Q3 2021 RLX Technology Inc Earnings Call
Hello, Ladies and gentlemen, thank you for standing by for <unk> technology.
2021 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.
It's a loss for about 45 minutes.
I will now turn the call over to your host Mr. Samsung.
Investor Relations of the company. Please go ahead Sam.
Thank you very much Hello, everyone and welcome to our technologies.
Quarter 2021 earnings conference call.
The company's financial and operational results were released through PR Newswire services earlier today and have been made available online.
You can also build the earnings press release.
Mr. Tang the IR section of our website at IR docs without stock comp.
Participants on today's call.
Co founder chairperson of the board of Directors and Chief Executive Officer, Mr case land.
Chief Financial Officer, Mr. Chao Lou.
And myself.
<unk> head of Investor Relations.
Before we continue please note that today's discussions will contain forward looking statements made under the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 995.
These payments Difficultly campaign works such as Maine.
Thanks Beth.
Estimate.
Pam believe potential continue or.
Other similar expressions.
Forward looking statements in walk 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 which are some hot beyond our control.
The company is affiliate of Pfizer's Representatives and underwriters do not undertake any other patients to update these forward looking information.
Except as required under the applicable law.
Please note that our X technologies earnings press release, and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.
All of this press release contains and reconciliation of the unaudited non-GAAP measures.
Unaudited GAAP measures.
I will now turn the call over to Mr. Wang Please.
Please go ahead.
Okay.
Thank you Sam and thanks, everyone for making time storing all of our conference call today.
In the second half of the third quarter.
There have been progressing rapidly treated watson through the global E vapor space, including in China.
Last Friday November six 2021.
The State Council announced its decision to amend the detailed and citation reservations of the tobacco monopoly law.
Posted with public of China.
Thanks, Ed.
<unk> 65.
We think that's it.
Segmentation rules for next generation tobacco part up.
Including E cigarettes shall refer to as relevant tools.
Back to cigarettes under the implementation recreation of the tobacco monopoly law.
On Tuesday November 32021.
The state's tobacco monopoly administration released a consultation paper entitled Electronic cigarettes.
National Public service pass one four standards information understate, the maintenance attrition for market recognition.
Seeking public comment regarding Nate nationally electronics, Greg paradox tenders.
Yesterday December 2nd two five times of one the state tobacco monopoly administration released.
Validation paper entitled.
The minutes kids matters for electronic cigarettes.
He can probably comment regarding it administered in mattress electronic cigarettes.
Powering barriers to access and.
And clothing production distribution and retail sales.
Import and export.
And inspections.
Oh, we firmly support this amendment to the detailed implementation recreation.
And have them call, making any required changes to fully comply with the new regulations.
In the minutes Trickett measures.
We believe the amendment.
Paved the way for long term indices terminable well.
Sector.
We are also well meaningful worldwide regulatory developments.
Which reflects 700 trend globally.
Okay.
In the United States.
The FDA has made substantial progress reviewing P. M P a applications.
And granted its first ebay part of authorization in October.
Demonstrating its recognition of certain you'd be prepared.
Harm reduction facts.
We closely follow global regulatory developments.
He has this calculation of E vapor products at the global trend.
And view grow as countries worldwide recognized either preferred or.
Harm reduction benefits well have that smokers.
These regulatory developments.
Especially in China.
Believe the scepter will enter a new era.
Development and ore market.
Marked by Hawk product safety and quality.
Oh man take social responsibility.
Ending improved.
Electro property protection.
Some of them you may be a winner.
CERN Cordova.
Pounding on the commercial front for the entire industry value chain.
Which had been reflected in our key bio team partner for natural results previously.
My information from temperature, a nectar published Jiang with E vapor sector, and Walgreens COVID-19 restrictions.
Pump two outbreak in China.
Which we discussed during last quarters earnings call.
<unk> had a significant adverse impact on the retail sales.
And product procurement now a brand new store.
The latter half of the second quarter.
As a result, we have record.
Circuit Walker Bank caught her will call her decline our net revenue.
But we believe this revenue declines to be temporary and to have a clean and clear plans to achieve long term healthy growth, which Tom will explain in detail later.
Despite the industry.
Industry headwinds, we continue to focus on building a solid foundation for sustainable success.
In the third quarter, we doubled our scientific research afterwards and have continued to attack.
