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spk00: Ladies and gentlemen, thank you for standing by for RLX Technology, Inc.' 's fourth quarter and full year 2023 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 Song. head of capital markets for the company. Please go ahead, Sam.
spk03: Thank you very much. Hello, everyone, and welcome to RIA Technology Incorporation's first quarter and full year 2023 earnings conference call. The company's financial and operational results were released through PL Newswire 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.realtest.com. Participants on today's call will include our CFO, Mr. Chao Lu, and myself. Before we continue, please note that today's discussion still contains forward-looking statements made under the safe harbor provisions of the U.S. Private Security Statistication Reform Act of 1995. These statements typically contain words such as may, will, expect, targets, estimates, intent, belief, potential, continuing, or other similar expressions. Forward-looking statements involve inherent risks and uncertainties. The accuracy of these statements may be impacted by a number of sequence risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Many of these factors are beyond our control. The company's affiliates, advisors, and representatives do not undertake any application to update this forwarding information, except as required under the ethical rule. Please note that RLS Technologies' earnings press release and this conference call include discussions of unaudited gap financial measures, as well as unaudited non-gap financial measures. Press release contains a reconciliation of the unaudited non-debt measures to the unaudited debt measures. I will now turn the call open to our CFO, Mr. Chao Lu. Please go ahead. Thank you, Sam, and thanks, everyone, for making time to join our earnings conference call today. 2023 was a transformative year for ILX. Despite external challenges, our outstanding product portfolio and strong strategic execution propelled an impressive recovery throughout the year, setting the stage for new ventures. I will begin with an update on our domestic operations before devolving into our international endeavors, followed by a review of our financial performance. For our domestic business, 2023 was the first full year under the eVapor industry's new regulatory framework in mainland China. The regulations necessitate prior approvals for eVapor products restrict flavor to tobacco only, and impose a 36% exercise tax on sales to distributors. As a compliant player, we have strictly adhered to the new rules since day one, continuously innovating to offer premium, compliant products amid competition from unauthorized flavored products. Leveraging our strong R&D capabilities and deep industry insights, we more than doubled our selection of approved cartridges this year, from 15 in January to 32 by December. Additionally, we broadened our cartridge series to four compared with three one year ago. enhancing our offerings to meet the diverse needs of adult smokers with more value-driven options. With a growing product portfolio, we believe we are well positioned to seize opportunities in China's legal e-vapor market, especially once enforcement against elusive products becomes more effective. While we have made meaningful progress in 2023, the adverse impact of illegal products is still lingering. Given the broad availability of popular flavors through unauthorized products, their sales still account for a significant portion of domestic sales, sales volumes, weighing heavily on compliant product sales. Unauthorized products are are also often cheaper than compliant products, as their manufacturers typically do not pay excise tax and duties. More importantly, they are manufactured without oversight and marketed irresponsibly, resulting in quality control issues that could potentially harm users. This damages the reputation of the entire evapour industry. Evapor products are meant to reduce harm, not cause or increase it. As our industry offers one of the few smoking harm reduction options available, effective regulation enforcement is critical in ensuring users' safety and essential to the evapor industry's development. We will continue actively working with regulatory authorities advocating for a responsible and well-regulated evapour industry. Meanwhile, we will remain focused on what we can control, that is meeting users' harm reduction needs with a diverse and growing portfolio of high-quality compliance products. That leads me to our overseas business. We believe that adult smokers seeking Smokeless alternative is a global trend. As such, we terminated our non-compete agreement with Relax Inc. in November 2023, enabling our company to explore prospects outside China, where the demand for evapour as a convenient and healthier smoking alternative is growing. With mounting evidence from reputable sources like the UK's National Health Service highlighting vapors lower health risks compared to traditional smoking, more countries are recognizing e-vapor's role in tobacco harm reduction. According to NHS, burning cigarettes releases thousands of different chemicals, of which many are poisonous, and carcinogenic. Most harmful chemicals, including tar and carbon monoxide, are not contained in vape aerosol. Switching completely from smoking to vaping significantly reduces exposure to toxins associated with risk of cancer, lung disease, heart disease, and stroke. RLX, without track record of regulatory compliance, and product excellence is ideally positioned to leverage these global shifts. That's another reason we believe it's the right time for us to expand outside China. Strategically, our first step is to increase our product accessibility in international markets. We are working with partners around the globe to bring our harm reduction products to more users worldwide responsibly. Increased access to our quality products will build brand recognition among global adult smokers, driving progress in our expansion efforts. Second, leveraging our extensive industry resources and expertise, we will target key markets and product categories with high growth potential. This, in turn, will boost profitability as margins will expand with scale. Our recent expansion into Southeast and North Asia has shown promising progress, validating our approach of combining our industry expertise with local insights to refine our market strategies. As we do for our domestic