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spk00: Hello, ladies and gentlemen. Thank you for standing by for RLX Technology Inc.' 's third 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 45 minutes. I will now turn the call over to your host, Mr. Sam Sonn. Head of Investor Relations of the company. Please go ahead, Sam.
spk03: Thank you very much. Hello, everyone, and welcome to RRX Technologies' third 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 press release by visiting the IR section of our website at ir.resetpad.com. Participants on today's call will include our co-founder, Chairperson of the Board of Directors, and Chief Executive Officer, Ms. Kate Wang, Chief Financial Officer, Mr. Chao Lu, and myself, Sam Seng, Head of Investor Relations. Before we continue, please note that today's discussions 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, advisors, representatives, and other writers do not undertake any obligations to update this forward-looking information, except as required under the applicable law. Please note that RX Technologies earnings press release and these conference calls include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Our LX Press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to Ms. Kate Wang. Please go ahead.
spk06: Thank you, Sam, and thanks, everyone, for making time to join our conference call today. In the second half of the third quarter, there have been progressive regulatory developments through the global EV space, including in China. Last Friday, November 26, 2021, the State Council announced its decision to amend the detailed implementation regulations of the Tobacco Monopoly Law of the People's Republic of China by adding Rule 65, which states that implementation rules for next-generation tobacco products, including e-cigarettes, shall refer to as relevant rules with respect to cigarettes under the implementation and regulation of the Tobacco Monopoly Law. On Tuesday, November 30, 2021, the State Tobacco Monopoly Administration released a consultation paper entitled Electronic Cigarettes, on National Public Service Platform for Standards Information under the State Administration for Market Regulations, seeking public comment regarding national electronic cigarette product standards. Yesterday, December 2nd, 2021, the State Tobacco Monopoly Administration released a consultation paper entitled Administrative Measures for Electronic Cigarettes, seeking public comment regarding administrative measures on electronic cigarettes, covering various aspects, including production, distribution, and retail sales, import and export, and inspections. We firmly support this amendment to the detailed implementation regulations and have begun making any required changes to fully comply with the new regulations and administrative measures. We believe the amendment will pave the way for long-term and sustainable growth in this sector. We are also aware of meaningful worldwide regulatory developments, which reflects similar trends globally. In the United States, the FDA has made substantial progress reviewing PMTA applications and granted its first EVA product authorization in October. demonstrating its recognition of certain evapour products' harm reduction effects. We closely follow global regulatory developments and view this regulation of evapour products as a global trend. and will grow as countries worldwide recognize UAPA products harm reduction benefits for adult smokers. With these regulatory developments, especially in China, we believe the sector will enter a new era of development, an era marked by enhanced product safety and quality, augmented social responsibilities, and improved electoral property protection. As some of you may be aware, the third quarter was challenging on the commercial front for the entire industry value chain. which have been reflected in our key value chain partners' financial results previously. Misinformation from temperature and negative publicity on the e-vapor sector and evolving COVID-19 restrictions in response to outbreaks in China. which we discussed during the last quarter's earnings call, has a significant adverse impact on the retail sales and product procurement by our branded store since the latter half of the second quarter. As a result, we have record 34% quarter-over-quarter decline in our net revenue. But we believe this revenue decline to be temporary and have a clear plan to achieve long-term healthy growth, which Chao will explain in detail later. Despite those industry headings, we continue to focus on building a solid foundation for sustainable success. In the third quarter, we redoubled our scientific research efforts and continued to attract and recruit top talent to strengthen our sales, supply chain, and R&D capabilities. We are committed to providing adult smokers with innovative harm reduction products of the highest quality. Also at IOX, we also plan and act for the long term. Corporate social responsibility has been an integral part of values since day one. In the third quarter, we unveiled our 2020 to 2021 Corporate Social Responsibility Report, wherein we shared our progress with respect to our CSR initiatives. Some highlights include our industry-leading age verification system, Sunflower System 3.0, with enhanced features to prevent underage use. Our relaxed care community service program to promote rural revitalization and common prosperity. These accomplishments are testament to our dedication to fulfilling our social responsibilities. We strive to positively impact our users, employees, and communities in which we live. With that, I will now turn the call over to our CFO, Chao Lu. He will elaborate further on some of our last quarter's initiatives and go over our operational and financial results in more detail. Charles, please go ahead.
