RLX Expertise Inc. (NYSE:RLX) Q1 2023 Earnings Convention Name Might 17, 2023 8:00 AM ET

Firm Individuals

Sam Tsang – Head, IR

Kate Wang – CEO

Chao Lu – CFO

Convention Name Individuals

Lydia Ling – Citi

Charlie Chen – China Renaissance

Operator

Hey, girls and gents. Thanks for standing by for the RLX Expertise Included First Quarter 2023 Earnings Convention Name. Presently, all individuals are in listen-only mode. After administration’s remarks, there will likely be a question-and-answer session. At present’s convention name is being recorded and is predicted to final for about 40 minutes.

I’ll now flip the decision over to your host, Mr. Sam Tsang, Head of Capital Markets for the corporate. Please go forward, Sam.

Sam Tsang

Thanks very a lot. Hey, everybody, and welcome to RLX Expertise’s first quarter 2023 earnings convention name. The corporate’s monetary and operational outcomes had been launched via PR Newswire companies earlier as we speak and have been made out there on-line. You can even view the earnings press launch by visiting the IR part of our web site at ir.relxtech.com. Individuals on as we speak’s name will embrace our CEO, Ms. Kate Wang; our CFO, Mr. Chao Lu and myself.

Earlier than we proceed, please be aware that as we speak’s dialogue will include forward-looking statements made below the Secure Harbor provisions of the U.S. Personal Securities Litigation Reform Act of 1995. These statements sometimes include phrases akin to could, will, count on, targets, estimates, intend, imagine, potential, proceed or different comparable expressions. Ahead-looking statements contain inherent dangers and uncertainties.

The accuracy of those statements could also be impacted by various enterprise dangers and uncertainties that might trigger precise outcomes to vary materially from these projected or anticipated, lots of which components are past our management. The corporate, its associates, advisors and representatives don’t undertake any obligation to replace these forward-looking info, besides as required below the relevant regulation.

Please be aware that RLX Expertise’s earnings press launch and this convention name embrace discussions of unaudited GAAP monetary measures in addition to unaudited non-GAAP monetary measures. RLX press launch comprises a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.

I’ll now flip the decision over to Ms. Kate Wang. Please go forward.

Kate Wang

Thanks, Sam, and thanks, everybody, for making time to affix our convention – earnings convention name as we speak. Through the first quarter, we continued optimizing our compliant GB product choices below, the brand new regulatory framework and made regular progress, because of our efficient product technique, and fixed efforts to reinforce our R&D capabilities. Nevertheless, as we attempt to develop new improved product to satisfy our customers’ numerous demand, the prevalence of unlawful merchandise continues to pose near-term challenges, to our enterprise within the broader {industry}.

First, let me present some coloration on current market situations affected by unlawful merchandise. Then I may also focus on, our first quarter endeavors in better element. The largest obstacles, we confronted within the first quarter of 2023, was competitors from unlawful merchandise. These embrace flavored merchandise manufactured by corporations that have not but obtained licenses, some taste product manufactured for exports which can be illegally bought within the home market and counterfeit merchandise.

The existence of those unlawful merchandise not solely break – our gross sales, but in addition disrupt the restoration tempo of these complete {industry}, by slowing shoppers’ dialog to – conversion to merchandise that meet the nationwide requirements. However on the brilliant aspect, the federal government has elevated its efforts to crack down on unlawful merchandise, lately conducting particular operations to deal with two main offenders, manufacturing corporations that proceed to provide flavored merchandise illegally, and retail individuals that use the Web as a distribution channel.

The outcomes of those authorities endeavors are encouraging to date. Now we have seen increasingly more unlicensed manufacturing corporations, deleting unlawful merchandise from their enterprise scopes in enterprise licenses. Additionally, various retailers from distributing unlawful flavored merchandise have been fined. Our gross sales have steadily recovered following, the execution of those particular actions. Our CFO will elaborate on this a bit later.

