Q2 2021 RLX Technology Inc Earnings Call
Hello, Ladies and gentlemen, thank you for standing by for <unk> Technology, Inc's second quarter 2021 earnings conference 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 is being recorded and is expected to last for about 40 minutes.
I will now turn the call over to your host Mr. Sam saying head of Investor Relations of the company. Please go ahead Sam.
Thanks, very much Hello, everyone and welcome to <unk> Technologies' second quarter Chinese Chunky, one earnings conference call.
Company's financial and operational results.
<unk> through <unk> P. M. This last one Frank says Oh yesterday and has been made available online.
You can also bill the earnings press release by visiting the IR section.
Website at IHOP docks relaxed.
<unk> com.
Participants on today's call will include alcohol founder chairperson of the board of Directors and Chief Executive Officer, Mr. <unk> Wang.
Chief Financial Officer, Mr. Chow.
And myself some Sam Hello.
Massa relations.
Before we continue please note that today's discussion will contain forward looking statements made under the safe Harbor provisions of the U S. Private Securities Litigation Reform Act up 1995.
These payments typically contains words such as may.
Well I come back on.
That's it.
Right.
Yeah.
Beliefs.
Potential.
Continues.
Our AGA similar expressions.
Forward looking statements involved inherent risks and uncertainties.
The accuracy of these payments 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 fish factors are beyond our control.
The company is a fairly advisors representatives and underwriters do not undertake any obligation to update these forward looking information.
Except as required under applicable law.
Please note that our technologies.
<unk> press release and this conference call include discussions.
Unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.
Alright technologies press release.
A reconciliation of the unaudited non-GAAP measures.
So the unaudited GAAP measures.
I will now turn the call over to Mr Taste lab.
Useful.
Okay.
Thank you Sir.
Hello, everyone.
Thank you for joining our earnings conference call today.
As most of you are aware.
Two major back later at the bottom line.
Place around second quarter 2021.
The first one.
March 22nd.
Well now start he's made an announcement.
Public comment on the proposal tourism wise relevant regulation.
To answer your Cupellation W E cigarettes.
And it's all the quality and safety risks.
And false advertising problems among others.
They believe that such regulatory framework.
Both necessary and beneficial.
For the long term healthy development of the industry.
It has served us well.
Eliminate the race.
There's uncertainty regarding the alleged messy.
This product category.
It can also help Y youth events and setbacks.
It would have occurred in some other overseas markets.
And are you sure the long term, but parity of the industry in China.
As of today, no need here and there.
I'd, rather let tourists from work have been released yet.
And we will closely monitor and follow up.
And as for the announcements.
The second development took place in May and June.
Then the Chinese National Health Commission.
Currently the China report I'm, a health hazard I'm smoking Tucson, Frankie Frankie.
Mentioning about Beijing partner.
The media and public.
And adult smokers and at our users meeting paradox.
What confused by certain other context historical information in the reports.
About the harm reduction benefits of using breaking fair enough.
Nasty population.
Since the release of the report.
We have been working closely with relevant scientific research.
Sundar communication.
To provide better information and I'm biased knowledge on related topics.
Yeah.
But that was founded to serve adult smokers.
State of the art curtain.
And I'll leave a rain pursuit.
Typically the wants us to deliver harm reduction benefit to our users.
Does that begin in the second quarter, we continued devoting resources to key operational areas.
Including Fine Science research and development.
Product innovation.
Quality assurance and control.
And brand building.
No were as a public company, we have spud that strengthen our operational and financial internal controls to better protect all of our shareholders value.
In the second quarter, we maintained our momentum momentum, you're attracting and developing high caliber talent.
And of course, our workforce.
27%.
These highly skilled individuals joined us from leading companies across.
M E T technology and pharmaceutical industries.
We're pleased to see like minded, Thailand, joining of our course.
And together we have achieved.
Satisfactory net revenue growth of 6%.
Two 4 billion RMB in the first quarter 221.
Kids more bidding RMB in the second quarter.
With that I will now turn the call over to our CFO who call Covid.
Can you maybe elaborate further on some initiatives taken during the past quarter.
I'll go over our operational and financial results in more detail.
Chao. Please go ahead.
Thank you Kate and Hello, everyone.
It has been my pleasure and privilege to have worked at the last four quarter Bye now.
To quote Steve jobs.
The only way to be truly satisfied with.
To do what you believe this great book.
And relax, we're doing great work by providing products of the highest quality and safety standards to adult smokers.
