Q3 2022 RLX Technology Inc Earnings Call
Hello, ladies and gentlemen, and thank you for standing by for the <unk> Technology third quarter 2022 earnings Conference call.
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.
Now I'll turn the call over to your house.
Thank you <unk>.
Investor Relations for the company go ahead. Please go ahead Sir.
Thanks, very much Hello, everyone and welcome to <unk> technologies third quarter earnings Conference call. The company's financial and operational results were released for flat services earlier today and has been made available online.
You can also view the earnings press release by visiting the IR section of our site.
I'll address that.
Dot com.
Participants on today's call.
Our CFO Mr Shah.
And mitel at Samsung.
Our relations.
The bulk of changes. 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 90 95.
These statements typically contain words, such as may well.
We'll expect target estimating.
We believe potential continue our artist similar expression.
Forward looking statements market material risks and uncertainties.
The accuracy of these statements may be impacted by a number of pretty.
Such risks and uncertainties that could cause actual results to differ materially from those co catharine our anticipated many of which are beyond our control.
The company.
By search and represented the Mart undertakes any obligation to update any forward looking information.
That is required under the applicable law.
Please don't Alright technology earnings press release, and this conference call includes discussion.
Discussions are unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.
Our press release contains a reconciliation.
non-GAAP measures.
Unaudited GAAP measures.
I will now turn the call over to Tom. Please go ahead.
Thank you Sam.
And thanks to everyone for making time to join our earnings conference call today.
During the third quarter, we remain dedicated to preparing for the transition to the new operating environment.
China's new National standard, which came into effect.
Towboat Quest 2022.
Specifically, we concentrated on developing new products in compliance with the National standard, which we call <unk> or.
Or GB product.
And finished moving our sales through the national transaction platform.
We started this transition in late August during the National transaction platform trial.
And in selected regions.
And have now achieved full geographic coverage nationwide.
Putting us on track to steadily rollout, our new products to customers to customize across China.
Before I delve further into the details of our endeavor during the transition period I'd like to talk about the the recent industry regulatory development.
On October 25th.
The Ministry of Finance General and administration of Carsten.
State taxation of administration jointly issued.
Announcements on imposing consumption tax on E cigarettes.
Which came into effect.
In November 2022.
The new law and closely a consumption tax on manufacturers input.
In quarter and or distribute as of E cigarettes in China.
Rep, representing another landmark events in the legalization and standardization of China's E cigarette industry.
Following the adoption of the E cigarette mandatory national standard and measures for the administration of E cigarettes, I already had this year.
With the implementation of new taxation policy.
Along side, the relevant laws and regulations on E cigarettes that has been rolled out over the past two years, we can see that China regulatory framework is becoming clearer.
Guiding the industry into a new era of healthier development.
With better oversight and management.
We firmly believe that the new regulatory framework will benefit all industry participants long term development.
And as always we will strictly comply with all applicable regulations.
At the same time, the new fast evolving operating environment create some challenges for industry participants as well as a short term impact.
The impact on our performance as we actively adjust our products and operations.
Despite these near term obstacles, we remain confident in our business is resilient and the growth potential of ebay per industry.
We believe.
Well ultimately benefit from the more structured regulatory environment and emerge stronger after we adjust our business and adapt our product and strategy for success in this new era.
Yeah.
Now, let me provide some more detail on our efforts and achievements during the transition period.
Since the formal rollout of the new rules and regulations earlier this year.
We have proactively responded through public channel adjusted our business richness and conducted our operations in accordance with all applicable requirements.
For instance, under the guidance of the competent authorities.
We increased communications and strengthened our in Toronto training on the regulations and the new standard.
In addition to deepening our teams our understanding of the regulation. We also actively provided timely support for store owner and distributor during the transition period to ensure a smooth transition for the whole value chain.
At the same time, we accelerated our research and development of the new GB product and actively applied for technical reviews and relevant licenses.
These efforts continue to bear fruit.
As we reported last quarter.
All of our GB products were among the first batch in the industry to achieve approval.
These products have now been brought to market.
She didn't steady style.
We have a healthy pipeline of products in that environment.
We are carefully monitoring GPO feedback on newly released product to ensure that our future product meet that need.
Sure.
As of the end of last week, we have obtained approval for 14 devices and 14 cartridges.
Expanding the number of our <unk> product and our ready for market pipeline.
Just as we did in the pre regulation era, we are striving to provide products catering to distinct user groups with differentiated preferences and price sensitivity.
For instance, we have team.
Portable device for bagging concept you too.
And Phantom device.
Our classic device product that features a new compliant child walk.
Also we have released and upgraded Falcon pro device equipped with adjustable Powell.
Battery views, our ultra premium device.
Both being adjustable power and resistance levels.
Perfect for experienced adult smoker.
