ATRenew Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 22, 2023

There are 5 speakers on the call.

Operator

morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to AT Renewals Incorporated's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. We'll be hosting a question and answer session after management's prepared remarks. Please note, today's event is being recorded.

Operator

I would now like to turn the call over to the first speaker today, Mr. Jeremy Gee, Director of Corporate Development and Investor Relations of the company. Please go ahead, sir.

Speaker 1

Thank you, Jason. Hello, everyone, and welcome to AT and T's Q3 2023 earnings conference call. Speaking first today is Cary Chen, our Founder, Chairman and CEO and he will be followed by Rex Chen, our CFO. After that, we will open the call to questions from analysts. The Q3 2023 financial results were released earlier today.

Speaker 1

The earnings release and investor slides accompanying this call are available at our IR website, ir.ctrenew.com. There will also be a transcript following this call for your early convenience. For today's agenda, Cary will share his thoughts of our quarterly performance and business strategy, followed by Rex who will address the financial highlights. Both Carrie and Rex will join the Q and A session. Let me cover Safe Harbor statements.

Speaker 1

Some of the information you will hear during our discussion today will consist of forward looking statements, and I refer you to our Safe Harbor statements in the earnings press release. Any forward looking statements that management makes on this call are based on assumptions as of today and that AT Renew does not take any obligations to upgrade our assumptions on these statements. Also, this call includes discussion of certain non GAAP financial measures. Please refer to our earnings press release, which contains a reconciliation of non GAAP measures to GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB and all comparisons are on a year over year basis.

Speaker 1

I'd now like to turn the call over to Cary for business and strategy updates.

Speaker 2

Hello, everyone, and welcome to HD Renew's Q3 2023 earnings conference call. During the Q3, we once again exceeded expectations in terms of both revenue and profit. The fact growth in new product sales did not adversely impact our business. Importantly, secondhand industry continues to thrive with more people choosing to trade in and buy high quality pre owned products for new lifestyles. With efficient optimization, a dedicated team and industry leading automation technology capabilities, we are confident in offering in the new era as a leader in the secondhand industry.

Speaker 2

In the quarter, our total revenues reached RMB3.26 billion, representing a 28.4% year over year increase, surpassing our guidance. Total revenues for the 1st 3 quarters amounted to RMB9.1 billion, marking a 32% year over year increase and exceeding our initial expectations at the beginning of the year. During the festive Q4, bolstered by jd. Com's support and our inclusion in Apple's official trading program, the outlook for our overall revenue growth in 2023 is increasingly clear. During the quarter, adjusted operating income reached RMB73.8 million with an adjusted operating margin of 2.3%, setting a new record and further confirming our ability to improve operational efficiency through automation technology and economies of scale.

Speaker 2

The adjusted operating margin for 9 months ended September 30 was 1.9% ahead of our schedule. Our quarterly results surpassed expectations. This was primarily attributable to the growing scale of the recycling and resale business, which consistently drives industry expansion. Within this context, the development of our 1P business remains our core strategic focus, serving as the primary driver of our growth. At the same time, enhancing the service capabilities of our 3P platform business to encourage long term merchant engagement service important supplementary driver.

Speaker 2

During the Q3, our 1P business revenue grew by 31.4 percent year over year to RMB2.92 billion. Within our core C2B business, we leveraged our existing network of nearly 2,000 nationwide offline stores and upgraded some into premier stores. These stores are designed to raise user awareness of multi kitwear recycling and AHS Recycle as a national brand. Alongside the competitive cost we offer to users, our convenient and reliable services have attracted a larger customer base and secured a greater supply of pre owned products, which further increases store performance while reducing costs. I'd like to share 2 noteworthy highlights resulting from these strategic upgrades.

Speaker 2

1st, in the aspect of walk in revenue as a percentage of our core C2B revenues, there has been a 6% year over year increase during the quarter, underscoring the increasing strength of our AHS brand and its impact on consumers. 2nd, during October, the marketing recycling values in Beijing and Shanghai both exceeded RMB100 1,000,000. We believe that as more AHS recycle stores are equipped with multi category recycling capabilities, the ceiling of our C2B business in higher tier cities will be further

Speaker 3

raised.