Harm reduction for themselves and for their loved ones around them.
I'm glad that I have joined this call.
Now, let me share some specifics regarding the initiatives we have taken in the second quarter.
Following that I will walk you through our financial results.
Okay.
In the past quarter, we continued the expansion of our offline distribution network and retail channels.
While we saw some weakness in product procurement by branded stores in the second half of the quarter.
Most likely due to negative publicity on ebay for industry.
And the absence of clarity on the regulation front.
We firmly believe that the steady expansion of our distribution network and retail channel is key to our long term growth and competitiveness.
We hope that with the passing of time and trading out of publicity effect.
Cost of procurement of branded stores will soon regain momentum.
Yes.
On the product front, we are focused on both device and flavor innovation.
We are working on a rich pipeline of product offering to cater to distinct user groups with differentiated preferences and price sensitivity.
We expect these product offerings to be launched in stages.
To further drive penetration and enhanced user retention.
We also take pride in our reputation.
Consistently delivering high quality products.
And investing heavily to improve quality control measures as we seek to further elevate.
User experience and inspire deeper you said longer term.
We conducted a rigorous quality assurance and control throughout our entire production cycles.
And have to but three production plant to further strengthen our QA and QC capabilities.
Yeah.
Our QA and QC systems consist of five laboratory with 197 quality control checks.
To ensure that every intake of our aerosol represents the safest and finest of vaping experience.
Currently we have over 110 professionals, managing our entire quality control process, which includes raw materials.
Reduction.
And finished products.
In terms of scientific research.
On July 32021.
We jointly published a research paper and the Sci Journal.
Core toxicology and environmental safety with salaries thing University.
Titled comparison of biological and transcript comics effects of conventional cigarette and electronic cigarette smoke exposure.
Toxicological dose and be able to be so.
The research pay by reveal that.
Based on equivalent nicotine content in it.
<unk> exposure to cigarette smoke condensate.
It's significantly larger impact on cell effect and gene expression profile compared.
Compared to E cigarette smoke contacts it.
Further demonstrating the harm reduction harm reduction effects of E vapor products versus combustible cigarettes.
On August 4th 2021, our E vapor clinical trial was successfully registered with the China clinical trial registration Center.
And the <unk> all international clinical trial registration platform.
Our trial is the first E vapor clinical research project in China.
Both ethical and expert reviews.
And to be approved for implementation.
And the boys and domestic E vapor clinical research.
It is also a pioneer is that our scientific studies in the China E vapor industry.
Looking forward, we will keep investing and in house lab research related to product quality and safety.
Vizio chemistry, pathological and clinical elements.
And the evaluation of long term use of E vapor products.
In keeping with our commitment to social corporate responsibility.
We remain dedicated to building and strengthening our trusted brand by.
By consistently adhering to our strong ethical principles.
On June 1st immediately after the enactment of law on the protection of minors.
Relax what the first among all our peers to call on all industry participants to thoroughly studied the regulation.
Strictly abide by all of them.
In July.
Several provinces in China, while affected by extreme weather and natural disasters.
Resulting in hundreds of Coyote.
We once again acted swiftly.
By donating millions to China, Korea, and foundation for poverty alleviation fun emergency supplies.
In addition, we will also deeply concerned about our partners the lawsuit.
And decided to set up the lax stores relief fund to help them recover the businesses.
Now turning to financial performance.
Our top line quarter on quarter growth slowdown in Q2 due to external factors.
By Kate previously.
Okay.
The impact of these factors are difficult to predict.
And may linger after the second quarter as well.
However.
We remain devoted to continuously driving user penetration among adult smokers as we firmly believe that the strength and benefits of harm reduction will prevail.
Over a misconception and false information.
Yes.
I will now provide a summary overview of our financial results for the second quarter of 2021.
Net revenues increased by 6% to RMB, two 5 billion in the second quarter of 2021.
From RMB, two 4 billion in the first quarter of 2021.
The increase was primarily due to an increase in net revenue from south to offline distributors.
Which was mainly attributable to the expansion of the company's distribution and retail network.
Gross profit increased by three 8% to RMB 115 billion in the second quarter of 2021 from RMB, One 1 billion in the first quarter of 2021.
Yeah.
Gross margin was stable at 45, 1% in the second quarter of 2021, <unk> compared to 46% first quarter of 2021.
Operating expenses were RMB $167.2 million in the second quarter of 2021, representing.