Consequently, despite the external environment, continuing to evolve rapidly and uncertainty for 16.
We believe there is a growth potential in the E vapor industry still a waiting to be unleashed.
We are convinced that E vapor products will continue to play a vital role in harm reduction for adult smokers.
And that with our teams hard work and innovation, we will create and deliver satisfying GB products for adult smokers across China in the new regulatory era.
Yeah.
And supported by our industry, leading technology and research capability, we plan to introduce our new TV products on a rolling basis as we assess the impact of the new tax regulation on sales as well as the use of feedback regarding our product innovation.
Aligned with our strong commitment to user satisfaction and regulatory compliance.
We also focused on fulfilling our social responsibilities, which we see as one of our core competitive advantages.
We recently published our third annual corporate.
Social responsibility report.
Summarizing our achievements with respect to market responsibility.
R&D investment.
Environmental protection employee career development.
And corporate governance over the past year.
Let me go through some of the report highlights.
Since the company's infection RMB Mcmahon has always been one of our strategic priorities.
To keep our <unk> at the forefront of innovation, we have to about one plus four five.
Research chain covering product quality.
Zero chemical research.
Toxicology research.
Longtime impact assessment and clinical research.
In March 2021, we launched the first E cigarette clinical research projects in China.
And in February 2022.
<unk> commenced the first clinical study on the safety of E cigarettes in China.
Well, it's the project was successfully registered with the Chinese clinical trial that is true.
Additionally.
Barrett Research project project led by <unk> in collaboration with Green now to research institutions.
Published in prominent academic journals, such as the Chinese journal of drug abuse prevention and treatment.
These achievements among other half firmly cemented our industry leading position in E vapor RMB.
Environmental protection is another area, where our ILEC shine.
We strongly advocate for sustainable consumption and encourage our users to participate in our past we bond program.
Which we started in September 2021.
Through the consistent effort showcased in our CSR report as of June 2022.
The program had been implemented in 188 cities in China with over 16000 stores both in the used parts recycling bin.
We are very pleased to report that based on S&P global.
Most recent annual.
Corporate sustainability assessment.
Our S&P Global ESG report score ranked ahead of 67% of our global peers.
Also our MSCI ESG rating has been upgraded from <unk> to <unk>.
Ranked in the top five in the tobacco industry globally.
Representing a powerful.
Commendation of our commitment to sustainability and ESG best practices.
And more than four years of enter Paradise. Thank you cannot ship our dedication to fulfilling our social responsibility is one of our attributes of which we are most proud.
This not only our duty as good corporate citizens it.
It is an integral part of the companies he built and the role we play in the World We all share.
Looking ahead, we will continue to uphold our commitment to social responsibility, while driving sustainable development, along our entire value chain.
I will now provide a summary overview of our financial results for the third quarter of 2022.
The first quarter. It was a transitional period for our ILEC as we actively adapted our business to the new regulation strictly can conduct at our operation in accordance with applicable requirements.
Amidst the complex macro environment, we delivered net revenues of RMB 1 billion in the third quarter.
Recording a sequential decrease mainly due to the discontinuation of older products.
During the transition to national standard as well as the second quarter as high base without him from the truck loading of salad in anticipation of that discontinuation of older products.
Also our shift to the national transaction platform fourth conducted on a regional basis, meaning that we also have to rollout our GB products gradually and region by region limiting the pace of availability in some areas.
Although we are experiencing short term headwinds with respect to our sales performance, we believe our diverse and growing product portfolio will continue to satisfy adult smokers.
And drive a gradual recovery in cells.
Users consume that inventory of older product.
Moving to our gross profit.
We deliver profit.
Approximately RMB 522 million with a gross margin of 50% in the third quarter compared with 39, 1% in the same quarter of 2021.
The increase was primarily due to a favorable change in the channel mix.
During the transition period, we gradually terminated our partnerships with distributors, who could not obtain a wholesale license.
Which led to an increased.
Contribution from direct supply to stores.
A decrease in direct cost related to promotional activity was also a factor.
Against the backdrop of macroeconomic headwinds and the pandemic resurgence we.
We continue to focus on factors within our control.
Strengthening our execution and getting our house in the back of shape possible to move forward in the new regulatory era.
Operational excellence is always a good business practice and it becomes more critical in times of economic turbulence.
Since the beginning of the year, improving operating efficiency, we have seen that.
A key focus for our management actively seek to navigate uncertainty.
With certainty.
Our ongoing efforts to include enhanced cost management once again prove effective in the third quarter evidenced by a decrease of 23, 4% in the absolute amount of our non-GAAP operating expenses compared with the second quarter.
Representing our second.
Consecutive quarter of reduction.
We believe non-GAAP metrics may better reflect our efforts and achievements with respect to operating operational improvements during the quarter.