We imagine the federal government’s crackdown on unlawful merchandise nonetheless ongoing, and we’re hopefully that it’s going to successfully help the creation of honest and orderly market situations, prompting a return to sustainable progress by – for law-abiding corporations akin to RLX. Nevertheless, we stay vigilant on any potential rebound of those unlawful actions.

Amid the primary quarter’s exterior challenges, we stay centered on strengthening our core competitiveness and pursuing high-quality growth. Let’s take a more in-depth have a look at the main points. Enhancing our product growth and scientific analysis capabilities has at all times been a key aspect of our technique. We partnered with Shenzhen Bay Laboratory within the first quarter to determine the brand new optimization know-how, analysis and growth platform.

Collectively, we’ll discover and develop new peptide medication primarily based on the digital atomization know-how, leveraging our DP clearance and industry-leading and atomization know-how to enhance absorption effectivity for the – and improve person expertise. Moreover, we proceed to execute our prudent product technique in reaching and optimizing our product portfolio to satisfy the wants of various person teams.

As of now, we now have acquired approvals for 20 cartridge SKUs and 22 machine SKUs. Encouragingly, we now have acquired some optimistic suggestions and constructive ideas from customers who’ve switched to our new merchandise. We’ll proceed gathering person suggestions and creating merchandise accordingly, looking for superior efficiency, and high quality whereas serving to grownup people who smoke transition to GB merchandise.

We stay devoted to shouldering, our social duty alongside our efforts to supply high-quality compliant merchandise, for grownup people who smoke. An excellent instance is our Pods Reborn program, considered one of our key sustainability initiatives to assist cut back plastic waste. This system has grown by leaps and bounds since its inception in 2021. As of the primary quarter of 2023, we now have accumulatively acquire over 3 million cartridges from over 80,000 customers throughout 297 cities nationwide.

What extra, customers can now use our formally to have account to seek out recycling places close to them or e-book a pickup appointment on-line. The used pods are recycled into cement then used to assemble roads, bridges and different robotization infrastructure initiatives. As of as we speak, we now have invested RMB20 million within the first part of our low robotization mission, offering higher directions for rural villagers – whereas conserving treasured sources.

To sum up the primary quarter, was a mixture bag. Whereas we made strong progress in bettering our GB product choices, we additionally skilled vital headwinds from unlawful merchandise. Nevertheless, we firmly imagine that – as our customers steadily adapt to GB merchandise and the federal government’s effort to guard market order and equity take impact, unlawful merchandise will ultimately be push out to the mainstream market. And the worst appears to have been behind us.

As a trusted e-vapor model for grownup people who smoke, we stay assured in our core competitiveness. We are going to deepen our dedication to offering compliant premium merchandise that meet our customers’ wants as we discover progress alternatives on this evolving {industry}.

With that, I’ll now flip the decision over to our CFO, Chao Lu. He’ll elaborate additional on a few of our newest quarter’s initiatives and go over our operational and monetary leads to extra element.

Chao Lu

Thanks, Kate, and whats up, everybody. I’ll now present an summary of our operational and monetary outcomes for the primary quarter of 2023. Given the extreme impression of unlawful flavored merchandise, we skilled an extremely difficult first quarter, particularly in January and February. These engaging flavored, however unsafe and unlawful merchandise induced customers to shift extra slowly than anticipated to our GB merchandise, driving a big lower in our web income to RMB189 million within the first quarter.

Nevertheless, our gross sales have lately proven clear indicators of restoration, partly because of the federal government’s large-scale operations to fight unlawful merchandise. Particularly, our month-to-month gross sales skilled sequential enchancment, particularly after the federal government’s particular actions in March. In actual fact, month-to-month gross sales virtually doubled in March in contrast with that in January.

Nevertheless, the detrimental impression of unlawful merchandise continues to be lingering, as it is going to take a while for the market to digest inventories, very similar to within the fourth quarter of final 12 months when it took a few months for customers to eat our older merchandise. The near-term challenges from unlawful merchandise will steadily ease, and change into extra manageable, and customers will steadily adapt to GB merchandise.

