RLX Technology Inc (RLX) 2022 Q3 法說會逐字稿

Hello, ladies and gentlemen, and thank you for standing by for the RLX Technology's Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded and expected to last for about 40 minutes. I will now turn the call over to your host, Mr. Sam Tsang, Head of Investor Relations for the company. Please go ahead, Sam.

Thank you very much. Hello, everyone, and welcome to RLX Technology's Third Quarter 2022 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 view the earnings press release by visiting the IR section of our website at ir.relxtech.com.

Participants on today's call will include our CFO, Mr. Chao Lu; and myself, Sam Tsang, Head of Investor Relations.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements typically contain words such as may, will, expect, target, estimate, intend, believe, potential, continue or other similar expressions.

Forward-looking statements involve 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 factors are beyond our control.

The company, its affiliates, advisers and representatives do not undertake any obligation to update this forward-looking information, except as required under the applicable law.

Please note that RLX Technology's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. RLX press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.

I will now turn the call over to Chao. Please go ahead.

Thank you, Sam, and thanks, everyone, for making time to join our earnings conference call today.

During the third quarter, we remain dedicated to preparing for a smooth transition to the new operating environment created by China's new national standards, which came into effect on October 1, 2022. Specifically, we concentrated on developing new products in compliance with the national standard which we call Guobiao or GB products and finished moving our sales to the National Transaction Platform.

We started this transition in late August during the National Transaction Platform trial phase in selected regions and have now achieved full geographic coverage nationwide, putting us on track to steadily roll out our new products to customers across China.

Before I delve further into the details of our endeavor during the transition period, I'd like to talk first about the recent industry regulatory developments. On October 25, the Ministry of Finance, General Administration of Customs and State Taxation Administration jointly issued the announcement of imposing consumption tax on e-cigarettes, which came into effect on November 1, 2022. The new law imposes a consumption tax on manufacturers, importers and/or distributors of e-cigarettes in China, representing another landmark event in the legalization and standardization of China's e-cigarette industry following the adoption of the e-cigarette mandatory national standards and measures for the administration of e-cigarettes earlier this year.

With the implementation of new taxation policy, alongside the relevant laws and regulations on e-cigarettes that have been rolled out over the past 2 years, we can see that China's regulatory framework is becoming clearer, guiding the industry to 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 creates some challenges for industry participants as well as a short-term adverse impact on our performance as we actively adjust our products and operations.

Despite these near-term obstacles, we remain confident in our business' resilience and the growth potential of e-vapor industry. We believe RLX will ultimately benefit from the more structured regulatory environment and emerge stronger after we adjust our business and adapt our products and strategies for success in this new era.

Now let me provide some more details 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 channels, adjusted our business and conducted our operations in accordance with all applicable requirements. For instance, under the guidance of the competent authorities, we increased communication and strengthened our internal training on the regulations and the new standard.

In addition to deepening our team's understanding of the regulation, we also actively provided timely support for store owners and distributors 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, several of our GB products were among the first batch in the industry to achieve approval. These products have now been brought to market and are achieving steady sales. We have a healthy pipeline of products in development and are carefully monitoring user feedback on newly released products to ensure that our future products meet their needs. As of the end of last week, we have obtained approval for 14 devices and 14 cartridges, expanding the number of our GB products in 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 Qing Yu, an affordable device for value-conscious users; and Phantom device, our classic device product that features a new compliant child lock. Also, we have released an upgraded Phantom Pro device equipped with adjustable power. Lastly, Zeus, our ultra-premium device, both in adjustable power and resistance levels, is perfect for experienced adult smokers.

Consequently, despite the external environment continuing to evolve rapidly and the uncertainty persisting, we believe there is a growth potential in the e-vapor industry still 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 team's hard work and innovation, we will create and deliver satisfying GB products for adult smokers across China in the new regulatory era.

Hence, supported by our industry-leading technology and research capability, we plan to introduce our new GB products on a rolling basis as we assess the impact of the new tax regulation on sales as well as user 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 inception, R&D investment has always been one of our strategic priorities. To keep RLX at the forefront of innovation, we have developed a 1+4 science research chain covering product quality, physiochemical research, toxicology research, long-term impact assessments and clinical research. In March 2021, we launched the first e-cigarette clinical research project in China. And in February 2022, we commenced the first clinical study on the safety of e-cigarettes in China.

