RLX Technology Inc. (RLX) Q1 2022 Earnings Call Transcript

RLX Technology Inc. (RLX 8.94%)
Q1 2022 Earnings Call
May 20, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies, and gentlemen. Thank you for standing by for RLX Technology Inc’s first quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After management’s remarks, there will be a question-and-answer session.

Today’s conference call is being recorded and is expected to last for about 40 minutes. I will now turn the call over to your host, Mr. Sam Tsang, head of Investor Relations for the company. Please go ahead, Sam.

Sam Tsang — Head of Investor Relations

Thank you very much. Hello everyone, and welcome to RLX Technology’s first quarter 2022 earnings conference call. The company’s financial and operational results were released for PRNewsire Services earlier today and have been made available online. You can also view the earnings press release by visiting the IR section of our website at ir.relxtech.com.

Participants on today’s caller input are [inaudible] Mr. Chao Lu, and myself [inaudible]. Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. This statement typically contain such as may, will, expect, target, estimate, intend, believe, potential, continue, are [inaudible] Part of the same ultimate inherent risks and uncertainties.

The accuracy of these statements may be impacted by a number of business rates, and uncertainties that could cause actual results to differ materially from those projected or anticipated. Many of which factor are beyond our control. The company’s affiliates, advisors, and representatives do not undertake an application to update this forward-looking information except as required by applicable law. Please note that RLX Technologies’ earnings press release and this conference call include discussions of all of GAAP financial metrics, as well as another non-GAAP financial measures.

RLX press release contains a reconciliation of the unaudited non-GAAP measures to the analytic measures. I will now turn over the course to Mr. Chao Lu. Please go ahead. 

Chao Lu

Thank you, Sam, and thanks, everyone, for making time to join our conference call today. As you are probably aware, the e-vapor industry is currently being reshaped by a mix of regulatory developments, and solid demand for high-quality, safe products. Both of which are influencing our short and medium-term strategy and outlook. While these developments are significant, we remain confident in our strategy and committed to building and enhancing the trustworthiness of our brand.

As always, we will maintain strict compliance with the applicable regulatory requirements, and uphold our core values while providing premium product, premium quality product, and catering user satisfaction with our industry-leading technology, Scientific Advancements, and adaptable approach. To give you a general sense of what’s happening in China’s e-vapor industry, I would like to provide a macro view of what we are seeing, and how our business is serving our users and society as we head back to the industry’s transformation. Following the publication of the final administrative measures for e-cigarettes in March, The National Standard and a set of detailed regulatory measures on e-cigarettes, licensing, logistics, and etc. were released in the past few weeks.

We fully embrace these new regulations, including the administrative measures and relevant implementation guidelines. As that further refine the regulatory framework, with clear standards and boundaries. It will benefit those existing industry players who like RELX, are capable of adapting to the new infrastructure, while maintaining their scale, as well as their ability to manage user experiences and risk risks effectively and efficiently. We have included a brief summary of the recent regulatory developments in our earnings release and more detailed analysis in our annual report on Form 20-F.

Now, let me walk you through some of the key investments. First, as you might have noticed, the final national standards will come into effect on October 1st, 2022, granting a transition period until September 30, 2022. This provides industry players like us, additional time to better adapt to the new regulatory regime, and minimize disruptions for our users and the e-vapor market. In addition, we noted that a regulatory pilot program was launched in April in [inaudible] province and [inaudible] province.

Under the pilot program, the new administrative measures were implemented early in these two City to assess the new e-vapor product supervision process. In accordance with the new policy, selected local retailers began placing orders for e-vapor products with the local subsidiary of China Tobacco, that will distribute e-vapor products in local districts going forward. To ensure that the process is running smoothly before the new mechanism is rolled out nationwide. Also, the national standard tighten the R&D and quality control standards for e-vapor products in China, advocating product safety, and limiting opportunities for counterfeit, and unauthorized compatible products.

