ATRenew Q1 2023 Earnings Call Transcript

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May 23, 2023

There are 5 speakers on the call.

Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to AT Renew, Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. We will be hosting a question and answer session after management's prepared remarks.

Operator

Please note today's event is being recorded. I will now turn the call over to the 1st speaker today, Mr. Jeremy Gee, Director of Corporate Development and Investor Relations of the company. Please go ahead, sir.

Speaker 1

Thank you. Hello, everyone, and welcome to ATV News' Q1 2023 earnings conference call. Speaking first today is Carrie Chen, our Founder, Chairman and CEO and here we follow by Rex Chen, our CFO. After that, we will open the call to questions from analysts. The financial results were released earlier today.

Speaker 1

The earnings release and investor slides accompanying this call are available at our IR website, ir. Atuanu.com. There will also be a transcript following this call for your convenience in English and Chinese. On today's agenda, Karen Lip will share his thoughts of the Qozhui's performance and the business strategy, followed by Rex, who will address the financial highlights. Both Carrie and Rex will join the Q and A session.

Speaker 1

Let me cover the Safe Harbor statements. Some of the information you will hear during our discussion today will consist of forward looking statements, and I'll 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 and T renewed does not take any obligations to upgrade our assumptions on these statements. Also, this call includes discussions of certain non GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non GAAP measures to GAAP measures.

Speaker 1

Finally, please note that unless otherwise stated, all figures mentioned during this conference are in R and D and all comparisons are on year over year basis. I'd now like to turn the call over to Cary for business and strategy updates.

Speaker 2

Hello, everyone, and welcome to ATReynu's Q1 2023 Earnings Conference Call. During the Q1, the rapid recovery of offline retail and logistics led to a resurgence in consumer recycling and consumption demand. As a result, our year over year revenue growth rebounded to 30.2% and we achieved total revenues of RMB2872 1,000,000, exceeding the high end of our guidance. Meanwhile, our non GAAP operating income reached a new record of over $44,000,000 representing an adjusted operating margin of 1.5%. Our first quarter revenue and profit both exceeded expectations in what is truly an off season for the secondhand industry.

Speaker 2

I'd like to share with you 3 main drivers, which contributed to our top line growth rebound. The first is the growth momentum of 1P business, which geared up again. The recovery phase to phase recycling fulfillment at our stores, the strength and brand awareness of the AHS recycle brand and an increase in compliance refurbishment product sales to consumers all contributed to the growth of product revenues. If we zoom in a bit, we encountered a tailwind on the sourcing end, which was generated by the rebound of consumer activity after the reopening. Our e commerce partners such as jd.com have increased their consumer subsidies, manufacturers including Apple have offered discounts and promotions on specific models.

Speaker 2

To add more color, Apple products account for 45 percent of our total businesses and 60% of our warranty business. Out of the popularity and resilience that Apple products have, our core recycling business remains stable and has been relatively less prone to the headwinds of decreasing new device shipments. While capitalizing on these recent favorable developments, we also consolidated our own operational capabilities, especially on the sourcing front. We strengthened our competitive mode in offline recycling via 19 35 physical stores across 2 69 cities nationwide enhanced the brand awareness of AHS Recycle and locking more high quality supplies from consumers. According to a recent survey, the net promoter score of our offline store recycling services have steadily increased.

Speaker 2

We continue to identify 2 store locations for new stores and we aim to make our directly operated stores the benchmark for customer service in top tier cities. Meanwhile, we have further expanded fulfillment coverage by empowering more franchisees. As a result, we have seen a rapid increase in 1P recycling transactions in the Q1 of 2023. The order volume increased by 13% sequentially and 42% year on year. Overall, 1P product revenue increased by 34.9 percent to RMB 2,570 5,000,000 and continues to be our core main organic growth driver.

Speaker 2

In terms of adding value to the supply chain, we continue to leverage our warranty sources to select products that are suitable for refurbishment. Through standardized compliant refurbishment practices, we brought more products into alignment with consumer standards and further consolidated the service capability for our RE RE refurbished business. In the Q1, overall sales of refurbished devices increased to 145,000,000 of which to consumer sales increased to 140,000,000. Notably, the overall gross margin of refurbished devices was 25%. In addition, we duplicated such capabilities in our East China operation center to supplement our capacity in South China.