Representing a decrease of 86, 3% from RMB, one 2 billion in the first quarter of 2021.
The significant decrease in operating expenses was primarily due to the recognition of share based compensation expenses of positive RMB hung.
$172.5 million.
Representing one share based compensation expenses, a positive RMB $51.5 million recognized in selling expenses.
To share based compensation expenses, a positive RMB 41 minute recognized in general and administrative expenses.
And three share based compensation expense at a positive RMB $79.7 million.
Recognizing the research and development expenses.
The significant fluctuation in share based compensation expenses was primarily due to the changes in the fair value of the ship incentive awards that accompany granted to each employee.
As affected by the significant fluctuations of the share price of the company.
Yeah.
Okay.
Selling expenses decreased by 56, 8% to RMB $126 million in the second quarter of 2021 from RMB $291.5 million in the first quarter of 2021.
The decrease was primarily driven by one the fluctuations of share based compensation expenses and to a decrease in salaries and welfare benefit partially offset by an increase in branding material expenses.
General and administrative expenses decreased by 93, 5%.
To RMB $46.1 million in the second quarter of 2021 from RMB 712, 8% 8 million in the first quarter of 2021.
The decrease was primarily driven by.
But the fluctuation of the share based compensation expenses and second a decrease in salaries and welfare benefits, partially offset by an increase in legal and other consulting.
Consulting consulting fees.
Okay.
Research and development expenses decreased by 100 and.
102, 3% too.
Two positive RMB four 9 million in the second quarter of 2021 from RMB $211.6 million in the first quarter of 2021.
The decrease was primarily driven by first the fluctuation of the share based compensation expenses.
And second.
A decrease in salaries and welfare benefits.
It will be offset by an increase in depreciation and amortization expenses.
Income from operations was RMB $979.3 million in the second quarter of 2021.
Compared with loss from operations of RMB $111.9 million in the first quarter of 2021.
Yeah.
Income tax expense was RMB $204.2 million in the second quarter of 2021.
Paired with RMB $176.3 million in the first quarter of 2021.
The increase was primarily due to an increase in taxable income.
Okay.
U S. GAAP net income was RMB.
$824.3 million in the second quarter of 2021, compared with U S. GAAP net loss of RMB 200, 267 million in the first quarter of 2021.
Non-GAAP net income was RMB $651.8 million in the second quarter of 2021.
Presenting an increase of six 8% from RMB $610 five minutes in the first quarter of 2021.
U S GAAP basic and diluted net income per American depositary share.
RMB.
595, and RMB five nine.
591, respectively in the second quarter of 2021.
Compared to U S GAAP basic and diluted net loss.
Of both RMB viewpoint.
To your 0.174 in the first quarter of 2021.
Yeah.
Non-GAAP basic and diluted net income per ads were RMB four.
Four seven.
And RMB four.
467, respectively.
In the second quarter of 2021.
Compared to non-GAAP basic and diluted net income for both.
Both RMB.
398 in the first quarter of 2021.
As of June 32021, the company had cash and cash equivalents.
Restricted cash.
Short term bank deposits short term investments and long term bank deposits of RMB 14.8 billion.
Compared to RMB <unk> 14, 4 billion as of March 31st 2021.
As of June 32021, approximately U S. Dollar one six for getting what's denominated in U S dollars.
This concludes our prepared remarks today, we will now open the call to questions.
Operator, Please go ahead.
Okay.
We will now begin the question and answer session.
To ask a question you.
You May press Star then one.
On your telephone keypad.
If you were using a speaker phone.
Please pickup your handset before.
Before pressing the keys.
If at any time your question has been addressed.
And you would like to withdraw your question. Please press Star then two.
For the benefit of all participants on today's call.
If you wish to ask your question to management in Chinese.
Please immediately repeat your question in English.
Again it is star then one to ask a question.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Lydia Ling with Citi. Please go ahead.
Okay.
So management is the leader from Citi and thanks for the presentation and taking my questions I have two questions. The first one is given the slowdown in that.
Second quarter could you elaborate more on just a quarter to date trends also were all up on the second half given college late like definitely negative publicity and also regulation environment and then my second question is on the extension so could.
Could you tell.
Tell us about how many stores do open step for us.
Second quarter and also what's your openings late in the second half given current market conditions and also how is your distributor sentiment on in Europe.
Thank you.
Sure. Thanks, very much lithia. So regarding the first question is mainly regarding.
First quarter trend.
<unk> and also the second half of our loans.
