ATRenew Inc.

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to ATRenew, Inc.' 's first 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 Gee, Director of Corporate Development and Investor Relations of the company. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to ATB News first quarter 2023 earnings conference call. Speaking first today is Kerry Chen, our founder, chairman, and CEO. And he will be followed by Rex Chen from the CFO. After that, we'll open the call to questions from analysts. The financial results we released earlier today, the earnings released and investors' lives accompanying this call are available at our IR website, ir.atrenew.com. There will also be a transcript for this call for your convenience in English and Chinese. For today's agenda, Kerry will share his thoughts of the quarter's performance and the business strategy. followed by Rex, who will address the financial highlights. Both Kerry and Rex will join the Q&A session. Let me cover the safe harbor statements. Some of the information you will hear during our discussion today will consist of forward-looking statements, and I'll refer you to our safe harbor statements in the earliest press release. Any forward-looking statements that management makes on this call are based on assumptions as of today, and that's AT&T news does not take any allegations to upgrade our assumptions on these statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earliest 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 are in R&D, and all comparisons are on year-over-year budgets. I'd now like to turn the call over to Kerry for business and strategy updates.

各位投資者和分析師,大家好。 歡迎各位參加萬物新生集團2023年第一季度業績電話會。 Hello, everyone, and welcome to A3 News' first quarter 2023 earnings conference call. 28.72 billion yuan in total revenue, exceeding the high of the last quarter. At the same time, we once again achieved a profit breakthrough, achieving a net gap of more than 44 million yuan in net profit. The net net profit rate has reached 1.5%. In the first quarter of this fiscal year, the company's performance surpassed the traditional short-term expectations of the auto industry, achieving a super target of income and profit.

During the first quarter, the rapid recovery of offline retail and logistics led to a resurgence in consumer recycling and consumption demand. As a result, our year-over-year revenue growth rebounded to 30.2%, and we achieved total revenues of $2,872 million, exceeding the high end of our guidance. Meanwhile, our non-GAAP operating income reached a new record of over $44 million, with a resented and adjusted operating margin of 1.5%. Our first quarter of demand profit has exceeded expectations in what is truly an off-season for the back-end industry.

Today, I will talk about three aspects of the reason why the company's performance has reached its ultimate goal. The first is the growth and dynamic recovery of the main business. The growth and dynamic recovery of the main business. The growth and dynamic recovery of the main business.

I'd like to share with you three main drivers which contributed to our top-line growth rebound. The first is the growth momentum of 1P Business, which geared us again. The recovery of face-to-face recycling fulfillment at our stores, the strengthened brand awareness of the AHS Recycle brand, and an increase in compliance refurbishment product sales to consumers all contributed to the growth of product revenues.

To be more specific, at the recovery stage, we have gained external benefits from the consumer feedback. With Jindong as the representative e-commerce partner, we have increased subsidies. With Apple as the representative brand supplier, we have also reduced sales of some brands, which has been welcomed by consumers. I would like to emphasize here that although the market of consumer building products is low, the sales of high-end products as the representative of Apple are still stable and strong. Because Apple's brand products If we zoom in a bit, we encountered a tailwind on the sourcing end which was generated by the rebound of consumer activity after the reopening. Our e-commerce partners, such as JD.com,

have increased their consumer subsidies, while brand manufacturers, including Apple, have offered discounts and promotions on specific models. To add more color, Apple products account for 45% of our total businesses and 60% of our 1T business. Out of the popularity and resilience that Apple products have, our core recycling business remains stable and has been relatively less prone to the headwind of decreasing new device shipments.

For the interior, we focus on the strong construction of the front-end through the distribution of the national 269 cities' 1,935 second-hand recycling sites. Enhance the competition of our face-to-face recycling methods. Enhance the user confidence of the second-hand recycling main brand. Lock in more high-quality C-section recycling products. The recent user satisfaction core indicator survey results show that and the steady growth of the recommended value of the service recovery service. We maintain the scientific choice to open the store and build a service benchmark for the store in the high-end city. By collaborating with the store, we can increase the coverage and delivery range of the market. Combining the strong environment inside and outside, we can see in the first record that the recovery of EP has been significantly improved, and the unit ratio has increased by 13%.

