Q1 2022 RLX Technology Inc Earnings Call
[laughter].
Yeah.
Hello, Ladies and gentlemen, thank you for standing by for <unk> 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.
Now I'll turn the call over to your host what's your Samsung head of Investor Relations for the company. Please go ahead Sir.
Thanks, very much Hello, everyone and welcome to our first quarter type of thing.
Earnings Conference call.
The company's financial and operational results were released.
Our year to date and has been made available online.
You can also build the earnings press release.
Final question.
And I'll start with that.
Hum.
On today's call are input.
Mr housing and lifestyle.
That's what relation.
Before we continue please note that today's discussion will contain forward looking statements made under the safe Harbor provision.
Private Securities Litigation Reform Act.
195.
These payments have wholly contained <unk> such as May will expect.
Target estimate in Japan.
And shall continue our artisan with fashion.
Forward looking statements involve inherent risks.
Certainty.
The accuracy of these statements may be impacted by a number of uncertainties that could cause.
Actual results could differ materially from those projected or anticipated.
Many of which factors are beyond our control.
The company affiliates by source and Representatives did not undertake an application.
These forward looking information.
As required by applicable law.
Please note that our largest earning.
Earnings Press release, and this conference call include discussion of all of the GAAP financial measures.
That's our model.
non-GAAP financial measures.
<unk> press release contains a reconciliation of the unaudited non-GAAP measures, putting our non-GAAP measures.
I will now turn over the call to Mr. Tao Li Please go ahead.
Thank you John and thanks, everyone for making time to join our conference call today.
As you are probably aware that ebay part industry is currently being reshaped by mix of regulatory development.
Solid demand for high quality safe products, both of which I am asking our short and medium term strategy and outlook.
Why would you give us a nice significant we remain confident in our strategy.
Emitted two building and enhancing the trustworthiness of our brand.
As always we will maintain strict compliance with applicable regulatory requirements.
Our core value, while providing premium product.
Premium quality product.
And patron user satisfaction with our industry, leading technology scientific advancements.
Basketball approach.
To give you a general sense of what's happening in China based on industry.
I'd like to provide a macro view of what we are seeing and how our business is serving our users at the sites.
Back to the industry transformation.
Following the publication of the final administrative measures for E cigarettes in March the National standards, and a set of detailed regulatory measure E cigarettes.
Logistics, and it et cetera, but really in the past few weeks.
We fully embraced the new regulations, including the administrative measures and relevant implementation backlog.
As that further refine.
To refine the regulatory framework.
What's clear standards and boundaries.
It's we're benefiting those exist.
Player.
Oh like relax are capable of adapting to the new infrastructure, while maintaining that scale as well as the ability to manage user experiences and risks risks effectively and efficiently.
We have included a brief summary of the recent regulatory developments in our earnings release and.
And more detailed analysis and our annual report on form 20-F.
Now, let me walk you through some of the key bottlenecks.
Yeah.
But as you might have to note that the final national standards will come into effect on October 1st 2022.
Granted I transition period until September 32022.
This provides industry players like that additional time to better adapt to the new regulatory regime and minimize disruption while.
We'll use that and based on market.
In addition, we noticed that a regulatory pilot program was launched in April .
Wait, Joe Guangdong Province, and Shandong Fujian Province.
Under the pilot program the new administrative measures implemented early in these two cities.
The new E vapor products the completion process.
In accordance with the new policy elected local retailer began placing order for E vapor products with the local subsidiary of China, tobacco that well distribute E vapor products and local districts going forward.
To ensure that the process is running smoothly before the new mechanism is rolled out nationwide.
Also.
The national standards tightened the R&D and quality control standards for it and you make a product in China.
Advocating product safety and limiting opportunities for concert.
And unauthorized compatible products.
Next I want to highlight our proactive actions in response to the regulatory changes.
Regarding the licensing requirements under the Ministry of the Mecca.
We have already initiated manufacturing license application.
That's the leading an extra player we believe we satisfied a relevant application requirement.
Yeah.
Yeah and alignment with the requirements.
It's related.
The national standard.
We have already adopted ebay cartridges.
We have already had in Japan.
Ebay pump packages and devices that would believe ocwen compliance and compliance with the national standards.
So and committed.
Two the state tobacco monopoly.
For technical review.
We believe that our products well past sort of review can be successfully launched to market in due course.
I'd also like to mention a user event that we hosted in April at the relaxed Lat am Sanjay.
It doesn't always existing users all invited to sample, our new product and the product.
Presentations by our technology technologically.
<unk> our in depth knowledge.
Technological advancements throughout all product R&D process.
Well I almost I experiment.
The feedback we received from the event.
