This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Hello, ladies and gentlemen. Thank you for standing by for Relics Technology Inc's fourth quarter and full year 2020 earnings conference call. At this time, 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. I will now turn the call over to your host, Mr. Sam Tseng, head of investor relations of the company, Please go ahead, Sam.
spk05: Thank you very much. Hello, everyone, and welcome to RLX Technology Incorporation fourth quarter and full year 2020 earnings conference call. The company's financial and operational results were released through PL Newswire services earlier today and have been made available online. You can also view the earnings press release by visiting the I-Out section of our website at iout.vestpac.com. Participants on today's call will include our co-founder, chairperson of the board of the directors, and chief executive officer, Ms. Kate Wang, and myself, Sam Zhang, 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 Security Litigation Reform Act of 1995. These statements typically contain words such as may, will, expect, target, estimate, intent, release, 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, advisors, representatives, and underwriters do not undertake any obligation to update it or locate information, except as required under the applicable law. Please note that our LX technology incorporation, earnings press release, and this conference call include discussions of unaudited gap financial measures, as well as unaudited non-gap financial measures. Our LX Press release contains a reconciliation of the unaudited non-gap measures to the unaudited gap measures. I will now turn the call to Ms. Kate Wang. Please go ahead.
spk02: Thank you, Sam. And thank you, everyone, for making your time to join our earnings conference call today. Just a little over two months ago, on January 22nd, 2021, we successfully listed our shares on the New York Stock Exchange and started our new journey as a public company On behalf of the management team, I would like to extend our gratitude to our employees, business partners, and all our shareholders and stakeholders who have been following and supporting us. I believe many of you are joining us today not only to learn about our fourth quarter earnings results and full-year achievements, but also to hear more about our response to the regulatory developments that occurred earlier this week. We are as attentive to these developments as you are, and we'll best answer any questions you have during the Q&A session. Now, I will talk you through our operational performance in the last year and then sharing our strategies going forward. Throughout last year, we remained focused on our mission and strategy, and we have achieved a solid set of results despite the challenging macro environment. First of all, looking at the overall e-vapor market in China, user penetration has been growing steadily. According to the CIC report, China's e-vapor user penetration rate grow from 0.4 percent in 2016 to 1.2 percent in 2019, and witnessed further growth in 2020. As an industry leader of the evapomarketing in China, we are well-positioned to make Relapse a trusted brand for adult smokers, providing better alternatives for them. Secondly, on the commercial front, we pioneered and integrated offline distribution and branded store-plus retail models tailored to China's e-labor market. Under this model, we identified and leveraged a variety of distribution and retail channels that allow us our products to reach ideal smokers in a more effective manner. As of September 30, 2020, we partnered with 110 authorized distributors to supply our products across over 5,000 RELAX branded partner stores. and over 100,000 other retailers nationwide, covering over 250 cities in China, as we adopt comprehensive systems and methods to manage, supervise, and empower our distributors and retailers. In this fourth quarter, we achieved significant growth in terms of number of branded stores and productivity. An increasing number of branded store partners have been joining our region network and crossed the 10,000 mark for the first time in this fourth quarter. On the other hand, we have been expanding our retail outlets network with multiple forms. More importantly, more and more retailers have been increasingly recognizing the benefits of retailing e-vapor products and partnering with RELAX. In addition to commercial development, to continually improve adult smokers' concerns with our products, We have implemented a multiple layer development framework to provide a solid infrastructure for our technology and product development. This framework involves five development layers surrounding our eWave for products, namely accessories, interactions, applications, face transitions, and infrastructure. catering to diversified needs of ideal smokers. In December 2020, we introduced RelaxSenton, which embodies our latest technologies developed to holistically enhance user experience for ideal smokers, including a newly introduced battery capacity indicator, improved battery lifetime and charging speed, strengthened structural resistance to illiquid leakages, refined airway design, and upgraded safety features. In the meantime, we have also received wide