While capitalizing on these recent favorable developments, we also consolidated our own operational capabilities, especially on the sourcing front. We strengthened our competitive mode in offline recycling via 1,935 physical stores across 269 cities nationwide, enhanced the brand awareness of AHS Recycle and locked in more high-quality supplies from consumers. According to a recent survey, the net promoter score of our offline store recycling services has steadily increased. We continue to identify suitable locations for new stores, and we aim to make our directly operated stores the benchmark for customer service in popular cities. Meanwhile, we have further expanded fulfillment coverage by empowering more franchisees. As a result, we have seen a rapid increase in 1P recycling transactions in the first quarter of 2023. The order volume increased by 13% sequentially and 42% year-on-year. Overall, 1P product revenue increased by 34.9% to $2,575 million and continues to be our core main organic growth driver.

In the industry chain growth and sales, we strengthen the selection of products suitable for maintenance growth in a batch of products. By standardizing the preparation, let more products meet the standards of 2C sales, and strengthen the business capability of free brand change machines. In the first quarter, the sales volume of change machines increased to RMB1.45 billion, and the profit rate reached 25%. Among them, the 2C sales volume increased to RMB1.4 billion. In terms of refreshability, in addition to the Huanan Business Center, which has already formed a large-scale production capacity, we will also copy the He Gui refreshability in the Huadong Business Center in the near future, and carry out He Gui refreshability in-house expansion, including laptop screen and battery maintenance, gradually realize the needs of users from all over the country, and more to meet the needs of Western users for high-quality second-hand products.

In terms of adding value to the supply chain, we continue to leverage our 1T sources to select products that are suitable for refurbishment. Through standardized, compliant refurbishment practices, we brought more products into alignment with consumer standards and further consolidated the service capability for our RERU refurb business. In the first quarter, overall sales of refurbished devices increased to 145 million, of which to consumer sales increased to 140 million. Notably, the overall gross margin of refurbished devices was 25%. In addition, we duplicated such capabilities in our East China operation center to supplement our capacity in South China. This upgrade was undertaken in tandem with an expansion of our refurbished product categories. We expect that this increase in total production capacity will allow us to satisfy the majority of user demand for high-quality pre-owned products nationwide.

B2B Tai Chi Tang registered users broke through 447,000. turning to our platform business. Service revenue in the first quarter was nearly 300 million, which was basically flat compared to the same period last year. However, take rate increased from 4.15% to 5.46%.

We have adopted a mixed approach to the platform businesses, based on each service's monetization rate. On the one hand, we have increased take rates for key services like quality inspection, logistics, and warehousing. On the other hand, we have reduced both our investments into the sales-off business and merchant rebates for businesses with low monetization rates. Our primary focus is serving high-quality, high-stakenness merchant users while facilitating high-quality transactions. The number of registered users of BJT Marketplace, our B2B business, now exceeds 447,000, while our core business take rate has increased by 1.8% on a yearly basis.

For the B2C retail business, we have strengthened the platform governance, improved quality control of cross-border products, and cooperated with the domestic知名检测机构每周对平台商品进行抽检, the coverage rate of 3D-based platform abstract products is doubled, and a higher requirement for practical service standards has been raised, such as Q1's delay in delivery rate is reduced by 7%, ensuring the joint development of the POP business scale and health. Due to the more EPUs brought by Hefei Fanxing, we use more excellent second-hand goods to ensure the purchase and purchase experience of C-end users. For PiPi, the B2C business offering, we have further strengthened our platform governance.

