ATRenew Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 20, 2024

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's Incorporated Second Quarter 2024 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. Please note today's event is being recorded.

Operator

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

Speaker 1

Thank you, Chuck. Hello, everyone, and welcome to AT and T's Q2 2024 Earnings Conference Call. Speaking first today is Cary Cheng, 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. Q2 2024 financial results were released at early today.

Speaker 1

The earnings release and the investor slides accompanying this call are available at our IR website, ir.atrenew.com. There will also be a transcript following this call for your 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 the Safe Harbor statements.

Speaker 1

Some of the information you will hear during this conversation 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 today are based on assumptions as of today and that AT and T does not take any obligation to upgrade our assumptions on these statements. 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

Speaker 2

on a year over year basis.

Speaker 1

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

Speaker 3

Hello, everyone, and welcome to AT and T's Q2 2024 Earnings Conference Call. We are pleased to share our achievements this quarter and the strategies we have implemented in the evolving landscape where the circular economy has been driving consumer behavior. In the Q2, we achieved solid growth, especially at the recycling end and in value for money retail business, even though consumers are more prudent with spending. To boost domestic consumption, the government has taken actions to encourage large scale trade ins of consumer goods. As a result, more products have entered the pre owned market through e commerce platforms and physical retailers.

Speaker 3

In the near term, we have already witnessed a significant increase in volumes in cities like Shenzhen. More importantly, we believe such policies and support will have a long lasting impact by raising awareness of sustainable consumption and the resulting of secondhand goods. Such support provides greater certainty to our sustained growth outlook. Looking specifically at our business performance in the Q2, our total revenue reached RMB3.78 billion, up 27.4% year over year, exceeding the high end guidance of our exceeding the high end of our guidance. Product revenue was RMB3.4 billion, up 29% year over year, serving as the main growth driver.

Speaker 3

Notably, other volume related to our core self operated consumer electronics recycling business grew 27.8%, while other volume of the overall self operated business that included low ASP business grew 38.9% year over year, leading in the secondhand industry. Among primary recycling scenarios, trade ins have become an increasingly mainstream way to shop. We collaborated with jd.com on their old iPhone Apple products for new Apple products initiative, which received widespread praise from users. In May, the recycling value of used products traded in through jd.com grew 97.6 percent year over year. During the June 18th shopping festival, the trading volume of used consumer electronic products from jd.com increased by 100% year over year.

Speaker 3

In our platform business, revenue grew 14.6% year over year to RMB370 1,000,000. PJT and pipeline marketplaces maintained healthy take rates with an increasing number of third party merchants leveraging our inspection capabilities and adopting our consignment model. The GMV of our multi category recycling service business increased by nearly 400% year over year, serving as the main driver of platform growth and reflecting that in the current macro environment, an increasing number of users are willing to explore recycling services beyond consumer electronics categories. On the gross margin front, we successfully turned the gross margin of the Apple Trading business positive in the 2nd quarter, raising the overall product revenue gross margin to 12.1 percent, an increase of 1.2 percentage points from the Q1 of 2024. Gross margin at the group level slightly dropped to 20.8% as the proportion of product revenue increased by 1.1 percentage points compared with the Q2 of 2023.

Speaker 3

Even though the economies of scale have also led to improved cost efficiency, The non GAAP fulfillment expense as a percentage of total revenues decreased by 0.3 percentage points year over year, while the non GAAP selling and marketing expense as a percentage of revenue fell by 1.1 percentage points year over year. This overall resulted in a 0.7 percentage points improvement year over year in the non GAAP operating profit margin, bringing it to 2.5% in the Q2 of 2024. The achievements we've discussed so far are rooted in our core strengths in recycling scenarios and supply chain capabilities. Going forward, we will continue to build on these strengths to drive further growth and success. On one hand, we have strengthened our service capabilities in our core business of consumer electronics recycling and transaction services.