Speaker 2

Starting in July this year, our B2C retail brand, PayPay Selection was integrated into the AHS main brand, which was renamed AHS Selection. This strategic initiative is intended to provide enhanced services for our retail users and bolster the quality and trustworthiness of the AHS Recycle brand. This brand upgrade further solidifies our secondhand retail value chain from C2B to B2C by complementing the closed loop with direct to consumer sales capabilities. In terms of compliance refurbishment, in the Q3, the compliance refurbished business contributed a total of RMB200 1,000,000 in revenue, adding greater value to more models of pre owned electronic products. Since the end of July, we have been authorized to recondition Huawei products, while exploring the refurbishment capabilities of multiple Android products.

Speaker 2

With controllable costs, we could gain a margin growth marginal gross profit of 4% to 5% and consumers will further benefit from a greater variety of refurbished products. In terms of industry standards, in the Q3 as the main sponsor, we jointly drafted the 2nd hand mobile phone transaction group standard with Electronics Industry Association. At the same time, in collaboration with the Association, the China Secondhand Electronic Trading Center was jointly established to promote online and offline integration and to promote healthy development of secondhand transactions. Turning to our services embedded in Apple's official channels. Our recycling business has been rapidly integrated into Apple's retail network in China, providing recycling and trading services on Apple's official website and in its offline flagship stores.

Speaker 2

During November this year, we obtained a qualification that allows us to recycle the 2 most recent generations of iPhone lineups, especially when a user trades in an iPhone 13 or iPhone 14 for a new iPhone 15 lineup product through Apple's official website and storefronts, used devices go to AHS Recycle for further handling. This presents a significant recognition of our supply chain capabilities. In terms of our marketplaces, we are continuously improving our service capabilities. During the quarter, 3T revenue increased by 7.3% year over year to RMB330 1,000,000 with an overall take rate of 5.4%. Regarding our PJT marketplace, we have improved our services for merchants and equipped them with Device Hero, our portable quality inspection terminal.

Speaker 2

The proprietary features embedded reducing time and labor costs, while realizing faster turnover. Reducing time and labor costs, while realizing faster turnover. PJT Marketplace has become an infrastructure of B2B transactions. By the end of the Q3, PJT had amassed over 530,000 registered users, while the number of active users increased by 15.4% year over year during the period. Our pipeline marketplace continues to allow us to meet broader consumer demand for cost efficient high quality pre owned products.

Speaker 2

We support JD's low price retail strategy by enhancing our retail price system through adjustments to product grade ranges to align with users' preferences for more affordable goods. During the quarter, we upgraded Pipe High's B2C consignment business model on JD's main site. This further opened up the platform to small and medium sized merchants to join, provide supplies and operate on jd.com. Our platform ensures quality with a unified quality system. Such an innovative model substantially reduces the entire entry barriers for small retail businesses in the industry, providing them with ample and easy access to platform resources, while ensuring product quality and buyer satisfaction.

Speaker 2

Turning to our expenses. Firstly, we continue to lower the non GAAP fulfillment expense ratio to 8.7% by 2 percentage points year on year. This was primarily due to an 11% year over year decrease in logistics expenses, thanks to our updated national operation station footprint. Return losses from testing errors saw a 20.5% year over year reduction, thanks to the technological and efficiency advantages provided by our automated operation centers, especially the Matrix 3.0 system. Secondly, we obtained optimization in ROI for selling and marketing expenses.

Speaker 2

During the Q3, adjusted selling and marketing expenses as a percentage of revenues were 7%, representing a year over year decrease of 2.8 percentage points. The strength of our brand name played a key role as we had a higher percentage of 1P recycling channels that required fewer selling expenses. We also streamlined our regional sales teams and increased our sales output. Building on our robust growth in consumer electronics categories, we actively diversify our multi category vertical business and explore marketing opportunities through new media. The recycling volume of our multi category business amounted to RMB350 1,000,000 in the 3rd quarter.

