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Operator: Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to ATRenew Inc. Second 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. 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 at the company. Please go ahead, sir.

Jeremy Ji: Thank you. Hello, everyone, and welcome to ATRenew’s Second Quarter 2023 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 will open the call to questions from analysts. The Q2 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 of 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. Please note that management are joining the call from different locations.

We’ll try to fix it if there is any connectivity issue. Let me cover the 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 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 note that unless otherwise stated, all figures mentioned during this conference call are in RMBand 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.

Kerry Chen: [Foreign Language] Hello, everyone, and welcome to ATRenew’s Second Quarter 2023 Earnings Conference Call. [Foreign Language] During the second quarter, we made notable progress in terms of both revenue and profitability. Our total revenues reached RMB2,960 million, representing a year-over-year increase of 38.1% and surpassing the high end of our guidance. As we navigated the post-pandemic era, our 1Q recycling business rapidly rebounded and our marketplaces for a healthy recovery, demonstrating the resilience of the circular business model. In terms of profitability, the adjusted operating income increased to RMB52 million, and the adjusted operating margin further expanded to 1.8%. These improvements fully align with our aims of enhancing the secondhand industry’s value chain and optimizing operational efficiencies.

[Foreign Language] Our strategic direction remains consistent. On the one hand, we aim to achieve steady growth in core consumer electronics businesses. Among them, the escalating 1P recycling channels, including AHS recycled stores and official website provide a better user experience, ensure firsthand sources of supply and acquire more market share. We also continue to strengthen cooperation with e-commerce pioneers like JD.com and leading brands such as Apple to advance their trading service experience in retail scenarios. On the other hand, we seek to unleash the potential through continuous innovations. On reflecting 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 goods recycling services in communities. We guide users through AHS recycle app, WeChat mini programs and encourage more customers to visit our physical stores to sell more high residual value products. [Foreign Language] Next, I will share more color from three aspects. First, key growth drivers of the core business. Second, operational efficiency improvement. And third, updates on our innovative businesses. [Foreign Language] In terms of growth drivers, 1P product revenue grew rapidly by 42.2% year-over-year to reach RMB2,637 million in the second quarter. This increase was primarily driven by the continuing upsurge in the trend for selling old for new and buying pre-owned products even when consumption growth flattened.

Another factor was the scaling sales of our refurbished products. [Foreign Language] Specifically on the recycling front, we saw a significant year-on-year improvements in both storefronts and JD recycling channels. We utilized our extensive network of 1,944 off-line stores nationwide to further develop consumer outreach and effectively improve user satisfaction with price quotations and services, of which the 1,462 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 116.9% year-on-year growth — revenue growth in the second quarter. In addition to Apple products, some Android models were also popular with JD customers.

On the selling front, having successfully navigated the challenges posed by the pandemic, merchant users’ transaction activities kept healthy. As for first-party retail distribution, we started the compliance refurbishment business and the RERE refurb brand following the release of relevant regulatory guidance in April 2022. Revenue from retaining RERE refurb devices totaled RMB170 million in the second quarter, representing a notable increase of 22% sequentially, further fulfilling consumers’ need for premium secondhand devices. [Foreign Language] Our platform service revenues rebounded at 12.1% year-on-year to RMB327 million in the second quarter. The overall take rates jumped 83 basis points to 5.37%. The platform business has achieved healthy growth even as our strategic focus shifted towards first-party businesses.

PJT marketplace advanced its market penetration efforts during the second quarter. This involves exploring more local buyers and seller channels and optimizing online transaction scheduling. As a result, we enhanced user stickiness and monetization capability. In terms of pipeline marketplace, its POP business fostered concurrent expansion in both scale and profitability and the JD flow 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 2023, 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. While lowering the participation threshold for merchants to supply goods, we will ensure product quality and buyers’ experience through warehousing quality inspection.

[Foreign Language] As for operational efficiency improvement, we widened our operating margin on a more comprehensive supply chain and more advanced automated operational efficiency. During the second quarter, 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% and 17% year-on-year, respectively. The cost saved in operation centers were attributable to, one, scale effects and reduced inspection errors following the use of our automated facilities in South China and Eastern China. And two, the optimization of the operation station network and related expenses. In addition, we credited the savings in logistics related expenses in two factors.

For one, it’s the deepened relationship with JD Logistics, shipping out solutions for better tailor-made for pre-owned good transactions. The other is we leverage supply chain algorithms to better match orders with our regional operation centers capacity, warehousing allocation and logistics solutions. This eases our operational decision-making and the overall logistics expenses. [Foreign Language] 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 second Apple trading service provider in the Mainland China market. We provide supply chain support for iPhone trading and iPhone upgrade program.