Both projects were successfully registered with the Chinese clinical trial registry. Additionally, various research projects led by RLX in collaboration with renowned research institutions were published in prominent academic journals, such as the Chinese Journal of Drug Abuse Prevention and Treatment. These achievements, among others, have firmly cemented our industry-leading position in e-vapor R&D.

Environmental protection is another area where RLX shines. We strongly advocate for sustainable consumption and encourage our users to participate in our Pods Reborn program, which we started in September 2021. Through the consistent efforts showcased in our CSR report as of June 2022, the program has been implemented in 188 cities in China with over 16,000 stores, boasting used pods recycling bin.

We are very pleased to report that based on S&P Global's 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 CCC to A, ranked in the top 5 in the tobacco industry globally, representing a powerful commendation of our commitment to sustainability and ESG best practices.

In more than 4 years of entrepreneurship, our dedication to fulfilling our social responsibility is one of RLX attributes of which we are most proud. This is not only our duty as good corporate citizens, it is an integral part of the company's ethos 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 third quarter was a transitional period for RLX as we actively adapted our business to the new regulations and strictly conducted our operations in accordance with applicable requirements. Amid a complex macro environment, we delivered net revenues of RMB 1.0 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's high base resulting from the front loading of sales in anticipation of the discontinuation of older products.

Also, our shift to The National Transaction Platform was conducted on a regional basis, meaning that we also had to roll out 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' needs and drive a gradual recovery in sales as users consume their inventories of older products.

Moving to our gross profit. We delivered profit of 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 sales contribution from direct supply to stores. A decrease in direct costs related to promotional activity was also a factor.

Against the backdrop of macroeconomic headwinds and the pandemic resurgence, we continued to focus on factors within our control, strengthening our execution and getting our house in the best 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 has been a key focus for our management as we seek to navigate uncertainty with certainty. Our ongoing efforts to enhance cost management once again proved 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 operational improvement 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 were RMB 52.5 million in the third quarter of 2022 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 branding materials and shipping expenses.

General and administrative expenses were positive RMB 41.7 million in the third quarter of 2022 compared with positive 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 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 2022 compared with RMB 452.7 million in the same period of 2021.

Non-GAAP basic and diluted net income per ADS were RMB 0.247 and RMB 0.246, respectively, in the third quarter of 2022 compared with non-GAAP basic and diluted net income per ADS of RMB 0.334 and RMB 0.332, 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 remained strong with cash and cash equivalents; restricted cash; short-term bank deposits, net; short-term investments; and long-term bank deposits, net of RMB 16.4 billion as of the end of September 2022 compared 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 will remain committed to migrating -- to mitigating the effect of external forces and controlling factors we can control. With the application of a 36% consumption tax to e-cigarette manufacturers since November 1, 2022, we expect that the steady rollout of new products and the price hike necessitated by the consumption tax will impact both sales and profitability in the future. And that end demand will take time to recover as customers acclimate to the new flavors and form new habits.

Therefore, expected 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' resilience 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 all industry players, including RLX, will experience short-term fluctuations as a result, we believe this regulation will ultimately facilitate the sector's long-term sustainable development.

This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

(Operator Instructions) And our first question today will come from Lydia Ling with Citi.

So this is Lydia from Citi. So I have 2 questions. The first one is on the tax impact. So CFO just mentioned actually we expected the tax impact, and so maybe could you actually quantify like what could be the potential financial impact on our sales and also the profitability after the tax imposition? We noticed that you have the price adjustment at the channel trend? And so how does the margin will look like to 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 on the tax part.

And my second question is on your new products. And as like the national standards can impact since October and also new products into the market for some time, so could you share with us some user feedback on your new products and also any color on the sales, too? That would be very helpful.

Thank you very much, Lydia. So the first question is mainly on the margin outlook and also the pricing after the tax regime and the second one is mainly on the new product feedback.

So I mean on the first one, as an e-vapor product manufacturer, so we'll be subject to a 36% consumption tax, and therefore, the additional consumption tax will inflate our cost of goods sold. As we have highlighted in our prepared remarks, we expect the consumption tax to negatively affect our profitability in the coming quarters.

On the other hand, with the implementation of the consumption tax, we have adjusted our pricing of our products accordingly, which we could help to mitigate the impact of the consumption tax.

