Q4 2020 RLX Technology Inc Earnings Call
[music].
Okay.
Hello, Ladies and gentlemen, thank you for standing by for <unk> Technology, Inc, fourth quarter and full year 2020 earnings call.
Today's call.
At this time all participants are in a 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. Sensei head of Investor Relations of the company. Please go ahead Sir.
Yeah.
Thank you very much Hello, everyone and welcome to all.
Technology in Corporation fourth quarter, and full year earnings conference call.
The company's financial and operational results were released.
PR newswire services earlier today.
And has been made available online.
You can also be with the earnings press release by visiting the IR section of our website.
I thought that.
<unk> com.
Participants on today's call.
Our co founder chairperson of the board of the directors.
And Chief Executive Officer.
Hey, Glenn and.
And myself.
And then.
Investor Relations.
Before we continue.
Please note that today's discussion.
Forward looking statements made under the Safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1995.
These statements typically contain words, such as may well.
Well it's.
Carpet.
Estimate.
Pam.
The lease with.
<unk> 10.
Opinion.
Or other similar expressions.
Yeah.
Forward looking statements involve inherent risks and uncertainties.
The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated.
Many of these factors are beyond our control.
The company is affiliate advisors Representatives and underwriters do not undertake any obligation to update forward looking information.
Except as required under the applicable law.
Please note that all.
Archie Incorporations earnings press release, and this conference call include discussions of <unk>.
GAAP financial measures as well as unaudited non-GAAP financial measures.
Our press release contains a reconciliation.
The unaudited non-GAAP.
Measures.
Unaudited GAAP measures.
I will now turn the call some of these case plan.
Please go ahead.
Thank you Dan.
And thank you everyone for making time to join our earnings conference call today.
Just a little over two months ago.
January 10th 227, Tucson Cranking Wang.
We successfully listed our shares.
Our New York stop the change.
And starting with our new journey.
Public company.
On behalf of the management team.
I would like to spend all of our gratitude to our employees.
Palmer.
And all of our shareholders.
The stakeholders well.
Have been following and supporting us.
I believe many of you are joining us today, not only learn about our fourth quarter earnings results and the full year of kidney.
But also to hear more about our response to the regulator a development.
Okay, well there this week.
We are attentive to these developments as you are.
And that's the answer any questions you have during the Q&A session.
Now I will talk you through our operational performance.
In the last year and again sharing our strategy going forward.
Sure.
We remain focused on our nation and its strategy.
And we have achieved a solid radnor really well.
By the time the macro environment.
First of all looking at the overall E vapor market in China.
Use the penetration has been growing badly.
According to the CIC report.
China E vapor use their kind of accretion right.
World from point for performance in 2016.
112% in 2019.
And windows.
That growth in 2000 tons.
As far as industry leader of the EBIT per market in China.
We are well positioned to make me laugh.
Allstate brand smokers, providing better alternative for them.
Secondly on the commercial front.
We pioneered and integrated offline distribution and brand new store class read your model.
China's E vapor market.
Under this model we.
I Don' T fund and the leveraged or rather to the distribution and the retail channels.
That's a lot.
Our program.
To read Idaho smokers.
A more effective manner.
As of September 32000 tonnes.
We partner with the 110 authorized distributor.
Supply our current outlook.
Cross over 5000 relapse branded partners Board.
In all of our 100, <unk> Saddam Adler retail outlets nationwide.
Katarina or 250 cities in China.
E adult comprehensive assistance in the masses to manage supervised and empower our distributions.
Okay.
In the fourth quarter.
We achieved significant growth in terms of number of the branded store and productivity.
An increasing number of brand new store partners.
How come to one of our radio network.
And crossed the 10000 Mark for the first time in the fourth quarter.
On the other hand, we have been expanding our retail network with multiple Paul.
More importantly.
More and more retailers have been increasingly recognizing the benefits so raising E vapor products.
Partnering with relaxed.
Yeah, Jason to commercial development.
Who continually improve Idaho smokers its terms without product.
We have implemented a mouth equal layered with government framework to provide solid new cross top tier for our technology and product development.
This framework involves five development land surrounding our you may prefer that.
Namely exactly interaction application.
This translation and infrastructure.
During two diversified needs of Idaho smokers.
In December 2020.
He introduced react Samsung.
Which embodies our latest technology.
To college take plain Com user experience Whitehouse smokers.
Including a new lean towards EV battery capacity may cater.
Improved battery life time I'm charging.
Greg.
Structural resistant to your liquidity.
Refined.
<unk> and.
And upgraded safety features.