recognition for our products globally in November 2020. Relax Infinity was granted the Golden Dean Design Award 2020. Turning to our corporate social responsibility development, we continued to consistently uphold and practice our ethical principles, including promoting the prevention of underage use of our products through our industry pioneering, guiding programs, introducing effective age verification practices to the industry. This past quarter witnessed the first anniversary of the launch of our Sunflower system, which is the first of its kind technology-driven underage access prevention system in China. according to CIC report. The Sunflower System encompasses a comprehensive set of technology-driven best practices designed to prevent underage youth through an array of advanced recognition tools to enhance on-site age verification as well as through geosensing technology. to identify the appropriate locations for opening with relaxed branded partner stores. In addition, we have zero tolerance for counterfeit products that could jeopardize adult smokers' health and interests. To that end, we launched the Golden Shield program to combat sales of counterfeit products. in cooperation with the public, media, and the local authorities. At RLS, social responsibility is not something we do on the side. It's part of our DNA and embedded into our everyday actions, operations, systems, throughout our organization. We have been caring for our user communities our partners, and our employees since day one. We have always placed special emphasis on helping minorities and disadvantaged groups through initiatives that provide better services and technological solutions to help them with their unique needs. In this regard, we recently launched three new initiatives. One to empower female entrepreneurs and working mothers. Another to assist the elderly in understanding and using technology in their everyday life. And the third to strengthen our equal opportunity guidelines. We will continue to prioritize social responsibility in our organization because It's part of who we are. Looking ahead, we plan to further solidify our leadership by continuing to invest in scientific research, enhancing our technology and product development, strengthening our distribution and retail network, fostering supply chain and production capabilities. These strategic initiatives are designed to support our growth over the long term. Here's to the end of my part. Thank you, everyone. With that, I will now turn the call over to Sam, who will discuss our key financial results.
spk05: Thank you, Kate. I will now provide a brief overview of our financial results for the fourth quarter and the full year of 2020. Net revenues increased by 44% to 1.62 billion RMB in the fourth quarter of 2020, from 1.12 billion RMB in the fourth quarter of 2020. The increase was primarily due to an increase in net revenues from sales to offline distributed, which was mainly attributable to the expansion of our distribution and retail network. Gross profit increased by 59% to 694 million RMB in the fourth quarter of 2020, from 438 million RMB in the first quarter of 2020. Gross margin increased to 42.9% in the fourth quarter of 2020, compared to 39.1% in the first quarter of 2020. Operating expenses were 853 million RMB in the fourth quarter of 2020, representing an increase of 124% from 318 million RMB in the third quarter of 2020. Salary expenses increased by 127% to 197 million RMB in the fourth quarter of 2020, from 87 million RMB in the third quarter of 2020. The increase was mainly driven by an increase in share-based compensation expenses and an increase in branding material expenses. General and administrative expenses increased by 75 percent to 447 million RMB in the fourth quarter of 2020 from 255 million RMB in the first quarter of 2020. The increase was primarily due to an increase in share-based compensation expenses and an increase in professional service fees. Research and development expenses increased by 442% to 209 million RMB in the fourth quarter of 2020 from 39 million RMB in the first quarter of 2020. The increase was primarily driven by an increase in share-based compensation expenses and an increase in software and technical services expenses. Share-based compensation expenses recognized in selling expenses, general and administrative expenses, and research and development expenses in total were 656 million RMBs in the fourth quarter of 2020, and 238 million RMBs in the third quarter of 2020. The increase was primarily due to the increase in fair value of ordinary shares of Relax Incorporation. Loss from operations was 158 million RMBs in the fourth quarter of 2020, compared with income from operations of 58 million RMB in the first quarter of 2020. Income tax expenses was 111 million RMB in the fourth quarter of 2020, compared with income tax expenses of 77 million RMB in the first quarter of 2020. primarily due to an increase in taxable income. Net loss was 237 million RMB in the fourth quarter of 2020, compared to net income of 8 million RMB in the third quarter of 2020. Non-GAAP net income was 419 million RMB in the fourth quarter of 2020. Basic and diluted net loss per American depository share, ADS, were both 0.165 RMB in the fourth quarter of 2020 compared to