Next, I want to highlight our proactive actions in response to these regulatory changes. Regarding the licensing requirements under the administrative measures, we have already initiated a manufacturing license application. As the leading industry player, we believe we satisfy the relevant application requirements. In line with the requirements stipulated in the final national standards, we have already adopted e-vapor cartridges, we have already developed e-vapor cartridges and devices that we believe are in compliance with the national standards and submitted them to the State Tobacco Monopoly Administration for technical review.

We believe that our products will pass the review, and be successfully launched to market in due course. I’d also like to mention a user day event that we hosted in April at the [inaudible]. A dozen of our existing users was invited to sample our new product and reserve presentations by our technologists showcasing our in-depth knowledge, and technological advancements throughout our product R&D process, as well as onsite experiments. The feedback we received from the event, together with the results of our youth survey, encouraged us to forge ahead with the user-centric product strategy we designed to adapt to the regulatory changes.

Given that our adaptation initiative to enhance user experience and satisfaction are supported by our private environment capabilities, industry-leading technologies, and scientific advancements, we are confident that our new products will be well-received by most of our existing users. To smooth our transition to the new operational regime, we are optimizing our operational structure in many aspects, such as warehousing and logistics, ERP systems, etc.. Last but not least, we are aware that as of now, in response to the changes in the industry value chain, several provinces and cities have locally announced that they will issue more than 48 thousand retailer licenses in total in the initial stages of regulatory implementation. We believe that this number will be adequate to satisfy most of the industry’s existing source need.

Given our relentless efforts to strengthen our operational capabilities and provide superior products to our users, we are optimistic that about our ability to capture the market potential ahead of us under the new regulatory landscape. As a trusted e-vapor grants for adult smokers, we will continue to strictly comply with the new regulations and policies while deepening our commitment to providing high-quality products and exploring new growth opportunities in the industry. Before moving on to discuss all financial performance, I would like to highlight that in the dynamic market in which we operate, our dedication to upholding our long-term commitment and fulfilling our responsibilities to our industry, environment, and society is at the core of our ongoing success. Since our inception, we have worked to advance a wide range of ESG initiative within the stakeholder community we serve.

Our 2021 ESG report showcases our action and progress. Including our low carbon development strategy and climate-related information disclosures. Most recently, we have set targets to achieve carbon neutrality across Scope one and Scope two by 2033, and accomplish net-zero for Scope three no later than 2050, to [inaudible] initially. We are unwaveringly committed to strengthening our ESG governance and management system, creating and meeting long-term ESG growth through ultimately empower our sustainable development.

Now I’d like to share some key updates regarding our first quarter financial. Our top five performance in the first quarter continues to demonstrate the resilience of our business, and our ability to navigate the rapidly changing market, amid the challenges stemming from the COVID-19 related restrictions, and the evolving regulatory environment. In early March, we have seen a strong recovery in demand from distributors. As a relief of the administrative measures brought me some clarity for eBay operation.

However, our shipment volume in the quarter was adversely impacted by the production stoppage at our exclusive production plant, and delays by some of our supplier in Shenzhen as the city imposed a lockdown during that period. In addition to the favorable impact of the weeklong Chinese New Year holiday. Our GAAP growth margin, however, declined year-over-year. This was primarily attributable to the shift in our revenue mix due to the increase in proportion of contract sales compared with the same period last year.

Thanks to our continued efforts to optimize our supply chain and streamline our operations, we maintained a steady unit cost in the first quarter. Excluding one of costs related to inventory provision from the GAAP gross margin, we sustained our gross margin at a level similar to that in the fourth quarter of 2021. Facing macro-economic uncertainty, tightening COVID-19 restrictions, and evolving regulatory environment, we remain diligent in controlling our costs and further improving our operational efficiency, through an array of initiatives designed to further streamline operations. As the saying goes, uncertainty is the only certainty.