Recruit top talent to strengthen our sales supply chain and R&D capability.
We are committed to providing.
Adult smokers in the law to harm reduction part of that was the highest quality.
Also at <unk>, We also plan and act was long term.
Corporate social responsibilities.
Being an integral part of value since day one.
In the third quarter, we unveiled our 2022 2021 corporate social responsibility report.
Bearing we shared our progress with respect to our CSR initiatives.
Some highlights in our industry, leading age verification system. Some flowers system three point O.
Within cost of features to prevent Andre teams.
I'll remember that care community service program to promote tomorrow.
Utilization in common prosperity.
He's accomplishment.
Testament to our dedication to fulfilling our social responsibilities.
We've tried to positively impact our users employees and communities in which we live.
With that I will now turn the call over to our CFO Cao Lou.
He will elaborate further on some.
While we're not callers measured tests.
And our goal or our operations and financial results in more detail.
Chop. Please go ahead.
Sure.
Thank you Pete and Hello, everyone I.
I will start by sharing some of this quarter's major initiatives and developments.
And then walk you through our key financial metrics.
We believe that offering the right product to the right user segments.
The optimal route to market will be the key to our sustainable high quality growth.
To this end, we continue to expand our product offerings to meet the needs of a diverse user segment and.
And optimized our distribution and retail networks to ensure quality data.
With respect to products we.
We are focused on offering better and more tailored vaping products.
Eric you said, which to help engage new users with the right product.
This quarter, we introduced E shooting.
Our new brand targeting adult smokers with a long history of smoking.
Our goal is to recreate and authentic smoking experience for adult smokers.
By launching eight tobacco flavored cartridges and our initial stage.
At the same time, we further upgraded shameful.
All accessible product line catering to price sensitive users needs.
We also recently re launched Stella.
Or she saw.
In Chinese.
Our premium device fly with upscale sky styling, including better life.
And other fashionable materially.
We will continue to monitor user experience it very closely and launch innovative targeted products at the right time.
We also made several advancements in user retention and engagement during the quarter.
We successfully upgraded our membership system, enabling members to enjoy more benefit as they accumulate reward points.
A growing number of users are scanning the QR codes on their cartridges to collect the reward points, which will allow us.
To empower users with instant product authentication.
Separately, we have established more effective communication channels.
To provide unbiased fact based scientific E vapor product information geology and the community.
Okay.
Finally, we are concentrating on distribution and retail channel optimization.
Instead of engaging more distribute it and expanding the number of our relaxed branded stores this quarter, we prioritized our existing distributors organizational upgrade.
We encourage our distributors to hire exceptional talent.
And then refine that unique structure within each department.
We optimize existing relax branded partner stores location.
Identifying the areas with high retail sales potential.
And encourage install net to adjust operations accordingly.
In addition, we provided online and offline training or store owners and sales personnel to enhance their communication skills, ending in which their product knowledge.
In order to counter the adverse effect from mix inflammation, resulting from periodic negative publicity oral category.
We have also upgraded our digitalization and shift them for branded partner store, providing improved functionality and additional use of portola.
Two of fixed store owners in South of course now in their daily operations.
While other retail outlets our focus in the third quarter was two identified primarily for expansion through trials and various channels.
These trials without it in several initial successes include.
Including strong momentum in lifestyle channels and other key accounts.
In addition to all entities all high quality growth, we are deeply committed to fulfilling our corporate social responsibilities.
We believe the healthy relationship between our products, you said shareholders and the community has been essential to the growth we have achieved all by relaxes four year history.
With this in mind, we will work tirelessly to introduce new technologies to tackle industry pinpoints.
For example, minor protection is one of <unk>.
Relaxes highest priority.
We spend no effort, our minor protection initiatives.
Product labels to trade channel and technology innovation.
In June 2021, we began upgrading sunflower system, our technology driven lineup protection system to version three point out.
And currently equipped all of our branded store with the upgraded software.
Almost half of our system three point O all users.
Wired to compete ne plus IV number.
Recognition three steps clarification before purchasing.
After the amendments to China's national standards become effective we will strictly comply with any upgraded product requirement.
For example, we are prepared to include minor protection features such as a child safety locks.
Similar to the feature which we have incorporated into our relaxed product line back in 2019.
As a company that values long term high quality growth.
Our commitment to social corporate responsibility is at the core of our daily operation.