Now turning to gross margin, the primary quarter of 2023 was our first full quarter below the brand new excise tax coverage on e-vapor merchandise, which got here into impact in November 2022. In consequence, our gross margin fell to 24.2% within the first quarter of 2023 from 38.3% in the identical interval of final 12 months. If we exclude the impression of excise tax, on an adjusted foundation, utilizing web revenues, which deducts excise tax we paid from the reported web revenues as denominator, our adjusted gross margin fell solely by 1.6 share factors.

This consequence displays our continued efforts to enhance our provide chain effectivity and product design to mitigate the deleveraging impact of decreased gross sales. Moreover, mounted prices, together with the lease we paid for unique manufacturing crops and depreciation we booked for PP&E, dragged on our gross margin by a low single-digit share within the first quarter.

Our gross margin will steadily enhance together with our prime line restoration within the coming quarters because the deleveraging impact, I simply talked about will shrink. Alongside with these – value optimization efforts, we proceed to deal with bettering operational effectivity. In consequence, excluding share-based compensation, our non-GAAP working bills had been down by 50.1% year-over-year within the first quarter of 2023.

Nevertheless, on account of our decreased gross sales, we recorded a non-GAAP working lack of RMB133 million within the first quarter. Moreover, we recorded a web lack of RMB56.3 million within the first quarter of 2023. Excluding share-based compensation, our non-GAAP web earnings was RMB184 million within the first quarter of 2023.

Non-GAAP fundamental and diluted web earnings per ADS, had been RMB0.139 and RMB0.136, respectively, within the first quarter of 2023. Our money place stays strong. As of March 31, 2023, we had money and money equivalents, restricted money, short-term financial institution deposits, short-term investments, long-term financial institution deposits, and web long-term funding securities totaling RMB15,369 million.

Because the second half of 2022, we now have been working to maximise the curiosity and funding earnings on our strong RMB15.4 billion money place. Our strategic effort now paying off, we generated RMB170 million curiosity and funding earnings within the first quarter of 2023, implying an annualized rate of interest above 4%, a big enchancment from lower than 2% a 12 months in the past.

Earlier than I conclude, I would like to offer an replace on our share repurchase program. Our Board of Administrators accepted a share repurchase plan on December 8, 2021, below which we could repurchase as much as US$500 million of our shares till December 31, 2023. As of December 31, 2022, we now have repurchased about US$100 million of our shares below this program.

Wanting forward, we’ll proceed investing in our core capabilities and bettering general effectivity. We imagine our gross sales and profitability will steadily decide up because the {industry} regains momentum. Our resilient enterprise mannequin and strong money place will help us as we navigate the market dynamics, enabling us to ship sustainable worth to our shareholders and stakeholders within the long-term.

We are going to now open the decision to questions. Operator, please go forward.

Query-and-Reply Session

Operator

Thanks. [Operator Instructions] Our first query comes from Lydia Ling from Citi. Please go forward.

Lydia Ling

Thanks. Hello administration, that is Lydia from Citi. So thanks for the presentation. I’ve two questions. First, glad to listen to that month-to-month gross sales have some sequential restoration simply talked about by CFO. So, may you share some extra coloration on the gross sales restoration development within the second quarter to-date, like how the month-to-month gross sales in April recovered to this point? And in addition primarily based on present restoration development, how do you see the total 12 months development? Are you turning extra optimistic or detrimental? Like – and in addition need to know some like your retailers’ profitability recovered to this point? And that is my first query?

And the second query is on new product. And so what number of are your new merchandise really at present on the pipeline and plan to additional rollout this 12 months? And in addition, what’s your view on like your aggressive edge over your friends when it comes to these new merchandise? And as you simply talked about, and for the unlawful product points at present available in the market, and so – how concerning the at present channel stock after the regulators crack down? And is the extent already considerably declining? Thanks.

Chao Lu

Thanks very a lot, Lydia. So relating to your first query, it is concerning the second quarter development. As we ready in our opening remarks, we all know that there are sequential enchancment in our month-to-month gross sales. And this development has really continued ranging from final 12 months’s, November till now, i.e., April or Might as a result of pure conversion of customers from the previous technology of merchandise to GB merchandise, because of the regulator’s nice motion in cracking down on unlawful merchandise and the product launches of varied SKUs.

