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spk02: Hello, ladies and gentlemen. Thank you for standing by for RLX Technology Inc's third quarter 2023 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 about 40 minutes. I will now turn the call over to your host, Mr. Sam Tsang. Head of Capital Markets for the company. Please go ahead, Sam.
spk05: Thank you very much. Hello, everyone, and welcome to IR Technology's third quarter 2020 free earnings conference call. The company's financial and operational results were released through PR on this wire 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.relectech.com. Participants on today's call will include our CEO, Ms. Kate Wang, our CFOs, Chao Lu, and myself. 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, intent, 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, and representatives do not undertake any obligations 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 Ms. Kate Wang. Please go ahead.
spk03: Thank you, Sam, and thanks, everyone, for making time to join our earnings conference call today. Before I get into our third quarter results, I would like to briefly update you on our industry's macro and regulatory involvement. As most of you know, it has been a year since the new regulation framework came into effect. bringing a number of changes to the industry. On the supply side, the new rules have pushed industry participants across the value chain to adjust their businesses and standardize their operations under the authority's supervision. This no longer concerns some strong players including us, who have already adapted to the new regulations and proactively developed new compliant products to meet users' needs. However, persistent irregularities among other industry participants continue to disturb the market order and adversely affect the industry's recovery with an active impact. of illegal flavored products lingering. On the demand side, the new regulations seem to have less impact on users and consumption. Studies have shown that most evapour users are still unaware of the changes brought about by the new regulations. A survey conducted by Shanghai Jiao Tong University reviewed that 40% of users now mainly use national standard of compliance products, but 17% have not even tried compliance products. Furthermore, only 40% of users said they knew that legitimate retailers are only allowed to sell tobacco-flavored products. Users' lack of awareness of the new regulations has slowed the transition to compliant products, as has the easy availability of legal flavored products. Advocating users about the new regulations Complying the products' advantages and the dangers of illicit products is pivotal to the industry's recovery. But this will take time and effort. Amid this challenging environment, we continue to refine and broaden our product portfolio while improving operational efficiency during the third quarter. I'm pleased to say that these efforts paid off, reflecting our strong execution of our effective core strategy. We narrowed our operating loss and boosted cash flow during this quarter. We are also seeing signs of sequelae recovery in our top sign. Our CFO will provide the details of those results in just a moment. Now let me share a bit more about our strategic efforts and the progress of our product portfolio improvement. In terms of cartridges, we now offer five distinctive series of compliant devices at various price points versus just two series, Phantom and Phantom Pro, a year ago. Last month, we launched LeiLi, our fifth compliant series, featuring an adjustable power at a more affordable price than Phantom Pro and ZSUS. We have also quickly expanded our flavor offerings with 17 distinct tobacco flavors now available versus two back in October 2002. Our wide selection of compliant products is designed to fulfill diverse demands across every user's taste and budget. We will continue to closely monitor market demand and collect users' feedback to inform our product refinements further while leveraging our leading R&D capabilities and deep industry knowledge to develop our portfolio accordingly. Our product's value proposition to users extended far beyond our broad production of product selection. First, IOX has prioritized quality control and product safety since our inception. Supported by our strong research quality control and safety assessment capabilities, we can guarantee higher product quality and safety. All of our products and ingredients must meet international standards and obtain regulatory approval before hitting the market. Furthermore, as a fully compliant participant, we greatly value this consumption clearance and provide outstanding after-sales service If users have problems with our products, we can call our whole line to visit our stores for assistance. Our excellent customer service team can respond and address users' issues in a timely manner with professional service and patient solutions. We also offer a one-year warranty on all of our devices and cartridges. These unique advantages add immense value to our products and provide peace of mind for users. In contrast, illegal products are manufactured by unlicensed factories, leading to poor quality, a lack of quality control, and potential health and safety issues. Illegal products may have dangerously high nicotine concentration levels or contain levels of nickel or chromium exceeding the standards, as well as other banned ingredients. Illicit cartridges also frequently have oversized tanks, which can create severe safety hazards when used in conjunction with many compliant vaping devices. We remain confident that our growing lineup of quality products will continue to earn more users' recognition, and ultimately, their loyalty as adult smokers realize our product's superiority and develop new habits. Meanwhile, we are trying to enhance users' knowledge of new regulations and collaborating with regulators to combat illegal products to create