This is seen in improved product quality control for pop products and the timeliness of services. We collaborate with well-known inspection institutions for weekly spot checks, Bought check coverage of consumer products doubled. Ship-out efficiency was improved. For example, the late ship-out rate in the first quarter has decreased by 7% sequentially. This will ensure stable growth in both the quantity and the quality for our pop business. Furthermore, since we have built up capacity for compliance refurbishment, we provide consumers with highly satisfying shopping and after-sales service experiences. As a result, retail distribution as a percentage of core wanted business increased by 96 year-over-year to 22.2%.

mainly distributed in cities such as Shanghai, Beijing, Guangzhou, Hangzhou, and Chongqing. From the category of luxury goods such as gold, rice wine, and other types, the recovery and transformation needs of multiple service users. With the increase in the number of products delivered to stores in multiple types, we expect to further introduce the advantage of Jindong recovery, online and offline. Our multi-type recovery is transparent and safe. The second growth contributor is the escalating new category recycling business. As of March 31st, we leveraged over 100 core AHS stores to successfully fulfill new category recycling orders without extra investment.

These stores are mainly located in Shanghai, Beijing, Guangzhou, Hangzhou, and Chongqing. We continue to improve our product mix, covering luxury goods, gold, prestigious liquor, etc., when meeting consumers' demand for cashback. As our fulfillment network expands, we expect to further leverage the high-quality and accurate traffic from JD.com, thus amplifying our online to offline capabilities. We also amplify AHS Recycle's brand influence with safe, fairly priced, and hassle-free offering. As a result, multiple new categories made delightful progress. For example, mostly GMV for non-electronic new categories recycling had surpassed 70 million RMB.

The fee rate of ManGap has decreased by 3.7% to 9.1%. We are proud of ManGap. It represents the first-class operating efficiency in the industry and provides standardized operating and trading platform support for hundreds of thousands of customers. At present, we are cooperating with the industry-leading automated unmanned detection module line at two operating centers in Huanan and Huadong. Through AI big data algorithm, we conduct training to detect modules. to achieve the accurate detection and marking of the appearance, slope, curve, line, demolition, surface construction, replacement, and other problems, and to reflect the level of the product and the corresponding order and price process. The automation of the flow line of no-man's work avoids the large amount of error in the traditional artificial inspection, reduces the cost of personnel training, and detects the loss caused by the quality of the product, and improves the standardization and processing efficiency of non-marked products from the processing point. The third driver is continued improvement in operational efficiency, mainly attributable to automated quality inspection technology upgrades.

Nungat fulfillment expenses as a percentage of total net revenues decreased by 3.7 percentage points year on year to 9.1% in the first quarter. We are proud of our operation centers. They deliver best-in-class operational efficiency and empower hundreds of thousands of merchants with standardized operational and transactional capabilities. The automated operation centers in South China and East China are equipped with our industry-leading systems. Its automated inspection lines incorporate AI and big data algorithms for inspection training, which achieves precise detection and labeling of scratches and dents, as well as identifying disassemblement and part replacement. All of these are factored into product grading and pricing results. Our NMAN production lines avoid the majority of errors associated with manual operation, helping us reduce personnel training costs and losses related to manual inspection and disassembly. Technology has improved our efficiency in processing non-standard products and ultimately reduces transaction disputes and losses from returns. Going forward, we believe that the application and continued development of automation technology, AI, and big data will further optimize our cost structure.

此外,我们还优化了销售费用的投入场地比。 低级度Non-GAAP的销售费用率同比下降1.9个百分点至7.5%。 Later, our CFO RECs will be supplemented by sales fees.

Beyond these improvements, we have also made steady progress in reducing our selling and marketing costs. During the quarter, our non-GAAP selling and marketing expenses as a percentage of total net revenues decreased by 1.9 percentage points to 7.5%. Our CFO RECs will provide more color on this.

