also start with joint ventures. I mentioned before a Hong Kong listed company called CN Logistics. But the strategy here is to really work with strategic partners and to develop better value propositions. The last one is, I mentioned here on our joint venture in Vietnam, we used to trade just one product, specifically the Blackmores baby formula, but now we're expanding that product range so that we're able to leverage the over 3,000 point-of-sale locations in Vietnam and Cambodia to drive more value for our brand principals.
Lastly, really around the supply chain technology, which is all centralised eCore OS. This is going to be our main growth driver in the coming months. And the idea is this platform has always been a critical part in our business internally because we utilise the system to manage everything from the whole supply chain, from supplier all the way to the consumer. So, these are really the three main modules that I can divide it into for eCore OS for easy to understand value. So, on the first part is logistics and fulfilment. eCore OS offers both a freight track-and-trace system, warehouse management system, fulfilment management in warehouse, connectivity through multiple courier systems that we can do shipment on. The idea is eCore OS drives, is the under-pillar of all that. The second module is order management. Basically, if you look at China, there's over 30 different platforms that brands can trade on, and including Southeast Asia, you add an additional 15, which now is over 40 different marketplaces or e-commerce platforms that brands could trade on. Imagine managing all those channels and orders, inventory and product information. eCore OS allows the brand to easily have visibility across all the marketplaces. The idea is we have been integrating with all these different marketplaces. Now we're able to offer the service to our brand principals as a way to manage their portfolio. Now, we also see additional value because of recent cyber security changes in China, that a lot of platforms, in overseas, in Australia and UK and America, that want to have the same visibility and integration with China marketplaces or in other parts of Asia, they just can't do it themselves. Therefore, eCore OS also acts as an API integrator that integrates to these platforms that allow platforms to get the access to the information. Lastly, on this consumer facing side is eCore OS offers a module around providing a B2B marketplace now, which is what drives JJX, and also a B2C, mainly direct to consumer marketplace as well, which is the PJF lines, which is the cross border platform that I mentioned. These modules are now allowed to be utilised by other principals that want to also do very similar things. So, eCore OS also provides a service around that area.
I want to just quickly touch on the brand partners that we work with. So, on the left side, these are some of the brands that we work with, and on the right are basically platforms and retailers. You'll see a number of these retailers are in China. We have over, as I mentioned, 2,000 point-of-sale locations across a hundred different distributors, so this is the partners that we work with. On the left side, some of the brands that we're currently trading for, as I mentioned before, ANC, we also have JoJoba, Australian Dairies, which is Fonterra, we also trade Bundaberg and more.
So really the last slides are management team, but I feel this is probably a good time that we can probably touch a little bit on Q&A. If there's any questions from the group, maybe I'll open the floor.
Q&A Clive Tompkins: Would you be able to provide any insight into your revenue expectations for the JJX platform this year and longer term?
Lawrence Lun: Thank you, Clive. I believe it's not the right time to provide any guidance in terms of revenue around the JJX platform. It's really just starting, it's in a beginning phase, but I can say that the future growth of the platform relies on us pushing all our orders that we do right now B2B onto the platform. So that's where it's going to be a significant growth in that aspect. But also we are encouraging more brands that we typically are not able to work with on a more hand-holding approach, but allow these brands to have complete access into the platform for free that they can then trade onto our distribution network. And we've seen some growth in that area as well in the first couple of months of operations.
Clive Tompkins: Could you provide an outline how the PJF lines launch is progressing, and what the near-term results have been?
Lawrence Lun: So, this one's a more exciting one for us in the B2C segment. It's one of our first attempts into going into a direct to consumer marketplace built. So, as I mentioned, PJF wines, which means [speaks Mandarin]. So, in Chinese, it's basically, "Wine tasting place", translated. The idea is we are signing on a number of merchants in Hong Kong and offering a wide range of wine. And why it's a unique platform, and why we're seeing this growth in this aspect. We just officially launched in August 1st, this year, in terms of out of alpha. So, basically the official launch. Why we're seeing growth is because traditionally for China, wine importation, you generally have higher tax, higher tariffs. The testing process is very rigorous. Meaning every batch that you import into China requires testing. And you also need to do Chinese labelling on the wine to be able to sell to consumers in market. Now, because of cross-border enablement, meaning if I ship the product direct to the consumer from outside of China, we can bypass all that. Meaning, we don't need to do that for wine. So, hence, if you see the value, this means that... In China, there's a lot of mass wine brands that basically sell to the mass consumers at lower price point, because they're able to then cater to the cost of importation. But, for premium and fine wines, they can't, right? Whether one is very limited supply and second the cost of doing importation is quite high. So, leveraging the cross-border elements where consumers pay a lower tax, and there's no damage to the label and nor do they need to do testing for the product to get imported. We really broadened the product range that's offered to Chinese consumers. So, for us with the first marketplace cross-border direct shipping from Hong Kong into China, and we've seen now significant growth in terms of users. Our current wine selection has grown purely from alpha around 50 to now over 500 wine selection. So, we are going to look forward to seeing more growth through as we drive more marketing, to acquire consumers in the later half of this year.
Clive Tompkins: Lawrence, you've moved away from low-margin products, which you've mentioned, to higher-margin products. What impact will this have over the next half on revenue?
Lawrence Lun: So, I think if you look at already the first half of this year, we've seen significant improvement in margin contribution. And we also seen in terms of EBITDA contribution through our FMCG online business. Going forward, we are expecting to continue to see growth in this aspect. And then also, this has already continued since the last quarter, last year, Q4. And we've been able to see the same benefit coming in. So, we expect the same patterns in trajectory for the second half.
Lewis Bacon: I've just seen another question come through in the Q&A area just regarding our new brand pipeline for the second half of the year.
Lawrence Lun: Our pipeline has always been a larger pipeline because we've seen a huge demand of brands looking for new markets to trade in. And China's obviously one that still has very high demand growth. So, I mean, on the first half we signed on 10-plus new brands, we expect the second half to be in the same similar pattern.
Clive Tompkins: Lawrence, thank you very much. We'll turn this into a copy for you, for investors to review. Thanks very much to everyone for your attendance today.
Lawrence Lun: Thank you, everyone.
Clive Tompkins: Thank you.
Lewis Bacon: Thank you.
Ends