In the meantime, we have also received wide reclamation flower products globally.
In November 2000, Clancy relax the Infinity was granted a golden Peanut design Award 2020.
Turning to our corporate social responsibility development.
We continued to consistently upheld and practice our ethical principles.
Including promoting the prevention of Andres of Alberta.
So our industry pioneering guarding program.
Introducing its back to age verification practices to the industry.
This past quarter witnessed the first one theory of the launch of our some flowers system.
Which is a first of its kind technology driven on their age access prevention system.
According to the IDC report.
There's some smaller system in Comcast with a comprehensive set of technology driven best practices.
Designed to prevent achy, who an area where the one recommendation to.
Two income on site age verification and to retool Amit.
As well as through Geo fencing technology to them.
That would imply no property location for opening.
That brand new partner stores.
Yeah, Jason we have zero tolerance for compensate part of that.
That could jeopardize adult smokers health and interest.
Does that and we launched the Golden Shield program to come back sales of Congress, but product in cooperation lanes of public media and the local authorities.
At the Iowa.
Responsibility is not something we do on the site.
It's part of all the DNA and the embedded empowered everyday actually.
Patients system.
A lot of power optimization.
We have been counting flower user community.
Our partners in.
All of our employees.
They won.
We have always placed Bachelor emphasize healthy monarchy and he's the one page school.
Through initiatives that provide better services and technology solutions to help them with their unique needs.
In this regard we've recently launched three new initiatives.
One to empower female entrepreneurs and walk in modular.
And now they're close to the alder elderly understanding and using technology in their everyday lives.
And then third to strengthen our equal opportunity gone guideline.
We will continue to power high social responsibility y'all, rather hydration, because it's part of who we are.
Looking at that.
We plan to fund this holiday Fi our leadership by continuing to invest in scientific research.
<unk>, our technology and product development.
Strengthening our distribution and radio network.
Life terrain supplying Tang and production capabilities.
These strategic initiatives are designed to support our growth over the long term.
Here to the end of my part. Thank you everyone with that I will now turn the call over to Sam who will discuss our key financial results.
Thank you Kate.
I will now provide a brief overview of our financial results for the fourth quarter and the full year of transplanted.
Net revenues increased by 44% to $1 2 billion RMB.
In the fourth quarter of playing strategy.
From one on one 2 billion RMB.
In the fourth quarter of <unk>.
The increase was primarily due to an increase in net revenues from south to offline distributed.
This was mainly attributable to the expansion of our distribution and retail network.
Gross profit increased by 59% to 694 million RMB in.
In the fourth quarter of signings.
From 448 million RMB in the first quarter of franchisees.
Gross margin increased to 42, 9% in the fourth quarter of <unk>.
Compared to 49, 1% in the fourth quarter of <unk>.
Operating expenses.
Our 853 million RMB in the fourth quarter of Chinese currency.
Representing an increase of 174% from 318 million RMB in the first quarter of changed Randy.
<unk> expenses increased by 127%.
197 million RMB in the fourth quarter, all thanks, Sandy from 87 million RMB in the third quarter of Chinese fancy.
The increase was mainly driven by an increase in share based compensation expenses.
And an increase in branding material expenses.
Yeah.
General and administrative expenses increased by 75% to 447 million RMB in the fourth quarter, obtaining financing from 255 million RMB.
Third quarter, all Chinese banks.
The increase was primarily due to an increase in share based compensation expenses.
And an increase in professional service fees.
Research and development expenses increased by 442% to 209 million RMB in the fourth quarter all changed hunting from 13 9 million RMB in the third quarter of 2020.
The increase was primarily driven by an increase in share based compensation expenses.
And an increase in software and technical service expenses.
Share based compensation expenses recognized in selling expenses.
General and administrative expenses and research and development expenses in total were 656 million RMB in the fourth quarter obtain sandy.
And 238 million RMB in the third quarter of St.
The increase was primarily due to the increase in <unk>.
Of ordinary shares possibly that operation.
Yeah.
Loss from operations was 158 million RMB in the fourth quarter of 2000.
Compared with income from operations of 58 million RMB in the.
Third quarter, Australia.
The income tax expense.
It was 111 million RMB in the fourth quarter of sanitizing.
Income tax expenses of 77 million RMB in the first quarter of 'twenty.
Primarily due to an increase in taxable income.
Net loss was 237 million RMB in the fourth quarter of 2000.
Compared to net income of 8 million RMB in the FERC quarter after incentives.
Non-GAAP net income was 419 million RMB in the fourth quarter I'll say anytime.
