ATRenew Inc (RERE) 2024 Q1 法說會逐字稿

Good morning and good evening, ladies and gentlemen.

Thank you for standing by and welcome to ATRenew Inc.'s first-quarter 2024 earnings conference call.

(Operator Instructions) Please note, today's event is being recorded.

I will now turn the call over to the first speaker today, Mr. Jeremy Ji, Director of Corporate Development and Investor Relations of the company.

Please go ahead, sir.

Thank you, Drew.

Hello, everyone, and welcome to ATRenew's first quarter of 2024 earnings conference call.

Speaking first today is Kerry Chen, our Founder, Chairman and CEO, and he will be followed by Rex Chen, our CFO.

After that, we'll open the call to questions from analysts.

The first-quarter 2024 financial results were released earlier today.

The earnings release and 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, Kerry will share his thoughts about our quarterly performance and business strategy, followed by Rex, who will address the financial highlights.

Both Kerry and Rex will join the Q&A session.

Let me cover some safe harbor statements.

Some of the information you'll 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 today are based on assumptions as of today, and ATRenew 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 press release, which contains a reconciliation of non-GAAP measures to GAAP measures.

Finally, please know 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 Kerry for business and strategy updates.

(interpreted) Hello, everyone, and welcome to ATRenew's first-quarter 2024 earnings conference call.

We are very pleased to share with you our recent developments, pivotal growth drivers, and business strategy.

Let's begin with some first-quarter financial highlights.

On the top line, our total revenues increased by 27.1% to CNY3.65 billion, the high end of our guidance.

Net product revenues from 1P business continue to be the primary growth driver, increasing by 28.5% year over year to CNY3.31 billion.

Later on, I will elaborate on the growth drivers of our 1P business.

Net service revenues were CNY341 million, marking year-over-year growth of 15.1%, and continuing its double-digit growth.

This was attributable to the growth of PJT and Paipai marketplace service revenues and multi-category restocking service revenues, which contribute to the company's growth and operating profit.

In terms of profit, non-GAAP operating income for the first quarter was CNY80.2 million, and our non-GAAP operating margin increased by 70 basis points year over year to 2.2%, representing meaningful improvements.

Strategically, we remain committed to our core development principles, which focus on developing recycling scenarios and supply chain capabilities.

Enforcing used products, we continue to leverage effective user conversion scenarios to secure first-hand, high-quality supplies through JD.com, Apple's official trading program, and our offline AHS recycle stores.

We acquire customers and build our brand through these scenarios.

On the supply chain, we enhance operational efficiency through our next-level automated quality inspection systems.

With compliant refurbishment, we also improve product standardization and customer access to more ample choices of like-new electronic products.

Occupying these precise recycling scenarios fortifies the competitive edge of our 1P business.

Firstly, JD.com continues to bring strong momentum to the growth of our product revenues.

As JD pays greater attention to the second-hand goods business, our recycling and trading business penetrated further to JD's new product sales business.

In addition, in March 2024, China's State Council released an action plan to promote large-scale trading of consumer goods and municipal action plans followed.

Brand manufacturers are also enthusiastically participating by offering trading promotions.

JD has announced the launch of a dedicated plan promoting trading for consumer electronic products, which include a RMB3 billion subsidy.

The goal is to drive new product sales exceeding RMB100 billion in the next three years.

To implement this initiative, JD has partnered with AHS Recycle, its exclusive used consumer electronic supply chain partner, to enhance end-to-end solutions and continuously optimize the service process and user experience related to trading.

In the first quarter of 2024, the gross recycling transaction value of trading products sourced from JD.com increased by 43% year on year.

Together with JD.com, we will continue to strengthen strategic cooperation.

For tradings originating from Apple's official program, we serve Apple's customers with competitive offers through Apple's official website and 47 Apple stores in mainland China.

At these flagship retail stores, Apple staff provide hassle-free trading services.

Customers pay a smaller amount of money when buying a new device if they choose to trade in.

It's a joyful way to upgrade electronic products.

Due to Apple's unique pricing mechanism and some market factors, in the fourth quarter of 2023, it had a negative impact on our gross profit margin.

However, since 2024, we have optimized our front-end bidding strategy.

Our approach is rooted in Apple's predominant customer mindshare, especially in major cities in China.

