ATRenew Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 23, 2023

There are 6 speakers on the call.

Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to AT Renew, Inc. 2nd 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 Ji, Director of Corporate Development and Investor Relations at the company. Please go ahead, sir.

Speaker 1

Thank you. Hello, everyone, and welcome to AT Renew's Q2 2023 earnings conference call. Speaking first today is Carrie 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 Q2 financial results were released earlier today.

Speaker 1

The earnings release and the investor slides accompanying this call are available at our IR website, ir. Etrunew.com. There will also be a transcript following this call for your convenience. On today's agenda, Cary will share his thoughts about 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.

Speaker 1

Please note that management are joining the call from different locations. We will try to fix it if there is any connectivity issue. Let me cover Safe Harbor statements. Some of the information you'll hear during the 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 obligation to upgrade our assumptions on these statements.

Speaker 1

Also, this call includes discussions 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. I'd now like to turn the call over to Cary for business and strategy updates.

Speaker 2

Hello, everyone, and welcome to AG Renew's 2nd quarter 2023 earnings conference call. During the Q2, we made notable progress in terms of both revenue and profitability. Our total revenues reached RMB 2,000 960,000,000, representing a year over year increase of 38.1 percent and surpassing the high end of our guidance. As we navigated the post pandemic era, our warranty recycling business rapidly rebounded and our marketplaces saw a healthy recovery demonstrating the resilience of the circular business model. In terms of profitability, the adjusted operating income increased to RMB52 1,000,000 and the adjusted operating margin further expanded to 1.8%.

Speaker 2

These improvements fully align with our aims of enhancing the secondhand industry's value chain and optimizing operational efficiencies. Our strategic direction remains consistent. On the one hand, we aim to achieve steady growth in core consumer electronics businesses. Among them, the the escalating 1P recycling channels, including AHS recycle stores and the official website provide a better user experience, ensure first hand sources of supply and acquire more market share. We also continue to strengthen cooperation with e commerce pioneers like JD dotcom and leading brands such as Apple to advance their trading service experience in retail scenarios.

Speaker 2

On the other hand, we seek to unleash the potential through continuous innovations. On recycling over time, we have successfully improved user experience and store service capabilities of recycling luxury goods and continue to strengthen the brand awareness of AHS Recycle. On user traffic, we have achieved some progress recently through high frequency household recycling services in communities. We guide users to AHS recycle app, which has mini programs and encourage more customers to visit our physical stores to sell more high residual value products. Next, I will share more color from 3 aspects.

Speaker 2

1st, key growth drivers of the core business. 2nd, operational efficiency improvements. And third, updates on our innovative businesses. In terms of growth drivers, YP product revenue grew rapidly by 42.2% year over year to reach RMB2637 1,000,000 in the Q2. This increase was primarily driven by the continuing surge in the trend for selling old for new and buying pre owned products, even when consumption growth flattened.

Speaker 2

Another factor was the scaling sales of our refurbished products. Specifically on the recycling front, we saw significant year on year improvements in both storefronts and JD Recycling channels. We utilized our extensive network of 1944 offline stores nationwide to further develop consumer outreach and effectively improve user satisfaction with price quotations and services, of which the 11 62 standard stores play a key role in obtaining more supplies of quality devices. In addition, recycling orders from JD channels recovered quickly as one stop trading business saw 100 and 100 and 16.9% year on year revenue growth in the Q2. In addition to Apple products, some Android models were also popular with JD customers.

Speaker 2

On the selling front, having successfully navigated the challenges posed by the pandemic, merchant users' transaction activities kept healthy. As for 1st party retail distribution, we started the compliance refurbishment business and the REI refurbished brand following the release of relevant regulatory guidance in April 2022. Revenue from retailing REI Refurb devices totaled RMB170 1,000,000 in the 2nd quarter, representing a notable increase of 22% sequentially, further fulfilling consumers' need for premium secondhand devices. Our platform service revenues rebounded at 12.1 percent year over year to RMB327 1,000,000 in the 2nd quarter. The overall take rate jumped 83 basis points to 5.37%.

Speaker 2

The platform business has achieved healthy growth even as our strategic focus shifted towards 1st party businesses. PJD Marketplace As a result, we enhanced user stickiness and monetization capability. In terms of pipeline marketplace, its pork business foster concurrent expansion in both scale and profitability under JD's low price strategy. We continue to provide premium supply chain support to more small business owners, diversifying businesses and product categories. In the second half of twenty twenty three, we will upgrade the B2C business model and carry out a new business based on the trust of users and the operation capacity of large stores.