Basic and diluted net loss per American depositary shares a day.
We're both sales climbed 165 RMB in the fourth quarter of <unk>.
Compared to a basic and diluted net income per ACF osteo funds <unk> five RMB in the third quarter of 2000.
Non-GAAP basic and diluted net income for Acs, we're both several points to 92 RMB in the fourth quarter operating expenses.
Compared to <unk> 171.
In the fourth quarter of <unk>.
Moving to the full year of COVID-19.
Net revenue increased by 147% to $3 8 billion RMB in finished 90 from $1 $5 5 billion RMB in 2019.
The increase was primarily due to an increase in net revenues from south to offline distributors.
Gross profit increased by 153% to $1 5 billion RMB 2020 from 581 million RMB in 2019.
We're off margin was 40% in the 2020 compared to 37, 5% in 2019.
Operating expenses were 151 billion RMB in 2020.
Representing an increase of 118, 9% from 525 million RMB in 2019.
Selling expenses increased by 23% to 443 million RMB.
<unk> thousand from 315 9 million RMB in 2019.
The increase was primarily due to an increase in share based compensation expenses.
And then increase in salary and welfare benefit to allow styling personnel.
Partially offset by a decrease in e-commerce platform surface expenses.
We closed our thoughts on e-commerce platforms, and these collaboration with E Commerce platform distributor.
In response to the October 2019 announcements.
General and administrative expenses increased by 479% to 772 million RMB in 2020.
From 143 million RMB 2019.
The increase was primarily attributable to an increase in share based compensation expenses.
And an increase in salaries and welfare benefits to our general and administrative personnel.
Research and development expenses increased by 837% to.
219, 9 million RMB in 2020.
32 million RMB in 2019.
The increase was primarily due to an increase in share based compensation expenses.
And an increase in salary and welfare benefits to our research and development personnel.
Share based compensation expenses recognized in selling expenses general.
General and administrative expenses.
Research and development expenses in total were 929 million RMB in 2020.
And 53 million RMB in 2019.
Primarily due to an increase in fab at all in the ratio of investment Corporation.
Income from operations.
Police by 77% to 14 million RMB 2020 from 50 billion RMB.
2019.
Income tax expenses was 231 million RMB in China and Turkey.
Representing an increase of 789% from $26 million in 2019.
The increase was primarily due to an increase in tactical retail.
Net loss was 128 million RMB in 2020.
Compared with net income of 48 million RMB in 2019.
Non-GAAP net income was 801 million RMB in 2020.
Basic and diluted net loss per avs, where Paul Cyril until a mine RMB <unk> <unk> compared to basic and diluted net income per avs osteo considerable free free RMB in 2019.
Non-GAAP basic and diluted net income for Acs, where both sales on 557, RMB <unk> <unk> compared to a 007 RMB per ATM in 2019.
Moving to the balance sheet.
December 31st training.
The company had cash and cash equivalents.
Restricted cash and.
Short term bank deposits and short term investments.
Three <unk> four 2 billion RMB comp.
Compared to 812 million RMB as of December 31, 2019.
Now turning to guidance.
For the first quarter of 'twenty one.
The company currently expects net revenues to exceed $2 3 billion RMB and expect non-GAAP net income to exceed 590 million RMB.
The company expects net income will also include share based compensation expenses, which dependent on the company's share price and are not available without unreasonable efforts.
The company also expect gross margin will remain steady.
The bulk of envelope is based on the current market conditions, including those related to COVID-19 pandemic.
And reflects the company's preliminary estimates of market and operating conditions and user demand.
Which are all subject to change.
Please refer to the safe Harbor statements in the press release for our risks associated with forward looking statements.
The above concludes all of our prepared remarks today.
We are now opening the call to questions.
Operator, Please go ahead.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two for.
For the benefit of all participants on today's call. If you wish to ask a question to management in Chinese. Please immediately repeat your question in English at this time, we will pause momentarily to assemble the roster.
Okay.
Your first question today comes from linearly with Citigroup. Please go ahead.
Oh, Hello management can help me.
Yes.
Hi.
Hello, Hello management, Thank you Amit.
Yes, we can hear you.
Oh, Okay, Hi management since August with Egfr Citi. Thanks for taking my questions I have three questions. On this one is on the regulation side. So that's where the money announcement, so could management share a bit more your views on this amongst men and also.
It's been vacation so what do you think of the regulation trends looking forward in China's E cigarette industry and also how we ought to company cope with this channel if anything to happen and.