basic and diluted net income per ADS of 0.005 RMB in the third quarter of 2020. Non-GAAP basic and diluted net income per ADS were both 0.292 RMB in the fourth quarter of 2020, compared to 0.171 RMB in the fourth quarter of 2020. Moving to the full year of 2020, net revenues increased by 147% to 3.82 billion RMB in 2020, from 1.55 billion RMB in 2019. The increase was primarily due to an increase in net revenues from sales to offline distributors. Gross profit increased by 163% to 1.53 billion RMB in 2020 from 581 million RMB in 2019. Gross margin was 40%. in the 2020 compared to 37.5 percent in 2019. Operating expenses were 1.51 billion RMB in 2020, representing an increase of 189 percent from 525 million RMB in 2019. Selling expenses increased by 23 percent to 443 million RMB in 2020, from 359 million RMB in 2019. The increase was primarily due to an increase in share-based compensation expenses and an increase in salary and welfare benefits to our selling personnel, partially offset by a decrease in e-commerce platform service expenses as we close our stores on e-commerce platforms and cease collaboration with e-commerce platform distributors in response to the October 2019 announcement. General and administrative expenses increased by 479 percent to 772 million RMB in 2020, from 133 million RMB in 2019. The increase was primarily attributable to an increase in share-based compensation expenses and an increase in salaries and welfare benefits to our general and administrative personnel. Research and development expenses increased by 837%, to 299 million RMB in 2020 from 42 million RMB in 2019. The increase was primarily due to an increase in share-based compensation expenses and an increase in salaries and welfare benefits to our research and development personnel. Share-based compensation expenses recognized in selling expenses General and administrative expenses and research and development expenses in total were 929 million RMB in 2020 and 53 million RMB in 2019, primarily due to an increase in fair value of all the nourishers of 3,000 corporations. Income from operations decreased by 77%, to 13 million RMB in 2020 from 56 million RMB in 2019. Income tax expenses was 231 million RMB in 2020, representing an increase of 789% from 26 million in 2019. The increase was primarily due to an increase in taxable income. Net loss was 128 million RMB in 2020, compared with net income of 48 million RMB in 2019. Non-GAAP net income was 801 million RMB in 2020. Basic and diluted net loss per ADS were both 0.089 RMB in 2020, compared to basic and diluted net income per ADS of 0.033 RMB in 2019. Non-GAAP basic and diluted net income per ADS were both 0.557 RMB in 2020, compared to 0.07 RMB per ADS in 2019. Moving to the bar sheets. as of December 31st, 2020. The company had cash and cash equivalents, restricted cash, short-term bank deposits, and short-term investments of 3.42 billion RMB, compared to 812 million RMB as of December 31st, 2019. Now turning to guidance. For the first quarter of 2021, the company currently expects net revenues to exceed 2.3 billion RMB and expects non-GAAP net income to exceed 590 million RMB. The company expects net income will also include share-based compensation expenses, which depends on the company's share price and are not available without unreasonable efforts. The company also expects gross margin will remain steady. The above outlook is based on the current market conditions, including those related to COVID-19 pandemic, and reflects the company's preliminary estimates of market and operating conditions and user demand, which are all subject to change. Please refer to Dave Harper's statement in the press release for risks associated with forward-looking statements. The about concludes all of our prepared remarks today. We are now opening the call to questions. Operator, please go ahead.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble the last question. The first question today comes from Lydia Lin with Citigroup. Please go ahead.
spk03: Hello, management. Can you hear me?
spk05: Hi, Lydia.
spk03: Hello, management. Can you hear me?
spk05: Yeah, we can hear you.
spk04: Okay. Hi, management. This is Lydia from Citi. Thanks for taking my question. I have three questions. This one is on the regulation side. So as for the Monday announcement, so could management share a bit more your views on this announcement and also its implication? So what do you think of the regulation trends looking forward in China's e-cigarette industry? And also, how will the company cope with these changes if anything happens? And my second question is about expansion. And the company has achieved very impressive expansion in the first quarter for the branded stores, as just mentioned. So could you also talk about the company's expansion for this year? The competition looks more intense for this year as more players also ramp up store openings with very aggressive fees. So how do you view the competitive landscape and the potential impact on your margins? And my last question is regarding the product. We noticed that the company has introduced a few new product series this year and also some entry-level products. So how about the feedback so far? And could you talk about your product strategies for this year? Thank you.