Speaker 2

This upgrade was undertaken in tandem with an expansion of our refurbished product categories. We expect that this increase in total production capacity will allow us to satisfy the majority of user demand for high quality pre owned products nationwide. Turning to our platform business. Service revenue in the Q1 was nearly RMB300 1,000,000, which was basically flat compared to the same period last year. However, take rate increased from 4.15 percent to 5.46%.

Speaker 2

We have adopted a mixed approach to the platform businesses based on each services monetization rate. On the one hand, we have increased take rate for key services like quality inspection, logistics and warehousing. On the other hand, we have reduced both our investments into the FairSoft business and merchant rebates for businesses with low monetization rates. Our primary focus is serving high quality, high stickiness merchant users, while facilitating high quality transactions. The number of registered users of DJT Marketplace, our B2B business, now exceeds 4 147,000, while our core business take rate has increased by 1.8% on a yearly basis.

Speaker 2

For PaiPai, the B2C business offering, we have further strengthened our platform governance. This is seen in improved product quality control for pulp products and the timeliness of services. We collaborate with well known inspection institutions for weekly spot checks, Spot check coverage of consumer products doubled. Ship out efficiency was improved. For example, the late ship out rate in the first quarter has decreased by 7% sequentially.

Speaker 2

This will ensure a stable growth in both the quantity and the quality for our pop business. Furthermore, since we have built up capacity for compliance refurbishments, we provide consumers with highly satisfying shopping and after sales service experiences. As a result, retail distribution as a percentage of core warranty business increased by 91.6% year over year to 22.2%. The second growth contributor is the escalating new category recycling business. As of March 31, we leveraged over 100 core AHS stores to successfully fulfill new category recycling orders without extra investments.

Speaker 2

These stores are mainly located in Shanghai, Beijing, Guangzhou, Hangzhou and Chongqing. And we continue to improve our product mix, powering luxury goods, gold, prestigious liquor, etcetera. We're meeting consumers' demand for cash back. As we as our fulfillment network extends, we expect to further leverage the high quality and accurate traffic from jd.com, thus amplifying our online to offline capabilities. We also amplify AHS Recycles brand influence with safe, fairly priced and hassle free offering.

Speaker 2

As a result, multiple new categories made delightful progress. For example, mostly GMV for non electronics new categories reflecting had surpassed RMB70 1,000,000. The first driver is continued improvement in operational efficiency, mainly attributable to automated quality inspection technology upgrades. Non GAAP fulfillment expenses as a percentage of total net revenue decreased by 3.7 percentage points year on year to 9.1% in the first quarter. We are proud of our operation centers.

Speaker 2

They deliver best in class operational efficiency and empower hundreds of thousands of merchants with standardized operational and transactional capabilities. The automated operation centers in South China and East China are equipped with our industry leading systems. Its automated inspection lines incorporate AI and big data algorithms for inspection training, which achieve precise detection and labeling of scratches and dents, as well as identifying disamblement and part replacement. All of these are factored into product grading and pricing results. Our unmanned production lines avoid the majority of errors associated with manual operation, helping us reduce personnel training costs and losses related to manual inspection and disambing.

Speaker 2

Technology has improved our efficiency in processing man standard products and ultimately reduces transaction disputes and losses from returns. Going forward, we believe that the application and continued development of automation technology, AI and big data will further optimize our cost structure. Beyond these improvements, we have also made steady progress in reducing our selling and marketing costs. During the quarter, our non GAAP selling and marketing expenses as a percentage of total net revenues decreased by 1.9 percentage points to 7 point 5%. Our CFO, Rex, will provide more color on this.

Speaker 2

We have had a good start to 2023 in large part thanks to our stable foundations of electronics processing and re commercialization businesses, middle office operations and back end cost controls. The continued development of the circular economy has also served as a tailwind for our business. During the Q2, we anticipate June 18 promotions once again stimulating consumers' demand for recycling and trading services. In particular, we are working diligently in preparation for a project kickoff in the second half, providing unique trading solutions through in-depth collaboration with the leading international brands and this will potentially become a key growth driver in the second half. As the circular economy evolves, we continue to amplify our industry influence by educating consumers and matching industry standards.