My second question is about our expansion and the company has achieved very impressive expansion in the first quarter for the brand as Josh just mentioned so could you also check about a company expansion for this year the competition looks more in cash flow. This year as more players also ramp up I'll stop it's open.
With very aggressive.
So how do you view the competitive landscape and the potential impact on your margin and then my last question is regarding the product.
Notice that the company has introduced a few new products. This year and also some entry level product. So how about the feedback so far on the crude you talked about your product strategy for this year. Thank you.
Oh sure. So I mean, there are three questions.
Firstly, it's on regulations and the second is on the Star plan in the first one is on all product feedback.
So at least.
Lengthy questions and Louisville bias one by one.
So I mean on Monday, we are aware that the department of industry policies.
And regulation of the <unk>, which.
Which is the ministry of industry, and information technology and announcements fiction for public comments, requiring the authorities proposal for revised detailed implementation regulations of the tobacco monopoly law of the PLP. So.
Such comments or feedbacks shelving submitted by April 22.
One month.
For submission of such comments Sylvia are also like.
Two attachments were included in the announcements.
First attachments proposed.
Lou.
The implementation regulation.
<unk> 65.
Indicating that the implementation rules for our next generation tobacco products, including E cigarette shall take reference to the relevant rules.
We expect to see with under the implementation of regulation of the pullback from one of the law.
And they are also the spectrum attachment that have provided free considerations for our making the objection of adding the proposed rule 65.
So far the first consideration is to make progress in the regulatory environment of E vapor products and the second consideration is two deals with the similarities.
Between E vapor products and cigarette.
<unk> also taken referenced towards the regulation on E vapor products.
Internationally.
And the FERC considerations is to enhance the effectiveness of Brexit relating to ebay for industry <unk>.
Clothing, effectively recognizing the operating efficiencies.
After ebay for industry and tackling potential product safety issues.
EBIT per product.
Bert.
Malaysia et cetera in order to protect the rights of E vapor users.
I generally repeats.
What happened for a non Chinese reader.
Basic understanding of such regulation for us.
So as company point of view in response to a direct relation to announcements we plan to submit our feedback regarding the proposed revision.
Mentation plan by April 22.
So we are also well aware of the considerations mentioned in the passion.
Including regulating b operating activities.
<unk> potential product safety issues or concerns over the other issue, which has been our focus now daily operation.
So I think you are.
Last bit of your question is mainly about how we adjust our operations.
Given that the regulations or the proposed amendments is.
During the process of seeking public feedback.
Preempt mature to speculate about the potential change on the commercial front.
So the T cell response on your first question so.
So maybe you can repeat the second question. Okay. So I may have missed that.
Oh, Yeah sure on the third question is about.
Could you talk about your expansion plan for this year, given you already have cancer identifiable star already and there's.
And also the competition and a small impact for this year because some small brands also a ramp up of that.
A sponsor with a glass that's up to me. So we also want to hear management view on the competitive landscape in the China E vapor industry and also thank you all of that potential impact on your margin.
I'm not sure.
Following the call Bob Evans.
The first one first.
Regarding our cost so.
As we have mentioned so the number of brands on our staff have been growing steadily so at all and September last year, we have partnered with over 5000 stores.
As of end of last year in the opening remarks made by case, we had already partnered with a 10000 pound upon a thought.
Yes.
You will see that the growth momentum or install plumbing remains strong.
As we see that many of our existing <unk> partners seeking to open more stores E circumstances stores bookstores and definitely we also received applications from potential new installs as well.
However from an operational or a commercial strategy funnel field.
I'll start with must be first powermeter Audi powerhouse important arbiter for mobile we always prioritize our brand upon his thoughtfulness productivity.
So we will always closely monitored the latest out of our branch staff to evaluate a number of thoughts to be open and then to determine and affect the number of requests or applications made by these solomon.
So under our current understanding.
Sure.
As you can see we have peak power.
Our internal projections. So we believe such trend will continue.
In the near future regarding the Gulf trajectory based on our projections.
And I think your second question second question is mainly on the margin side so on margin side.
Our gross margin has been growing steadily while with our.
Our cost optimization initiative and better supply chain management.
And we also have achieved operating leverage as shown in the fourth quarter or the posture of quarter results.
However, we will also still focus on methane in our strategy estimation in pace opening remarks.
So it seems like a fair question.
<unk>.
Pop up again.
Oh sure on the last question is about the project and that's all we noticed that the company also introduced some products earlier this year like entry all products, including Dr quarter week.
So about call, but the feedback so far and also could you share about your views on your product strategies and also some technology.
Going forward.
Sure. So it has been only a few things.
