Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to ATRenew's Incorporated First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after managements' prepared remarks. Please note that this event is being recorded. Now I'd like to 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. Hello, everyone, and welcome to ATRenew's first quarter 2022 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. Our first quarter 2022 financial results were released earlier today. The earnings release and investor slides accompanying this call are available on our IR website at ir.atrenew.com. There will also be a transcript following this call for your convenience. For today's agenda, Kerry will share his thoughts on 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 since Shanghai is under lockdown, management joined today's conference call via different lines in Shanghai. Kindly, excuse us if there is any connectivity issue during the call. Some of the information you will hear during our discussion today will consists of forward-looking statements and I refer you to our Safe Harbor statements in the earnings press release. Any forward-looking statements that ATRenew makes on this call are based on assumptions as of today and that ATRenew does not take any obligations to update our assumptions on these statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. 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 Kerry for business and strategy updates.

Hello, everyone, and thank you for joining us on our first quarter earnings conference call. In the first quarter, we realized rapid growth during a very challenging period of time during the highly transmittable Omicron variant. GMV for the first quarter increased by 51.6% year-over-year to RMB9.38 billion, and the total revenue increased by 45.7% year-over-year to RMB2.21 billion, both exceeding our guidance. Starting in mid-March, we faced headwinds of the pandemic. Against this difficult backdrop and off-season of the Spring Festival, we are delighted to announce that we have extended our past quarter's strong performance into this quarter to achieve non-GAAP operating profit. In addition, we recorded a positive cash flow from operating activities of RMB120 million. As we navigate the pandemic challenges, I would like to address two issues in today's earnings call. First, how do we respond to the transitory difficulties caused by the pandemic? Second, what is the outlook for consumer demand in the longer term? And how can we seize opportunities in the post-pandemic circular economy? On the first issue regarding the pandemic and our reaction, there are three characteristics of our business which I trust many of our audience today are familiar with. First, our online business constitutes a large proportion of our overall business. Specifically, PJT and Paipai Marketplaces are both online training platforms and therefore experienced a limited impact from offline lockdown. AHS Recycle, though characterized by offline stores, also received a large proportion of its orders online. Taking the first quarter as an example, 58% of recycling orders were placed online through JD's app, AHS Recycle's app, and mini program. GMV for the orders fulfilled through our offline stores contributed 14.5% of total GMV in the first quarter. Second, our offline stores are located throughout China. As a result of our…

Thanks, Kerry, and hello, everyone. We are very pleased to report that our first quarter revenue exceeded our previous guidance despite the macroeconomic headwinds. I will start by sharing some of our financial highlights before we go into a more detailed look at the numbers. 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 of 2022, despite the fact that it was in OPEC we delivered 45.7% revenue growth to achieve total revenues of over RMB2.2 billion, exceeding the high end of our previous guidance range provided in the fourth quarter earnings conference call. Total GMV grew by 51.6% to RMB9.4 billion, driven by strong growth in both product sales GMV and online marketplace GMV, which was 57.1% and 50%, respectively. In this quarter, the commission rate of our third-party marketplaces was 4.1% at the group level, relatively stable compared to results of the first quarter 2021. Gross margin at the group level was 25.7% in the first quarter. Gross margin for our 1P business was 14.1%. In the first quarter, we meaningfully optimized cost structure compared with the same period last year. This is seen in GAAP fulfillment expenses, selling and marketing expenses, general and administrative expenses as well as technology and content expenses. As such, we are delighted to report an operating margin of 7.2% in the non-GAAP measures. Now, let's take a detailed look at the financials. In the first quarter, total revenues increased by 45.7% to RMB2,206.5 million. Net product revenues increased by 45.7% to RMB1,908.9 million, while net service revenues increased by 46% to RMB297.6 million. Growth in net product revenues were driven by continued increases in the density of our AHS stores, our reinforced trading collaboration with JD.com, and our…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Wen Li of Goldman Sachs. Please go ahead.

Thank you, management, for taking my question, and congratulations on the solid 1Q results. Can management share with us the COVID impact on supply chain and consumer demand across business lines, especially in Shanghai where the headquarter is located? And what are the key assumptions behind our second quarter guidance? So looking forward, what are our expectations on the second half of 2022? Thank you.