So for our channel partners, taking our cartridges as an example, we expect that after the price adjustments, the absolute amount of gross profit per cartridge will still be higher than that of our competitors' products.

And regarding a more medium or normalized margin outlook, it's difficult to give a quantitative guidance at the moment and it will affect by several factors, for example, how our consumer behaves 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 our consumption tax, which will be put with costs, we are still committed to improving our cost structure and we'll do our best to manifest impact on our bottom line as much as possible.

So regarding your second question on the new product feedback. As these national products -- national standard products gradually launch with different SKUs on a regional basis province by province, still consumers in some of our regions or province may not have the access to our full product portfolio. As we expected, it will take some time for consumers to adapt to some -- these new flavors.

Our recent consumer service suggested that the NPS, i.e., Net Promoter Score, of our new products is improving every month.

So regarding your last question around about the sell-through. So we are seeing a similar trend as well and also with more products and SKUs being launched in the market, the portion of consumers who would like to try and use our products continue to grow as well. Now thank you very much for your question.

And our next question will come from Charlie Chen with China Renaissance.

I have 2 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 on 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 a month that the older China inventory will be completely depleted? How is that compared with your original expectation?

My second question is on your company's sales, monthly sales actually, do you see a month-on-month sales recovery since October when the new regulation started to be implemented?

Thanks, Charlie. So the first one is mainly on whether the actual results of our channel inventory meet our expectation. And also the second one is about how the sales trend in recent months.

So I mean regarding the inventory of our channels, so on our last earnings call, we expect that this channel inventory will be digested in 6 to 8 weeks. So as we discontinue these older products during the third quarter, we expect that the current channel inventory is extremely low and currently consumers are consuming their products on hand.

So we expect that the majority of channel inventory of older products will be consumed by our users by the end of fourth quarter. So at that point, we would have a clear picture of the consumer demand for next year.

And so regarding the recent months' sales, we understand that investors and research analysts are concerned about how consumer demand has changed since we adjust the pricing of our products to accommodate the change of consumption tax, together with the change of our products from older generations to GB products.

But honestly speaking, at least till the 16th of November, together with the first week of October is the Golden Week holiday, it's difficult for us to provide an apple-to-apple comparison at the moment. Thank you for your question.

And our next question will come from Peihang Lyu with CICC.

This is Peihang at CICC. My first question is what are the differences between the Phantom Pro, Zeus and original products with regard to target customers and positioning strategies?

And my second one is, recently, we have noticed that the purchase rate of new national standard products might not be very optimistic. So could you please share some causes for this? And also some e-cigarette users might change back to use cigarettes. So how will be the churn rate from your perspective?

Thanks, Peihang. So the first one is about our new product launch, what's the difference we see in our portfolio. And the second one is about our user retention and also what's the churn and also how usage will evolve after GB products being launched or introduced.

So far, the first one is about the difference of products. So the key difference between the Phantom Pro and Phantom device is that the Phantom Pro features an adjustable power. So for example, the fixed power level for the original Phantom cartridge is 6.5 watts. And with the Phantom Pro cartridge and device together being used, consumer can select or arrange the power level that batteries can use whether they be stronger or less strong from 5 watts to 8 watts.

Zeus is our ultra-premium device, boosting both adjustable power and also resistance 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 on having more diversified product portfolio offering various consumer segments, offering best-in-class products to various user groups, price sensitivity and also other preferences.

So your second question is about our consumer behavior, how the retention goes and also what the churn rates, whether these users have changed to use 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 products are factors that will affect our consumers' purchase journey and also their retention ratio.

And also, as said before, we believe that a significant portion of our consumers are still consuming their remaining inventories of our older generation of products and some haven't tried our new GB products yet. And therefore, I think the current base of users for calculating retention rates may be distorted.

And also, we would like to keep in mind for both investors and research analysts that the performance of 1 to 2 or 3 stores may not be reflective of the company's overall product performances.

And second question is regarding the shift from e-vapor back to cigarettes. And we think that this portion would be extremely limited. We believe that harm reduction and other convenience are 2 major factors that adult smokers try to use e-vapor products according to our internal consumer survey.

So while our product experience may have changed, these 2 factors, i.e., the convenience and offered harm reduction will continue to play an important role in our user retention. So thank you very much for your question.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact RLX Technology's Investor Relations team through 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.