So as a formal E vapor products remain underpenetrated.
Ill ask a question on China.
Our company believes that harm reduction products, including E vapor products are all currencies for asthma <unk> in China.
We remain committed to the trend of analysts Mccars enbridge income cigarettes to E vapor products.
We are confident in the medium long term prospects of the inventory.
As well as our field trip recall.
So to answer your question regarding our third quarter to date Transpacific, Holly we have cleanest decentralization.
Operating and financial metrics in recent weeks as we continue to engage and retain our users.
So we are very confident on the future outlook of the company.
So regarding your second question is mainly on the store numbers.
Turning plan.
Distributors sentiments et cetera.
So I mean with part of our overall start with logic.
We believe our current model is very solid.
Our model largely depends on where that.
Users are using our products in order to support a brain upon a stall in the kitchen area or a district.
So for our newly.
Brent upon his thoughts.
We monitor and evaluate the store productivity.
In combination with other macro and micro factors.
So for example.
So our productivity after newly opened stores is better than expected productivity car.
So we will allow some new stores to be opened and vice versa.
So it will have much.
Our label tax in different age groups or areas based on the HD since March.
In our Michael Manish and witness our manage any cannibalization.
In existing and new stores.
So we indeed closely monitored the singles bar economic model of our current Brian upon his thoughts.
So thanks very much part of question.
The next question comes from Charlie Chen with China Renaissance. Please go ahead.
Thank you management for taking my question I guess two questions here first of all I want you ask about steep performance of your products in different categories like the premium products versus the mainstream products, which you launched about a quarter ago. So how has that developed for.
So far and my second question is regarding the retail price as we observed some of the competition in certain areas quite.
So do you see any retail price softness or rather a volatility in some of the markets and also is there any special situation, where distributors made you parallel trading which means they are selling their products at a lower price Chi.
Outside of their authorized areas.
That's the situation alright, thanks happened in Europe market. Thank you.
Sure. So thank you very much Charlie so regarding the first question is on on our product brands. So we have been providing diversified our product portfolio.
Various price points from <unk>.
So you will see that more and more users asthma course, if different paths of user group trying to use our products at their home exception alternatives.
So regarding our new products. So we do see that there has been positive feedback and contribution from both our users and retailers.
So we will continuously cautiously to monitor our user behavior and trends.
Trying to optimize our panamax wildcard and launching new product lines.
So on the second question is on pricing actuaries have selling price and unauthorized sell by distributors to unauthorized areas.
So first one is on pricing. So we have been closely monitoring the pricing across the balance sheet.
Especially the actual selling price and discounts of our products from retailers Parnell Bill.
So indeed in Asia, and our program to monetize the actual sale price of each layer of our value chain in the second quarter of change 'twenty one.
We do see that most of our retailers, especially brand upon us dollars ASP.
Following suggested retail selling price in there at yourself to adult smokers.
So regarding any unauthorized south of distributors to unfold authorized areas.
So we have been actually implementing effective matches in technology and control.
We have a unique QR axle system for each of our product line.
So if you found any of our distributors.
Retailers report any cases that they see an authorized products being a period.
Reveal the identity of distributors selling such products and software issue. Accordingly. So thank you very much for your questions.
The next question comes from Stephanie Mom with Python International. Please go ahead.
Right.
Hi management. Thank you for taking my questions I have two questions from my and my first question is regarding on store openings.
We noticed that some of our peers have also get more store openings in the past couple of months, maybe know what is the management's views on that first of all as our approaches on store openings.
Second question is regarding on the raw material cost pressures and gross margin do you think the cost high cost raw materials, maybe you know if we have to lift up the wholesale prices to franchisees and distributed in all their deposit costs on <unk>.
And how should we estimate that margin trend going forward. Thank you.
Sure. Thank you very much patterning. So on the first one is on.
Subsidies gives them a competitive landscape.
You do see that our startup speeds have remained consistent and now subsidies per store have the equate consistently since we have introduced a burner punish those model back in early 2019.
Yeah in assessing and grants thoughts at least largely based on the macro environment and single store economics of our brand upon us Clos.
So I mean part past two years, our peers have offered far more subsidies to potential star owners driven by their intention to penetrate the market and make our presence.
However, these larger subsidies frequency did not translate into market share growth of their brands.
Given the currency environments of the industry.
We have recently seen our peers start to decrease their subsidies to potential brand upon his thoughts.
In the medium and long term he believes that starts of disease will be more rational.