Speaker 3

In June, we renewed our strategic agreement to deepen our business collaboration with jd.com in areas such as consumer electronics recycling, trade ins and the retail of value for money secondhand products. This renewal also introduced new trading methods for Apple products. We continue to meet the high standards and specific needs of JD users through our industry leading fulfillment and supply chain capabilities. Our trading business through JD has experienced a rapid growth. In the first half of the year, the recycling value of products traded in by JD users increased by over 50% year over year.

Speaker 3

Mostly in June, the recycling value of products fulfilled by trading program surpassed that of regular recycling for the first time, establishing it as the leading recycling method through JD. Trillions provide a better user experience than regular recycling, effectively capturing users' demand for upgraded devices and receiving growing acceptance and adoption by our users. For our Apple's official trading business, we successfully turned the gross margin positive as anticipated in the Q2. During this typically off peak period, we achieved RMB160 1,000,000 in revenue. Specifically, we ensured a positive operating margin for this segment in the Q2, while aiming at a long term operating profit margin of 3% to 4%.

Speaker 3

Expenses at the operating level are simple, and we expect Apple's official trading business to bring more positive operating profit. We continue to build our offline fulfillment capabilities to strengthen our business mode. As of the end of the second quarter, we operated 1516 AHS offline stores in 2 60 cities nationwide, with a net increase of 19 self operated stores and 69 jointly operated stores in the quarter. To meet users' demand for multi category recycling, we upgraded the store image for a location of over 50 self operated stores. Additionally, we have a nationwide doorstep service team of over 600 staff to address users' diverse fulfillment needs.

Speaker 3

Our service team maintains a consistent brand image and service standard, offering face to face device inspections and on the spot payments, which provide several advantages over traditional mail in recycling. In the Q2, the doorstep recycling business sustained the same year over year growth rate as the overall C2B business. Our in store and doorstep fulfillment options offer users flexible and convenient recycling choices. On the other hand, we are further enhancing our core capabilities in client shopping scenarios and supply chain management. These improvements aim to provide users with a wider selection of premium products, while strengthening the brand recognition of Ahrefs selections.

Speaker 3

We are witnessing a clear trend that consumers are increasingly looking for value for money high quality pre owned products. We offer a curative selection of premium secondhand products in our offline stores, allowing consumers to directly access the quality of certified pre owned items that are 95% 90% new, stimulating their interest in trying and purchasing these products. By linking in store inventory with our nationwide online inventory, we provide consumers with cost effective options for buying secondhand items. This capability has successfully gained the trust and recognition of our AHS selection brand. In the Q2, product revenue from AHS selection in our offline stores and on our official website surpassed RMB210 1,000,000 marking an increase of 31% year over year excuse me, marking a 31% increase from the previous quarter and an eightfold increase year over year.

Speaker 3

Product revenue brought by our 1P2C retail business increased by 125% year over year to RMB960 1,000,000. Retail channels included the pipeline selection, AHS recycled websites and physical stores, Douyin, etcetera. Building on our robust end to end supply chain capabilities from sourcing to processing to sales, We are exploring synergies with retail partners in addition to the established retail channels of PayPay, AHS store and live streaming platforms. In June, our B2B transaction platform, PJT Marketplace partnered with Douyin E Commerce to empower more small and medium sized businesses to thrive in the new retail landscape by leveraging PJT's leading secondhand consumer electronics supply chain. Key elements of our collaboration include our operation center, which supports product quality inspections and PJT supplying secondhand consumer electronics to Douyin e commerce.

Speaker 3

Additionally, PJT has established a strategic partnership with Huitungda, a leading retailer in mass market cities. Together, we are exploring opportunities for secondhand products through Huitungda's extensive offline store network. Initial sales pilot programs have already been launched recently. In closing, we would like to share our perspective on establishing our brand as the top of mind choice for consumers nationwide when it comes to recycling. Starting last year, we have increased our marketing efforts to promote our upgraded services in recycling to raise the awareness of our brand and to improve public understanding of recycling trade ins and circular consumption.