Speaker 2

During World's Earth Day on April 22, we launched the Cosmic Reflecting Alliance initiative partnering with several leading consumer brands to promote green reflecting and the circular use of consumer products. The initiative strengthens our brand's asset and expands our product offerings by advocating for the recycling of idle daily necessities, bags, watches, among others that still retain some value. On World Intellectual Property Day on April 26, we joined forces with the Shenzhen Electronics Industry Association to explore industry development and to celebrate the anniversary of the combined refurbishment guidelines publication. As a corporate representative, we participated in the formulation and implementation of multiple standards. Furthermore, we regard the protection of both intellectual property and the user rights as our responsibility.

Speaker 2

We are committed to working towards the standardized development of compliance refurbishment in the electronics industry. At the same time, we strive to enable the utilization of a wider range of Huioni's electronics. With that, I will hand the call over to Rex, our CFO to go over the financials.

Speaker 3

Hello, Cadeo. We are pleased to report another profitable quarter as the total net revenues reached the top end of our guidance and net debt operating income, which I will now report. I will start by sharing some of our financial highlights before going to a more detailed look at the numbers. Please note that all amounts are in R and D and our comparisons are on a year over year basis unless otherwise stated. In the Q1, total revenues increased by 30.2 percent to RMB2871.8 million.

Speaker 3

This was primarily due to the continued growth contribution of our 1 gs product service revenues, which increased by 34.9 percent to 2,575,200,000 dollars In terms of profitability, we had another positive mid quarter with an GAAP operating income of 44,400,000 This was primarily attributable to scale effects, powered by automation, expansion upgrades and improved cost efficiencies in sales and marketing. Now let's take a detailed look at the financials. In the Q1, total revenues increased by 30.2% to 2871,800,000 Net product revenues increased by 34.9 percent to RMB275,200,000 while net service revenues were $296,600,000 slightly decreased by 7.3%. Growth in net product revenues was primarily driven by an increase in the sales of pre owned consumer electronics, both through our online and offline channels. In terms of service revenue, the PJT marketplace generated more compared with the same period last year.

Speaker 3

This was primarily due to the lessened consignment business of Pipeline Marketplace as we pivoted its strategic focus, which was partially offset by an increase in the service revenue generated from PGT Marketplace. Next, turning to our operating expenses to provide greater clarity on the trends in our operating based actual expenditures. We will also discuss our non GAAP operating expenses, which better reflect how the management views our results of operations. The reconciliations of GAAP and GAAP results are available in our earnings release and the corresponding Form 6 ks furnished with the SEC. Merchandise costs were RMB252,100,000, representing an increase of 37.7 3%.

Speaker 3

This was in line with the growth in product sales. So gross margin at the group level was 21.6% in the 1st quarter. Gross margin for our OMP business was 12.5%. Fulfillment expenses decreased by 10.1% to 200 and $66,400,000 excluding share based compensation expenses, which we will refer to as SBC from Jial. Non GAAP fulfillment expenses decreased by 7.3 percent to RMB260.9 million.

Speaker 3

Under non GAAP measures, the decrease was primarily due to 1st, a decrease in operations center related expenses as we optimized our store and operation station networks and second, a decrease in logistic expenses as Carey presented earlier. Our quality inspection process has integrated the industry leading AI and big data algorithms, minimizing inspection errors and losses from returns. Our non GAAP fulfillment expenses as a percentage of revenues was 9.1% compared with 12.8% in the same period last year. Selling and marketing expenses decreased by 2.9% to RMB299 1,000,000 excluding SBC expenses and amortization of intangible assets and the deferred costs resulted from acquisitions. Our non GAAP selling and marketing expenses were RMB216.7 million, which grew at a slower pace at 4.9% year over year.

Speaker 3

The increase was primarily due to the increase in marketing expenses and office related expenses, mainly composed of travel expenses in relation to business development as the COVID pandemic faded. However, non GAAP selling and marketing expenses as a percentage of total revenues decreased to 7.5% from 9.4% in the same period last year. General and administrative expenses were $76,400,000 compared to $45,000,000 in the same period last year. Excluding SBC expenses, non GAAP G and A expenses were $57,400,000 compared with $28,400,000 The increase in non GAAP G and A expenses was primarily due to an increase in professional services and the consulting fees. Non GAAP G and A expenses as a percentage of total revenues were 2% compared with 1 point 3% in the same period last year.