Speaker 2

While lowering the participation threshold for merchants to supply goods, we will ensure product quality and buyers experience through warehousing quality inspection. As for operational efficiency improvements, we widened our operating margin on a more comprehensive supply chain and more advanced automated operational efficiency. During the Q2, non GAAP fulfillment expenses as a percentage of total revenues was 8.8%, down 3.7 percentage points compared with the same period of 2022. To break it down, operations center related expenses and logistics expenses decreased by 12% 17% year on year respectively. The costs saved in operation centers were attributable to 1, scale effects and reduced inspection errors following the use of our automated facilities in South China and Eastern China and 2, the optimization of the operation station network and logistics related expenses into 2 factors.

Speaker 2

For 1, it's the deepened relationship with JD Logistics, shipping out solutions were better tailor made for pre owned goods transactions. The other is with our supply chain algorithms to better match orders with our regional operation centers capacity, warehousing allocation and logistics solutions. This eases our operational decision makings and overall logistics expenses. One more thing, in addition to the organic growth of our core businesses, we are cultivating external growth engines through innovations. On June 30, we officially integrated into Apple China's online and offline retail system, becoming the 2nd Apple trading service provider in the Mainland China market.

Speaker 2

We provide supply chain support for Apple trading and iPhone upgrade program. Users can place API service orders via apple.cn or visit any of the 45 flagship stores. A selection of used devices will be transferred to AHS according to allocation mechanisms and recycling prices. Upon receipt, AHS conducts data erasure and quality inspections. We have completed system deployment and accumulated some experience through testing and we accept more progress when the new iPhone lineup debut.

Speaker 2

In terms of the new grade recycling, GMV and service capability continue to scale. During the quarter, GMV excluding photography and video equipment rapidly exceeded RMB200 1,000,000. Among these, luxury goods and gold recycling transaction volumes increased by 60% and nearly 100% compared with this Q1 respectively. We also polished our store service capabilities. These include opening new AHS iconic stores in 1st and second tier cities with competitive pricing quotations, on-site luxury goods quality inspection and shortened waiting period for customers.

Speaker 2

For a larger number of existing AHS stores, we provide standardized multi category recycling services supported by IT systems. In the 2nd quarter, 231 AHS stores fulfilled multi category recycling orders. On branding, we made additional investments in our main brand AHS Recycle and advocated the new model of circular consumption with wider participation of consumer brand. AHS Recycle has cooperated with brands such as Cotton Times, Captain Land, Wonderland, Fresh People and Tencent Charity, etcetera. We will attach great importance to synergies with consumer brands to form the recycling mentality.

Speaker 2

Finally, some updates on our ESG efforts. On June 20, we released our 2022 ESG report. Particularly noteworthy is our commitment to disclosing greenhouse gas emissions for 3 consecutive years. During the 3 year period, we continuously downsized greenhouse gas emission intensity. On the social front, we have enhanced our quality control system, attaining ISO 9,001 certification during the reporting period.

Speaker 2

We provided training to 10,000 merchants, strengthening value co creation along the industry chain. In terms of governance, the Board structure of the company has been further diversified and we have made allowances in internal controls and risk management to realize robust operations in the long run. Now, I'd like to turn the call over to our CFO, Rex for financial updates.

Speaker 3

Hello, everyone. We are pleased to report another profitable quarter as we generated a new record non GAAP operating income on revenues that beat the top end of our guidance. One of the key drivers of our continued profitability was our use of industry leading AI and big data algorithms to enhance our quality inspection systems, which continuously optimized our fulfillment costs. The non GAAP fulfilled gross margin was 12.7%. It continued to recover from a low point in the Q4 of 2022.

Speaker 3

Now, let's take a detailed look at the financials. Please note that all amounts are in RMB and all comparisons are on a year over year basis unless otherwise stated. In the Q2, total revenues increased by 38.1 percent to $293,900,000 driven by growth in net product revenues. Net product revenues increased by 42.2 percent to $2636,700,000 while net service revenues was $327,000,000 representing an increase of 12.1%. Gross in net product revenues was primarily driven by an increase in the sales of pre owned consumer electronics, including the sales of RMB191 1,000,000 refurbished devices.