Weather was a result of BELBUCA Sylvain encouraged us to forge ahead with the use of essentials product strategy designed to adapt with it.
To the regulatory changes.
Given that our adaptation initiatives to enhance user experience and satisfaction are supported power product, but from a capability.
Industry, leading technologies and scientific advancement, we are confident that our new products will be well received by most of our existing user.
Yeah.
To smooth our transition to the new operational regime, we are optimizing our operational structure in many aspects.
Warehousing and logistics ERP system et cetera.
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 48000 retailer licensing in total in the initial stage of regulatory implementation.
We believe that this number will be adequate to satisfy most of the industry existing stores.
Given our relentless efforts to strengthen our operational capabilities and provide superior products to our user.
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 brands, while adult smoker.
We will continue to strictly comply with the new regulation.
Policy, while deepening our commitment to providing high quality products.
Exploring new growth opportunities in the industry.
Before moving on to discuss our financial performance.
I would like to highlight that in the dynamic market in which we operate.
Our dedication to upholding our long term commitments and fulfilling our responsibilities to all industry environment and society is that the core of our ongoing success.
Since our inception, we have what Julian advance a wide range of yet to be initiated within the state.
Take hold of communities we serve.
Our 2021, Yes, you report showcases our actions and progress.
Including our low carbon development strategy.
Climate related information disclosures.
Most recently, we have set targets to achieve carbon neutrality.
Across the scope, one and scope two by 2033 and accomplished net zero plus sculpt, Sweden, no later than 2015 through eight key initiatives.
We are unwaveringly unwaveringly committed to strengthening our E F E governance and management system.
The aging and meeting long term DFT go through ultimately empower all sustainable.
Yeah.
Now I'd like to share some key updates regarding our fourth quarter financials.
Our top line performance in the first quarter continues to demonstrate the resilience of our business and our ability to navigate the rapidly changing market amidst the challenging stemming from the COVID-19 related restrictions.
And the evolving regulatory environment.
Since early March we have seen a strong recovery in demand from distributors.
As the release of the administrative measures brought me some clarity for ebay operation.
However, our shipment volume in the quarter was adversely impacted by that.
Production stoppage at all exclusive production plant.
And delayed by some of our supplier and Shenzhen access city imposed lockdown during that period.
In addition to the seasonal impact of the week long Chinese new year holiday.
Yeah.
Our GAAP gross margin, however declined year over year.
This was primarily attributable to the shift in our revenue mix due to the increasing proportion of cockpit yourselves compared with Santana with last year.
Thanks to our continued.
Continued efforts to optimize.
And streamline our operations.
We maintained a steady unit costs in the first quarter.
Excluding one off 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.
Tracing macroeconomic uncertainty tightening COVID-19 restriction.
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.
At the same goals.
Certainly if the only certainty.
Balance sheet remains strong with a cash position of approximately $14 9 billion RMB as of March 31 2022.
Also we have generated positive operating.
Trading 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.
Hmm.
Net revenue was <unk>.
One 7 billion RMB in the first quarter of 2022, compared with $2 4 billion RMB in the same period of 2021.
The decrease was primarily due to the impact of COVID-19 on our production plant in Shenzhen.
Which have adversely affected our production and shipment volume.
Gross profit was 657 million RMB in the first quarter of 2022.
Compared with $1 1 billion RMB.
Then carried into 2021.
Gross margin was 38, 3% from the fourth quarter of 2022.
Pat with 46% in same period of 2021.
Yeah.
The decrease was primarily due to first a change in product mix and second.
An increase in inventory provision largely due to recent regulatory development.
Yeah.
Operating expenses were $33 6 million RMB in the first quarter of 2022.
Presenting a decrease.
97, 2% from $1 2 billion RMB Vanity area of 2021.
The decrease in operating expenses was primarily due to the change in share based compensation expenses.
Which decreased to a positive RMB $325 2 million in the first quarter of 2022.
From RMB 877, five minutes in the same period periods of 2021.
<unk>, Oh, but share based compensation expenses, a positive RMB 41, 9 million recognized in selling expenses.
To share based compensation expense is a positive $238 1 million or RMB recognized in general and administrative expenses.
And three.
Share based compensation expense and a positive $53 2 million RMB and recognized in our research and development expenses.
The decrease in share based compensation expenses was primarily due to the changes in the fair value of the Sheraton incentive award.
Granted to employees as affected by the fluctuation of the share price of the company.
Yeah.
Selling expenses decreased by 73, 9% to $75 9 million RMB in the first quarter of 2022.
<unk> $291 5 million RMB in the same period of 2021.
The decrease was primarily driven by a decrease in share based compensation expenses.