Users can place ATI service orders via Apple Docs or 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 learn-out debut. [Foreign Language] In terms of the new category recycling, GMV and service capability continue to scale. During the quarter, GMV excluding photography and video equipment, rapidly exceeded RMB200 million. Among these, luxury goods and gold recycling transaction volumes increased by 60% and nearly 100% compared with this first quarter, respectively.

We also polished our store service capabilities. These include opening new AHS iconic stores in first and second-tier cities with competitive pricing quotations, on-site luxury goods quality inspection and shortened waiting period for customers. For a larger number of existing agent stores, we provide standardized multi-category recycling services supported by IT systems. In the second 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 brands. AHS recycle has cooperated with brands such as Cotton Times, CapitaLand, Winter Line, Freshippo and Tencent Charity center.

We will attach great importance to synergies with consumer brands to form the recycling mentality. [Foreign Language] 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 three consecutive years. During the three-year period, we continuously downside greenhouse gas emission intensity. On the social front, we have enhanced our quality control system obtaining ISO 9001 certification during the reporting period. We provided training to 10,000 merchants, strengthening value corporation along the industry chain. In terms of governance, the Board structure of the company has been further diversified and we have made losses in internal controls and risk management to realize robust operations in the long run.

[Foreign Language] Now I’d like to turn the call over to our CFO, Rex for financial updates.

Rex Chen: Hello, everyone. We are pleased to report another profitable quarter. As we generated a new record on 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 fourth quarter of 2022. Now let’s take a detailed look at the financials. Please note, as such, all amounts are in RMBand our comparisons on a year-over-year basis, unless otherwise stated. In the second quarter, total revenues increased by 38.1% to RMB2963.7 million, mainly driven by growth in net product revenues.

Net product revenues increased by 42.2% to RMB2636.7 million while net service revenues was RMB327 million, representing an increase of 12.1%. Growth in net product revenues was primarily driven by an increase in the sales of prolonged consumer electronics, including the sales of RMB191 million refurbished devices. The increase in service revenues was primarily due to the revitalizing business of our marketplaces from the COVID-19 pandemics and an increase in the overall commission rate, which grew to 5.37% from 4.54%. Next turning to 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 reflect how the management is our results of operations.

The reconciliations of GAAP and non-GAAP results are available in our earnings release and in the corresponding Form 6-K furnished with the SEC. Merchandise costs increased by 40.6% to RMB2325.8 million. The increase was in line with the growth in product sales revenues. Gross margin at the group level was 21.5% in the second quarter. Gross margin for our 1P business was 11.8%. Fulfillment expenses decreased by 2.3% to RMB268.8 million. Excluding share-based compensation expenses, which we will refer to as SBC from here. Non-GAAP fulfillment expenses decreased by 2.2% to RMB261.8 million. Under the non-GAAP measures, the decrease was primarily due to the decrease in logistics expenses and operations center-related expenses as we kept optimizing our store and operating 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. Selling and marketing expenses increased by 14.3% to RMB335.3 million, 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 first, an increase in advertising expenses and the promotional campaign related expenses, second, an increase in commission expenses in relation to channel service fees. And third, an increase in office and 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 the last year. G&A expenses increased by 27.2% to RMB57.5 million.

Excluding SBC expenses, non-GAAP G&A expenses increased by 37.5% to RMB39.6 million, primarily due to, first, an increase in expected credit loss relating to credit risk, second, an increasing professional services and consulting fees. The increase was partially offset by a decrease in personnel costs. Non-GAAP G&A expenses as a percentage of total revenues was 1.3%, the same as a year ago. Technology and content expenses decreased by 24.6% to RMB45 million, excluding SBC expenses, and amortization of intangible assets, non-GAAP technology and content expenses decreased by 26.8% 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.

As a result, our non-GAAP operating income was RMB52 million in the second quarter of 2023. Non-GAAP operating profit margin was 1.8%, marketing 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 RMB2.5 billion. Our sufficient cash on hand safeguards a sustainable growth outlook. During the second quarter of 2023, we repurchased 2.3 million ADSs in the over market for a total cash consideration of $6.4 million. As of June 30, 2023, we had repurchased a total of 12.3 million ADSs for approximately $44.4 million under our share repurchase program.

Now turning to outlook. For the third quarter of 2023, the company currently expects its total revenues to be between RMB3,150 million and RMB3,250 million. This forecast already 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: [Operator Instructions] And the first question comes from Weiting Tang with Goldman Sachs.

Weiting Tang: [Foreign Language] Thank you management regarding the recent launch of [Apple’s trade-in] (ph) service, which supports 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.