So, we really made worth changes on the April 17 and decrease our manufacturing facility worth of chosen cartridge by mid-teens to offer higher margins for retailers, and we do witness a restocking from our distributors since then. For the total 12 months outlook, we’re assured on the general traits because the numbers have been rising each month, however there are additionally uncertainties as the general person sentiment hasn’t totally recovered but and retailers with retail license must determine whether or not or not renew, their retail license within the coming months.

So I feel general, we’re assured on the development, and we keep our inner operational targets. And relating to our retailers’ profitability, the development of their gross sales of GB merchandise has been going upwards, particularly after regulators particular motion in March/April. In fact, if some retailers could promote the unlawful merchandise, their gross sales could also be affected by the particular motion as effectively.

So, I feel it is troublesome to estimate their profitability quantitatively as every of them have totally different mounted value construction. So relating to the second query is concerning the product pipeline and in addition our edge in direction of different manufacturers within the markets. So relating to the product pipeline, we now have already launched 20 cartridge SKUs accepted in April in contrast with 15 in February, i.e., we now have 5 increments in two months solely.

And we’ll steadily launch these new merchandise on a provincial foundation. And we now have additionally various merchandise submitted or within the progress of software along with the 20, and we’ll present an replace as soon as we now have obtained the approvals. And we now have very clear and vital money in direction of different manufacturers as effectively. Now we have industry-leading R&D capabilities to innovate our distinct and nice tobacco flavors for grownup people who smoke.

And in contrast to most of our friends, they solely or closely depend on their suppliers. Now we have our personal unique manufacturing crops and e-liquid manufacturing facility, which may assure our product high quality and endure our strict product management protocol. And lastly, we now have essentially the most diversified product portfolio and we’ll proceed to diversify the portfolio to satisfy the wants of varied person teams.

And relating to the unlawful merchandise, I feel it is positively not simple to estimate their degree of stock on condition that it is a flat market. As talked about in our – ready remarks, we predict the detrimental impression of unlawful merchandise continues to be lingering, and it may take a while for the market to digest the inventories much like fourth quarter of final 12 months, which took a few months for person to eat our previous merchandise. Thanks in your questions.

Lydia Ling

Thanks.

Operator

The subsequent query comes from Peihang Lyu from CICC. Please go forward.

Unidentified Analyst

Hello administration, that is [indiscernible] at CICC and thanks in your time and presentation. I’ve three questions for you. My first query is, how is your newest cartridge machine gross sales construction of 4 product strains? And the way is the most recent cartridge to machine ratio? And my second query is with regard to flavors and what could be differentiated or the instructions for every sort of GB commonplace flavors akin to syn or [indiscernible]?

And the final one I’ve is of the district supervision and crack down on unlawful merchandise. And what’s the present gross sales proportion for GB authorized merchandise available in the market? And looking out ahead, what could be the next emphasize for supervision and regulation enforcement? Thanks.

Sam Tsang

Thanks very a lot, Peihang. So I feel the primary query is concerning the worth areas, what is the proportion. And I feel in March/April, we’re nonetheless steadily launching varied SKUs to markets, province-by-province. And the combo throughout every product collection is essentially rely on the tempo of recent product launches. So we acknowledge our income upon the supply to our distributor warehouse.

And subsequently, if we launch a brand new SKU, like what we did in March/April in a single specific collection in that month, the self-contribution of that collection will likely be increased than ordinary. And in the meantime, as you might also conscious of that, the makes use of of our previous Phantom machine can nonetheless proceed to make use of their machine to eat our new actual Phantom cartridge. And that is why you might conscious that we now have Phantom person base continues to be nearly all of our 4 product collection.

And I feel we internally do not need a selected goal relating to the proportion of every collection. And we imagine the proportion throughout every collection will rely on the person demand within the medium time period. And relating to second query, it is concerning the R&D, how can we attempt to differentiate our flavors. In order you in conscious, we do have 4 totally different collection for our cartridge with totally different taste options, i.e., the Ciem, which is a extra Chinese language-style with gentle tobacco taste.