Second a decrease in salaries and welfare benefits and a decrease in branding material expenses.
General and administrative expenses decreased by 109, 3% to a positive RMB 66 4 million in the first quarter of 2022.
From RMB $712 8 million and that's M. P. A N 2021.
The decrease was mainly driven by one.
A decrease in share based compensation expenses and to a decrease.
And salaries and welfare benefit partially offset by increased legal and other consulting expenses.
Research and development expenses decreased by 88, 7% to 24, RMB 24 million RMB in the first quarter of 2022.
$211 6 million RMB in the same period of 2021.
The decrease was primarily driven by.
A decrease in share based compensation expenses.
Second a decrease in salaries and welfare benefit partially offset by one an increase in depreciation and amortization expenses and to an increase in software and technical technicals.
Technical service expenses.
Income from operations was.
$623 4 million RMB in the first quarter of 2022, compared with a loss from operations, though.
$111 9 million RMB in the same period of 2021.
Income tax expenses was RMB $112 6 million.
In the first quarter of 2022, compared with $176 3 million RMB in the same period of 2021.
U S. GAAP net income was $687 1 million RMB in the fourth quarter of 2022.
Compared with the U S. GAAP net loss of 267 million RMB seven period of 2021.
non-GAAP net income was RMB.
361, 8 million in the first quarter of 2022, compared with RMB $610 5 million in the same period of 201.
U S GAAP basic and diluted net income per ADR.
Were RMB, they'll 0.5 to eight and RMB.
521, respectively in the first quarter of 2022.
Compared with the U S GAAP.
Basic and diluted net loss per ads.
Oh RMB one.
One seven for the same period of 2021.
non-GAAP basic and diluted net income per well.
Were RMB 284, and RMB, they all point to a one respectively in the fourth quarter of 2022 compared with RMB three.
398, and the same.
In periods 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 RMB $414 9 billion.
Paired with RMB 14, 4 billion as of March 31, 221.
Among them approximately U S.
About $1 6 billion, what's denominated in U S dollars as of March 31st 2021.
Sorry 2020.
Q.
Looking ahead, we will continue to focus on the business elements under our control such.
Such as product innovation cost optimization, and operating efficiency 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 shareholder and long term investors.
This concludes our prepared remarks today.
We will now open the call to questions.
Operator, Please go ahead.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Is it are using a speakerphone please pick up your handset before pressing the keys.
I was wondering a question. Please press Star then two.
The benefit of all participants on today's call.
You wish to ask a question to management in Chinese.
To your question in English.
Today's first question comes from linear Wang with Citi. Please go ahead.
Hi management, I Didnt media from Citi and thanks for the presentation and update for the first quarter and on the regulation side.
Two questions here.
What's the question.
Just on the regulations that upfront and we also see many probably does not have details like the retail bank.
So we are very keen to off mall.
Hello.
In terms of your license application for example lifestyle.
You can't get.
Production license and also Oh.
Is it all works.
And we're also very interested.
That was quite a b the initial feedback from your new product it would be very helpful to us and my second question is yep.
No.
Retail Ken also on the retail side itself, how does management see the competitive landscape looking forward as Youll recall my tend to inquiry I include malt brands at store level.
You get a license.
Thank you.
Two questions.
Thank you very much the idea.
The first one is on the license application together with the quantitative elements.
Okay.
It's mainly on the exclusive lease term.
In the latest regulations.
Good morning.
The license so we have already submitted.
Manufacturing license application to the state.
Tobacco Melissa administration. So now we are still waiting for the regulator approvals a paintbrush license and we are confident this past week would be the first batch of branded manufacturer.
Obtained such manifesting license and.
And regarding the question regarding the retail license its belief that most of the retailers that operate the mono brand stores.
So our industry pain.
Paying a retail license.
During the construction period.
And regarding the new product development, we are still undergoing the final testing phase with both small and large user testing groups.
We strive to excel at and the pace of our new.
Tobacco paper cottage, which fully comply with the national standards, while at the same time also ensuring our classic T.
And second question is mainly on the high school, so typically <unk> of the retailer.
Based on our observation equal must be that the competitive landscape has changed much recently.
<unk> changed understands that and Michelle and medium term.
We believe that makes a difference to a brand market share is.
Yes, I mean, the macro motor score Brendan.
Brand equity with a bank and also the R&D capability.
And these are equally important broadband base productivity.
During the transitional period from this month, yes that some retailers who are previously a mono brand stores and the inventory stockpiling out of brands products.
Indeed, we think thats the non exclusive peak cost profile.
Two retailer, who previously about auto brands, bringing our final thoughts.
You bought these retailers may not have so our products are only for our products.