During the quarter, the impacts of the pandemic were limited to several provincial capital cities, including Sichuan, Tianjin, Changchun and Tier 1 cities such as Shanghai and Shenzhen, with a stronger impact on offline recycling business. We consider this quarter's results as only a cross-sectional view of the pandemic's overall influence on our business. From the perspective of our C2B recycling business, starting in mid-March, regional lockdowns posed short-term challenges for our business in Shanghai. To comply with the zero COVID policy, our Shanghai-based employees started to work from home and all offline stores in Shanghai were temporarily closed. Although our 1,400 AHS stores are located throughout the country, the most productive ones are in the 600 self-operated stores, mainly located in the first and second-tier cities, where users have stronger recycling awareness and the unit price is high, but they are negatively affected by the lockdown. We have 102 stores in Shanghai, 89 in Beijing and 56 in Shenzhen, respectively. At present, Shenzhen has returned to normal, but the control measures in Beijing and Shanghai are still continuing. That is to say, in the second quarter, we estimate that the operation of one-third of self-operated stores has been affected to varying degrees. For our B2B platform business, strict pandemic control policies disrupted our interactions with merchants. Although our operating centers and city-level operation stations are geographically dispersed and can support one another during lockdowns, which reduced some pressure on fulfillment, we still face significant difficulties in terms of operations and expanding local merchant coverage. In addition, soft consumer demand for new phones also affected the volume of supply of pre-owned devices for supply merchants, especially for the number of cellphones ordered shipped out during the first quarter. For the B2C retail business, although we faced headwinds, including the decline in consumer spending and recent logistics interruptions, we are optimistic about consumers' need for good value products, a particular virtue in shoppers' eyes during a recession. We also feel confident that in the mid to long-term, compliant refurbishment at scale can increase the proportion of goods recycled from our service offerings that are still to go for D2C retail. This helps to include more dots to the industrial chain and realize the optimization of product quality, as well as profit from value-added services. We have also seen hopeful signs of a recovery. According to the Shanghai officials, starting June 1, pandemic controls will be downgraded to a regular level and a gradual recovery of work and life is expected. Although we are still facing challenges in the near term, we are very confident in our business model, the resilience and flexibility of our supply chain, and additional margin improvement from compliant refurbishment.

Thank you. The next question comes from Joyce Ju of Bank of America. Please go ahead.

I will translate by myself. I would like to ask how is the progress in the first quarter of our city-level service integration, as it was the strategic focus of the company mentioned for this year, but we are facing a new macro situation, which you see in challenging economy and also the risk of pandemic new wave. So we would like to know like if the management are going to like have any change or like an adjustment in terms of those service integration strategies or the launch of like new cellphone nationwide? Thanks a lot.

Thank you. We will be even more meticulous when assessing market conditions. Considering lockdown restrictions are still in place in some parts of China, the impacts created by the pandemic are ongoing. Therefore, we will increase our focus on cost management, efficiency improvement and healthy cash flow this year. And our goal to achieve a positive non-GAAP operating income for this year remains unchanged. In terms of store network expansion, we are targeting the same number, opening 200 to 300 new stores for this year, with a more disciplined approach, while prioritizing the opening of jointly operated stores. This enables us to expand our branded recycling network nationwide, sharing profits while handling risks together with local partners. On the third-party merchants and retail end, we continue to acquire new local customers through city-level service integration, enhancing the penetration rate of the secondhand market through the rollout of intracity business. Among the 16 cities where growth exceeded the nationwide average, we achieved high double-digit year-over-year growth of our C2B plus B2B business in Suzhou, Hefei, Kunming, and Shaodong. Growth momentum was especially strong in Shaodong, where we achieved about 120% year-over-year growth in January for C2B business, and almost 200% year-over-year growth in January for B2B business. These are our benchmarks for implementing the city-level service integration model in terms of sourcing supply and penetrating local markets. The pandemic remains a challenge for us. In April, the recurrence led to stricter controls in many regions across China. We faced interruptions in both connecting with merchants and providing platform services on the retail front. Growth temporarily slowed down in those pilot cities, but we saw GMV and other volumes in those cities demonstrated higher resilience compared with the national average. We pay more attention to our own operating efficiency. For sales and marketing expenses, we will further optimize our cost. Instead of spending on short-term promotions, we will pivot to the longer term by further investing in building the brand equity of AHS Recycle and acquiring greater consumer mind share by providing timely and quality services to our customers. In addition, we work well in controlling our back office fees, in particular, general and administration expenses. We have kept these at a low level for four consecutive quarters by implementing our compact, but organized structure for our mid and back offices. Macro headwinds and consumption slowdown are challenging issues to almost every industry. In the long run, what we see is a huge and underserved secondhand electronic transaction and service market. As we mentioned earlier, we believe in our core strategies of expanding the city-level service integration model to increase the penetration rate, using a tiered store strategy to offer differentiated services, continuing to improve cost efficiency by investing in automated quality inspection technology and seizing the chance to profit from the open policy window in the electronics refurbishment market.