business, we will respond quickly to changing consumer preferences, tailor our product portfolio to fit local needs, and help local teams improve operating efficiency. Going forward, we will continue to expand our business across new markets based on careful evaluation while developing innovative premium products to meet global users' evolving needs. Before I move on to our financial performance, I'm pleased to share that our ESG efforts continue to win recognition from leading global ESG rating agencies. We received an NA rating from MSCI for the second consecutive year for our outstanding performance in responsible marketing, commercial ethics, and product security. In addition, our companies score in the 2023 S&P Global Corporate Sustainability Assessment improved by 13%. Our commitment to integrating ESG best practices remains unwavering, reflecting our dedication to social responsibility and value creation for all stakeholders. an overview of our operational and financial results for the fourth quarter and full year of 2023. Please note that unless otherwise stated, all the financials we present today are in RMB terms. In 2023, we strategically adjusted our business model to align with China's new regulatory requirements, focusing on efficiency and profitability. These adjustments have resulted in steady financial improvements throughout the year. First on top line, on a full year basis, our net revenues were $15.9 billion, a significant year-over-year decrease as 2023 was the first full year of the new regulatory era. Our domestic businesses' recovery pace were uneven. We released the product research quickly after the regulator's special action ended in April 2023, impacting our sales. We quickly adjusted our strategy on operations in response to the changing market dynamics and further diversified our product portfolio to meet more adult smokers' needs. For example, we launched Lely, a line of cost-effective products to target price-sensitive users. I'm pleased to report that these efforts paid off. The year-over-year decline in our quarterly net revenues narrowed from 89% for the first quarter to 83% in the second quarter to just 52% for the third quarter. For the fourth quarter of 2023, our net revenues were up 63.1% year-over-year to $520 million, marking our first quarter of positive year-over-year growth at seven consecutive quarters of decline. The increase was mainly driven by our international expansion, which began with Southeast and North Asia. Such encouraging results in a short-time framework validate our decision to diversify our revenues geographically. As I mentioned earlier, we believe adult smokers seeking smokeless alternatives is a long-term global trend. With our deep industry know-how and outstanding leadership team, we are confident that RLS will quickly win the trust and loyalty of adult smokers worldwide. Next, our growth profit margin. Our four-year growth margin fell 18.8% points to 24.4%, primarily due to the 36% excise tax implemented in mainland China in November 2022. However, thanks to our efforts to optimize supply chain efficiency, improve product design, and increased utilization of our exclusive manufacturing plant, gross profit margins for our core domestic business improved quarter-over-quarter throughout the year. Our four-quarter gross margin remained stable quarter-over-quarter at 23.7% as an unfavorable change in the revenue mix offset the margin improvements we achieved for our domestic business. In 2023, we recorded an operating loss of 497 million. Excluding the impact of stock-based compensation, our non-GAAP operating loss was 134 million. Since the introduction of the new regulatory framework, we have been actively adjusting and streamlining our business for greater agility. various foods, with stringent cost control driving a 49% decrease in full-year total salaries and welfare benefits, and a 48% decrease in non-salaries and welfare benefits year over year. For the fourth quarter, we recorded our 76 million after three consecutive quarters of operating loss. Thanks to our cost reduction initiatives and positive profit contribution from outside China. This significant turnaround from operating loss of 133 million in the first quarter to an operating profit of 76 million in this quarter reflects our robust rebound and growth trajectory. Moving forward, we will remain focused on optimizing operating efficiency and profitability as we pursue high-quality growth domestically and abroad. Our balance sheet remains solid. As of December 31, 2023, the company has cash and cash equivalents, restricted cash, short-term bank deposits net, short-term investments, long-term bank deposits net. and long-term investment securities net of $15 billion. Also, we recorded an operating cash inflow of $305 million in the fourth quarter of 2023, primarily due to improved working capital and inventory management. Supported by our financial strength and solid balance sheet, we extended our commitment to enhancing shareholder returns In 2023, we returned value to our shareholders through a total of approximately US dollar 112 million in share repurchases and cash dividends, comprising US dollar 98.5 million from our share repurchase program and US dollar 15 million from cash dividend payouts. As of December 31st, 2023, the company had repurchased about $195.5 million of its ordinary shares represented by ADSs. Our Board of Directors has authorized the extension of its existing share repurchase program established in December 2021 for an additional 24-month period through December 31, 2025. The extended program demonstrates our confidence in the company's long-term prospects. In conclusion, we are proud of our pivotal progress during the past year's challenges. Thanks to our excellent execution and effective strategies, as well as our team's dedication and our partners' deep trust and support, our business remains resilient and strong. Our commitment to meeting adult smokers' needs with premium harm reduction products and advocating for a responsible and well-regulated evapour industry will never waver. Heading into 2024, we will continue to propel recovery in our domestic business through product innovation while tapping into new markets abroad to unleash growth potential. We believe our strong financial foundation and solid balance sheet will empower us to seize development opportunities that create value for all of our stakeholders. This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.