Looking ahead, we remain committed to optimizing our services by, first, obtaining high-quality products through more disciplined sourcing costs, and second, improving sales efficiency for popular models.

We believe these measures can ensure stable operating profits for the Apple business.

Third, we further leverage our offline stores.

We have open self-operated stores in first- and second-tier cities that mainly focus on recycling and standard jointly-operated stores in the broader mass market with a focus on retailing as well as recycling.

As of the end of March, we had 711 self-operated AHS stores and 557 standard joint-operated AHS stores.

Both store formats have achieved quality growth compared to the same period in 2023.

These standard stores ensure primary sources of product supply, and they are crucial user touchpoints as we provide recycling and trading services with a premium user experience.

In addition, they generate revenue and operating profit at a store level.

In contrast, for the shop-in-shop format that opens in offline retail scenarios, we have made some adjustments, migrating them to PGT sellers or using doorstep collection.

The adjustment of shop-in-shop format has reduced the total number of our stores, but its impact on our revenue and profit is limited.

Our multi-category recycling strategy uplifts our store economics, allowing us to open more stores, especially those with higher sales per square meter and better profitability.

Since the introduction of the multi-category strategy in 2022, the transaction value of non-electronics categories has grown rapidly quarter over quarter, as such strategy meets consumers' needs nimbly to dispose of idle goods, convert them into cash at hand in the current economic cycle.

Since the beginning of this year, we have seen a significant surge in such user demands.

For instance, the transaction value of our multi-category recycling business, including secondhand bags and watches, gold, jewelry, and fine liquor, quadrupled year over year to RMB600 million in the first quarter of 2024.

At the same time, the multi-category recycling business itself is profitable.

Conducted under a platform business model, it not only has a live structure without the risk of inventory and price decline, but also brings an additional profit of RMB7,000 per month to each store.

As a remarkable incremental business, multi-category recycling grows on the foundation of users' trust in the AiHuiShou brand and strong performance of existing stores and our capability of establishing industry standards in the spring-on sector.

It is a reflection of the accumulated capabilities of AiHuiShou over the past decade.

Looking at cross-category orders, 18% of users who completed an order-to-recycle luxury products came back for other product recycling services within 30 days.

We believe that the conversion rate can be further enhanced if we extend the timeframe.

In terms of user satisfaction, our goal in recycling business ranks first in all categories with a top promoter score due to transparent pricing, legitimate channels, and trusted brands.

We look forward to expanding the multi-category recycling within our existing store network and further promoting the opening of new stores.

We are confident that the GMV of our multi-category recycling business will continue to achieve scalable growth this year.

Now, let's take a look at our supply chain capability from two aspects.

Firstly, 1P business improves product standardization through compliance refurbishment.

Secondly, the overall business enhances fulfillment efficiency through quality inspection automation in the operation centers.

During the first quarter, our robust supply chain capabilities yielded solid results.

Mostly, the revenue from refurbished devices was RMB282 million, further increasing its share in our 1P business.

We have made additional improvements to our operational processes, expanded access to a wider range of product sources, and identified devices that are both popular among users and have the potential for improved quality.

Adding to our retail offerings through AHS stores and AHS websites, the total retail sales revenue as a percentage of 1P product revenues jumped to 24.5%.

In terms of operational efficiency, our non-GAAP fulfillment expense as a percentage of revenue for the first quarter was 8.3%, a decrease of 0.8 percentage points from the same period of 2023.

This was mainly due to cost efficiency improvements at our Southland China Dongguan automated operation center over the past year.

Our non-GAAP selling and marketing expenses as a percentage of revenue was 6.1%, a year-over-year decrease of 1.4 percentage points.

The reduction in promotional expenses is mainly due to the growth of our trading business with Apple, which operates independently of our marketing efforts.

For our platform business, we are gradually increasing the utilization of digital customer management tools.

This approach helps us to reduce expenses associated with customer relationship management and promotional expenses on the platform.

In the long term, we are committed to reinforcing the foundation of Korean-owned smartphones and consumer electronics business.

Through a multi-category recycling strategy, we aim to improve user experience and increase brand awareness for AiHuiShou.

We will focus on addressing users' pain points in recycling services by exploring more high-frequency and essential recycling scenarios, aiming to establish ourselves as the top-of-mind brand in consumer's mind.