spk05: Sure. So, I mean, there are three questions. First is on regulations, and the second is on the store plan, and the third one is on product feedback. So it's like lengthy questions and we'll go by it one by one. So I mean on Monday, we are aware that the Department of Industry Policy and Regulation of the MIIT, which is the Ministry of Industry and Information Technology, they made an announcement seeking for public comments requiring the authority proposal to revise detailed implementation regulations of the tobacco monopoly law of the PLC. So such comments or feedback shall be submitted by April 22, i.e. they leave one month for submission of such comments. So there are also two attachments were included in the announcements. So the first attachment proposed a new rule under the implementation regulation as Rule 65, indicating that the implementation rules for next-generation tobacco products, including e-cigarettes, shall take reference to the relevant rules in respect to cigarettes under the implementation regulation of the Tobacco Monopoly Law. And there are also the second attachment that has provided free consideration for making suggestions of adding the proposed Rule 65 So for the first consideration is to make progress in the regulatory development of e-vapor products. And the second consideration is to deal to the similarities between e-vapor products and cigarettes, which is also taken reference to the regulations on e-vapor products internationally. And the first consideration is to enhance the effectiveness of regulating the e-vapor industry, including effectively regulating the operating activities of the e-vapor industry and tackling potential product safety issues of e-vapor products, false advertisement issues, et cetera, in order to protect the rights of e-vapor users. So I generally repeat what happens for a non-Chinese reader who has a basic understanding of such regulation first. So as company point of view, in response to the regulation, the announcements, we plan to submit our feedback regarding the proposed revision of implementation plan by April 22. So we are also well aware of the considerations mentioned in the attachment, including regulating the operating activities tackling potential product safety issues, concerns over the underage youth, which has been our focus in our daily operation. So I think your last bit of your question is mainly about how we adjust our operations. Given that the regulations or the proposed amendments is still in the process of seeking public feedback, it's premature to speculate about the potential change on the commercial front. So this is our response on the first question. So may you repeat your second question again, as I may have missed that.
spk04: Oh, yeah, sure. The second question is about, so could you talk about your expansion plan for this year, given you already have 10,000 branded stores already? And also the competition looks more intense for this year because some small brands also ran top of their expansion with their aggressive subsidies. So we also want to hear management view on the competitive landscape in the China evaporation industry and also that potential impact on your margins.
spk05: Sure. So we'll talk about the first one first regarding our thoughts. So as we have mentioned, the number of branded partner stores has been growing steadily. So as of end of September last year, we have partnered with over 5,000 stores. And as of end of last year, in the opening remark made by Kate, we have already partnered with 10,000 branded partner stores So we do see that the growth momentum on store opening remains strong, as we see that many of our existing partner stores partners seeking to open more stores, i.e. second stores, third stores, fourth stores, and definitely we also receive applications from potential new store owners as well. However, from an operational or a commercial strategy point of view, Number of stores is not the first parameter or the paramount important parameter from our wheel. We always prioritize our branded partner stores' owners' productivity. So we will always closely monitor the latest sales of our branded partner stores to evaluate the number of stores to be open and then to determine and accept the number of requests or applications made by these store owners. So under our current understanding, as you can see, we have beat our internal projections. So we believe such trend will continue in the near future regarding the goal trajectory based on our projections. And I think your second question is mainly on the margin side. So I mean, on margin side, our gross margin has been growing steadily. with our cost optimization with new agencies and better supply chain management. And we also have achieved operating leverage as shown in the fourth quarter or the past two quarter results. However, we will also still focus on investing in our strategy as mentioned in Kate's opening remarks. So you have your first question. May you talk about that again?
spk04: Sure. The last question is about the product. And so we noticed that the company also introduced some products earlier this year, like some entry products, including the Cotton Week. And so about the feedback so far, and also could you share about your views on your product strategies and also some technology looking forward?
spk05: Sure. So we have been always using the user-centered approach to have a diversified product portfolio in order to meet the increasing needs of eVapor users as we see the penetration has been increasing. So in March, we have introduced the affordable version of a rechargeable eVapor product. But given that it's still at the early stage of development, we would like to share more thoughts regarding that when we have more results internally. So thank you very much, Lydia, for your questions.