a healthy and orderly market. Before I conclude, I would like to share that our RelaxQuality and SafeLab recently received customer testing facilities certificate approval from Eurofins Technologies, becoming the first EVAPOR brand in China to gain this certification. The recognition by the industry-leading authority indicates that our lab's capabilities of testing electrochemical times meets the global standard. qualifying our test results for acceptance by 54 SAECC member countries and regions worldwide. Through our ongoing efforts in scientific research and development, we continue to enhance our product safety assessment capabilities and quality control. In conclusion, we continue to afford ahead during the quarter made a challenging environment. We have made meaningful progress in our recovery over the past year, with an intense focus on our core strategies to develop our portfolio and enhance efficiencies. Looking ahead, we see external havens persisting especially the lingering negative impact of illegal products and the uncertainties in the consumption environment. As such, we will deepen our commitment to offering compliant, high-quality products to adult smokers and educating users on their various benefits. Meanwhile, to catch potential growth opportunities in the international market, on November 10th, 2023, we terminated an existing non-competition agreement with IELX, Inc., which had been entered into on December 16th, 2020. Terminating this agreement gives us the flexibility to build an international presence in the future by conducting tobacco harm reduction product business outside China. As we move into 2024, we believe our expansion to international markets, effective product strategy, and resilience in this model will propel our recovery, positioning RLX for long-term growth and sustainable value creation. 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.
spk06: Thank you, Kate, and hello, everyone. Before we start the detailed discussions of our financials, please note, unless otherwise stated, all the financials we present today are in RMB terms. I will now provide an overview of our operational and financial results for the third quarter of 2023. Against the challenging backdrop Kate just described, Our total revenue was down 59% year over year. However, this represents a significant narrowing from last quarter's 83% year over year decline. While the sales of our compliant products continue to be impacted by illegal products in the market, we noticed a quarter over quarter increase in device shipment. indicating that the demand for e-vapor products is still growing. On the other hand, cartridge shipments remain low, as many users still use illegally compatible flavored cartridges in conjunction with our compliant devices. We want to remind our users that using illegal cartridges may damage our devices and void the warranty. Due to their poor quality, illegal cartridges often suffer severe leakage issues that can ruin devices and may cause other safety hazards. As a fully compliant participant in the eVapor industry, we are dedicated to promoting the industry's recovery and long-term healthy growth. To that end, we continue to encourage users to call 12313 if they find anyone selling illegal products. We are also conducting user education campaigns to increase awareness of the regulations and the dangers of illegal products. We hope these efforts will effectively reduce the sale and use of illegal products while better protecting every user. Turning now to profitability, in the third quarter, Our gross profit margin remained stable at around 25% due to the unfavorable change in our revenue mix. However, on a like for like basis, our gross margin, gross profit margin for our core evaper business to provincial distributors continue to improve quarter over quarter. Thanks to our cost optimization initiative and product design improvement. We're confident these efforts will continue to drive improvement in our growth margin. Since the introduction of the new regulation framework, we have been actively adjusting and streamlining our businesses and implementing stringent expense controls for greater overall agility. I'm happy to report that as a result, our non-GAAP operating expenses decreased by 27% on a quarterly basis. It's also worth noting that our non-GAAP operating expenses decreased by 48% compared with the same period last year. Moreover, we reduced our non-GAAP net operating loss to just 15 million. From 133 million in the first quarter of 2023, and 67 million last quarter. Our non-GAAP basic net income per ADS was 0.149, and non-GAAP diluted net income per ADS was 0.146 for the same period. We remain confident that our profitability will continue to rise in the upcoming quarters as we strive to enhance our supply chain and operational efficiencies. Encouragingly, we maintained positive operating cash flow for the second consecutive quarter, with operating cash inflow of 67 million in the third quarter of 2023, mainly due to improved management of our working capital and inventory. Our cash position remains strong. As of September 30, 2023, We have cash and cash equivalents, restricted cash, short-term bank deposits, net, short-term investments, long-term bank deposits, net, and net long-term investment securities, net totaling $15.1 billion. Our strong cash position will continue to support us in navigating the market dynamics. We aim to achieve additional cost savings and efficiency enhancements to accelerate our recovery. Lastly, we are very pleased to report that our board of directors has approved a cash dividend of US dollars 0.01 per ordinary share or US dollar 0.01 per ADS to holders of ordinary shares and holders of ADSs. This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like 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 the management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. The first question today comes from Lydia Ling with CIDI. Please go ahead.