Ultimately, our goal is to create one-stop circular consumption solution for consumers.

First, we will call more recycling scenarios, improve the penetration rate, and raise user awareness of recycling and trade-ins.

Due to low recycling rate, the 400 million units of new smartphones, tablets, laptops, and other consumer electronics that are shipped in China annually indicate a growing supply of idle devices with used value.

As part of our ongoing efforts, we integrate our trade-in services into new product sales scenarios on e-commerce and brands' official platforms.

By doing so, we create -- we cater to users' demands for product renewal and realize sustained growth in the long term.

Second, seize the opportunity in the current consumer environment with an increasing demand for used products online and offline.

In the first quarter, we achieved over 80% year-over-year 1P 2C sales growth through Paipai and on JD.com, live-streaming platforms, AiHuiShou stores, and official websites.

Meanwhile, as business owners need for ready-to-go retail products increases, we explore more opportunities based on the existing B2B service capabilities.

For instance, the dispersed retail touchpoints of new phone retailers can help us extend our sales channels and increase the proportion of 2C sales from our self-operated supply.

Third, leverage compliant refurbishment capabilities to enhance the grade of 1P recycled products.

We anticipate organic growth in the proportion of compliant refurbishment income within our product revenues.

By building more in-house capabilities, we expand the coverage of product categories, brands, models, and functions, et cetera.

On the sales side, we open the supply of those products to support both B2C sales and enrich the high-quality supply to business owners on PJT Marketplace.

Overall, this shall contribute to improving the gross profit margin of our 1P business.

In the long term, we aim to gain more market share through a combination of scenarios and supply chain capabilities.

In conclusion, we are confident in our strategic path for effective and long-term sustainable development.

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

Okay.

Hello, everyone.

We are pleased to report another profitable quarter under non-GAAP measures on revenues that once again reached the top end of our guidance.

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 first quarter, total revenues increased by 27.1% to CNY3,651.1 million, primarily driven by the strong growth in net product revenues.

Net product revenues increased by 28.5% to CNY3,309.8 million.

While net service revenues were $341.3 million, representing an increase of 15.1%.

Growth in net product revenues was primarily driven by an increase in the recycling channel expansion and sales of pre-owned consumer electronics through both online and offline channels, of which sales of 1P refurbished devices totaled CNY282.4 million, representing a year-over-year increase of 94.8%.

The increase in service revenues was primarily due to an increase in service revenues generated from PJT marketplaces and our multi-category recycling businesses.

The overall transaction value of marketplaces increased consistently when service revenues and the take rate of our marketplaces was 5.41% in the first quarter of 2024.

Now, let's discuss our operating expenses.

To provide greater clarity on changing our actual operating based expenses, we will also discuss our non-GAAP operating expenses, which better reflect how management views our results of operations.

The reconciliation of GAAP and non-GAAP results are available in our earnings release and the corresponding form 6-K, furnished with SEC.

Merchandise costs increased by 30.9% to CNY2,947.8 million, in line with the growth in product sales.

Gross margin at the group level was 19.3% in the first quarter.

Gross margin for our 1P business was 10.9%.

Fulfillment expenses increased by 16.3% to CNY309.8 million, excluding share-based compensation expenses, which we will refer to as SPC from here on.

Non-GAAP fulfillment expenses increased by 16.3% to CNY303.4 million.

Under the non-GAAP measures, the increase was primarily due to an increase in personnel expenses as we conducted more cycling and transaction activities compared with the same period of last year.

Non-GAAP fulfillment expenses as a percentage of total revenues decreased to 8.3% from 9.1%.

Sales and marketing expenses increased by 7.5% to CNY321.3 million, excluding SPC expenses and amortization of intangible assets and deferred costs resulting from assets and business acquisitions.

Non-GAAP selling and marketing expenses increased by 3.6% to CNY224.5 million, primarily due to an increase in expenses related to marketing activities.

Non-GAAP selling and marketing expenses as a percentage of total revenues decreased to 6.1% from 7.5%.

General and administrative expenses decreased by 3.4% to CNY33.8 million (sic - see press release, CNY73.8 million), excluding SPC expenses.

Non-GAAP G&A expenses increased by 1.2% to CNY58.1 million, primarily due to an increase in office-related expenses.