On an at home and formal basis. So if the class being removed. They now chose to at least a product. We are the largest player in the market and our brand recognition and therefore.
Help them to price the single store ourselves.
So on the iron.
There are some retailers who are previously.
Brenda punish those.
We'll start this thing out of brands products as these brands may have provided them at some places our promotional products.
However, based on our observation these brands have not yielded significant retail self Keith on the MTS brand equity user base and product to therapy or less robust.
So in summary, we believe that our market leadership.
Based on these key bankers rather than be excluded activity and we can still maintain a relatively high market share going forward.
Thank you. Thank you for your question.
And our next question today comes from Charlie Chen China Renaissance. Please go ahead.
Yeah.
Yeah.
Thank you management for taking my questions I have two questions as well. The first one is regarding the sale of some momentum in the second quarter of this year.
As we know that's effectively all of your products are actually sold offline. So can you share.
With us some color on how the Covid control measures could impact your sales channel, what's the assay with them only so far.
And my second question is.
In the status of your distribution channels in particular, I would like to get.
You get some sense on whether there is kind of.
Distributor, creating this business or they're leaving us.
Because of the regulatory restrictions.
And also how about the retailer.
Retail us for example, the AR how's the sales are retailers and distributors.
In the pilots every I've seen Quito and Shannon. Thank you.
Yeah.
Well, thank you very much.
So regarding.
Second put us out so as mentioned in our opening remarks.
Net revenues in the first quarter, it's mainly been affected by the Covid restrictions in Shenzhen, we should have better production volume and also the human body.
So I didn't have in Patrick with building a distributor orders.
Since the latter part of March and now quarter to date performance has been robust and is in line with our expectation so.
So currently we do see that there are some appropriate restrictions and so on.
They can buy for example in Shanghai and Beijing.
Yes.
Our material sales.
From a retail perspective.
And regarding your question about the pilot program and also how the current distributor and retailer.
So we kind of pack program B collaboration has been very smooth.
Both gentlemen, and.
Hey, Joe and we do see a very strong south data as well. So we believe that such a program, but it can be a good indicator and could help the industry adapt to the new regulatory regime.
And regarding the distribution channels. So all current.
This growth is who are the private companies to scale. This.
The product during the transition period.
That's the business performance has been robust and take a profit for making the convention. So as of today, we have not seen any significant accretion.
Existing distributors. Thank you for your question.
Thank you.
Thank you and our next question today comes from.
Please go ahead.
Hi management.
The ITC I actually I have two questions to ask.
First one is how is the company's inventory level and especially how is the channel inventory level.
He also noticed that consumers were stocking at 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 plant you do them in the future. Thank you.
So the first one is on the inventory level for each of our stakeholders and also us and.
And then the second one is mainly on the cost optimization measures.
Measures. So for the first question is Japan.
Our balance sheet. He thinks he has to remain a relatively low level.
From a close to $600 million in the fourth quarter to 264 7 million in the first quarter and most of this amount only a small portion of that.
Thanks, Chris.
In light of the effectiveness of the National standards and also some of the slow.
No movement of Skus, we have been very prudent in how to establish adequate inventory provisions in the last two quarters.
So regarding our trading and fee either the inventory in our distribution channels.
Nothing significant to be brief and throughout the first quarter due to the COVID-19 restrictions.
And Patrick and this situation has been gradually improve.
In the second quarter.
The cautiously that there should be a distributor of products as people want the people have beaumont the channels to have too much inventory.
And finally regarding our use of inventory so based on our membership data.
That's the average cottage purchased per user per month has decreased buying water snapple since December of last year.
Keith This currency we are still in this transition period.
Pembroke Burkey video by Dan bass pro visibility regarding our users.
Inventory turnover days.
This same product portfolio.
So second question is on the cost optimization initiatives. So we strive to optimize our cost and FX from the unit cost of each ball and also the packaging and also the logistics and warehousing cost.
So previously we have been able to rebuild our packaging warehousing costs by changing packaging design and increasing our warehouse and utilization rates.
Starting with the Union.
Paul we have consistently communicated with all the fires.
Breaking down our procurement cost thanks to the technological advancements and automation of our supply chain.
So going forward, we will still offer.
And Mike our cost in these assets.
From a unit cost of each ball to our product design.
Our continuous improvement and digitalization also fine tune contest. Thank you for your question.
It's very clear and comprehensive thank you.
Okay.
Gentlemen, this concludes our question and answer session I'd like to turn the conference back over to the company for closing remarks.
Thank you once again for joining US today. If you have further questions. Please feel free to contact accent largest investor relations team for the contact information provided on our website or TPG Investor relations. Thank you.
Thank you ladies and gentlemen, this concludes today's conference call. Thank.
Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.