spk01: Hi, management. This is Lydia from Citi. Thanks for giving me the opportunity to ask questions. So my first question is regarding your overseas development. As Justin mentioned, you had terminated a non-competition agreement with Res Inc. So what's the rationale that you consider to expand, like, explore the overseas extension at this point, and how it works with the existing overseas business by your parent company? Do you have any detailed plan or target for overseas business that you could share to us? And also, how do you think about the potential upside to a company? So this is my first question. And the second question is, happy to see the cash dividend declaration. So how do you consider the payout ratio and what's the dividend policy looking forward? Thank you.
spk05: Thank you very much, Lydia. So the first question is on the international expansion, and the second one is on the dividends. So, RX only operated its e-payment business only in China due to regulatory uncertainties and a relatively low social acceptance in the overseas market when it was its IPO. But in the last two to three years, we have witnessed positive developments globally that changed our decision. First, many countries have established an encouraging and stable regulatory framework for this category. becoming attractive and stable markets for leading and compliance brands to enter and develop a presence. Second, global adult smokers are increasingly perceiving eVapor products as a mainstream, effective, harm reduction nicotine alternative, evidenced by growing user penetration in many regions. These two external developments have been highly encouraging. For RRX itself, our franchise has become a household name with clear national market leadership. Internally, we have upgraded our organizational capabilities with adequate capabilities and resources to expand our franchise to areas outside China. To achieve our mission, we decided to terminate our non-competition agreement with relaxed incorporation, which enabled us to seize growth opportunities in the international markets and establish a significant global presence outside China. We will share more details on our international expansion in the coming quarter. So regarding your second question is on our dividend policy, as indicated in our earnings release, our board approved our first cash dividends of one cent US dollar per ordinary share or per ABS to reward our valued shareholders' continuous support. Despite macro-volatilities and uncertainties, we are highly confident in our franchise future building on our international expansion, steady profit generation, robust operating cash flows, and adequate capital reserve. The cash dividends and our announced share-by-debt program demonstrated our confidence in our prospects and commitments to returning shareholders despite the short-term volatility in the stock markets. We plan to maintain a consistent and sustainable dividend payout policy that may grow progressively with our earnings. Thank you for your questions.
spk01: Thank you.
spk02: The next question comes from Charlie Chen with China Renaissance. Please go ahead.
spk04: Thank you, management, for taking my questions. I have two questions here. The first one is about industry. I can see the company actually grow revenue by roughly like 10% or so quarter on quarter. So I think in the past few quarters, China's e-cigarette industry has experienced kind of the regulators' crackdown, resurrection of the legal products, et cetera, et cetera. So I just want you to have some color. What do you think will be the normalized industry growth going forward, or is that too early to say, or you have kind of see a set-up pattern of the future growth of this industry? So that's your first question. And my second question is, with all those cost-saving efforts, we can see your company's non-GAAP EBIT margin loss has narrowed quarter on quarter. So originally in the past, we recall that management guided or aimed to have breaking even non-GAAP EBIT margin in the fourth quarter. So do you still think this target is achievable based on current circumstances? Thank you very much.