Our balance sheet remains strong with the cash position of approximately RMB14.9 million as of March 31st, 2022. Also, we have generated positive operating cash flows in each of the past three years. We believe our strong cash position and robust cash flow build a firm foundation for us to better adapt to the new regulatory environment and market dynamics. Also, during these times of uncertainty, our strong capital and liquidity position is an important source of confidence for all our stakeholders.

I will now provide a summary overview of our financial results for the first quarter of 2022. Net revenue were RMB1.7 million in the first quarter of 2022, compared with RMB2.4 million in the same period of 2021. The decrease was primarily due to the impact of COVID-19 on the production plant in Shenzhen, which are adversely affected our production and shipment volume. Gross profit was RMB657 million in the first quarter of 2022, compared with RMB1.1 million in the same period of 2021.

Gross margin was 38.3% in the first quarter of 2022, compared with 46% in the second period of 2021. The decrease was primarily due to first, a change in the product mix, and second, expecting an increase in inventory provision largely due to recent regulatory developments. Operating expenses were RMB33.6 million in the first quarter of 2022, representing a decrease of 97.2% from RMB1.2 million on the incentive of 2021. The decrease in operating expenses was primarily due to the change in share-based compensation expenses, which decreased to a positive RMB325.2 million in the first quarter of 2022, from RMB877.5 million in the second period of 2021.

Consisting of first share-based compensation expenses of positive RMB41.9 million recognized in selling expenses to share-based compensation expenses of positive RMB230.1 million recognized in general and administrative expenses. And three, share-based compensation expenses of positive RMB53.2 million recognized in research and development expenses. A decrease in share-based compensation expense was primarily due to the changes in the fair value of the share incentive award that the company granted to its employees, as affected by the fluctuations of the share price of the company. Fund expenses decreased by 73.9% to RMB75.9 million in the first quarter of 2022, from RMB291.5 million in the same period of 2021.

The decrease was primarily driven by first, a decrease in share-based compensation expenses. Second, a decrease in salaries and welfare benefits. And third, a decrease in branding material expenses. General and administrative expenses decreased by 109.3% to a positive RMB66.4 million in the first quarter of 2022, from RMB712.8 million in the same period of 2021.

The decrease was many given by one, a decrease in share-based compensation expense, and two, a decrease in salaries and welfare benefits, partially offset by increase in legal and other consulting expenses. Research and development expenses decreased by 88.7% to RMB24 million in the first quarter of 2022, from RMB211.6 million in the same period of 2021. The decrease was primarily driven by first, a decrease in share-based compensation expense. Second, a decrease in salaries and welfare benefits, partially offset by one, an increase in depreciation and amortization expenses, and two, an increase in software and technical service expenses.

Income from operations was RMB623.4 million in the first quarter of 2022, compared with a loss from operations of RMB111.9 million in a certain period of 2021. Income tax expenses for RMB112.6 million in the first quarter of 2022, compared with RMB176.3 million in the same period of 2021. US GAAP net income was RMB687.1 million in the first quarter of 2022, compared with a US GAAP net loss of RMB267 million in the same period of 2021. Non-GAAP net income was RMB361.8 million in the first quarter of 2022, compared with RMB610.5 million in the same period of 2021.US GAAP basic and diluted net income per ADS were RMB0.528 and RMB0.521 respectively in the first quarter of 2022, compared with the US GAAP basic and diluted net loss per ADS of RMB0.174 in the same period of 2021.

Non-GAAP basic and diluted net income per ADS for RMB0.284 and RMB0.281 respectively in the first quarter of 2022, compared with RMB0.398 in the same period of 2021. Moving to the balance sheet. As of March 31st, 2022, the company had cash and cash equivalents, restricted cash, short-term bank deposits, short-term investments, and long-term bank deposits net of RMB14.9 million compared withRMB14.4 million as of March 31st, 2021. Among them, approximately $1.6 million was denominated in US dollars as of March 31st, 2021, sorry, 2022.

