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spk00: Hello, ladies and gentlemen. Thank you for standing by for the RLX Technology Incorporated's first quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After management's remarks, there will be a question and answer session. Today's conference call is being recorded and is expected to last for about 40 minutes. I will now turn the call over to your host, Mr. Sam Tsang, head of investor relations of the company. Please go ahead, Sam.
spk05: Thank you very much. Hello, everyone, and welcome to RxTechnology's first quarter 2021 earnings conference call. The company's financials and operational results were released through PL Newswire services earlier today and have been made available online. You can also view the earnings price release by visiting the IR section of our website at ir.relaxtech.com. On today's call, our co-founder, Chairperson of the Board of Directors and Chief Executive Officer, Ms. Kate Wang, will make some general remarks on our first quarter achievements and strategic focuses going forward. Then, our Chief Financial Officer, Mr. Chao Lu, will elaborate further on our specific initiatives and take us through our financial results for the first quarter ended March 31st, 2021. Before we continue, please note that today's discussion will contain four looking statements made under the safe harbor provisions of the U.S. Traffic Security Litigation Reform Act of 1995. These statements typically contain words such as made, will, expect, target, estimate, intent, believe, potential, continue, or 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 does not undertake any application to update its forward-looking information. except as required under the applicable law. Please note that RLX Technologies' earnings press release and this conference call include discussion of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. RLX Technologies' press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited gap measures. I will now turn the call over to Ms. Kate Wendt. Please go ahead.
spk03: Thank you, Sam. Thanks, everyone, for making your time to join our earnings conference call today. First quarter 2021 was an eventful one for our company and the industry. In January, we successfully listed on New York Stock Exchange. After listing, We continued to the leadership in scientific research, technology, and product development, supply chain production, and distribution and regional network. Our net revenues for the first quarter grew 48% quarter over quarter. In March, the authorities made an announcement seeking public comments regarding a proposal to revise relevant regulations aimed at strengthening the supervision of e-cigarettes and solving the quality and safety risks, and forth advertising problems among others. Just yesterday, the newly revised law on the protection of minors was enacted. Partial clauses address the prevention of underage use of alcohol and tobacco, e-cigarettes included. At Relapse, we have always been upholding user value, corporate value, and social value as the key pillars of everything we do. It is the relentless pursuit of these values that makes us the most trusted brand of choice and a leading force in our industry. The dynamic market and regulatory environment serve as continued inspiration for us to keep pioneering in all fronts, at a speed and with purpose. For our users, we focus on value creation through product development to meet their diverse needs, and through distribution and regional network enhancement to ensure their seamless investing cost purchase experience. For our corporate stakeholders and partners, we focus on value creation through investing into science and technology to reinforce our sustainable advantage and empower everyone in our value chain. For the society, we focus on value creation through providing products of highest quality and safety standards to address markers for harm reduction, and through fighting against counterfeit products and against illegal marketing and sales to minors. To keep pace with our business development, we have been steadily attracting and developing high-caliber talent to strengthen our capability. In the first quarter, they appointed Mr. Chao Lu as our Chief Financial Officer. He brings over a decade of investment banking experience and a comprehensive understanding of China's healthcare industry. We are pleased to welcome him to our management team and believe he will be an invaluable addition to our company. With that, I will now turn the call over to Chao. who has been with us for more than two months now. He will elaborate further on some of the initiatives taken during the past quarter and go over our operational and financial results in more detail. Chao, please go ahead.