Chanhao, a Chinese language flavored – a extra balanced tobacco taste; Yanko, a Chinese language taste with robust tobacco taste; and Puyen, which is similar to the abroad type with a robust tobacco taste. So these 4 totally different cartridge collection do supply a variety of choices for our customers, aiding them to pick their designated alternative of cartridge.

So for instance, if a person has a really lengthy historical past of smoking, they may take into account to, use Yanko as they’ve a really robust kick. And for instance, for customers that favor a lightweight tobacco or cigarettes, they could favor to make use of Ciem. And the third query is about after the combats of unlawful merchandise, how our GB merchandise do and in addition the rules and in addition the actions towards the unlawful merchandise?

To date, the sale of unlawful merchandise, as we talked about earlier than, it is troublesome to estimate their sizing. And that is why I feel now it is nonetheless troublesome to estimate is sizing for – I imply, proportionalize for GB merchandise as effectively. However after all, we see that after the particular motion that was launched in March and April, it was very efficient. And we do offset that there’s a problem, for customers to hunt for unlawful merchandise that with flavors in contrast with earlier than. And our month-to-month gross sales of GB merchandise, has been rising.

And in the long term, we do imagine that the regulators will proceed to watch our markets and crackdown unlawful merchandise every day – frequently as these merchandise may result in a big lack of tax, product questions of safety and in addition minor safety points. And versus us, a compliant e-vapor model, we now have paid a 36% of excise tax with a rigorous high quality management mechanism and in addition a full help for minor safety initiatives.

So, we do count on that regulators may also intently monitor the unlicensed producers who utilized, however didn’t receive the license and in addition licensed producer, which manufactured safer merchandise for export, however could also be illegally redirected to the home market. Thanks.

Unidentified Analyst

Thanks.

Operator

The subsequent query comes from Charlie Chen from China Renaissance. Please go forward.

Charlie Chen

Good night administration, thanks for taking my questions. I obtained two questions right here. The primary one is about gross margin. Mr. Lu commented within the presentation that the GB margin is probably going to enhance with working leverage continues. However beforehand, you additionally talked about that you’ve got accomplished some provide chain optimization in addition to some product combine change?

So are you able to give us extra coloration on the driving components of these three components, like working leverage, provide chain optimization in addition to product combine change? How do these three components drive your gross margin going ahead by what magnitude, for those who can?

And my second query is concerning the margins about your new merchandise in addition to your newly launched equipment akin to chewing gums and different merchandise. So how do these merchandise contribute to your margins, to the corporate in addition to how the margins of promoting these merchandise by your retailers? Thanks.

Sam Tsang

Thanks, Charlie. In order we ready in our opening remarks, so the implementation of the excise tax to stress our GPM, it was the primary quarter of excise tax that got here into the impact. And we additionally skilled some deleveraging impact from the – via [indiscernible] D&A. And for future GPM traits, a very powerful issue could be the restoration tempo of our gross sales. So if gross sales may get better quicker than what we count on, the GPM would get better extra rapidly.

And in the meantime, the second issue could be the price of merchandise, which is calculated on a – weighted foundation. So, we imagine the advantages of our continued efforts – bettering our provide chain effectivity will likely be proceed to extra gradual. And the second query is on the brand new initiatives. So thanks in your curiosity. And there are, nonetheless some pilot program at this stage with minimal income contribution.

And we will certainly share extra coloration with you once they can contribute a monetary – significant monetary contribution. And at present, our new initiatives, merchandise gross margin general are increased than that of our core e-vapor enterprise as they aren’t topic to the excise tax. Thanks in your query.

Charlie Chen

Thanks.

Operator

As a result of time constraints, now I want to flip the decision again over to the corporate for closing remarks.

Sam Tsang

Thanks as soon as once more for becoming a member of us as we speak. If in case you have additional questions, please be happy to contact RLX Expertise’s Investor Relations crew via the contact info supplied on our web site or TPG Investor Relations.

Operator

This concludes – this convention. You could now disconnect your line. Thanks.