Speaker 3

So increasing service revenues was primarily due to the revitalizing business of our marketplaces from the COVID-nineteen pandemics and an increase in the overall commission rate, which grew to 5.37% from 4.50 4%. Next, turning to our operating expenses to provide greater clarity on the trends in our actual operating based expenses. 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 non GAAP results are available in our earnings release and in the corresponding Form 6 ks furnished with the SEC. Merchandise costs increased by 40.6 percent to RMB225.8 million.

Speaker 3

The increase was in line with the growth in product sales revenues. Gross margin at the group level was 21.5% in the 2nd quarter. Gross margin for our 1T business was 11.8%. Fulfillment expenses decreased by 2.3% to 268,800,000 Excluding share based compensation expenses, which we will refer to as SBC from here, non GAAP fulfillment expenses decreased by 2.2% to $261,800,000 Under the non GAAP measures, the decrease was primarily due to the decrease in logistic expenses and operation center related expenses as we kept optimizing our store and operation station networks, but was partially offset by an increase in personnel costs as our recycling activities developed compared with the same period of 2022. Non GAAP fulfillment expenses as a percentage of total revenues decreased to 8.8% from 12.5% in the same period last year.

Speaker 3

Selling and marketing expenses increased by 14.3 percent to RMB335,300,000. Excluding SBC expenses and amortization of intangible assets. Non GAAP selling and marketing expenses increased by 28% to RMB253.6 million. The increase was primarily due to firstly, an increase in advertising expenses and promotional campaign related expenses 2nd, an increase in commission expenses in relation to channel service fees and third, an increase in office and the traveling related expenses, non GAAP selling and marketing expenses as a percentage of total revenues decreased to 8.6% from 9.2% in the same period last year. G and A expenses increased by 27 point 2 percent to $57,500,000 Excluding SBC expenses, non GAAP G and A expenses increased by 37.5 percent to RMB39.6 million, primarily due to: 1st, an increase in expected credit loss relating to credit risk 2nd, an increase in professional service and consulting fees.

Speaker 3

The increase was partially offset by a decrease in personnel costs. Non GAAP G and A expenses as a percentage of total revenues was 1.3%, the same as that a year ago. Technology and content expenses decreased by 24.6 percent to $45,000,000 Excluding SBC expenses and amortization of intangible assets, non GAAP technology and content expenses decreased by 26.8 percent to RMB38.8 million. This was partially due to the decrease in technological personnel costs and technology expenses in relation to platforms as the company's platform matured. Non GAAP technology and content expenses as a percentage of total revenues decreased to 1.3% from 2.5% in the same period last year.

Speaker 3

As a result, our non GAAP operating income was $52,000,000 in the Q2 of 2023. Non GAAP operating profit margin was 1.8%, marking a new record high. So, non GAAP operating margin was negative 2% in the same period last year. As of June 30, 2023, cash and cash equivalents, restricted cash, 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. During the Q2 of 2023, we repurchased 2,300,000 ADSs in the open market for a total cash consideration of US6.4 million dollars As of June 30, 2023, we had repurchased a total of 12,300,000 ADSs for approximately US44.4 million dollars in our share repurchase program.

Speaker 3

Now turning to outlook. For Q3 of 2023, the company currently expects its total revenues to be between RMB315 1,000,000 and RMB320 1,000,000. This forecast only reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator

Yes. Thank you. At this time, we will begin the question and answer session. And the first question comes from Wei Qing Tang with Goldman Sachs.

Speaker 4

Thank you, management. Regarding the recent launch of the Appraisal service with support to Apple's official retail channels in China, can the management team provide an overview of the background of the service support and the outlook for growth and profit of this business stream in 2023? Thank you.

Speaker 2

Thank you for the question. We are pleased to announce that we have become Apple's 2nd official trading partner in Mainland China, providing recycling supply chain services to Apple China's official website and 45 flagship stores. Our vision is closely aligned with Apple's. We both share a focus on enhancing product and service accessibility, prioritizing user privacy and data security in recycling, delivering unparalleled user experience and reducing the cost of decision making as well as the economic cost of upgrading devices. Specifically, Apple has 2 alternative processes for recycling in its official retail channels in China.

Speaker 2

Users can submit recycling orders via apple.cn and send in used devices. They can also visit Apple Stores, flagship stores in person, where Apple staff use specialized devices to scan, verify, erase data and pay on-site. Certain models are then handed over to us as our inventories for back end privacy erasure and standardized quality checks before the end distribution. This business is carried out under 1P model. Since we don't need to advertise to acquire customers and there is no store expense on our end, the cost structure is more simple.