Thank you.

Thank you.

[Operator Instructions] The next question comes from Jin Yu of Guotai Junan International. Please go ahead.

In the PR sharing, the management mentioned the new recycling policy of the industry. Are there any specific business plans to share with us?

Okay. Thank you, Jin. So I will take this question. In Apple, since they issued the first guidelines for electronic product refurbishment, which for the first time clarified the boundary of engaging in compliance refurbishments, including the source of goods must be legal, the purpose of repairs to the stores, the function and tariffs, official accessories, also third-party accessories with quality assurance can be used such as batteries and screens of third-party brands. Personal data must be strictly clear. When recycling, products should be clearly marked as pre-owned or refurbished to avoid confusion. Quality warranty should be included. Traditionally, the repair and refurbishment industry had many holdbacks. The refurbishment was mishandled by merchants as there were no relevant regulations. Merchants were worried about potential risks and they operate on a small scale. Meanwhile, mobile phone brand manufacturers control the supply of repairing components. Since they do not recognize the use of third-party components, the supply of high-quality goods suitable for 2C sales in the market is insufficient. As a leading platform, ATRenew has always carried out operations cautiously to avoid selling risky products. And since it had little participation in refurbishment, it has always lacked that segment of the industry chain profit. We believe the guidelines for refurbishment can benefit the industry and the company. More merchants can conduct repair and refurbishment with confidence, which will help expand the scale of recycling and sales. We also aim to save such opportunity and hail our plan. We're here to combine repair and refurbishment on a large scale and increase profits reasonably. Previously, our self-recycling products and third-party supplies were not repaired or refurbished. Hence, we only earned gross profit in service fees from testing and reselling. Our value chain lacked maintenance and better analytics. Recently, we conducted our pilot project, which…

Thank you. The next question is from [Bonnie Liu] of China Renaissance. Please go ahead.

Thank you management for taking my question. We saw some [indiscernible] longer term? And if so, how are you planning to reduce the impact? Thank you.

I'll take this question. In the first quarter, especially since March, we see that OEMs are facing greater downward pressure on new phone shipments, and the replacement cycle is also expanding from about a year to more than 20 months now. But we do have several advantages against downside risk. The total addressable market of the secondhand consumer electronics is huge, and now we only have obtained some of it. Thus, we are poised to further expand our penetration rate. Besides, we believe that consumers demand for instant cash back increases as economic growth becomes flattish, and there are opportunities for converting more recycling orders. Secondly, the key brand we serve is still growing. The main model we recycle is Apple, which accounted for 45% of the total C2B plus B2B recycling transaction volume in 2021. Compared with other brands, Apple has maintained a higher growth rate of new device shipments. So our recycling fundamental is relatively stable. This year, the pressure on new phone shipment is mainly from domestic brands. In this case, we work closely with JD.com to provide brands with trading solutions as a better promotion measure. Thirdly, we are also trying to deploy multi-category recycling beyond mobile phones, such as luxury goods, camera equipment and other high-value products to meet customers' varied demand for recycling. We believe that to carry out multi-category recycling, the most important things are brand trust, delivery scenarios, and quality inspection capabilities. AHS Recycle has a long-term accumulation of brand recognition, and we believe that multi-category is an extension of our recycling brand and services. Also, our national stores have set a good basis for fulfillment, and we do not have to budget for extra investment to handle the non-3C categories. In terms of quality inspection, we aim to achieve it through self-build or collaboration with specialty retailers. As such, we trust online quotation platform line fulfillment makes the best combination of recycling services. Although new phone shipment flattened, we remain prudently optimistic about our business outlook. Thank you.

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

Thank you. Thank you all, again for joining us. A replay of today's call will be available on our website shortly. If you have any additional questions, please feel free to email us at ir@atrenew.com. Thank you.

Thank you.

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