In the first quarter of 2023, Wang Wuxing Zong achieved a good start. This is closely related to the firmness and stability of our business, the further expansion of the supply chain, and the effort to control costs. In addition, the big trend of the circular economy is still going well. In the second quarter, we look forward to the rejuvenation of the users by the e-commerce 618 branch. Here I would like to mention one more thing. In the second half of the year, there will be a relatively large increase in the number of resale main business.

We have had a good start to 2023, in large part thanks to our stable foundations of electronic recycling and re-commercialization businesses, middle office operations, and back-end cost controls. The continued development of the circular economy has also served as a tailwind for our business. During the second quarter, we anticipate June 18th promotions once again stimulating consumers' demand for recycling and trade-in services. In particular, we are working diligently in preparation for a project kickoff in the second half, providing unique trade-in solutions through in-depth collaboration with a leading international brand. And this will potentially become a key growth driver in the second half.

Finally, in the process of circular economic development, we will continue to do consumer education, promotion of standard systems, and improvement of industry influence. On April 22, World Earth Day, AI Recreation launched a joint venture of space recovery, with a number of leading consumer brands, to provide green environmental recycling and consumer products for cycle use. We are committed to recycling life-saving products, such as sachets, watches, and other consumer products with a certain value, to consolidate the brand and product power of AI Recreation, On April 26th, the World Intellectual Property Office and the Shenzhen Electronics Industry Association joined together to summarize and review the industry development dynamics since the release of the Sino-U.S. Sino-U. Sino-U. Sino-U. Sino-U. Sino-U.

As the circular economy evolves, we continue to amplify our industry influence by educating consumers and nudging industry standards. During World Earth Day on April 22, we launched the Cosmic Recycling Alliance initiative, partnering with several leading consumer brands to promote green recycling and the circular use of consumer products. The initiative transcends our brand's assets and expands our product offerings by advocating for the recycling of idle daily necessities, bags, watches, among others, that still retain some value. On World Intellectual Property Day on April 26, we joined forces with the Shenzhen Electronics Industry Association to explore industry development and to celebrate the anniversary of the Compliant Refurbishment Guidelines publication. As a corporate representative, we participated in the formulation and implementation of multiple standards. Furthermore, we regard the protection of both intellectual property and the user rights as our responsibility. We are committed to working towards the standardized development of compliant refurbishment in the electronics industry. At the same time, we strive to enable the utilization of a wider range of pre-owned electronics. With that, I will hand the call over to Rex, our CFO, to go over the financials.