And we will become more dependent on the single store economics of each brands, Brian upon his thoughts.
So regarding the second question is on the raw materials increase and whether it's increase al.
Pricing and margins.
So given the macro situation so the price of raw materials for example, like chips.
Batteries have been on an upward trend since the beginning of the year.
As a result, some of our suppliers have experience an increase in procurement costs throughout the supply chain.
However, so far we didn't really experience a significant increase in unit cost due to the price of raw materials. So far.
And therefore, we have not increased the wholesale price of our products being sold to our distributors.
But of course, we will closely monitor the latest supply chain development as well as our suppliers operating issues.
Give them the cost optimization in each atheists, our entire industry value chain.
For example, like automated production cost saving product design.
We believe the long term given the cost of the industry, including ours will be further optimized.
Thank you very much for a question.
The next question comes from drew now Bob what's the ICC.
Please go ahead.
Yeah.
Hi, Thanks management for taking my question, So I am sure Paul So I would say ITC.
Also have tool question, yes, that's the way it's a we know that because they are mainly are there more and more E cigarettes in the market how does the management estimates of the future a competitive.
Competitive landscape among Chinese E cigarettes right.
My second question is since many similar vape cartridges argues market, which can also be used.
The debate is like a week.
Actually within the hour that will do to solve this problem. That's my two questions. Thank you.
Frankly, I imagine how so I mean on the first one is on the competitive landscape.
China's E vapor markets.
I believe the competitive landscape of the market will be increasingly complex.
Requesting each brand.
Market participants to put more emphasis and further innovate in asset classes, such as commercial strategy product innovation and efforts in scientific research.
So we believe that with our leading position strong brand equity extensive retail network and product innovation capabilities.
We can remain or expand our market leadership in the China market.
So regarding the second question I'm not sure if I hear correctly is on the compatible a path that you have mentioned.
So I'm in for unauthorized compatible pods, we do see that they post a great hurry to E vapor users house, given that's the product quality and safety and may not be guaranteed.
These comparable Pos are also largely sold in illegal retail channels, which may be a basketball to under age users.
So as a brand.
Have been collaborating with various partners and parties.
Prohibits illegal sales of unauthorized compatible path and have filed a patent claims and lawsuit against brands that may have used our patrons.
<unk> without our permission.
So I mean on commercial wise, we also have expanded our product portfolio to cater to a diversified knees off the E Bay produces in China in multiple aspects, including the availability of flavors.
Price points and functionality.
We do believe that these commercial strategies have been and will continue to be effective in combating unauthorized compatible cartridge that currently exists in the markets.
Well, thanks very much for your questions.
The next question comes from Louise Li with Bank of America Securities. Please go ahead.
Hi, Thank you management for taking my question.
Question.
I know that.
We set up our electronic clinical.
Clinical trial, we lap.
Hello, we took out so what are the major or the potential benefit of that.
And secondly.
About the regulation of the potential impact.
The whole industry is under the regulation in China tobacco kit.
Sure Thanks very much.
So it's nice to have you. So far first question is on the lap that Chuck mentioned in the opening remarks.
So our trial is actually the first E vapor clinical trial projects in China for E vapor products that have passed both ethical and expert reveals and have been approved for an implementation.
So we believe that.
This laboratory and research can show past hour, leading to both therapies in scientific research and clinical trials.
So as a company, we believe that fact speak louder than words.
We hope more and more clinical trials on E vapor products to be carried out in upcoming years.
With increasing fact base science based communication across various parties.
And more and more out of smokers can use E vapor products as their harm reduction tobacco alternatives.
So regarding the second point on the regulations fronts.
So on March 22, so the <unk> released.
<unk> rules regarding E vapor products.
So as mentioned in the last earnings call we have.
Ladies and metered power feedback regarding the proposed revision of the implementation plan.
So currently there's no updates on the regulations and no new implementation details have been rebuilt.
These are parts directly between matches mentioned in announcements.
Including the proposal directly the operating activities after ebay for industry.
And tackle potential product safety issues of E vapor products.
Advertisement et cetera.
So frankly I much phone questions.
Yeah.
As there are no further questions now I would like to turn the call back over to the company for closing remarks.
So thank you once again for joining us today.
So if you have any further questions. Please feel free to contact our Rx technologies Investor Relations team through the contact information provided on our website or TPG Investor relations. Thank you very much.
This concludes the conference call you May now disconnect your line.
Thank you.
Okay.
[music].
Yes.
Okay.
[music].