To Echo what Kate has pointed out previously our gaming has entered the second half.
With the state Council decision to have met the detailed implementation and regulation of the tobacco monopoly ball.
And the subsequent release of AR.
Consultation paper regarding national electronic cigarette product standards.
By the states tobacco monopoly administration.
As well as last night's release of a conflict consultation paper.
Adding an administrative measures only electronic cigarettes, covering various aspects, including production distribution and retail sell import and export and inspection.
Different from the first half of the game when the sector lack clear regulatory guidelines.
The second half is marked by an enhanced product quality safety and quality authentic social responsibility.
And improved intellectual property protection.
The investments we made in product talent research and compliance in the third quarter and beyond will place us advantageous conditions of the new regulatory paradigm.
We expect these investments to get steady and sustainable growth.
And two of water and our shareholders in the long term.
Turning to our financial results for the third quarter of two probably in 'twenty one.
Net revenues decreased by 34% to RMB, one 8 billion.
Equivalent to U S dollar 262 minutes.
First quarter of 2021 from RMB two five for bidding in the second quarter of 2021.
Okay.
The decrease was the result of volatile market conditions, including one.
Negative EBIT claimed that the publicity since the latter half over the second quarter.
Two the fact that the new the draft New rules announced on March 22nd in 2021 had not been formally confirmed and no new information implementation detail had been revealed during the quarter.
And three.
Ballgame restriction.
Sponsored COVID-19 outbreak in China, which had an impact on our sales and channel inventory management.
Gross profit decreased by 42, 8% to RMB 656 million equivalent to U S dollar one.
101, eight minutes in the third quarter of 2021 from RMB 115 bidding in the second quarter of 2021.
Gross margin was 39, 1% in the third quarter of 2021 compared to compared to.
54, slide 45, 1% in the second quarter of 2021.
The decrease was primarily due to one an increase in direct costs related to promotional activity and to an increase in inventory provision.
Operating expenses were positive.
$241 3 million equivalent to U S dollar $37 5 million in the third quarter of 2021.
Representing a decrease of 244, 4% from RMB $167 2 million in the second quarter of 2000 and trying to work.
This significant decrease in operating expenses was primarily due to the recognition of share based compensation expenses.
Positive RMB $523 7 million.
Equivalent to U S dollar.
$81 3 million.
And shifting.
Wyman.
Share based compensation expenses, a positive RMB $19 8 million equip.
Equivalent to U S $14 1 million recognized in selling expenses.
To share based compensation expenses of positive RMB $328 1 million.
Equivalent U S dollar $49 7 million recognized in general and administrative expenses.
And three share based compensation expenses.
RMB $112 8 million equivalent to U S dollar $17 5 million recognized in the research and development expenses.
Yeah.
If I can do that.
The significant fluctuation in share based compensation expenses were primarily due to the changes in fair value of the share incentive awards that the company granted to employees as affected by significant fluctuations of the company's share price.
Yeah.
Selling expenses decreased by 55, 1% to RMB 56, 5 million equivalent to USD eight eight minutes.
In the third quarter of 2021.
From RMB 126 million in the second quarter of 2021.
The decrease was primarily driven by first the fluctuation of share based compensation expenses.
A decrease in salaries and welfare benefit partially offset by an increase in branding materials exactly.
General and administrative expenses decreased by 649, 8% to.
Two positive RMB $253 two minutes.
Equivalent to U S dollar $39 3 million in the third quarter of 2021.
From RMB 46, 1% and the <unk>.
Second quarter of 2021.
The decrease was primarily driven by the fluctuation.
Share based compensation expenses, and a decrease in salaries and welfare benefits.
Yeah.
Research and development expenses decreased by 808, 3% to positive RMB $44 6 million.
Equivalent to U S dollar $6 9 million.
In the third quarter people on in 'twenty, one from positive RMB $4 9 million in the second quarter of 2021.
The decrease was mainly driven by the fluctuation of the share based compensation expenses.
And a decrease in salaries and welfare benefits, partially offset by an increase in software.
And technical expenses and second an increase in consulting expenses.
Income from operations was RMB $897 3 million equivalent to U S dollar $139 three minutes in the third quarter of 2021, compared with RMB 900, $979 3 million in the second quarter of 2021.
Income tax expenses was RMB $121 4 million equivalent to U S dollars $18 eight minutes.