Speaker 3

Technology and content expenses decreased by 25.4 $1,000,000 excluding SPC expenses and amortization of intangible assets and the deferred costs resulting from acquisitions, net debt technology and content expenses decreased by 26.3% to $42,300,000 The decrease was primarily due to the changes in technological personnel costs related to platforms as our platform matured. Non GAAP technology and content expenses as a percentage of total revenues decreased to 1 point 5% from 2.6% compared with the same period last year. As a result, our non GAAP operating income was 44,400,000 in the Q1 of 2023. Sudden GAAP operating margin was 1.5% compared with 0.2% in the same period last year. As of March 31, 2023, cash and cash equivalents, short term investments and funds receivable from third party payment service providers totaled $2,500,000,000 Our sufficient cash on hand safeguards a sustainable growth outlook.

Speaker 3

As a recap, on December 9, 2022, we announced an extension of our existing US100 $1,000,000 share repurchase program for another 12 months charades starting from December 28, 2022 based on management's strong confidence in our solid fundamentals and growth momentum. During the Q1 of 2023, we repurchased over 1,400,000 AGSS in the over market for a total cash consideration of $4,100,000 As of March 31, 2023, we have repurchased a total of 10,000,000 PDSs for approximately $38,000,000 under our share repurchase program. Now turning to outlook. For the Q2 of 2023, we currently expect the total revenues to be between RMB2850 1,000,000 and RMB2950 and 50,000,000 due to the similarity of our business. As China's economy continues to normalize and the impact of COVID-nineteen phase, We expect that our sourcing and fulfillment functions will recover in tandem.

Speaker 3

We will continue to improve our cost efficiency, leverage our automated inspection facilities to further realize skill effects and accurately capture the cycling and shopping scenarios. We expect to further improve our NANDDAF operating margins in the coming years. This forecast only reflects our current and preliminary views on the market and the operational conditions, which are subject to change. 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 today will come from Joyce Ju of Bank of America. Please go ahead.

Speaker 4

I'll translate myself. My first question is that during the Q1, we have seen very promising growth in the business accelerating from the previous quarter. So can you share a little bit more about the outlook for this year in terms of the economy, cost rate in China as well as consumption of the electronics product? And my second question is on the progress of the multi category recycling services. Do you see any categories that are showing potential for scaling up our country building quality to the revenue and profitability in the future?

Speaker 4

Thank you.

Speaker 2

Okay. Thank you for the question. I will take the first question. Since the reopening and the Chinese New Year, we have seen a rapid recovery offline, including in person consumption at shopping malls, restaurants and other local services. In line with this trend, our AHS stores have experienced a significant surge in business volume, while the number of warranty sourced products has grown by 42% year on year.

Speaker 2

While durable goods consumption recovery is still on its way, we expect to see the same trading service demand driven by the major promotions held by our e commerce partners during the Q2. By offering the option to upgrade devices in a cost effective and eco friendly way, our trading service provides value to consumers who purchase new devices. It also serves to raise consumer awareness of circular consumption. In addition to higher closing volumes, we are refining our automation capabilities and integrating compliance refurbishment services to expand our inventory of high quality pre owned electronics. These improvements will provide consumers with a wider area of premium choices, which means that consumers will always strive for a better life and better products.

Speaker 2

Therefore, the demand for recycling and reusing for your own electronics is always there. We are committed to working with home brands for the betterment of trading experience and supply chain capabilities. In the Q2, we expect to achieve year over year revenue growth of 32.8 percent to 37.5 percent, while maintaining our annual target for non GAAP operating profit. I'll answer my second question regarding the new categories. We kicked off the reception category expansion in the Q2 of 2022, starting with high value bags and watches.

Speaker 2

Currently, the category has already established scale in terms of trading volume. Gold is another category that has achieved this level of development. The development of these 2 categories is highly correlated with user trust in AHS recycle accumulated over the years. As of the end of March, over 100 AHS stores have fulfilled such recycling orders. Among them, the top 30 stores have an additional average monthly GMV of RMB500000.