Speaker 2

This is a testament to the rapid growth over the past quarters. Non consumer electronics recycling services have gained wide popularity among the AHS user community. Experience is the most important part of our flywheel. We shortened the waiting time for in store pricing of luxury goose recycling, further launching user experience. User satisfaction with the quotation was improved and payments were made even faster.

Speaker 2

Through trust and service experience advantages of in store face to face fulfillment, we are able to break the glass ceiling while uplifting service frequency and UE of our stores. Furthermore, as part of our internal marketing resource allocation and to support the multi category recycling business, We test the water of traffic generation from new media. We have already launched local accounts for our offline store on short video platforms, where we create cost effective localized content that showcases user experiences while exploring our stores and utilizing doorstep recycling. By leveraging location algorithms, we attract a higher number of local users to our stores. Since the content is developed in house, we didn't have any significant expenses.

Speaker 2

In summary, these results came from our shared strategies of occupying precise scenes, consolidating supply chain capabilities and underlying a tech driven business. The results also verify the secondhand industry's substantial potential for scale and enduring value. I would like to thank our united and hardworking team again for their tireless efforts. Finally, I would like to provide an update on our sustainability efforts. In September 2023, as a Chinese company from the pre owned consumer electronics industry, we are honored to become the 1st signatory to join the United Nations Global Compact.

Speaker 2

We are committed to upholding the 10 universally accepted principles in the areas of human rights, labor, environment and anti corruption. This commitment strengthens the foundation for our company's sustainable development and aligns with our long term mission. Now I'd like to turn the call over to our CFO, Rex, for financial update.

Speaker 3

Thank you. Hello, everyone. We are pleased to report another profitable quarter as we achieved yet another new record non GAAP operating income on revenues that exceeded the top end of our guidance. Before going into our financial details, please note that all amounts are in RMB and our comparisons on a year over year basis unless otherwise stated. In the Q3, total revenues increased by 28 0.4% to RMB3256,800,000, mainly driven by growth in net product revenues.

Speaker 3

Net product revenues increased by 31.4 percent to RMB2924 million, while net service revenues increased by 7.3% to RMB332.8 million. Gross in net product revenues was primarily driven by an increase in sales of pre owned consumer electronics both through the conference online and offline channels. Sales of 1 PC refurbished devices totaled RMB 2,000,000,000, more than doubled compared with the same period last year. The increase in service revenues was primarily due to the recovery of pipeline and the PJT marketplaces from the COVID-nineteen pandemic influence during 2022 and an increase in the overall ticket rate, which grew to 5.4% from 4.45%. Turning to our operating expenses to provide greater clarity on the trends in our actual operating based expenses.

Speaker 3

We will also discuss our non GAAP operating expenses, which better reflect how management views our results of operations. The reconciliations of GAAP and GAAP results are available in our earnings release and the corresponding from 6 ks furnished with the SEC. Merchandise costs increased by 35.1 percent to RMB2611 million. Dollars The increase was in line with the growth in product sales revenues. Gross margin at the group level was 19.8% in the 3rd quarter.

Speaker 3

Gross margin for our O and P business was 10.7%. Fulfillment expenses increased by 3.8% to 200 and 87,700,000. Excluding share based compensation expenses, which we will refer to as SPC from here, Non GAAP fulfillment expenses increased by 4.2 percent to $282,300,000 under the non GAAP measures. The increase was primarily due to an increase in personnel costs as the company's recycling activities developed compared with the same period of 2022. Non GAAP fulfillment expenses as a percentage of total revenues decreased to 8.7% from 10.7% in the same period last year.