In the third quarter of 2021 compared to RMB $204 2 million in the second quarter of 2021.
The decrease was.
Primarily due to a decrease in taxable income.
U S. GAAP net income was RMB $976 4 million equivalent to USD 150, 951, sorry, $151 5 million.
The third quarter of 2021 compared to RMB $824 3 million in the second quarter of 2021.
Non-GAAP net income was RMB $452 7 million equivalent to U S. Dollar $70 3 million in the third quarter of 2021, representing a decrease of 35% from RMB $651 8 million in the second quarter ship on 'twenty one.
U S GAAP basic and diluted net income per well.
R M B 0.7 to four equivalent to U S dollar 0.112.
RMB <unk> 717.
Equivalent to U S dollar viewpoint 111, respectively in the third quarter of 2021.
Impaired to U S GAAP basic and diluted net income per avs of RMB.
$5 95, and RMB 591, respectively in the second quarter of 2021.
Non-GAAP basic and diluted net income per ads was RMB three.
Briefly six.
Equivalent to U S dollar you'll 0.052.
And R&D is there a 0.333 equivalent to U S. Dollar 0.052, respectively in the third quarter of 2021 compared to a non-GAAP basic and diluted net income per avs RMB zero point was seven zero and RMB <unk> four.
467, respectively in the third quarter of 2021.
As of September 32021, the company had cash and cash equivalents restricted cash and short term bank deposits short term investments and short term bank deposits of RMB 14, seven two.
Okay.
Equivalent to U S. Dollar 2.28 billion compared to RMB 14, eight 8 billion as of June 32021.
As of September 32021, approximately U S dollar $1 64 billion equivalent to RMB 10 point.
$5 9 billion.
Was it was denominated in U S dollar.
Yes.
For the third quarter ended September 32021.
Net cash used in operating activities was RMB $142 9 million.
Equivalent to U S dollar $22 two minutes.
This concludes our prepared remarks today, we will now open 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 of you touched on some of them.
If there isn't a speakerphone please pick up your handset before pressing the keys.
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.
Today's first question comes from with Citi.
Please go ahead.
Okay.
Hi, everyone. Thanks management for the presentation and this is <unk> from Citi I have two questions. My first question is given the recent congratulation upstate developer mindshare.
Would you like to share with us how we our product portfolio involved going forward and watch changes can we expect to see in your existing product portfolio and then my second question is so we saw the slowdown.
In the third quarter itself could you actually share more color on your fourth quarter to date operation.
And also your ultra that's all for next year given the current.
Graduation updates and and also does the COVID-19 situation. Thank you.
Thank you very much livia.
So regarding your first question regarding our product portfolio. So we do have a very clear positive on our strategy as mentioned in the opening remarks, we plan to offer device products to the right Scotia silent for the optimal route to market channel.
We are aware of the press conference.
State tobacco monopoly administration yesterday, and also the announced public consultation.
National electronic cigarettes across standards.
So it seems a transition period.
Requirements to become effective.
Gratefully compliant with the regulatory guidelines.
So regarding what was the change to our current product offerings.
And or when the draft national electronic cigarettes cross standards become effective.
Anticipate we may need to monetize some of our current offerings.
However, we are very confident that such changes once the complex for our company and a colleague and we believe asthma Kristian will still continue to seek out and use our products.
Tommy touched on alternatives.
So regarding your second question about our parts of outlooks and tie in 'twenty.
So we currently do not have any guidance.
Quarter, two got together with next year. So we hope to shatter Marlin has got a parakeet.
Thank you.
Our next question today comes from Charlie Chen of China Renaissance. Please go ahead.
Thank you management to taking my questions I have two questions here.
First one is could you please share your observations on the current path.
For the industry are there any changes compared to the first half of this year.
And also what are your thoughts on the retail pricing fortinet.
Harsh environments. So that's the first question.
My second question.
Duffy.
Yeah, So on Rd single store sales.
Brandon pumped storage.
Al.
Nor perspective.
How do you consider to be a healthy those store sales now thank you very much.
Thank you very much challenging so I mean, there are two questions one is on the.
Competitive landscape and the other one is on I'll spend a ton of stores.
So I mean on the first one.
As mentioned before during the latter half of the second quarter we.
We do see past the industry the boundless did not progress as expected.