spk00: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Peiheng Lu with CICC. Please go ahead.
spk02: Thank you, Matt. This is Pei Hang from CICC. I have two questions here. The first one is regarding your oversea disposable products, WACA, which have sold very well. And how do you view the growth trend of disposable products overseas, given the intensifying competition and changing regulations in some countries? And my second question is that in the domestic market, has there been an enhancement in the enforcement and has the approval process for new products accelerated compared to the past? Those are my questions. Thank you.
spk03: Thank you very much, Peihan. In the last 10 years, the subcategory of e-labor has evolved from time to time. From open systems to closed systems, from part systems to disposables, One thing that hasn't changed is the overall penetration of e-vapor has been growing among other smokers. The evolving regulatory landscape and intensified competition presents challenges and opportunities in specific markets, such as proposed bans on disposable vaping products in countries like the UK and France. For markets that may have banned disposable products, this won't affect the overall demand of either category over a longer time frame. Users can move from one product subcategory to another, and we are a global leader in the pod system and have a significant presence in disposable products. Suppose the ban on disposable products is effective in some markets. In that case, we will encourage users using disposables to use our pod products as we can provide a similar or even better user experience. For countries that have yet to announce regulatory changes, we will continue to offer and launch various products in various forms, including disposables, park systems, and illegal solutions that may fit different user groups to capture the growth of the overall category. And regarding your second question about the domestic market enforcement as well as the Regulators have been continuously cracking down on illegal sales of slavery-delivered products, and we have long assisted and supported their enforcement. Multiple enforcement actions have been recently carried out nationwide among manufacturers and distributors. One example is Zhejiang province, where regulators have been working with the police force. They have arrested 23 suspects, closed 7 warehouses, and one production facility and sees illegal evapoproducts valued at RMB 15 million. We continue to assist regulators in cracking down on illegal sale of evapoproducts. We have continuously applied for new approvals for cartridges and devices as new products must undergo several rounds of review to ensure they meet the national standard requirements including the packaging inspection and technical review of quality and ingredients. Obtainment approvals take time, especially since the Chinese New Year holiday just passed a few years ago. We can bring you more exciting new products soon once approved. Thank you for your question.
spk02: That's very comprehensive. Thank you.
spk00: And once again, Just in case, 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. The next question comes from Lydia Ling with Citi. Please go ahead.
spk01: Hi, management. Thanks for the presentation. So, I have two questions related to the overseas extension. And the first one is like the overseas expansion, like kick off the first quarter of last year. And so looking into this year and also beyond, so can you actually detail more of your overseas expansion plan, such as which countries and also regions that you plan to expand for this year and also any other acquisition plan looking forward. And the second question is on the profitability of your, like, overseas business. And so could you share, like, a little bit more color on, like, how is the profitability of your existing overseas business you entered and also how to further drive the profitability looking forward? And so what kind of normalized margins that you would target looking forward for overseas business versus, like, the domestic business? Thank you.