Our GAAP operating expenses increased to RMB $56 8 million from positive RMB $241 3 million in the same quarter of 2021, primarily due to the change in share based compensation expenses.
Specifically, our selling expenses was RMB $52 5 million in the third quarter of 2022 from.
From RMB $56 5 million in the same period of 2021, primarily due to the fluctuation of share based compensation expenses, while offset by the decrease in Brandon materials and shipping expenses.
General and administrative expenses were positive RMB 41, 7 million in the third quarter of 2022, compared with RMB $253 2 million in the same period of 2021.
The change was primarily driven by the fluctuation of share based compensation expenses.
Research and development expenses were RMB 46 million in the third quarter of 2022, compared with a positive RMB $44 6 million in the same quarter of 2021.
The change was primarily driven by the fluctuation of share based compensation expenses.
Our non-GAAP net income was RMB $328 6 million in the third quarter of 2000 and pointed to.
Compared with RMB $452 7 million in the same period of 2021.
non-GAAP basic and diluted net income per Aes were RMB, <unk> 247, and RMB <unk> 46, respectively in the third quarter of 2022 compared with non-GAAP.
Basic and diluted net income per RMB airplanes, 334 and RMB.
332, respectively in the same quarter of 2021.
Moving to our balance sheet, we maintained a solid cash position in the third quarter.
Our cash position remains strong with cash and cash equivalents restricted cash and short term bank deposits net.
Short term investments and long term bank deposits net of RMB 16 four.
<unk> 4 billion as of the end of September 2022.
Paired with RMB 14, 7 billion a year ago.
In conclusion in the face of challenges in the operating environment as well as the macro headwinds.
We remain committed to migrating to mitigating the effect of external forces.
Controlling factors, we can control.
With the application of 836% consumption tax to E. Cigarette manufacturers since November 2022, we expect that the steady rollout of new products and the price hike necessitated by the consumption tax well impactful sales and profitability.
In the future.
And that and demand will take time to recover as customer acclimate to the new flavors and form new tablets.
Therefore effective cost control measures will remain our priority in the short term as we continue to stimulate sales with enticing new GB products for adult smokers.
We remain confident that our business is resilient and operational excellence will empower us to navigate the challenges as we explore new opportunities for growth and development.
Meanwhile, we believe all industry participants across the value chain will work jointly to overcome this challenging time and adapt to the paradigm of the new era.
Although our industry players, including <unk> will experience short term fluctuations as a result, we believe this regulation, where ultimately facilitate effective long term sustainable development.
This concludes our prepared remarks today, we will now open the call to questions.
Operator, Please go ahead.
Thank you and ladies and gentlemen at this time, we will conduct a question and answer session.
If you would like to ask a question. Please press Star then one on your telephone keypad.
They need to pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
<unk> of all participants on the call today, if you wish to ask your question.
Management in Chinese please immediately repeat your question in English.
One moment please for the first question.
Okay.
Yes.
And our first question today will come from Lydia Lang with Citi. Please go ahead.
Hi management, thanks for the presentation.
So I have two questions. The first one is on the tax impact.
As you.
CFO , just a mash and we ask that in the.
Hum.
So maybe could you actually quantify like what could be.
The potential financial impact of ourselves and also the possibility after dose testing impulse station. We noticed that you have to go private just men edge to channel.
<unk> trend and if so how does the margin would've looked like through the company and also your channel partners and also we would like to hear your views on your normalized margin outlook in the mid to long term and so this is all on the Tech part and then my second question is on the new products and.
Like the Nationals Danielle can in fact since October and also new products into the market for some time I still can go shelf without some feedback on your new products and also any color on the sales too.
Very helpful. Thank you.
Thank you very much linear so the first question is mainly on the <unk>.
And all of them and also the.
Pricing after the test regime and a second one is on the kind of feedback.
So I mean on the first one.
Ebay propane manufacturer so it would be subject to a purchase percent consumption tax.
And therefore, the additional consumption tax in place our cost of goods sold.
As we have highlighted in our prepared remarks.
The consumption typhoon negatively affect our profitability in the coming quarters.
On the other hand with the implementation of the consumption pattern, we have adjusted our pricing of our products Accordingly, which equals helped to mitigate the impact of the consumption tax.
So.
For our channel partners picking our partnership as an example.
That's after the price of gasoline.
Absolute amount across properties.
Corkage.
It'll be hard and fast.
Those products.
And regarding a more medium or normalized margin level.
It's difficult to give quantitative guidance at the moment.
Several factors for example.
Consumer behavior and also our efforts to improve our supply chain efficiency.
So what we could share now is that even though our gross margin will face some pressure from a consumption tax.
Which will be put to cough.
Still committed to improving our cost structure, and we'll do our best and mitigates the impact on our bottom line.
That's possible.
So regarding your second question on <unk>.
New product feedback.
As these national product.
Not sure incentive product.