Looking ahead, we will continue to focus on the business elements under our control, such as product innovation, cost optimization, and operating efficiencies to reinforce our fundamentals and position ourselves to seize future opportunities. We are confident in the future of our company, together with our industry and therefore, we have been steadily implementing our share repurchase program, creating value for our shareholders and long-term the investor. This concludes our prepared remarks today. We will now open the call to question.

Operator. Please go ahead.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instruction] Today’s first question comes from Lydia Ling with Citi. Please go ahead.

Lydia Ling — Citi — Analyst

Hi management, this is Lydia from Citi, and thanks for the presentation and updates for the first quarter and on the regulation side. So I have two questions here. So the first question, so as you just mentioned, there are quite a few updates on the regulations first on first quarter. And we also see many problems and I have details I would like to retail measures, so we are very keen to opt to have more colorful from you that in terms of your license application, for example, like what [inaudible] are you expected to order you can get your production license, and also your expectation on what percentage of your retailers make the retail license.

And we are also very interested to know that what the court to be the initial feedback from your new product is will be very helpful to us. And my second question is on jobs. We also know that there be no exclusive retail terms offered on the retail side. So how do management see the competitive landscape looking forward? As you’ll recall, with my tend to increase, include more front in store level in order to get license.

So thank you. I have to give two questions.

Sam Tsang — Head of Investor Relations

Thank you very much, Lydia. So the first one is on the license application together with the product development [inaudible] is mainly on the exclusive term that we remove in the latest regulations. So, I mean, I’m not sure on the license. So we have already submitted our manufacturing license application to the state’s Tobacco Monopoly administration.

So now, we are still waiting for the regulatory approval to obtain such license, and we are confident that could be the first batch product manufacturer to obtain such manufacturing license. And requirements regarding the retail license, we believe that most of the retailers that operate the model from a store model of our industry are paying a retail license during the construction period. And regarding the new product development, they are still undergoing the final testing phase. There’s both small and large research testing groups.

Fully [inaudible] to excel in the pace of our nearly tobacco safer cartridge, which fully comply with the national standards, while at the same time also ensuring our safety. And for the [inaudible], second question is mainly on the exclusive key term of retailer. So based on our observation, we do not feel that the competitive landscape has changed much recently, nor will it change significantly in the short and medium-term. We believe that what makes a difference to a brand market share [inaudible] brand equity, user base, and also the [inaudible], and these are equally important by [inaudible] creativity.

So during the transitional period from this month, yes, they announced that some retailers who are previously opened stores in the industry start selling out of brands products. Indeed, we think that the enormous specific costs provide us with thorough access to retailers who previously were other brands [inaudible]. So we thought these retailers may not have, so our products are only sold our products on an affluent and informal basis. So with the cost being reduced, they now chose to lease our products as we are the largest player in the market.

And our brand recognition can definitely help them survive this most ourselves. So on the other hand, for some retailers who are previously our exclusive brand upon our stores, to start listing on a brand’s products, as these brands might provide them with some of our promotional products. However, based on my observation, these brands have not deals and it becomes retail sales, given their MPS brand equity user-based and product capacity are less robust enough. So in summary, we believe that our market leadership is based on these key backers, rather than the exclusivity.

And if we can still maintain a relatively high market share going forward.

Lydia Ling — Citi — Analyst

Thank you, Sam.

Sam Tsang — Head of Investor Relations

Thank you for your question.

Operator

And our next question today comes from Charlie Chen of China Renaissance. Please go ahead.

Charlie Chen — China Renaissance — Analyst

Thank you, management, for taking my questions. I have two questions as well. The first one is regarding the sales momentum in second quarter of this year. As we know that effectively all of your products are actually sold offline.