Hello, everyone. We are pleased to report another profitable quarter. The total net revenues is the top end of our guidance, and the net operating income reached our new record. I will start by sharing some of our financial highlights before we go into a more detailed look. As members, Chris notes that all amounts are in RMB and our comparisons are year-over-year basis unless otherwise stated. In the first quarter, total revenues increased by 30.2% to $2,871.8 million. This was primarily due to the continued growth contribution of our 1G product's sales revenues, which increased by 34.9% to 2,575.2 million. In terms of profitability, we had another profit-making quarter with an gap operating income of 44.4 million. This was primarily attributable to scale effects powered by automation inspection upgrades and improved cost efficiencies in sales and marketing. Now let's take a detailed look at the financials. In the first quarter, total revenues increased by 30.2% to $2,871.8 million. Net product revenues increased by 34.9% to $2,575.2 million, while net service revenues were $296.6 million, slightly decreased by 7.3%. Growth in net product revenues was primarily driven by an increase in the sales of pre-owned consumer electronics, both through our online and offline channels. In terms of service revenue, the PJT marketplace generated more compared with the same period last year. This was primarily due to the lessened consignment business of Pi Pi marketplace as we pivoted its strategic focus, which was partially offset by an increase in the service revenue generated from PJT marketplace. Next, let's move to our operating expenses. To provide greater clarity on the trends in our operating-based actual expenditures, we will also discuss our gap operating expenses, which better reflect how the management views our results of operations. The reconciliations of gap and non-gap results are available in our earnings release and the corresponding form 6K, finished with the SEC. Merchandise costs were 2,252.1 million, representing an increase of 37.73%. This was in line with the growth in product sales. The gross margin at the group level was 21.6% in the first quarter. Gross margin for our 1P business was 12.5%. Fulfillment expenses decreased by 10.1% to 266%. which we will refer to as SPC from PR, and then gap fulfillment expenses decreased by 7.3% to $269 million. Under the gap measures, the decrease was primarily due to, first, decreasing operation center-related expenses as we optimized our store and operation station networks, and second, decreasing logistic expenses, as Carrie presented earlier. Our quality inspection process has integrated industry-leading AI and big data algorithms, minimizing inspection errors and losses from returns. Our gap fulfillment expenses as a percentage of revenues was 9.1% compared with 12.8% in the same period last year. Selling and marketing expenses decreased by 2.9% to 299 million, excluding SBC expenses. and amortization of intangible assets and deferred costs resulted from acquisitions. Ordnance gap selling and marketing expenses were 216.7 million, which grow at a slower pace at 4.9% year over year. So increase was primarily due to the increase in marketing expenses and office related expenses mainly composed of traveling expenses in relation to business development as the COVID pandemic faded. However, Nangap's selling and marketing expenses as a percentage of total revenues decreased to 7.5% from 9.4% in the same period last year. General and administrative expenses were 76.4 million compared to 45 million in the same period last year. Excluding SBC expenses, Nangap's G&A expenses were 57.4 million compared with 28.4 million. The increase in NGAP G&A expenses was primarily due to an increase in professional services and consulting fees. NGAP G&A expenses as a percentage of total revenues were 2%, compared with WenHuan's 3% in same period last year. Technology and content expenses decreased by 25.4 million, excluding SPC expenses and amortization of intangible assets. And the deferred cost resulting from acquisitions and debt technology and content expenses decreased by 26.3% to 42.3 million. The decrease was primarily due to the changes in technological personnel costs related to platforms as our platform matured. Nangap technology and content expenses as a percentage of total revenues decreased to 1.5% from 2.6% compared with the same period last year. As a result, our Nangap operating income was $44.4 million in the first quarter of 2023. The Nangap operating margin was 1.5% compared with 0.2% in the same period last year. As of March 31, 2023, cash and cash equivalents, short-term investments, and funds receivable from third-party payment service providers totaled $2.5 billion. Our sufficient cash on hand safeguards our sustainable growth outlook. As a recap, on December 9, 2022, we announced an extension of our existing $100 million US dollar share repurchase program for another 12-month period starting from December 28, 2022 based on management's strong confidence in our solid fundamentals and growth momentum. During the first quarter of 2023, we repurchased over 1.4 million ADSS in the open market for a total cash consideration of $4.1 million. As of March 31, 2023, we have repurchased a total of 10 million ADSS for approximately $38 million under our share repurchase program. Now turning to Outlook. For the second quarter of 2023, we currently expect the total revenues to be between RMB 2,850 million and RMB 2,950 million due to the seniority of our business. As China's economy continues to normalize and the impact of COVID-19 fades, we expect that our sourcing and fulfillment functions will recover in tandem. We will continue to improve our cost efficiency leverage our automated inspection facilities to further realize scale effects and accurately capture recycling and shopping scenarios. We expect to further improve our in-depth operating margins in the coming years. This forecast already reflects our current and the preliminary views on the market and the operational conditions which are subjected to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. When asking the question, please state your question in Chinese first, then repeat your question in English for the convenience of everyone on the call. Once again, it is star and then one to ask a question. Our first question today will come from Joyce Ju of Bank of America. Please go ahead.