Non-GAAP G&A expenses as a percentage of total revenues decreased to 1.6% from 2%.

Technology and content expenses increased by 5.9% to $50.2 million, excluding SPC expenses and amortization of intangible assets and deferred costs resulting from assets and business acquisitions.

Non-GAAP technology and content expenses increased by 7.6% to CNY45.5 million, increased primarily due to an increase in personnel expenses in connection with the ongoing upgrade of the company's operations center and systems.

Non-GAAP technology and content expenses as a percentage of total revenues decreased to 1.2% from 1.5%.

As a result, our non-GAAP operating income was CNY80.2 million in the first quarter of 2024, representing a significant increase of 88.6% year on year.

Non-GAAP operating profit margin was 2.2%, compared to 1.5% in the first quarter of 2023.

As of March 31, 2024, cash and cash equivalents, restricted cash, short-term investments, and funds receivable from third-party payment service providers totaled CNY2.6 billion.

Our strong cash position safeguards a sustainable growth outlook.

Now turning to the business outlook for the second quarter of 2024, we anticipate total revenues to be between CNY3,670 million and CNY3,770 million, representing an increase of 23.8% to 27.2% year on year.

Please note that 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.

Operator, we are now ready to take questions.

(Operator Instructions) Joyce Ju, Bank of America.

(interpreted) Congrats on the solid results.

My first question is we have seen this year the national and local governments have issued action plans to promote large-scale replacement and trading of consumer products, which could potentially benefit growth of the AiHuiShou.

Could management help us understand the potential impact on sales and revenue, especially some quantitative colors?

Secondly, we note there are multiple growth drivers contributing to the company's 2024 revenue guidance.

Could management walk us through the key drivers of the guidance?

What's the growth assumptions behind each of the driver and such as AiHuiShou's own channel, JD.com and Apple respectively?

Also, what will be the growth outlook for the service revenue in 2024?

Many thanks.

(interpreted) Thank you for the question.

We believe that our primary growth driver in 2024 will continue to be our self-operated business, which contributes approximately 90% of our total revenues.

Domestically, we expect the annual growth rate of our core self-operated business to significantly outpace the broader consumer market in 2024.

This is for a few reasons.

First and foremost, our growth is fueled by our consumer-trusted AHS stores, which are strategically located in malls within prime commercial areas.

We continue our growth with dozens of new self-operated store openings in 2024, while improving the services and output of our stores.

Second, we are boosting our recycling penetration rate, which is currently in the low single digits through precise recycling scenarios integrated into new product sales on JD.com, supported by trading subsidies from the platform and brand.

Third, by collaborating with a series of premium high-frequency consumer brands, we bring more benefits to our users.

We are upgrading the AHS mini program, which offers richer and more day-to-day scenarios for users to visit our stores and try our second-hand consumer electronics and multi-category recycling services.

These scenarios consistently provide us with high-quality product sources.

In our collaboration with Apple's official trading program, we balance the pricing mechanism and target models at the recycling end.

In the full year 2024, we anticipate the product revenue coming from Apple's trading program to increase by approximately RMB1 billion.

For our open platform business, we have enhanced the full-service offerings for over 600,000 merchants, including professional business owners, electronic product franchisees, and mom-and-pop stores owners on PJT Marketplace.

These enhancements include empowering our users with retail business solutions and ample sources of retail supply, which consolidates our 1P high-quality second-hand products.

By generating additional value for both merchants and the industry, we are driving healthy growth in service revenues.

Thank you.

Was there a follow-up, Ms. Ju?

Junyun Chen, CITC.

Let me translate myself.

Congratulations for achieving solid growth for the Q1 results.

I have three questions.

The first question is, what is the company's long-term profit goals and what's the path to achieve that?

The second question is, we saw some pressure on the overall gross profit margin and 1P gross profit margin.

So how do you view the trend of the GP margin in the future?

The third question is, what's your comment on the cash position?

That's all my questions.

Thank you.

Okay, thank you.

So, Andres, I will take your questions.

To answer the first question, about gross profit and operating profit, first of all, we prioritized the variation of the non-GAAP operating profit margin, which has been improving over the past quarters.

We are currently in the educational stage of consumers recycling.

We serve users as the prices of the recycling site.