Speaker 2

We expect to escalate our tech and service capacity in the Q3 and the recycling volume to increase following the arrival of the new iPhone line up in September and during its major shipment in the Q4. With operations and margins stabilizing next year, we anticipate an annual recycling volume of RMB1000000000 to RMB1.5 billion from this new channel based on historical market data. In addition to the trading support license, we've recently been authorized to beat for and distribute Apple's Apple phones. These two collaborations with Apple can further enhance our access to high quality supplies and allow us to serve as mainstream customers in key scenarios. These are also recognitions of our supply chain capabilities, privacy protection, compliance and corporate governance.

Speaker 2

The breakthrough in collaboration with iPhone with phone manufacturers, signifies a major milestone apart from our strategic partnership with e commerce players. Thank you for the question.

Operator

Thank you. And the next question comes from Joyce Ju with Bank of America.

Speaker 5

We have seen the company seen this business has made a quite positive contribution to the company's 1Q gross profit. For the management team help provide more insights into the business and help us to understand its growth potential? Like for example like what percentage of like revenue it can contribute to our 1P business? Thanks.

Speaker 2

Since the launch in April last year, our RE RE refurb labeled products have continuously improved our industry value chain. During the Q2, we replicated the capabilities from Dongguan operation center in South China to Wuhan, Chengdu and Tianjin operation centers with value added capacity covering major regional markets. We also reconditioned broader product categories including tablets, laptops, smartwatches, earphones, etcetera, meeting the demand for high quality products from both consumers and merchants. During the Q2, total sales of refurbished products exceeded RMB190 1,000,000 accounting for 7.2 percent of 1P product revenues. This percentage increased by 1.6% quarter on quarter and 4.5% year over year.

Speaker 2

We believe that more of our 1P source products can go through our own facilities for reconditioning, common quality products will bring greater value to the industrial chain. We obtained official maintenance authorization from Huawei at the end of July, further enhancing our cooperation with brand manufacturers. Looking forward, we will continue to strengthen value added services with closer collaboration with phone brands and industry associations to promote the compliance and healthy development of the industrial chain. In the long run, we believe that the proportion of private label RE, RE referred in 1P product revenue can be increased to 30% and even more.

Operator

Thank you. And the next question comes from Zhanping Chong with BITG. Please go ahead. Your line is live.

Speaker 2

Yes, we can hear you. Thank management for the sharing and congratulations on a strong quarter. Could you provide more color and breakdowns regarding your profit realization and profit outlook? And how will your revenue mix evolve in the future?

Speaker 3

Okay. Thank you for the question. I will take this. Our non GAAP operating margin was 1.8% in the 2nd quarter surpassing the 1.5% full year target we discussed earlier. This was due to our effective execution towards improving 1P gross margin and operational efficiency.

Speaker 3

And improved 1P gross margin was mainly attributable to really referred products whose gross margin exceeds such of regular 1P2C products by 5% basis points. We anticipate the total sales of re referred products at RMB700 1,000,000, edging up 1P gross margin gradually in 2023, we credit improvements in operational efficiency to smart storage management and automated testing technologies. We optimize order allocation to operation centers with the help of the data algorithms and condensed the number of small city level operating stations. As a result, the service fees, logistic expenses and the packaging fees were cut down as we upgrade our automated inspection system to Matrix 3. Our losses related to inspection mistakes decreased significantly.

Speaker 3

Service fees, logistics expenses, packaging fees and return loss decreased by RMB17.6 million compared to the same period in 2022, downsizing our non GAAP fulfillment expenses as a percentage of total revenues by 3.7 percentage points. Overall, we expect our non GAAP operating margin for this year to be 1.5% and we aim to achieve a betterment of 1 percentage points every year. On revenue mix, we have been shifting our focus and strategic resources towards first party businesses since the second half of twenty twenty two to achieve more controllable operations facing complex environments. We aim at capturing to diversify the user needs, enhancing the recycling experiences and in reaching our quality per owned quality listing. This transition has led to a downsized revenue mix for marketplaces service revenues.

Speaker 3

However, our platform business continues to exhibit healthy growth for this year. We expect that our platform's overall ticket rate will exceed 5%. Following the strategic adjustments of our pipeline consignment businesses, we are now experiencing renewed momentum in the growth of service revenue. In the second half of this year, we anticipate that the 1P product service revenue will continue to dominate our revenue structure, maintaining a year over year growth rate of over 30%. Thank you.

Operator

There are no further questions at this time. I would like to hand the conference back over to management for any closing comments.

Speaker 1

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

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