spk06: Thank you, Kate, and hello, everyone. It has been an honor and a great pleasure to join Relaxed Management Team. To advocate, value creation has been at the center of all our initiatives, Next, I will share some specifics regarding the initiatives we have taken in the first quarter. Then, I will walk you through our financial results for the first quarter and our guidance for the second quarter. In March, in response to user demand, we released a new product, Relax Light, also known as Vietcure Qingfeng, with a more affordable pricing. We will keep expanding and enhancing our product offerings as we seek to serve the diversities of our users in China. We also continued our expansion of offline distribution networks and retail channels across the nation to further penetrate e-vapor products amongst adult smokers. As of March 31, 2021, we partnered with over 15,000 RELAX branded partner stores nationwide And we are excited to see an increasing number of branded store partners willing to start business with us to open relaxed branded partner stores, working together to better serve adult smokers in China. Meanwhile, as part of our consistent efforts to expand our industry-leading retail model nationwide, we have also been collaborating with various former retailers to diversify our distribution and retail networks. In the first quarter of 2021, we opened our quality lab to further strengthen our quality assurance and control capability. We also started developing our second and third exclusive production plants to enhance our production capabilities. In terms of our efforts in scientific research, the Journal of Applied Technology published RELAX Lab's science study on the cooling agent The peer-reviewed journal article forms part of our ongoing emphasis on scientific research. Looking ahead, we will keep investing in in-house lab research related to product quality and safety, physiochemistry, pathological and clinical elements, and the evaluation of long-term use of e-vapor products. Keeping up our commitment to corporate social responsibility We remain dedicated to building and strengthening our trusted brand by consistently adhering to our strong ethical principles. We have continued investing in the Golden Shield program to combat sales of counterfeit products, having delisted over 100,000 online links and seized over 170,000 counterfeit products. In late April, we published our first ESG program detailing our efforts and commitment to our stakeholders. Yesterday, after newly revised law on the protection of miners was enacted, we were the first amongst all our peers to call on the entire industry participants to thoroughly study the relevant laws and regulations and strictly abide by all. Turning to financial performance, we started 2021 with good momentum as our first quarter results came in above our expectations. Our robust top-line growth continued as a result of the expansion of our distribution and retail network, driving increased user penetration among adult smokers. We remain devoted to implementing our cost optimization strategy and enhancing operating leverage. I will now provide a brief overview of our key financial raised out for the first quarter of 2021. Our net revenues increased by 48.2 percent to 2.4 billion RMB in the first quarter of 2021 from 1.62 billion RMB in the fourth quarter of 2020. The growth was primarily due to an increase in net revenues from sales to offline distributors, which was driven by the expansion of our distribution and retail networks. Growth profit increased by 59.1 percent to 1.1 billion RMB in the first quarter of 2021, from 694.1 million RMB in the fourth quarter of 2020. Growth margin increased to 46 percent in the first quarter of 2021, compared to 42.9 percent in the fourth quarter of 2020. Operating expenses were 1.2 billion RMB in the first quarter of 2021 compared to 852.6 million RMB in the fourth quarter of 2020. Selling expenses increased by 48.2 percent to 291.5 million RMB in the first quarter of 2021 from 196.7 million RMB in the fourth quarter of 2020. The increase was mainly driven by one an increase in salaries and welfare benefits, two, an increase in branding material expenses, and three, an increase in shipping expenses. General and administrative expenses increased by 59.5% to 712.8 million RMB in the first quarter of 2021, from 447 million RMB in the fourth quarter of 2020. The increase was primarily due to, first, an increase in salaries and welfare benefits, and second, an increase in share-based compensation expenses, partially offset by a decrease in legal and other consulting fees. Research and development expenses increased to 211.6 million RMB in the first quarter of 2021, from 208.9 million RMB in the fourth quarter of 2020. The increase was primarily driven by an increase in salaries and welfare benefits partially offset by, first, a decrease in share-based compensation expenses, and second, a decrease in material expenses. Share-based compensation expenses recognized in selling expenses, general and administrative expenses, and research and development expenses in total were 877.5 million RMB in the first quarter of 2021 and 656.1 million RMB in the fourth quarter of 2020. Loss from operation was 111.9 million RMB in the first quarter of 2021, compared with 158.5 million RMB in the fourth quarter of 2020. Income tax expenses was 176.3 million RMB in the first quarter of 2021, compared with 110.6 million RMB in the fourth quarter of 2020, primarily due to an increase in taxable income. GAAP net loss was 267 million RMB in the first quarter of 2021, compared with 236.7 million RMB in the fourth quarter of 2020. Non-GAAP net income reached 610.5 million RMB in the first quarter of 2021. Gas basic and diluted net loss per ADS were both 0.174 RMB in the first quarter of 2021 compared to 0.165 RMB in the fourth quarter of 2020. Non-gas basic and diluted net income per ADS were both 0.398 RMB in the first quarter of 2021 compared to 0.292 RMB in the fourth quarter of 2020. As of March 31, 2021, the company had cash and cash equivalents, restricted cash, short-term bank deposits, short-term investments, and long-term bank deposits of 14.4 billion RMB. compared to 3.4 billion as of December 31st, 2020. The increase was primarily due to net proceeds raised in the company's IPO in January. As of March 31st, 2021, approximately 1.65 billion U.S. dollars, equivalent to 10.8 billion RMB, was denominated in U.S. dollars. Now turning to guidance. For the second quarter of 2021, the company currently expects net revenue to exceed 2.85 billion RMB and non-GAAP net income to exceed 720 million RMB. The above outlook is based on the current market conditions, including those related to COVID-19 pandemic, and reflects the company's preliminary estimate of the market and operating conditions. and the user's demand, which are all subject to change. This concludes our prepared remarks today. We will open the call to questions. Operator, please go ahead.