So relative cost of markup coupons at the recycling end are included in our merchandise costs, which affects the gross profits of our product revenues.

But we will comprehensively balance ourselves in the marketing expenses in order to improve our operating profits.

The promotion of 1P recycling affects our cost instead of expenses and its common characteristics of the secondhand recycling industry.

Looking specifically at the first quarter, the gross profit margin was 19.3%, an increase of 0.6% from the fourth quarter.

1P gross profit margin was 10.9%, an increase of 0.3% from the fourth quarter.

Excluding the negative impact of sales of overseas industries, the gross profit margin of our core recycling business has increased steadily, with a quarter-over-quarter increase of 1.6%.

In the medium to long term, the path to improving our non-GAAP operating profit margin, mainly comes from three aspects.

First, compliance and refurbishment.

We improve product standardization through our supply chain to gain more profits.

So gross profit margin of compliant refurbished products has remained stable above 20% for several consecutive quarters.

Second, increased proportion of retail sales revenue as we have established end-to-end coverage.

For online channels, JC.com supports reasonable product standards, adjustments on Paipai and we list more products with a broader price range to meet buyer's demand.

For offline channels, retail sales through our stores rapidly increased by 21% compared with the previous quarter.

As more consumers from medium- to low-tier cities are happy to visit our stores, not only for recycling, but also for buying used products.

Third, the scale effect.

Further advanced the efficiency of our operating expenses through the amplification of transaction volume and comprehensively brings an increase in non-GAAP operating profit margins.

In the first quarter of 2024, there was another loss in the income from operations below the operating income.

Looking at the full year of 2024, we expect a limited impact on our net income.

Regarding this particular other loss, in Q4 2023, we subscribed to shares of Ecosystem Enterprise Hong Kong IPO share impacted by market conditions.

Its stock price experienced a downward pressure in Q1, resulting in a loss in our other losses.

To answer your second question, in terms of net cash, at the end of March, we prepared RMB294 -- RMB295 million of inventory in advance to meet users' purchasing needs during the second quarter.

We sold the majority of them and received a payment in the second quarter.

As a result, it appears to be a timing difference.

In addition, regarding Apple trading businesses, we have 45 payable days, as mentioned in the last quarter.

And thanks to our efficient secondhand consumer electronics turnover capabilities, this business has a limited impact on our cash flow.

If we extend the time horizon, our operating cash flow will be consistent with the steady growth of our non-GAAP operating profit.

Thank you.

[Jiajing], do you have a follow-up question?

No, I don't.

Thank you.

Michael Kim, Zacks Small-Cap Research.

First, just in terms of capital management, be curious if you could provide some perspective on CapEx needs going forward, particularly as it relates to plans to continue to upgrade your operation centers and open new offices.

And then second, just kind of stepping back, and to increase shareholder return, particularly as it relates to share repurchases.

Thanks.

Okay, thank you for your questions.

We invest in our operation capabilities instead of investing heavily into assets.

So our business is in a light-asset model.

Regarding our CapEx, we expect RMB100,000 per new store opening.

For stores with multi-category recycling offerings, the CapEx per store will be a little bit higher.

For joint-operated stores, the CapEx are handled by our local partners.

On the processing end, as part of our long-term development strategy, we continue to enhance the automated inspection and grading capabilities of our regional operation centers.

The existing operation centers in Dongguan and Changzhou have incurred approximately RMB30 million each in CapEx for automation upgrades.

Currently, these two operation centers support 40% of the quality inspection demand for second-hand consumer electronics nationwide.

During daily operations, they maintain the flexibility in capacity utilization without operating at full capacity.

Regarding corporate finance activities, in March, we announced a 12-month buyback plan to purchase up to USD20 million of our ADSes following consultation with our Board of Directors.

In the long run, we will also consider distributing dividends at the end of this year, depending on our profitability.

We'll closely monitor efficient capital deployment into our operations and remain committed to developing our scenario supply chain capabilities.

We remain open to innovative investments that support our core business development and adhere to profit-driven strategies that deliver sustainable value to our shareholders and users.

Thank you.

Mr. Kim, do you have a follow-up question?

No, that was it.

Thanks for taking my question.

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

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 email us at iratrenew.com. Have a good day.

This conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call.

The interpreter was provided by the company sponsoring this event.