Hello, I'm Guan Licheng. Thank you for your sharing. I have two questions. The first is that we see that we have achieved a fairly good product growth. Relatively 4G is also very good. I would like to ask Guan Licheng, what is the expectation of our economic output and this product consumption recovery this year? My first question is that during the first quarter we have seen very promising growth in the business accelerating from the previous quarter. So can you share a little bit more about the outlook for this year in terms of the economy recovery in China as well as consumption of the electronic products? My second question is on the progress of the multi-category recycling services. Do you see any categories that are showing potential for scaling up our country's business to revenue and profitability in the future. Thank you.

Okay, thank you Joyce. Let me answer this question. The first question, we see that since this year's Spring Festival, the current face-to-face and contact-based consumption has quickly recovered, including commercial, business, and life services. We can see that the flow and the number of transactions are increasing rapidly across the country. EBIT's recovery volume has increased by 42%. Although the consumption of durable products is still on the recovery path, we hope that through e-commerce and large-scale activities that can continue in the second quarter, we can return the focus to the consumers who are very happy to participate, so that the large number of users can experience the sense of participation and relaxation that is more cost-effective. and continue to improve users' consumer awareness. On the basis of a more sufficient supply of recovery members, we continue to combine the ability of automation with the feeling of reconfiguration to form a stronger second-hand electronic product storage supply chain, so that the customer has a sufficient purchase choice. We believe that consumers still long for a beautiful life and high-quality products, so the demand for recovery and second-hand electronic products consumption is still huge. Okay, thank you for the question. I will take the first question.

Since the reopening and the Chinese New Year, we have seen a rapid recovery offline, including in-person consumption at shopping malls, restaurants, and other local services. In line with this trend, our AHS stores have experienced a significant surge in business volume, while the number of One Piece Wars products has grown by 42% year-on-year. While durable goods consumption recovery is still on its way, we expect to see sustained trading service demand driven by the major promotions held by our e-commerce partners during the second quarter. By offering the option to upgrade devices in a cost-effective and eco-friendly way, our trading service provides value to consumers who purchase new devices. It also serves to raise consumer awareness of circular consumption. In addition to higher sourcing volumes, We are refining our automation capabilities and integrating compliant refurbishment services to expand our inventory of high-quality pre-owned electronics. These improvements will provide consumers with a wider area of premium choices. We believe that consumers will always strive for a better life and better products. Therefore, the demand for recycling and reusing pre-owned electronics is always there, and we are committed to working with phone brands for the betterment of trading experience and supply chain capabilities. In the second quarter, we expect to achieve year-over-year revenue growth of 32.8% to 37.5%, while maintaining our annual target for non-GAAP-property profits.

The two major brands are closely related to the user trust and mindset accumulated by our second recovery brand. As of the end of the first quarter, the number of door stores covered by multi-brand capacity has exceeded 100. Top30's main store average multi-brand recovery transaction costs more than RMB500,000. Capacity and scale are gradually increasing. I'll answer the second question regarding the new categories.

We kicked off the restructuring category expansion in the second quarter of 2022, starting with high value bags and watches. Currently, the category has already established scale in terms of trading volume. Gold is another category that has achieved this level of development. The development of these two categories is highly correlated with user trust in AHS recycle accumulated over the years. As of the end of March, over 100 AHS stores have fulfilled such recycling orders. Among them, the top 30 stores have an additional average monthly GMV of 500,000 RMB. Recently, the monthly GMV of multi-category recycling has exceeded 70 million RMB. excluding camera equipment recycling which is already on scale.

In terms of operations, we have been leveraging our own storefront fulfillment capabilities while collaborating with merchant partners on quality inspection and distribution at the back end.

It's clear that the transaction of used luxury goods, including bags and watches, have considerable potential for monetization. The wide margin space has laid the foundations for mutually beneficial collaboration with our partners. We will strive to achieve further breakthroughs in scale and profitability by continuing to enhance our comprehensive capabilities in areas including service processes, user experience, and structured data.

Our multi-category recycling business is built on the foundation of user trust in us and the AHS Recycle brand.