Speaker 3

Selling and marketing expenses decreased by 12.1 percent to RMB299.5 million. Excluding SBC expenses and amortization of intangible assets, non GAAP selling and marketing expenses decreased by 8.7 percent to $227,900,000 primarily due to a decrease in expenses in relation to marketing activities. Non GAAP selling and marketing expenses as a percentage of total revenues decreased to 7% from 9.8% in the same period last year. G and A expenses increased by 9.7 percent to $69,800,000 Excluding SBC expenses, non GAAP G and A expenses increased by 9.3 percent to $58,600,000 Non GAAP G and A expenses as a percentage of total revenues decreased to 1.6% from 1.8% in the same period last year. Technology and content expense decreased by 21.3 percent to $39,400,000 Excluding SBC expenses and amortization of intangible assets, non GAAP technology and content expenses decreased by 23.2 percent to $33,700,000 This was primarily due to the decrease in technological expenses as the company's platforms matured.

Speaker 3

Non GAAP technology and content expenses as a percentage of total revenues decreased to 1% from 1.7% in the same period last year. As a result, our non GAAP operating income was RMB73.8 million in the Q3 of 2023. Non GAAP operating profit margin was 2.3%, marking a nearly quarter high. The non GAAP operating margin was 0.4% in the same period last year. As of September 30, 2023, cash and cash equivalents, restricted cash, short term investments and the funds receivable from third party payment service providers totaled RMB2.3 billion.

Speaker 3

Our sufficient cash on hand safeguards a sustainable growth outlook. During the Q3 of 2023, we repurchased 1,600,000 ADSs in the open market for a total cash consideration of 4,000,000 dollars As of September 30, 2023, we had repurchased a total of 13,800,000 ADSs for approximately US48.4 million dollars in our share repurchase programs. Now turning to the business outlook. For the Q4 of 2023, the company currently expects its total revenues to be between RMB730 1,000,000 RMB330 1,000,000 representing a year on year increase of 25.1 percent to 28.5 percent. This forecast only reflects our current and preliminary views on the market and operational conditions, which are subject to change.

Speaker 3

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Victor Tang from Goldman Sachs. Please go ahead.

Speaker 4

Thank you, management, for taking my question. I'm asking this question on behalf of our panelists Ronald Hume. Can management share some color on the key single stage brand promotion performance? And what is management's take on the outlook for 2024? Can management also provide update on iZexo's inclusion in Apple's official channel in Mainland China?

Speaker 4

And will the recent revival of Huawei's cell phone impact your recycling performance? Thank you.

Speaker 2

Throughout this year's thank you, sir, for your question. Throughout this year's Double 11, we observed a surge in user enthusiasm for recycling and trade in. During the presale period of the grand promotion, the total value of C2B recycling orders increased significantly by RMB100 1,000,000 milestone in single month transaction values in October. And our B2C sales on November 11 across all channels totaled RMB160 1,000,000, representing an increase of 24% year on year. Our recycling business performance speaks volumes about user loyalty towards the IHS recycle brand and the scoring resilience and enhanced growth potential of our business model within the circular economy.

Speaker 2

As we approach the end of November, our guidance for total revenue in the Q4 of 2023 ranges from RMB3700 and 30,000,000 to RMB3830 1,000,000, reflecting 25 0.1% to 28.5 percent year over year growth. Looking ahead to fiscal year 2024, we remain confident in the promising evolution trends of the circular economy and our business strategies. We are confident in executing our strategy to realize higher profitability from our compliant refurbished business. Our involvement in Apple's official recycling and trading programs, expansion of our multi category recycling and efficiency enhancements from automation technology. Apple remains a key brand for our pre owned consumer electronics recycling business, accounting for 60% share of 1P Recycling Business Revenues.

Speaker 2

IPhone sales in Mainland China continue to be robust, reflecting Apple's sustained popularity among consumers. The number of Apple products in circulation is huge and the value retention rate is still industry leading. There is room to further increase the penetration rate of trading services. Our services for Apple's official website flagship stores in Mainland China began in the Q3, generating RMB30 1,000,000 in sales, despite limited new phone shipments and trading orders during the period. In the Q4, we secured qualifications that allow us to recycle the 2 most recent generations of iPhones, which means we can have iPhone 13 lineups and 14 lineups for the new iPhone 15 lineups.