He also centered approach.
To have a diversified our product portfolio in order to meet the increasingly of EBIT for our users as we see the penetration has been increasing so in March. So we have introduced the affordable version of rechargeable E vapor products.
But given that its still at the early stage of development.
I'd like to share a mothball requiring that when we have more results.
And internally.
So thank you very much leader for our questions.
Our next question is from Charlie Chen with China Renaissance. Please go ahead.
Hi, Thank you management. This is Charlie Chen from China Renaissance I got I got three questions here as well first.
How do you think ceramic atomizers versus cotton <unk> I mean, how do these two different material fit into your future business strategies in both supply chain and product portfolio management. So that's the first question.
Second question is about consumer loyalty do you have any data in terms of average number of E vapor brands consumers regularly uses or how often or how difficult for consumer to switch brands and how what are the factors to help them to make these kind of decisions.
And in consumer and your strategy in this area will be very helpful and lastly distributions.
Distribution, what kind of.
Index, such as like sales or traffic.
Sandra if you have a do you use to monitor your store density in a city or in a market like in Beijing, How many stores do you think as you know.
And what makes you to think so.
So thats relates to what kind of a store expansion plan you have in other cities. So that's my three questions. Thank you.
Thanks, very much Charlie so.
For the first question.
About the.
<unk> and also the Qualcomm keeping elements that you mentioned.
So for us we always.
Prioritize use essentially that's our first priority so as mentioned before so we use a product development framework called AI API.
The allowed the ebay for prana for asthma <unk> in China.
So I mean part of the supply chain one site largely.
Largely depends on user feedback on which products are used from time to time, which includes elements to use as mentioned in your question.
So for US we have been using both cotton and ceramic keeping element in our supply chain. So currency product mix keeping all of them are still account for the majority of our rechargeable cartage.
So for US we will continue to monitor user preferences closely and the improvement of the product and technology, providing the right product mix.
So adult smokers in China.
So hopefully I answer your question.
So no question. The second question is on the like the.
Bren brand loyalty in the user preference site.
Social for up.
There are differences between us and also auto brands.
So we still see very strong user loyalty for E vapor products.
As more and more adult smokers and our users.
We are increasingly recognize the benefits of goofing peso all currencies.
So I think for US we can share more insight in the following perspective.
So I mean for the first perspective I can share is about the user experience side.
So according to our internal data we observed that our users have continued to purchase.
E vapor products after the second consecutive months of their initial purchases I E.
After M. One.
We can also see improvements in terms of retention rate of user cohort with a longer timeframe as well.
And I think the second perspective, I can share is the possible user experience.
So far a large say the E vapor users they can power a significant difference in terms of product. So it does seem like.
The installation experience like the issues that they may overcome with other products like E. They couldnt make page.
In store experience and our brand upon a sauce and most importantly is to recognize unique friend.
And therefore, I mean for a majority of them.
Can also consider our competitor's products given our leadership in equity aspect of developments.
So that part we do have seen that if their messages and the number of competitors users.
Becoming our users as indicated by competitors a significant increase in the charter hall device, whether it's a lower or no increase in harvest volume.
And a quick question.
<unk>.
Distribution distribution and also the star density.
So if I can.
Briefly share the logic of our store opening plan or the logic behind it.
He is not talking about like we set certain limits of coal for each CCR region.
So the overall logic of the operation model for like Cps are reached.
Regions is largely depend on whether there are sufficient potential users.
Ebay her product area.
So.
We know that user penetration of E vapor products among adult smokers across China has been relatively low.
A single digits penetration across tier one cities two counties religious et cetera.
I mean of course, we built a requirement for store openings election likely affect the 500 <unk>, Turkey requirement for most of the region.
The cannibalization amongst us.
But if you're talking about.
The most important parameter is always about the user penetration of the corresponding CPE in order to calculate whether a number of stores can support.
And as a part of it.
Operational model.
So in future as we can see there will be growing user penetration of our products a miasma of course, we.
We expect to gradually loosen our requirements.
A 500 meter requirements to maintain our competitiveness.
An increasing number of brand upon his thoughts while most importantly to ensure the politics of each of these stores.
So thank you very much for your questions.
Due to time constraints no I'd like to turn the call back over to the company for any closing remarks.
Okay.
Sure.
Thanks, very much. So thanks, everyone for your time also feel free to.
I look at further information through a website called <unk> com.
Through a comprehensive information for wireless.
To us or the TPG Investor Relations.
Thank you very much.
This concludes this conference call you May now disconnect. Your line. Thank you.