spk05: Thank you very much, Charlie. So the first question is on the growth of our industry, and the second one is on the profitability of our company. So I think the user demand for national standard products have improved overall compared to what you mentioned in March 2023, before the regulators initiated a special crackdown on illegal products. However, after the special action ended, our industry faced waves of challenges from illegal products as their illegal sales have become more secretive. At the beginning of this year, retailers would publicly display legal products on shelves. Now, after the special action, they only sell these products to users they are familiar with. Therefore, it's difficult to accurately estimate the demand for this category and predict the need for the national standard products. We are confident in our regulatory enforcement and believe more users will gradually use national standard products in the medium and long term. So regarding your second question, I think as discussed in our second quarter earnings conference call, we have significantly optimized our cost structure and streamlined our operations over the past few quarters. As a result, the absolute amount of our gross profit improved by 7% quarter over quarter, and our non-GAAP operating expenses for the third quarter decreased by 27% quarter over quarter and 38% year over year. With our top line recovery and cost reduction efforts, we realized positive non-GAAP operating profits in September. We expect our non-GAAP operating profit to remain positive in the fourth quarter if our top line and cost structure don't change significantly in this or next month. Furthermore, our operating cash flow has been positive for two consecutive quarters. In the first quarter of 2023, we achieved and operating cash inflow of RMB 67 million, compared to a 41 million inflow in the second quarter and a 231 million cash outflow in the first quarter. Demonstrating opportunities to adapt to the changes in macro and industry development quickly. Thank you for your question.
spk02: The next question comes from Peihang Lu with CICC. Please go ahead.
spk00: Thank you, management. This is Peihang at CICC. I have two questions here. The first one is about a product. Could you give us some color on the sales of the recent approved GB products in the third quarter, and how is the sales proportion for each major product? And my second question is about the channel. After the renewal of retail license, and what is the most updated number of domestic outlets, and how is their profitability and their operating situation from your perspective? Thank you.
spk05: Thank you very much, Peihan. So the first question is on our new products, and the second question is on the retail outlets that we have. So for the first question, our user survey actually shows that two flavors that we launched A couple of months ago, Shan Shui Ren Xing and Rao Zhi Qing Wu are becoming increasingly popular among users. These flavors are now available at most stores nationwide. And in October, the sales contribution of these two flavors to our Phantom series had already reached the mid-teens. Additionally, Shan Shui Ren Xing Net Promoter Score now ranks number three among our Phantom series, just slightly behind our best-selling Lu Shan Ying Ying. and Wang Jiang You Jin flavors. We anticipate that the sales contribution of Shan Shui Ren Xing and Miao Zhi Qing Wu will continue to rise. And in October, we also launched our fifth cartridge series, Lei Li, which is compatible with ASUS device, but are more affordable than its cartridges. By the end of October, we have launched the Lei Li series in more than 17 provinces. And regarding your second question, it's about the number of retail outlets. The number of retail outlets has remained stable in the past few months, following regulators' special crackdown in cracking down on illegal products. Furthermore, more users have begun trying compliance products. As we explained in our opening remarks, only 40% of participants were aware that after October last year, retailers could only sell tobacco-flavored cartridges legally. As more and more users gradually become aware of the new regulations and the benefits of national standards, such as required approvals before product launches and the assurance that all ingredients in the liquids are on the right list, they will be increasingly interested in using national standard products. This will improve our retailers' productivity and enhance their profitability. Our self-operated stores' profitability could reflect the overall sales profitability. These stores' profitability has been increasing quarter over quarter, and they have started to turn profits on the operational level in the past couple of months. Thank you for your question.
spk02: Due to time constraints, now I would like to turn the call back over to the company for closing remarks.
spk05: Thank you once again for joining us today. If you have further questions, please feel free to contact our LX Technologies Investor Relations team through the contact information provided on our website, our TPG Investor Relations. Thank you.
spk02: This concludes the conference call. You may now disconnect your line. Thank you.
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