Kerry Chen: [Foreign Language] Thank you for the question. We are pleased to announce that we have become Apple’s second official trade-in 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 products and service accessibility, prioritizing user privacy and data security and recycling, delivering unparalleled user experience and reducing the cost of decision-making as well as the economic cost of operating devices. [Foreign Language] Specifically, Apple has two alternative processes for recycling in its official retail channels in China. 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 eraser and standardized quality checks before the end distribution. This business is carried out in the 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. [Foreign Language] We expect to escalate our tax and service capacity in the third quarter and the recycling volume to increase following the arrival of the new iPhone lineup in September and during its major shipments in the fourth quarter. With operations and margins stabilizing next year, we anticipate an annual recycling volume of RMB1 billion to RMB1.5 billion from this new channel based on historical market data.

[Foreign Language] In addition to the trade-in support license, we’ve recently been authorized to bid for and distribute Apple’s phones. These two collaborations with Apple can further enhance our access to high-quality supplies and allow us to service mainstream customers in key scenarios. These are also recognitions of our supply chain capabilities, privacy protection, compliance and corporate governance. The breakthrough in collaboration with iPhone or its phone manufacturers, signify a major milestone apart from our strategic partnership with e-commerce players. [Foreign Language] Thank you for the question.

Operator: And the next question comes from Joyce Ju with Bank of America.

Joyce Ju: [Foreign Language] We have seen the company actually enhancing its refurbishment for a couple of quarters in a row in the performance of the second quarter we have seen this business has made a quite positive contribution to the company’s 1P gross profit. Could the management team help provide more insight into the — this like new business, can help us to understand its growth potential, like, for example, like what percentage of like revenue that can contribute to our 1P business. Thanks.

Kerry Chen: [Foreign Language] Since the launch in April last year, our RERE refurb labeled products have continuously improved our industry value chain. During the second quarter, we replicated the capabilities from Dongguan Operations Center in South China to Changzhou, Wuhan, Chengdu and Tianjin operation centers with value-added capacity covering major regional markets. We also recondition broader product categories, including tablets, laptops, smart watches, earphones, et cetera, meeting the demand for high-quality products from both consumers and merchants. [Foreign Language] During the second quarter, total sales of refurbished products exceeded RMB190 million, accounting for 7.2% of 1P product revenues. This percentage increased by 1.6% quarter-on-quarter and 4.5% year-over-year.

We believe that more of our 1P source products can go through our own facilities for reconditioning, the common quality products while bringing greater value to the industrial chain. [Foreign Language] 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 industrial associations to promote the compliance and healthy development of the industrial chain. In the long run, we believe that the proportion of private label RERE refurb in 1P product revenue can be increased to 30% and even more. [Foreign Language] Thank you.

Operator: [Operator Instructions] And the next question comes from [indiscernible]. Please go ahead. Your line is live.

Unidentified Analyst: [Foreign Language] Thanks management for the sharing and congratulations on a strong quarter. Could you provide more color and breakdown regarding your profit realization and profit outlook? And how will your revenue mix evolve in the future?

Rex Chen: Okay. Thank you for the question. I will take you through this. Our non-GAAP operating margin was 1.8% in the second quarter, surpassing the 1.5% full-year target, we discussed earlier. This was due to our effective execution towards improving gross margin and operational efficiency and improved 1P gross margin was mainly attributable to RERE refurbed products whose gross margin exceeds set of regular 1P B2C products by 5% basis points. We anticipate the total sales of RERE refurbed products at RMB700 million, adding our 1P gross margin gradually in 2023. Credit improvements in operational efficiencies to smart storage management and automated testing technologies. We optimize order allocation to operation centers with the help of the data algorithms and condense the number of small city level operation stations.

As a result, the service fees, logistic expenses and packaging fees were cut down as we upgrade our automated inspection system to measure our losses related to inspection decreased significantly. 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 exceed 1.5% and we aim to achieve a basement of 1 percentage point every year. On revenue mix, we have been shifting our focus in the strategic resources towards first-party businesses since the second half of 2022 to achieve more consumable operations facing complex environment.

We aim at catering to diversified user needs, enhancing the recycling experiences and enriching our quality pre-owned product listing. This transition has like to downsize the revenue mix for marketplace service revenues. However, our platform business continues to exhibit healthy growth for this year. We expect that our platforms overall to 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 1P product sales revenue will continue to dominate our revenue structure, maintaining a year-over-year growth rate of over 30%. Thank you.

Operator: Thank you and there are no further questions at this time. I would like to hand the conference back over to management for any closing comments.

Jeremy Ji: Thank you all again for joining us. A replay of today’s call will be available on our website shortly, followed by a transcript ready. If you have any additional questions, please feel free to e-mail us at ir@atrenew.com. Have a good day.

Kerry Chen: Thank you.