Speaker 2

This allows us to significantly scale up the amount of recycling mainstream products. Thank you for the question.

Operator

The next question comes from Jijing Chen from CICC. Please go ahead.

Speaker 2

Thanks management for taking my question. Could management talk about the use of cash and how you are handling the shares repurchased? Thank you.

Speaker 3

Okay. Thank you for the question. As of September 30, 2023, our total cash and cash recurrence, restricted cash, short term investments and the funds receivable from third party payment service providers summed to RMB2.3 billion. To support our long term strategic and business development. So first, for the main business of pronged consumer electronics, we will continue to strengthen the control of the use of cash, improve the operating cash flow and increase the positive cash inflow from core mature business.

Speaker 3

2nd, we will deploy cash in a disciplined manner into areas with long term potential, especially in multi category business based on existing AHS recycle stores. We believe that the enhanced operational cash flow and the prudent capital expenditure will be conducive to the further strengthening of the company's competitive advantages and the long term value to shareholders. We have been continuously repurchasing our shares since later 2021 through the share repurchase programs we adopted. Repurchased stocks are booked as share stock, which are divided of rights to dividends or voting. By the end of the Q3 of 2023, a total of US48.4 million dollars had been spent through the share repurchase program since December 2021.

Speaker 3

We plan to continue to conduct stock repurchase in the foreseeable future. Thank you for your question.

Speaker 2

There is one another question from Joyce Zhu of Bank of America. But due to technological issues, I'll read out her question on behalf of her. Congrats on another strong quarter. My first question is about margins. Can management share more color on gross profit margin and your non GAAP OP margin?

Speaker 2

What's the outlook for your margins? My second question is on refurbishment. Can management comment on the progress and expectations of the combined refurbishment business? Thank you.

Speaker 3

Okay. Thank you for the question. So in the Q3 of 2023, so overall gross profit margin was 19.8%, which was a year over year decline due to our strategic shift in revenue mix. Over the past quarters, we have focused on bolstering our 1P businesses and as such the 3P service revenues, which involves several costs, contributed 10.2% to our total revenues, downsizing by 2% year over year. So taking a detailed view of the gross profit of the 1P business, the 3rd quarter gross profit margin stood at 10.7%.

Speaker 3

This aligned with our expectations that 1P gross profit margin would contract last quarter. There are two reasons behind this. First, during the new phone sales season in September, We proactively adjusted our sales price of refurbished devices in preparation for seasonal margin fluctuation. We also adjusted to finished product selling prices. Such adjustment aims to meet the demand of merchants by reducing their procurement costs and ensuring their profitability.

Speaker 3

2nd, to supplement our supply, we procured secondhand devices from industry partners, resulting in a relatively lower gross margin for such supply. However, as our automation technology further improves our fulfillment efficiencies, along with optimized selling and marketing cost efficiency, Our fulfillment expenses ratio and the selling and marketing expense ratio against the total revenues dropped to 8.7% 7%, delivering on the GAAP OP margin of 2.3%. Although, OMC gross margin decreased, we were able to provide consumers with more competitive recycling price and joyful experiences. In the Q3, our compliance refurbishment service business generated RMB2 1,000,000,000 in revenue, reflecting notable user acceptance of pre owned electronic devices, especially pre owned Apple Devices. Research suggests that an iPhone's lifespan can reach up to 8 years, with 50% of globally activated iPhones being pre owned devices.

Speaker 3

While the domestic compliant refurbishment market is still in its early stages, our refurbishment business shows promising growth potential. We anticipate an improvement in overall adjusted operating margins attributable to the growth of the FURV business and Apple businesses. Thank you for the question.

Operator

As there are no further questions at this time, I'd like to hand the conference back to management for closing remarks.

Speaker 1

Thank you. Thank you all again for joining us. A replay of today's call will be available on our IR website shortly, followed by a transcript when ready. If you have any additional questions, please feel free to e mail us at irhrenew.com. Have a nice day.

Operator

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

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