So can you share us with some color on how these COVID control measures could impact your sales, and what’s the sales moment before? And my second question is regarding the status of your distribution channels. In particular, I would like to get some sense on whether there is some kind of distributor quitting this business or they are leaving you because of the regulatory restrictions. And also, how about the retailers, for example, the house, the sales or retailers and distributors in the pilot area seeing widow and shaman. Thank you.

Sam Tsang — Head of Investor Relations

Thanks very much, Charlie. So regarding our second quarter sales, so as I mentioned in my opening remarks, our net revenues in the first quarter were mainly being affected by the COVID restrictions, which affected our production volume and also our human volume. So I mean what happens after fulfilling [inaudible] orders since the latter part of March, and I’ll quote today performance has been robust and it’s in line with expectations. So currently, we do see that there are some COVID restrictions in certain areas nationwide, for example, in Shanghai and Beijing.

But these areas do not to material sales from we would have expected. And regarding a question about the entire program and also how the [inaudible] distributors and retailers. So we kind of have program, B collaboration has been very smooth in both Salman and Pico, and we do see a very strong sales data as well. So we believe that such programs can be a good indicator, and could help the industry better adapt to the new regulatory regime.

And regarding the distribution channels. So our current distributors, who are the private companies, distributors of products during the transitional period. And given that the business performance has been robust, and they took profits from making the concessions. So as of today, we have not seen any similar penetration of existing distributors.

Thank you for your question.

Charlie Chen — China Renaissance — Analyst

Thank you.

Operator

Thank you. And our next question today comes from [inaudible] with ICC. Please go ahead.

Unknown Speaker

Hi there, management. This is [inaudible] with ICC. Actually, I have a few questions to ask. And the first one is, how is the COVID came to a level, and especially how is the channel’s inventory levels? We also noticed that consumers were stocking up cartridges recently.

So from your opinion, how many cartridges are estimated to be stored by each user? And my second question is that from the perspective of cost reduction, what actions have you taken so far, and how you plan to do in the future? Thank you.

Sam Tsang — Head of Investor Relations

Thank you. So the first one is on the inventory level for each of our stakeholders and also us. And the second one is mainly on the cost optimization measures. So for the first question, as you can review our partnerships [inaudible] close to RMB600 million in the fourth quarter to RMB267 million in the first quarter.

And also update amount, only a small portion of that in the finished goods. So in light of the effectiveness of the national standards, and also some of the small [inaudible], we have been very prudent and have established adequate inventory position in the last two quarters. [Inaudible] It has been significantly decreased throughout the first quarter due to the COVID-19 restrictions in national factories, and this situation has been gradually improved since the second quarter. But we have to be cautiously, this should be our process as people want things and people have formed the channels to have so much inventory.

And it finally is regarding our use of inventories. So based on our membership data, we are allowed to ask the average cartridge purchase per user per month has decreased by moderate level since December of last year. Given this current state, we are still in the transitional period through September 30, they will by then have better visibility regarding our users estimates of inventory turnover days of our existing product portfolio. So second question is on the cost optimization initiatives.

So we strive to optimize our cost in many aspects from the unique cost of each front, and also the packaging, and also the logistics, and warehousing costs. So previously, we have been able to reduce our packaging and warehousing costs by changing our packaging design, and increasing our warehousing utilization rates. Regarding the unique hub of each forum, we have consistently communicating the type of fires. We have been fighting on our procurement card, thanks to the technological advancements and automation of our supply chain.

So going forward will still optimize our costs and this affects the unit cost of each bottle to our product design, as well as our continuous improvements in the utilization also fighting process. Thank you for your question.

Unknown Speaker

It’s very clear and comprehensive. Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to the company for closing remarks.

Sam Tsang — Head of Investor Relations

Thank you, once again for joining us today. If you have further questions, please feel free to contact RLX Technology Investor Relations Team. For the contact information provider on our website, [inaudible] Thank you.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Sam Tsang — Head of Investor Relations

Chao Lu

Lydia Ling — Citi — Analyst

Charlie Chen — China Renaissance — Analyst

Unknown Speaker

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