Speaker 3

We have distributed educational content about recycling and trade ins on popular social media platforms, including Douyin, Xiaohongshu, Wei video platform, while partnering with key influencers to advertise our brand name. Moreover, we have collaborated with leading consumer brands to launch the Revive Fanhan Xinxing initiative. In the Q2, we ruled out trading programs in partnerships with 20 brand owners, championing the concept of sustainable circular consumption. To name a few, Jin Dong Jin Zhao, Meng Nio, Bilibili, Naixu and Audi. We jointly encouraged more consumers to pick up Quest, return more used goods and claim the rewards.

Speaker 3

Given the clear shift in consumer behaviors, we believe it is crucial to proactively seize the opportunities presented by the circular economy. We will continue to invest in our brands. We aim to acquire greater value share for our brands and services among consumers through strategic brand marketing, cross brand partnerships and revamping our stores. As we enter the Q3, we are preparing for the upcoming launch season for new cell phone models in September October. We look forward to serving even more users by facilitating the recycling and transactions of their secondhand products through our enhanced service offerings.

Speaker 3

Now, I'd like to turn the call over to our CFO, Rex, for financial updates.

Speaker 2

Okay. Hello, everyone. We are pleased to report another profitable quarter under GAAP measures on revenues that once again exceed the top end of our guidance. Before taking a detailed look at the financials, please note that all figures are in RMB and all comparisons are on a year over year basis unless otherwise stated. In the Q2, total revenues increased by 27.4 percent to 3,776,700,000 primarily driven by the strong growth in net product revenues.

Speaker 2

Net product revenues increased by 29% to RMB 3,401,800,000 while net service revenues increased by 14.6% to RMB374,900,000. Gross in net products revenues was primarily driven by an increase in the sales of pre owned consumer electronics, both throughout the company's online and offline channels. The increase in service revenues was primarily due to an increase in the service revenue generated from PJT Marketplace and the multi category recycling business. So overall gross transaction value of marketplaces increased consistently with service revenues and the take rate of our marketplaces was 5.28 percent in Q2 of 2024. About 30,000,000 were directly attributable to our multi category recycling business with an average service ticket of 3%.

Speaker 2

Multi category recycling business accounted for 8% of total service revenues in the Q2 of 2024, while the figure was 1% in the same period of 2023. Now let's discuss our operating expenses. To provide greater clarity on the trends in our actual operating base expenses, we will also discuss our non GAAP operating expenses, which better affect how management views our results of operations. The reconciliations of GAAP and GAAP results are available in our earnings release and is a corresponding Form 6 ks furnished with the SEC. Merchandise costs increased by 28 0.6% to 2919 $600,000 in line with the growth in product revenues.

Speaker 2

Gross margin at the group level was 20.8% in the 2nd quarter. Product revenues gross margin, which we also refer to as 1P Business gross margin, was 12.1%. Fulfillment expenses increased by 22.1% to $328,300,000 excluding share based compensation expenses, which we will refer to as SPC from TRL. GAAP fulfillment expenses increased by 22.9% to RMB321.7 million. Other than GAAP measures, the increase was primarily due to first an increase in personnel costs as the company conducted a more recycling and transaction activities compared with the same period of time.

Speaker 2

23 and second, an increase in operation center related expenses as the company expanded its store and operation station networks. Non GAAP fulfillment expenses as a percentage of total revenues decreased to 8.5% from 8.8%. Selling and marketing expenses increased by 5.6 percent to RMB354 1,000,000, excluding SBC expenses and the amortization of intangible assets and deferred costs resulting from assets and business acquisitions. Non GAAP selling and marketing expenses increased by 11.7 percent to RMB283.3 million, primarily due to an increase in advertising expenses and promotional campaign related expenses. Non GAAP selling and marketing expenses as a percentage of total revenues decreased to 7.5% from 8.6%.

Speaker 2

General and administrative expenses increased by 26.1 percent to 72.5 1,000,000. Excluding SBC expenses, non GAAP G and A expenses increased by 41.9 percent to 56,200,000, primarily due to an increase in personnel costs. Non GAAP G and A expenses as a percentage of total revenues was 1.5% compared with 1.3% in the same period of 2023. Technology and the content expenses increased by 10.6% to 49.8 $1,000,000 excluding SPC expenses and amortization of intangible assets and deferred costs resulting from assets and business acquisitions. NetApp Technology and Content expenses increased by 12.6 percent to 43,700,000.