Indeed, this has carried into the first quarter and we don't see that there are external factors affecting the entire industry, including our company and also appears to varying degrees.
But indeed regarding competitive landscape we have.
<unk> observed reduced industry combination as compared to the first half of 'twenty one.
So regarding like retail price that you have.
So we do have increased our promotional assets in the first quarter.
Trying to drive our retail sales and reduce inventory pressure.
I'll, let him Shane.
And we have also feed ads keep them the third quarter decline in general consumer spending in China.
Many honors companies then laterally implemented subsidies are auto sales incentives.
So the overall amount appeal of our subsidies are promotional effort is relatively insignificant compared to other consumer goods company in China.
And we have to start already.
Dosing is Florida.
So going forward, we will continue to monitor our inventory level.
Together with use of demand.
And adjust our promotional efforts promptly to maintain reasonable retail price.
And users.
So regarding your second question about the single Star South and also how we mentioned.
Healthy as the indicator.
So indeed.
Painless to ourselves together with their profitability in every operating metrics has been a really core focus.
In our day to day operations.
Yes.
As we also are aware of the industry wide deep in retail.
Starting in the second half of 'twenty one.
But however, we also see that there have been recovery for many of our stores in recent months.
Yes, I'll start operating in a wide variety of implementation somewhat.
Shopping malls.
And some are on the streets.
And they also place different slope environments. We believe each star situation is very unique so in daily entirely.
Healthy parameter for singles Bar, South as we look at it one by one.
So far.
Brendan E vapor company.
Been devoting resources and tools to.
This star owners and sales personnel.
Operations.
Colin providing branding materials P O S N training resources digitalization tools and enhanced store site selection assistance.
So in the parties quarterly has also launched several new products.
And also upgraded our membership system to drive user engagement and retention and better.
So if these niche eighties.
We believe we can and we will continue to drive singles to ourselves after relaxed brand Anastasia.
Thank you very much.
Thank you next question comes from Louise.
Please go ahead.
Hi management. Thank you for taking my question. So my question for you.
Oh, sorry for the Q4 outlook.
You don't have the guidance.
Information that you have seen some recovery.
During the past amount mountain.
So could it be could issue, which has more color on that recovery.
In terms of the single store shelves.
What is that store count between now and then.
Our target.
Hum.
And also what are the key growth driver for the economy.
Yes.
Thank you very much Lee.
So based on our preliminary plus with Mace data, we do see sequential improvement.
In retail sales and also channel inventory management, so he could share more about our strategies in the following aspects.
Pardon me, that's been a kind of thoughts.
To date, we have been focusing on increasing singles to ourselves.
And we kept being mentioned and up till now.
We do see the initial success.
And for either with US we do see strong growth momentum in store counts in multiple channels.
And our retail channel has become more diversified from cloud to date.
But of course, we are also keenly aware of the recent developments.
In the regulatory funds, especially Yesterdays press release helped by these base tobacco monopoly administration.
So it was greatly followed to any new regulations and administrative matches.
Thank you very much.
Thank you our next one.
It comes from.
Oh, yes.
Please go ahead.
Hi, good management and pay hardly FC ITC I have one question is what is the outlook for our cartridge development Andrew Nick attended 2%. Thank you very much.
Thank you very much Jim Howe. So I believe you are actually referring to the two state crop is a constant risk across vendors.
So indeed.
Global.
U S listed Chinese company, we have been long been aware of product requirements globally, including in the European Union and also the initial draft of National tenders.
So looking at the well developed market penetration.
Blowing nicotine concentration will affect some of your statements satisfaction how.
However, most of the asthma Castile satisfying.
Such nicotine content our limits in the long run.
So from the perspective of product development, our technology developments, we have kicked off project right at too low nicotine concentration after satisfaction since 2019, and we do have dependent.
Panicle knowhow and partner with us.
So currently as you may know most of our hottest nicotine concentration is 3%.
If such a national standards, becoming infected.
Tracy you comply with auto requirements at least on the National standards.
Including all nicotine content.
Thank you very much.
Yeah.
Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to the company for final remarks.
Yes.
Okay.
Thank you once again for joining us today.
You have further questions. Please feel free to contact our X technology Investor Relations team through the contact information provided on our website.
Our TPG Investor Relations.
Thank you ladies and gentlemen. This concludes today's conference call you may now.
Disconnect your lines and have a wonderful day.