spk01: The next question is from Charlie Chen with China Renaissance. Please go ahead.
spk00: Thank you, management. This is Charlie Chen from China Renaissance. I got three questions here as well. First, how do you think ceramic atomizers versus cotton atomizers. I mean, how do these two different materials fit into your future business strategies in both supply chain and product portfolio management? So that's the first question. Second question is about consumer loyalty. Do you have any data in terms of average number of eVapor brands your consumers regularly uses or how often or how difficult for consumers to switch brands and what are the factors to help them to make these kind of decisions. Any consumer insights in this area will be very helpful. And lastly, distribution. What kind of index, such as like sales or traffic, et cetera, if you have, do you use to monitor your store density in the city or in the market? Like in Beijing, how many stores do you think is enough and what makes you to think so. And also that relates to what kind of store expansion plan you have in other cities. So that's my three questions. Thank you.
spk05: Thank you very much, Charlie. So I mean, for the first question, it's about the ceramic and also the cotton heating elements that you mentioned. So for us, we always prioritize user-centric needs as our first priority. So, as mentioned before, so we use a product development framework called AIAPI to develop the e-vapor product for our customers in China. So, I mean, for the supply chain one side, it largely depends on user feedback on which product to use from time to time, which includes which elements to use, as mentioned in your question. So, for us, we have been using both cotton and ceramic heating elements in our supply chain. So currently, products with ceramic heating elements still account for the majority of our rechargeable cartridge. So for us, we will continue to monitor user preferences closely and the improvement of the product and technology, providing the right product mix to adult smokers in China. So I hope this answers your question. So your question, the second question is on the brand loyalty and the user preference side. So for us, there are differences between us and also other brands. So we do see very strong user loyalty for eBay products. As more and more Amazon workers and our users have been increasingly recognizing the benefits of using better alternatives. So I think for us, we can share about more insights in the following perspective. So I mean, for the first perspective, I can share about the user experience side. So according to our internal data, we observed that our users have continued to purchase our e-vapor products after the second consecutive month of their initial purchases, i.e., after M1. We can also see improvements in terms of retention rate of user cohorts with a longer time frame as well. And I think the second perspective I can share is about the user experience. So for a more daily eVapor user, they can tell the significant difference in terms of product availability, like the inhalation experience, like the issues that they may overcome in other products, like easy-to-make cash, in-store experience at our brand partner stores, and most importantly, is to recognize our unique brand value. And therefore, I mean, for a majority of them, they tend not to consider our competitors' products given our leadership in every aspect of development. So, I mean, for that part, we do have seen that it's a limited number of competitor users becoming our users, as indicated by competitors' significant increase in rechargeable device, but with a lower or like no increase in cartridge volume. And your first question is the distribution, yeah. Distribution and also the store density. So if I can briefly share the logic of our store opening plan, or the logic behind Like he's not talking about like we set certain limits of goal for each city or region. So the overall logic of the operation model for like cities or like regions is largely depend on whether there are sufficient potential users of evapoproducts in such area. So we know that user penetration of evapoproducts among adult smokers across China has been relatively low, with a single-digit penetration across Tier 1 cities to counties, villages, etc. I mean, of course, we do set requirements for store opening selection, like we set the 500-meter distance requirement for most of the region to avoid the cannibalization among stores. But if you're talking about the most important parameter, it's always about the user penetration of the corresponding city in order to calculate whether the number of stores can be supported in the operational model. So in future, as we can see, there will be growing user penetration of our products among air smokers. We expect to gradually loosen our requirements, like 500-liter requirements, to maintain our competitiveness having an increasing number of friend upon a sauce, while most importantly, to ensure the productivity of each of these stores. So, thank you very much for your questions.
spk01: Due to the time constraints, now I'd like to turn the call back over to the company. Sorry to close your mic.
spk05: Sure. Thank you very much. So thanks, everyone, for your time. So feel free to look at further information through our website called ihouse.resetpass.com or through the conference information provided to us or through the TPG Investor Relations feed.
Disclaimer