spk02: Thank you, Kate. And hello, everyone. I will start by sharing some of this quarter's major initiatives and developments and then walk you through our key financial metrics. We believe that offering the right products to the right user segments through the optimal route to market will be the key to our sustainable, high-quality growth. To this end, we continue to expand our product offerings to meet the needs of diverse user segments and optimize our distribution and retail networks to ensure quality growth. With respect to products, we are focused on offering better and more tailored vaping products for various user groups to help engage new users with the right products. This quarter, we introduced Yi Xiyun, a new brand targeting adult smokers with a long history of smoking. Our goal is to recreate an authentic smoking experience for adult smokers by launching eight tobacco-flavored cartridges in our initial stage. At the same time, we further upgraded Qinfeng, a more accessible product line catering to price-sensitive users' needs. We also recently relaunched Stella, or Xinhe in Chinese, a premium device line with upscale styling, including leather, lace, and other fashionable materials. We will continue to monitor user experiences very closely and launch innovative, targeted products at the right time. We also made several advancements in user retention and engagement during the quarter. We successfully upgraded our membership system, enabling members to enjoy more benefits as they accumulate reward points. A growing number of users are scanning the QR codes on their cartridges to collect reward points, which will allow us to empower users with instant product authentication. Separately, we have established more effective communication channels to provide unbiased, fact-based, scientific e-vapor product information to our users and the community. Finally, we are concentrating on distribution and retail channel optimization. Instead of engaging more distributors and expanding the number of our relaxed branded stores, this quarter we prioritized our existing distributors' organizational upgrade. We encouraged our distributors to hire exceptional talents and refine their team structure within each department. We optimized the existing Relax branded partner stores locations by identifying areas with high retail sales potential and encouraging store owners to adjust to their operations accordingly. In addition, we provided online and offline trainings for store owners and sales personnel to enhance their communication skills and enrich their product knowledge. in order to counter the adverse effects from misinformation resulting from periodic negative publicity on our category. We have also upgraded our digitalization system for branded partner stores, providing improved functionality and additional use of photos to assist store owners and sales personnel in their daily operations. For our other retail outlets, our focus in the third quarter was to identify prime outlets for expansion through trials in various channels. These trials resulted in several initial successes, including strong momentum in lifestyle channels and other key accounts. In addition to our emphasis on high-quality growth, we are deeply committed to fulfilling our corporate social responsibilities. We believe the healthy relationship between our products, users, shareholders, and the community has been essential to the growth we have achieved over RELAX's four-year history. With this in mind, we'll work tirelessly to introduce new technologies to tackle industry pinpoints. For example, miner protection is one of RELAX's highest priorities. We spare no effort in our miner protection initiative, from product labels to trade channels and technology innovation. In June 2021, we began upgrading Sunflower system, our technology-driven miner protection system, to version 3.0. and currently equipped all of our branded stores with the upgraded software. On the Sunflower System 3.0, all users are required to complete name plus ID number plus face recognition three steps verification before purchasing. After the amendments to China's national standards become effective, we will strictly comply with any upgraded product requirements. For example, we are prepared to include minor protection features such as child safety locks, similar to the feature which we have incorporated into our Relax Ice product line back in 2019. As a company that values long-term, high-quality growth, our commitment to social corporate responsibility is at the core of our daily operations. echo what Kate has pointed out previously. Our game has entered the second half. With the State Council's