spk00: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please... 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. Our first question comes from Lydia Ling from Citi. Please go ahead.
spk02: Hi, management. Hi, okay. Hi, Scott, and hi, Sam. And thanks for the presentation. And this is the Air France City. So first, congratulations on the strong results achieved in the first quarter. I actually have two questions. We'd like to hear your views. And the first question is still on the regulation side. So actually after the opinion in the March and also like the public feedback ended in late April, so could you share with us any regulatory updates for this industry and like what's your view on the current progress and like your expectation on the timeline for the detailed regulation? And my second question is, like, what's your views on the latest competitive landscape for the China easy grid market? And so any changes have you observed after the March opinion announcement? And, like, how does your competitor's market share evolve? And we also observed the opening has been very aggressive in first quarter. So how about your peers? And also, did you... or any pushback in the openings in the second quarter of the announcement? Thank you.
spk05: Sure. Thank you very much, Lydia. It's nice to see you again. So, I mean, on the first one, it's about the regulatory updates. So, in response to the announcement made by MIIT on March 22nd, so we have submitted our feedback regarding the announcement before the deadline of April 22nd. So we are absolutely supportive on the considerations being mentioned in the attachment of the announcement on March 22nd, which includes to regulate operating efficiencies of the e-vapor industry and tackle the potential safety issues of some of the e-vapor products in the market. Some of those advertisements made by some market participants as well. These considerations have been always our focus in our daily operations. Regarding the timeline or updates, there has been no updates regarding the announcements according to the website of RAS and regulatory authorities. We will keep monitoring the regulatory developments very closely. So I think the second question is on the competitive landscape side. So stepping onto 2021, so far this year, as mentioned by both Kate and Charles, our business has remained a very strong growth momentum as evidenced by our operational and financial results. So alongside our expansion, we also try to identify more diversified demand to better serve adult smokers in China through our advanced technologies and product developments, our nationwide distribution and retail network, as well as our enhanced supply chain and production capabilities. So I mean regarding the market share or the landscape itself, according to our knowledge, most of our peers have witnessed a deceleration of growth, or even decline in financial results or operating results from the beginning of the year. I believe the major reason is that our commercial and product strategies have given us a competitive. So as mentioned in the opening remarks, so we plan to adhere to our own strategies of style creation and grow more investments into scientific research, product development, et cetera, supply chain distribution support, and most importantly, on the age of protection to widen our lead over our market players in the e-vapor market in China.
spk02: Thank you, Jen.
spk00: The next question comes from Charlie Chen from China Renaissance. Please go ahead.
spk01: Thank you, management. Thanks for taking my questions. I have two questions. Number one is, since the announcement on March 22, have you seen any material changes or impacts on, I mean, consumer behavior or your business or any kind of would be appreciated? Second question will be, do you have visibilities towards your production capacity and the whether your largest supplier has sufficient capacity reserved for your growth for the rest of the year. Thank you.
spk06: Thanks, Charlie, for the question. On your first question, since March 22nd announcement, we have been closely monitoring the macro environment and market condition and our own operating results. We have also been gathering feedback from our business partners, including retailers, distributors and suppliers through daily communication. We have also been closely monitoring our operating and financial metrics, including the retail sales value, frequency of purchases, and inventory levels through our own system. We continue to see sustained support from our business partners and users for our business development and our products. We have not yet experienced material negative impact on our operating results since that announcement. We will keep monitoring the industry landscape, including the regulatory framework. We're maintaining the active communication with our trusted partners and monitoring key operating metrics. We will aim at deliver value creation to our users, stakeholders, and the society as a whole. On your second question regarding production capability, visibility, and our capacity with the partners, right, with our supply chain partners. We strive to be agile in managing our supply chain and production plans. We formed our supply chain and production plans for various time frameworks based on the multiple factors, including user demand, distributors and retail sales, commercial goals, inventory levels, to ensure that we could achieve an optimal inventory level while fulfilling users' demand for our e-vapor products. Our e-vapor products contain multiple components including e-liquid, packaging, battery, and various materials, and we currently have hundreds of SKUs. We have been discussing and communicating with our production needs with our suppliers and manufacturers periodically over the past year and the past quarter. Our suppliers and manufacturers have fulfilled our needs effectively. We remain vigilant on our suppliers and manufacturers' capability or capacity and their actual production volume. I think we can manage their capacity and expand or adjust accordingly. We expect our suppliers and manufacturers to be able to meet our needs under the current supply chain planning mechanism and fulfill our future expansion plans.