spk03: Thank you very much, Lydia. So regarding the international expansion, Our two strategic priorities is to increase our product accessibility and enhance our profitability in international markets. So we periodically examine different markets and decide whether to expand to that market. We expanded to North and Southeast Asia in late 2023 and plan to expand to more Asian markets in 2024. We are confident in many Asian markets and have built a strong presence. We have been, and we expand to more markets, and we hope Asian markets can contribute significantly to our company in 2024. For European markets, we are still evaluating the regulatory changes in certain markets, and it will take some time for us to expand and decide. Regarding acquisition plans, we do have discussions with potential partners occasionally. We will share more details once we have any meaningful progress. And regarding the profitability of our overseas business, it is still in the early stages of development and we have been expanding to certain markets. And the profitability of each market depends on the volume, the competitive landscape, taxation, and pricing across the value chain. Expanding to a new market could change our overall profitability. Given that we are in the process of expanding, the profitability varies across different time periods. Our strategic focus is to optimize product portfolios and expand international sales channels, which could contribute to our top and bottom lines. Looking at our non-GAAP operating profit this quarter, our efforts to optimize domestic operations operating efficiency and generate additional earnings from our international franchise have benefited us. As we are still expanding to many international markets, it is premature to share specific margin targets. However, direction-wise, sales volume, which could have economies of scale, is the most critical factor for profitability. Thank you for your question.
spk01: Thank you.
spk00: The next question comes from Eileen Lin with China Renaissance. Please go ahead.
spk01: Thanks, Benjamin, for taking my question. I have two questions. The first one is on the domestic market. Can Benjamin share some comments on the momentum of domestic sales by month? Is there any changes in the chain? In particular, I also want to get the sense where are non-JV products now, and what's the latest stance to this product from the regulator's perspective? My second question is on the overseas market. UK governments recently made some changes in the policies on the e-cigarettes, including restrictions on some disposable and flavor products. And there's a new potential tax on e-cigarettes starting in 2026. Have you seen any changes in the market after this announcement? And how do you think it might impact RELAX? Thank you.
spk03: Thank you very much, Eileen. So regarding our domestic business, the sales trend in the domestic market are influenced by seasonality, with stable monthly averages observed over longer periods. For instance, in February this year, the Chinese New Year holiday lasts for eight days, with minimal sales a few days before and after a holiday. We also have relatively strong sales in January before the CNY. We remain vigilant in monitoring the illicit markets and assist regulators in combating these challenges. Our commitment to compliance and market integrity supports regulatory efforts to secure consumption tax and can position us as leaders in promoting responsible market practices. Our proactive stance on compliance and collaboration with authorities will foster a healthier market environment and and supports sustainable growth. Regarding your second question about recent proposed policy in the UK, I think the UK regulatory changes could present a nuanced landscape, opportunities to adapt and capture new consumer segments. We can share our view on the three topics that we mentioned. First is the proposed disposable ban. As you have mentioned, the prohibition of disposable As we have mentioned earlier, the prohibition of disposables will not change the overall demand in the long run. As most users, new migrates from disposables to other forms, like the POS system. There have been early signs that some distributors and retailers have started encouraging users to convert from disposables to POS systems, which allow us to expand to the market and acquire new users in the medium term. The ban may create short-term chaos in the market, just like what happened in the U.S. and China, but we are well-prepared for the changes. Second, regarding proposed vapor restrictions, British regulators have been encouraging other smokers to switch from cigarettes to reduced-waste products like e-vapors. Regulators are concerned about appealing packaging, use of appealing flavor, and advertising. but at the same time, they also understand a flavor's role in adult smokers' transition. In other words, products with plain flavors and packaging that are not marketed and that such restrictions should be reasonable and might have minimal impact on adult smokers. Finally, excise packs could level the pairing field We have seen this introduced in many countries and regions, including the countries where we are currently operating. The current suggested tax rate is moderate compared to other countries globally. This would foster a healthier industry ecosystem and provide incremental incentives for regulators to combat illegal products. Thank you for your question.
spk01: Very clear. Thank you.
spk00: At this time, there are no further questions. I would like to turn the call back over to the company for closing remarks.
spk03: Thank you once again for joining us today. If you have further questions, please feel free to contact our LX Technology Investor Relations team through the contact information provided on our website of Yanshiante Financial Communications. Thank you.
spk00: This concludes the conference call. You may now disconnect your line. Thank you.
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