decision to amend the detailed implementation regulations of the Tobacco Monopoly Law and the subsequent release of a consultation paper regarding national electronic cigarette product standards by the State Tobacco Monopoly Administration, as well as last night's release of a consultation paper, regarding administrative measures on electronic cigarettes, covering various aspects including production, distribution and retail sales, import and export, and inspection. Different from the first half of the game, when the sector lacked clear regulatory guidelines, The second half is marked by enhanced product safety and quality, augmented social responsibility, and improved intellectual property protection. The investments we made in product, talent, research, and compliance in the third quarter and beyond will place us in an advantageous position on the new regulatory paradigm. We expect these investments to yield steady and sustainable growth soon and to reward us and our shareholders in the long term. Turning to our financial results for the third quarter of 2021. Net revenues decreased by 34 percent to RMB 1.68 billion, equivalent to U.S. dollar 260.2 million in the third quarter of 2021, from RMB 2.54 billion in the second quarter of 2021. The decrease was the result of volatile market conditions, including one negative eBay per-index publicity since the latter half of the second quarter, Two, the fact that the draft new rules announced on March 22nd, 2021, had not been formally confirmed, and no new implementation details had been revealed during the quarter. And three, evolving restrictions in response to COVID-19 outbreaks in China, which had adverse impact on ourselves and China inventory management. Gross profit decreased by 42.8% to RMB $656 million, equivalent to US dollar $101.8 million in the third quarter of 2021, from RMB $1.15 billion in the second quarter of 2021. Growth margin was 39.1% in the third quarter of 2021, compared to 45.1% in the second quarter of 2021. The decrease was primarily due to one, an increase in direct costs related to promotional activities, and two, an increase in inventory provision. Operating expenses were positive RMB 241.3 million, equivalent to US dollar 37.5 million in the third quarter of 2021, representing a decrease of 244.4% from RMB 167.2 million in the second quarter of 2021. This significant decrease in operating expenses was primarily due to the recognition of share-based compensation expenses of positive RMB 523.7 million, equivalent to US dollar 81.3 million. Consisting of one share-based compensation expenses of positive RMB 90.8 million, equivalent to US dollar 14.1 million, recognizing selling expenses. Two, share-based compensation expenses of positive RMB 320.1 million, equivalent to US dollar 49.7 million, recognized in general and administrative expenses. And three, share-based compensation expenses of positive RMB 112.8 million, equivalent to US dollar 17.5 million, recognized in research and development expenses. The significant fluctuations in share-based compensation expenses were primarily due to the changes in fair value of the share incentive award that the company granted to its employees as affected by significant fluctuations of the company's share price. Selling expenses decreased by 55.1% to RMB 56.5 million, equivalent to U.S. dollar 8.8 million in third quarter of 2021, from RMB 126 million in the second quarter of 2021. The decrease was primarily driven by, first, the fluctuation of share-based compensation expenses, and second, a decrease in salaries and welfare benefits, partially offset by an increase in branding material expenses. General and administrative expenses decreased by 649.8% to positive RMB 253.2 million equivalent to US dollar 39.3 million in the third quarter of 2021 from RMB 46.1% in the second quarter of 2021. The decrease was primarily driven by the fluctuation of share-based compensation expenses and a decrease in salaries and welfare benefits. Research and development expenses decreased by 808.3 percent to positive RMB 44.6 million, equivalent to U.S. dollar 6.9 million in the third quarter of 2021, from positive RMB 4.9 million in the second quarter of 2021. The decrease was mainly driven by the fluctuation of the share-based compensation expenses and a decrease in salaries and welfare benefits, partially offset by an increase in software and technical expenses, and second, an increase in consulting expenses. Income from operations was RMB $897.3 million, equivalent to U.S. dollar $130 billion. 