spk01: Thank you very much.
spk00: Our next question comes from Junhao Fan from CICC. Please go ahead.
spk04: Okay. Thanks, management. I'm Junhao from CICC. I have two questions. The first question is what's your latest number of members and how will the membership system help the company's operation? And the second question is does the industry's upstream raw material price increase affect the company's cost, especially some electronic components such as chips, if the price has gone up? What's the effect of the company's cost?
spk05: Sure, Junhao. Nice to talk to you again. So there are two questions. One is on the membership system, and the other one is on the macro cost increase. So on the membership guide, we've been developing our own membership system since 2019 to better serve our users with our reward system and enhanced experience. So I mean, for us, the membership system can also improve our understanding of our user needs and how we can deliver the best possible product. So currently, we have over 10 million members in our membership system on a registered basis. where we can keep updated them on our scientific information, some introduction of our products, store locations, and also after-sales services. So we will continue to improve and enhance the membership system in a bid to better serve and reward our members as we try to assist our workers in using e-waste products as harm reduction alternatives. So on the second question is on the raw material pricing on macro level. So we do aware that there has been a challenging global economic situation. Prices of raw materials in electronic industry like chips have indeed having a upper trend. So as part of this, we also see that some of our suppliers have experienced an increase in cost. in part of the supply chain process. However, so far, our costs have not experienced any material adverse impact from the change in the price of raw materials. So, I mean, for us as a brand manufacturer, so we'll continue to closely monitor the latest developments throughout our supply chain and some of the operating or financial issues that could be faced by our suppliers. So if the cost of our products do increase, so we will do it for very active solutions to mitigate any potential impact on our financial or operating results.
spk00: The next question comes from Stephanie Lam from Haitong International. Please go ahead.
spk07: Hi, management. Thank you for taking my questions and congratulations on the strong result. I have two questions. First one is regarding the store opening target. We noticed that some of your peers have been accelerating their store opening in China. So just want to check if we have any adjustment on our current store opening plans. This is my first question. The second question is related to the new product side. Could you talk about the price positioning of our future products? It would be great if you can also share the sales and testing progress of our sixth-generation low-priced products. Thank you.
spk05: Sure. Thank you very much, Stephanie. So for our store opening plan, so I can explain the logic a bit. So for the overall logic of our branded counter stores, our operating model remains intact, and it is largely dependent on whether there are enough potential users. for our product in a given area or a district. So for each district or area where we have our bread and butter sauce, we will monitor and evaluate the source producticity in combination with other macro or micro factors to decide whether more stores are needed to be there open instead of looking what's our PS2. So the implementation of our branded partner stores operating model has achieved great success in the past. We have partnered with over 15,000 relaxed branded partner stores nationwide as of March 31st of this year. So we have been consistently monitoring the speed of store opening based on a comprehensive set of metrics, including productivity of existing stores. So for us, we will continue to expand our network based on the above criteria with careful measurement of potential user traffic. We will also pay very close attention to avoid cannibalization among stores by enforcing distance requirements for most of the region. So this is the first one on the store opening plan and how we adjust in accordance with our competitors as well. So the second one is the product pricing and also our latest . So I mean, for us, the product pricing strategies have been dynamic. It really depends on user penetration in the industry together with actual commercial feedback. We will continue to offer a range of products at various price as we seek to fulfill differentiated needs of different types of . For example, we'll introduce features for high-end products and manage the cost for lower-end products to make various types of additives still affordable. Regarding the sixth generation of products, we have been conducting the pilot testing of the series science in multiple cities. We are still in the process of collecting preliminary feedback from our users and business partners. It will require more time for us to better evaluate the performance of such products and better decide the scale and availability of such products. So thank you very much for your patience.
spk07: Thank you.
spk00: There are no further questions. This concludes our question and answer session. I'd like to turn the conference back over to management for any closing remarks.
spk05: Thank you again for joining us today. If you have any further questions, please feel free to contact our Earth Technologies Investor Relations team through the contact information provided on our website or TPG Investor Relations.
spk00: This concludes the conference call. You may now disconnect your line. Thank you.
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