<unk> launch.
Different skus on a regional basis.
Province by Province will.
So consumers in some of our regions our problem I may not have the desktop product portfolio.
We expect that it will take some time for consumers to back to this new playbook.
A recent consumer survey suggested that the NPS net promoter score.
All of our new product every month.
So regarding the last third is around about the telco.
We are stealing a similar kind of flow.
And also with more products and upgraded being launched to the market the portion of consumers who like to tie in with our product continues to grow as well.
Thank you very much for your question.
Thank you.
Yeah.
And our next question will come from Charlie Chen with China Renaissance. Please go ahead.
Ed.
Yeah.
Hi management, Thanks for taking my questions I have two questions here. The first one is regarding the channel inventory I remember last time, you mentioned that you expect the China inventory of old products.
Distributor or consumers level should be exhausted by somewhere around December . So how do you think the progress right now or do you still think December will be.
Mouth, that's the Oh, the China inventory will be completely depleted how does that compare with your original expectation.
My question is.
Your company is sales monthly sales actually did you see a muscle.
Also recovery.
October when the new regulations start to distribute implemented thank you.
Thanks, Charlie So the first one is mainly on later actually south of our channel inventory now let me talk about patients and also the second one is about half the sales trend in.
In recent months.
So I mean regarding the Ethan three of our channels.
So for our last earnings call, we expect that.
You're going to see would be digested in six to eight weeks.
So as we discontinue these older products during the first quarter.
We expect that the current channel inventory is extremely low.
Consumers are consuming put us on churn.
So we expect that the majority of channel inventory of older product will be consumed by our users by the end of fourth quarter.
So at that point it will have a clear picture of the consumer demand in for next year.
And so regarding the recent months south.
I understand that investors and research analysts are concerned about how consumer Piedmont has change since we adjust the pricing.
Products to accommodate the change.
<unk>.
Together with the change of our product from older generation two <unk>.
<unk> products.
But honestly speaking at least for the 16th of November .
Together with the first week of October as the Golden week holiday.
It's difficult for us to provide a apple to Apple comparison at the moment.
Thank you for your question.
Thank you.
And our next question will come from the hang Lib with TICC. Please go ahead.
Yeah.
Hi management. This is pay how etsy I can say thank you very much for taking my questions. My first question is what are the differences between the fathom crowed zoos and original products with regard to target customers and addiction with scrap seats and my second one is recently we.
Had noticed that the repeat purchase rate of new national standard products might not be Barry I'm optimistic. So could you. Please share some causes for that and also some E cigarette users might change back to use cigarettes. So how it would be the churn rates from your perspective.
Okay.
Uh Huh. So the first one is about new product launch and I'll work with them with female health portfolio and taking the money above all user retention and also what's the churn and also how you proceed law after the TV cross being launch are into deals.
So far the first one is about the defense.
So the key difference between the pro and personal devices.
Please proceed.
Typical power. So far example type power levels body original Phantom targets on five watts.
And with the anthem pro cartridge and B bonds together being used consumer accounts. So that's our range. The prior level debt basket Tammy, we're better than you saw stronger or less strong.
Five five watts to eight slots.
So to our ultra premium devices.
So just to both power and also a systems level.
And in our view it is perfect for adult smokers with a long history of smoking.
So as we did in the past so we plan to have a more diversified product portfolio coupling glad we havent consumer excitement.
Offering best in class products to various user groups profitability and also other purposes.
So second question is about our consumer behavior. How is the retention goal and also what's the churn rates better Tcs has had to change for you.
Cigarettes again.
So I think we are still in the process of gradually rolling out our entire product portfolio.
Province by Province.
So therefore I think the.
Accessibility and availability of product or factors.
Our consumers purchase journey and also their retention pension ratio.
And also as said before we believe that a significant portion of our consumers are still consuming their remaining inventory of our older generations of products.
And somehow tried our new GB product yes.
And therefore, I think the current phase of users for calculating the retention rate may be distorted.
And also we want to keep in mind for both our investors and research analysts that deep.
The procurement of one to two or three stores.
<unk> may not get there overtime.
The company's overall product performances.
And second question is.
Regarding key shifts from ebay perpetual cigarettes.
And we think that this person would be extremely limited.
We believe that harm reduction and other convenience are two major factors.
Smokeless trying to do vapor product according to our internal consumer survey.
So while all product variants may have change. These two factors I E. The convenience and Oklahoma reduction will continue to play an important role in August the retention.
Thank you very much for your question.
That's very helpful. Thank you.
Okay.
And this will conclude our question and answer session I'd like to turn the conference back over to management for any closing remarks.
Okay.
Thank you once again for joining US today. If you have further questions. Please feel free to contact RF technology in lateral relations team for the contact information provided on our website or TPG Investor Relations.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Okay.
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Right.
Okay.
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