9.3 million in the third quarter of 2021, compared with RMB 979.3 million in the second quarter of 2021. Income tax expenses was RMB 121.4 million, equivalent to US dollar 18.8 million in the third quarter of 2021, compared to RMB 204.2 million in the second quarter of 2021. The decrease was primarily due to a decrease in taxable income. US GAAP net income was RMB $976.4 million equivalent to US dollar $151.5 million in the third quarter of 2021 compared to RMB $824.3 million in the second quarter of 2021. Non-GAAP net income was RMB $452.7 million, equivalent to U.S. dollars $70.3 million in the third quarter of 2021, representing a decrease of 30.5% from RMB $651.8 million in the second quarter of 2021. U.S. basic and diluted net income per ADS were RMB 0.724, equivalent to U.S. dollar 0.112, and RMB 0.717, equivalent to U.S. dollar 0.111, respectively, in the third quarter of 2021. Compared to U.S. GAAP basic and diluted net income per ADS of RMB 0.595 and RMB 0.591 respectively in the second quarter of 2021. Non-GAAP basic and diluted net income per ADS were RMB 0.336 equivalent to U.S. dollar 0.052 and RMB 0.333 equivalent to US dollar 0.052 respectively in the third quarter of 2021 compared to non-GAAP basic and diluted net income per ADS of RMB 0.470 and RMB 0.467 respectively in the third quarter of 2021. As of September 30th, 2021, the company had cash and cash with equivalents, restricted cash, short-term bank deposits, short-term investments, and short-term bank deposits of RMB 14.72 billion, equivalent to US dollar 2.28 billion, compared to RMB 14.88 billion as of June 30th, 2021. As of September 30th, 2021, approximately U.S. dollar 1.64 billion equivalent to RMB 10.59 billion was denominated in U.S. dollar. For the third quarter ended September 30th, 2021, net cash used in upgrading activities was RMB 142.9 million equivalent to U.S. dollar 22.2 million. This concludes our prepared remarks today. We will now 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're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And 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. Today's first question comes from Lydia Ling in Citi. Please go ahead.
spk05: Hi, everyone. Hi, thanks, management. Thanks for the presentation. And this is Lydia Ling from Citi. I have two questions. My first question is, Given the recent regulation update development, would you like to share with us how will your product portfolio evolve going forward and what changes can we expect to see in your existing product portfolio? And my second question is, so we saw the slowdown, further slowdown in the third quarter. So could you actually share more color on your first quarter to date operation trend and also your outlook for next year, given the current regulation update and also the COVID situation? Thank you.
spk03: Thank you very much, Lydia. So regarding your first question regarding our product portfolio, So we do have a very clear product development strategy. As mentioned in the opening remarks, we try to offer device products to the right future segments for the optimal route to market channel. So we do aware of the press conference held by the State Tobacco Monopoly Administration yesterday, and also the announced public consultation of the National Electronic Cigarette Product Standards. So, within the transition period for new requirements to become effective, we will strictly comply with the regulatory guidelines. So, regarding what will be changed to our current product offerings, if and or when the draft National Electronic Secrets Crowd Standards become effective, we anticipate we may need to modify some of our current offerings. However, we are very confident that such changes won't be complex for our company and our colleagues, and we believe as brokers we will still continue to seek out and use our products as harm reduction alternatives. So, regarding your second question about Broker Outlooks and 2020, so we currently do not have any guidance for the quarter to go together with next year, so we hope to share more when we have better clarity.
spk00: Thank you. Our next question today comes from Charlie Chen in China Renaissance. Please go ahead.
spk04: Thank you, management, for taking my questions. I have two questions here. The first one is, could you please share your observations on the current competitive landscape for this industry? Are there any changes compared to the first half of this year? And also, what are your thoughts on the retail pricing for the industry in the current environment? So that's the first question. And my second question is regarding single-store sales. So what are the single-store sales of RealX branded powder stores for now? From your perspective, where do you consider to be a healthy single-store sales level? Thank you very much.