Speaker 2

Recently, the monthly GMV of multi category recycling has exceeded RMB70 1,000,000, excluding camera equipment recycling, which is already on scale. In terms of operations, we have been leveraging our own storefront fulfillment capabilities, while collaborating with merchant partners on quality inspection and distribution at the back end. It's clear that the transaction of used luxury goods including back end watches has considerable potential for monetization. The wide margin space has laid the foundations for mutually beneficial collaboration with our partners. We will strive to achieve further breakthrough in scale and profitability by continuing to enhance our comprehensive capabilities in areas, including service processes, user experience and structured data.

Speaker 2

Our multi category recycling used in our consumer electronics sector And it represents one of our paths for creating long term value. Thank you for the question.

Operator

Our next question today will come from Wei Teng teng of Goldman Sachs. Please go ahead.

Speaker 3

Thank you, management. I will translate for myself. What kind of strategic targets do we have for our repairs businesses and what impact should we expect from our to our net profit from expanding our repair businesses? Thank you.

Speaker 2

Thank you for the question. In the Q1, compliance refurbished devices retailing increased 4th consecutive quarter and the corresponding ASP stabilized at RMB2600. We anticipate that the gross margin of the refurbished device retail business will remain stable, while its scale and its contribution to our warranty business will gradually increase. We believe that this will allow us to further close the value chain of the industry, obtain more profits based on the existing 1P sources and strengthen competitive edges. By 2023, we aim to expand the coverage of our refurbishment operations to more regions, replicating the capabilities we have already established in East China and South China operation centers.

Speaker 2

In terms of product categories, we are going beyond mobile phones, while establishing refurbishment capabilities for tablets, smart watches and laptops, etcetera. At the same time, we will steadily improve our operations and enhance our brand focused category. During the Q1, the scale of our refurbished production remained at around 70,000 units. As we accumulate our refurbishment and supply chain capabilities for more product categories, we expect to add value to at least 160,000 units in the first half of twenty twenty three. Thank you.

Operator

Our next question today will come from judging Chen of CICC. Please go ahead.

Speaker 2

Thank you, management. I will translate myself. What are the reasons for an improved adjusted OP margin? And do you have any plan to increase sales and marketing expense for new category recycling business? And what's the outlook for the adjusted OP margin for the whole year?

Speaker 3

Okay. Thank you for your question. I will take your question. So under the GAAP measures, we reported a new breakthrough in operating profits this quarter. Non GAAP operating margin increased to 1.5% from 7.2% in the same quarter last year.

Speaker 3

This was mainly due to the optimization of cost efficiency of fulfillment expenses brought by improved automation capabilities and selling expenses as we further implement cost control measures. In the Q1, non GAAP and operating expenses were $1,000,000 accounting for 9.1 percent of total revenue. So non GAAP fulfillment expenses decreased by 20.6% year on year. The most evident reason is the scale effect of our automated facilities mentioned by Harry. The 2 operation centers in Dongguan and Changzhou handled over 40% of the total orders processed nationwide in the Q1.

Speaker 3

Therefore, automation has a significant impact on the reduction of overall fulfillment costs. At the same time, automation technology also brings about improvements in the accuracy of quality inspection and reduces the return rate of goods and associated losses. In addition, we have optimized the deployment and operational efficiency of city level operations stations. We started to take full control over our operations stations in the Q3 of 2022 and optimize the network, therefore, saving packaging and logistic fees due to distributed shipments. The non GAAP selling and marketing expenses were $217,000,000 Non GAAP selling and marketing expenses as a percentage of total revenues was 7.5%, down 1.9% points year on year.

Speaker 3

This was primarily due to a decrease of $33,700,000 in marketing expenses for Papa Marketplace since we strategically downsized as a consignment business. As we are developing multi category recycling, there was a corresponding fee increase of RMB10 1,000,000 in this quarter. We will maintain appropriate investment in new categories and brand building. Looking into full year of 2023, we expect to continue improvements in cost efficiencies. At the same time, we will further amplify the positive impacts of automation as we plan to automate 1 operation center every year.

Speaker 3

And for sales and marketing, we keep our proven spending pattern from our 2 businesses and selectively investing in new strategic initiatives. So we will we expect our operating margin to be increased at a healthy pace. Thank you for your question.

Operator

As there are no further questions at this time, I'd like

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