Speaker 2

The increase was primarily due to an increase in personnel costs in connection with ongoing upgrade of the conference operation center and system. Non GAAP technology and content expenses as a percentage of total revenues decreased to 1.2% from 1.3%. As a result, our non GAAP operating income was RMB94,100,000 in the Q2 of 2024, representing a significant increase of 81% year on year. GAAP operating profit margin was 2.5% compared to 1.8% in the Q2 of 2023. And our ongoing share repurchase program, which our Board of Directors approved as uplifting's limit to purchase US50 $1,000,000 through June 27, 2025.

Speaker 2

We have returned approximately US8 $1,000,000 to our shareholders for a total number of US3.3 million ADSs as of June 30, 2024. As of June 30, 2024, cash and cash equivalents, restricted cash, short term investments and the funds receivable from third party payment service providers totaled RMB2.8 billion. Our strong cash position safeguards a sustainable growth outlook. Now turning to the business outlook for Q3 of 2024, we anticipate total revenues to be between RMB 3,970,000,000 and RMB 4,170,000,000, representing an increase of 21.9 percent to 25 percent year over year. Please note that this forecast only reflects our current and preliminary views on the market and operation conditions, which are subject to change.

Speaker 2

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

Operator

Thank you. We will now begin the question and answer session. And the first question will come from Joyce Ju with Bank of America. Please go ahead.

Speaker 4

I'll translate myself. This is Joanne on behalf of Joyce from Bank of America. Thank you for taking my question and congrats on a solid result this quarter. We see there are recent domestic policies that have increased support for large scale consumer goods trade ins, such as the subsidies announced by the National Development and Reform Commission in July. How do these policies impact your business?

Speaker 4

Thank you.

Speaker 3

Since the State Council released its action plan for large scale consumer goods trading in March, we've observed both central and local policy support, mainly focusing on computers, cars and home appliances. In July, the NDRC and Ministry of Finance issued measures to further support these trade ins. We've seen more cities implementing specific subsidies for electronic products, including home appliances and computers. Etirenew and jd.com have collaborated to meet users' trading needs, securing more high quality first hand recycling products. Currently, phone specific subsidies are being implemented at the local level.

Speaker 3

For instance, in Shenzhen's July trading subsidy program, we processed used consumer electronics products from JD's trading orders. The number of successful recycling transactions increased 2.5 times compared with the number in June, even though June was a peak month considering the grand promotion season, reflecting the popularity of such initiatives. In the second half of the year, we expect more cities to introduce similar subsidies, further promoting the effective recycling of idle electronic products within the circular economy. However, we primarily view these policy subsidies as catalysts for enhancing users recycling awareness. Some studies suggest this round of subsidy may last longer than previous programs like home appliances going to the countryside.

Speaker 3

Therefore, we aim to see these opportunities to strengthen the recycling system, enhance AHS recycle brand recognition and guide users towards trading. We anticipate that as national and local subsidy policies are introduced, user acceptance increases and our fulfillment capabilities strengthen. These factors will collectively promote further penetration of this unique service model into the circular economy.

Speaker 2

Okay.

Speaker 3

Thank you for the question.

Operator

The next question will come from Zhao Wang with CICC. Please go ahead.

Speaker 3

Congratulations on the solid results and I have two questions. The first one is about the top line. What are the contributions on the compliance refurbishment business and your Apple Trading business? And the second one, could you please elaborate on how you improve the non GAAP operating margin? Thank you.

Speaker 2

Okay. Thank you. I will take your question. In terms of the compliant refurbishment, we saw a 50% year over year increase in the Q2, reaching RMB300 1,000,000 in product revenue. In the first half of this year, we continued to enhance our selection of self recycled goods swiftly identifying suitable forms for refurbishment and improving efficiency across our value chain.