spk03: Thank you very much, Charlie. So, I mean, there are two questions. One is on the competitive landscape, and the other one is on our real-expanded partner stores. So the first one, as mentioned before, during the latter half of the second quarter, we do see that the industry development did not progress as expected. So indeed, this has carried into the third quarter when we do see that there are external factors affecting the entire industry, including our company and also our peers to varying degrees. But indeed, regarding competitive landscape, we have observed reduced industry competition as compared to this first half of 2021. So regarding like retail price that you have mentioned, so we do have increased our promotional assets in the first quarter, trying to drive our retail sales and reduce inventory pressure of our value chain. And we have also seen that given the third quarter decline in general consumer spending in China, many other companies similarly implemented subsidies or other sales incentives. So the overall magnitude of our subsidies or promotional efforts is relatively insignificant compared to other consumer goods companies in China. And we have started already reducing this further. Going forward, we'll continue to monitor our inventory level together with user demand and adjust our promotional efforts promptly to maintain a reasonable retail price for our end users. Regarding the second question about the single-star sales and also how we mentioned healthy as the indicator, So indeed, single-star sales together with their profitability and every operating metrics has been a really core focus in our day-to-day operations. As we also aware of the industry-wide deep in retail sales starting in the second half of 2021. But however, we also see that there have been recovery for many of our stores in recent months. As our stores are operating in a wide variety of locations, some of them are in shopping malls, and some of them are on the streets, and they also face different local environments, we believe each store's situation is very unique. So, indeed, we inherently do not have a healthy parameter for single-store sales as we look at it one by one. branded e-vapor company, we have been devoting resources and tools to assist star owners and sales personnel in their data operations, including providing branding materials, POSM, training resources, digitalization tools, and enhanced star site selection assistance. So, indeed, for this quarter, we have also launched several new products, and also upgraded our membership system to drive user engagement and retention better. So with these initiatives, we believe we can and we will continue to drive single-star sales of relaxed branded finance stocks. Thank you very much.
spk00: Thank you. Our next question today comes from Luis Lee at Bank of America. Please go ahead.
spk05: Hi management. Thank you for taking my question. My question is also for the Q4 outlook. I understand that you don't have the guidance, but you just mentioned that you have seen some recovery. during the past month. So could you share with us more color on the recovery in terms of the single store sales? And what is the store count as for now? What is our target for the year end? And also, what is the key cost driver for the recovery? Thank you.
spk03: Thank you very much, Louise. So based on our preliminary, quasi-taste data we do see sequential improvements in retail sales and also channel inventory management. So, we could share more about our strategies in the following aspects. So, for relaxed brand-apprentice stores, for a quarter-date, we have been focusing on increasing single-store sales for our initial ETFs being mentioned. And up until now, we do see the initial success. And for other retail outlets, we do see strong growth momentum in store counts in multiple channels. And our retail channel has become more diversified from quarter to date. But of course, we are also keenly aware of the recent developments in the regulatory funds, especially yesterday's press release held by the State Tobacco Monopoly Administration. So it was greatly followed to any new regulations and administrative measures. Thank you very much.
spk00: Thank you. Our next question today comes from Peihong LV with CICC. Please go ahead.
spk01: Hi, your management and Peihong LV at CICC. I have one question is that what is the outlook for cartridge development and the nicotine limit of 2%? Thank you very much.
spk03: Thank you very much, Junhao. So I believe you are actually referring to the a two-state graph in the current cigarette product standards. So indeed, as a US-listed China company, we have long been aware of product requirements globally, including in the European Union and also the initial graph of national product standards. So looking at the well-developed market penetration, We believe lowering nicotine concentration will affect some user segments' satisfaction. However, most of the other smokers could still satisfy with such nicotine content or limits in the long run. So from the perspective of product development or technology development, We have kicked off projects related to low nicotine concentration data satisfaction since 2019, and we do have the technical know-how and product reserves. So, currently, as you may know, most of our cartridge nicotine concentration is 3%. If such national standards become effective, it will strictly comply with all the requirements listed on the national product standards, including on equity content. Thank you very much.
spk00: Thank you. And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the company for final remarks.
spk03: Thank you once again for joining us today. If you have further questions, please feel free to contact RX Technologies' Investor Relations team through the contact information provided on our website, our TPG Investor Relations.
spk00: Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines and have a wonderful day.
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