We expect more users to become familiar with recycling and repeatedly return to our stores. Multi-cache-free recycling is an extension of the capabilities we have used in our consumer electronics sector, and it represents one of our paths for creating long-term value. Thank you for the question.

Our next question today will come from Wei-Ting Tang of Goldman Sachs. Please go ahead.

Thank you, Manager. I will translate for myself. What kind of strategic targets do we have for our repair businesses and what impact should we expect to our net profit from expanding our repair businesses. Thank you.

and better local industry. Based on a group of current members to obtain more complete benefits, strengthen the comprehensive competitive advantage. In 2023, our goal is to form Huanan as the basis, Huazhong as the extension of regional ability coverage, and to further integrate the ability into other business centers. In the field, with mobile as the main focus, learn to form tablet computer, smart watch, laptop computer, digital mall, and other field-based ability. Thank you for the question.

In the first quarter, compliance refurbished devices retailing increased for a full consecutive quarter and the corresponding ASB stabilized at 2,600 RMB. We anticipate that the gross margin of the refurbished device retail business will remain stable while its scale and its contribution to our 1T business will gradually increase. We believe that this will allow us to further close the value chain of the industry obtain more profits based on the existing 1P sources and strengthen competitive edges. By 2023, we aim to extend the coverage of our refurbishment operations to more regions, replicating the capabilities we have already established in East China and South China operation centers. In terms of product categories, we are going beyond mobile phones, while establishing refurbishment capabilities for tablets, smartwatches, and laptops, et cetera. At the same time, we will steadily improve our operations and enhance our brand-focused category. During the first quarter, the scale of our refurbished production remained at around 70,000 units. As we accumulate our refurbishment and supply chain capabilities for more product categories, we expect to add value to at least 160,000 units in the first half of 2023. Thank you.

Our next question today will come from Jiajing Chen of CICC. Please go ahead.

Thank you, management. I will translate myself. What are the reasons for an improved adjusted OP margin? Do you have any plan to increase sales and marketing sales for new category recycling business? And what's the outlook for the adjusted OP margin for the whole year?

OK, thank you for that question. I will take the other question. So under the NGAP measures, we reported a new breakthrough in operating profits this quarter. NGAP operating margin increased to 1.5% from 0.2% in the same quarter last year. This was mainly due to the optimization of cost efficiency of the fulfillment expenses brought by improved automation capabilities and outstanding expenses, and we further implement cost control measures. In the first quarter, accounting for 9.1% of total revenue. So the gap of fulfillment expenses decreased by 20.6% year-on-year. The most evident reason is the scale effect of our automated facilities mentioned back here. The two operation centers in Dongguan and Changzhou handled over 40% of the total orders of all fulfillment costs. At the same time, automation technology also brings about improvements in the accuracy of quality inspection and reduces the return rate of goods and the associated losses. In addition, we have optimized the deployment and operational efficiency of city level operations stations. control over operating stations in the third quarter of 2022 and optimize the network, therefore saving packaging and logistic fees due to distributed shipments. The Nangap selling and marketing expenses were $217 million. Nangap selling and marketing expenses as a percentage of total revenues was 7.5%, down 1.9% points year-on-year. This was primarily due to a decrease of $33.7 million in marketing expenses for Papa Marketplace since we strategically downsized as a consignment business. As we are developing multi-category recycling, there was a corresponding fee increase of $10 million on being this quarter. We will maintain appropriate investment in new categories and brand building. Looking into the fall year of 2023, we expect to continue improvements in cost efficiencies At the same time, we will further amplify the positive impact of automation as we plan to automate one operation center every year. And for sales and marketing, we keep our proven spending pattern for mature businesses and selectively invest in new strategic initiatives. So we expect our operating margin to be increased at a healthy pace. Thank you for your 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. The reply to today's call will be available on our website shortly, followed by a transcript when ready. If you have any additional questions, please feel free to email us at ir.atvnews.com. Have a nice day.

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