Speaker 2

Currently, we have achieved 95% comparison coverage in the mobile phone category, laying a solid foundation for future replication to other categories. At the same time, we have enhanced our repair coverage and capabilities and the processing capabilities for different phone conditions. Additionally, we have bolstered our sales capabilities for 1P Goods, opening up channels for both retail and business buyers, better connecting the end to end industry chain. Regarding Apple's official trading service, we have successfully optimized our gross margin as planned, achieving a positive gross margin in the Q2. Although the overall gross margin for our Apple business in the Q2 was already low single digits.

Speaker 2

We have observed significant improvements in the gross margin for goods received during the Q2. We will continue to refine this business in second half of this year, aiming to provide an excellent trading experience for Apple's official users, while maintaining steady profitabilities. In the first half of this year, in addition to our consumer end trading service, we also enhanced our service to Apple's corporate offerings Based on Apple's orders from a number of Fortune 500 corporates, we expect to recover used devices from these corporate clients in next 1 to 3 years. Through such a program, we can access the corporate service market while addressing the needs of leading international and domestic corporates when disposing of used workplace iPhones and MacBooks of their employees. In terms of profitability, we reported an 8 consecutive quarter with positive net GAAP operating profit.

Speaker 2

In the Q2, net GAAP operating profit was RMB94 1,000,000. Net GAAP operating margin was 2.5% during the promotional season of e commerce platforms compared with 7.8% in the Q2 of 2023. Such improved operating efficiency was a testament to the economy of scale back by our end to end supply chain. As mentioned earlier, in the Q2 of 2024, non GAAP fulfillment expenses increased by 22.9% and non GAAP sales and marketing expenses increased by 11.7%, both grow slower than our top line. Labor costs in relation to fulfillment as a percentage of total revenues decreased by 7.2%, compared with the Q2 of 2023.

Speaker 2

Although promotion fees related to the branded promotion of AHS cycle increased, but the commission fees and the promotion fees of PGT Marketplace and the pipeline in relation to sales and marketing as a percentage of total revenues dropped. So both are the main reasons behind the improvement margin. Thanks.

Speaker 3

Thank you.

Operator

The next question will come from Michael Kim with Zacks Research. Please go ahead.

Speaker 5

Great. Good morning or good evening everyone. Thanks for taking my questions. First, just curious how the gross margins for the recycling of luxury goods compare to consumer electronics? And then assuming the mix continues to shift in favor of luxury items, just wondering how that might impact overall gross margins?

Speaker 5

And then I do have a second question.

Speaker 2

Okay. So for your first question, currently approximately 90% of our total revenues comes from the product sales related to the cycling, quality inspection, refurbishment and the resale of pre owned products. So remaining 10% of our total revenues come from service revenues generated by our platform. Revenue is equivalent to the gross profit for this segment in our financial statements. Of this service revenues, 80% is attributable to our motor category recycling business operated under the platform model.

Speaker 2

But in terms of the operating profit margin, the luxury goods products will be similar to our electronic products. So when we exchange the recycling business of high value goods, including luxury items, we categorized some as a part of our multi category business alongside other than consumer electronic categories. This indicates that the multi category recycling business currently has a limited impact on our overall gross margin. However, we believe that by expanding the scope and accessibility of our multi category recycling services, we can positively influence our overall gross profit mix and margins as well as operating profit margin. Thanks.

Speaker 5

Got it. Makes sense. Appreciate that. And then second, just given the strength of your balance sheet and your asset light business model, just curious to hear your updated thinking on the capital management front. I know you talked about the Board recently upsizing and extending the share repurchase authorization, but just wondering how you might be thinking about potentially instituting a dividend down the road and or capitalizing on potential M and A opportunities?

Speaker 5

Thanks.

Speaker 2

Okay. Thank you. In terms of our shareholder returns, we will maintain regular and open communication with the Board and the market to explore the feasibility of share buyback and dividend plans. And our current plan to use most of our current year profit for share repurchase in current year. So considering the current capital market environment and the competitive stage of development, we will adopt a prudent approach to capital utilization and we do not have any M and A planned now.

Speaker 2

Thank

Speaker 5

you. Great. Thanks for taking my questions.

Operator

This will conclude our question and answer session. I would like to hand the conference back over to management for any closing remarks. Please go ahead.

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. Thank you.

Operator

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

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