RLX Know-how Inc. (RLX) Q2 2022 Earnings Name Transcript

RLX Know-how Inc. (RLX 1.63%)
Q2 2022 Earnings Name
Sep 21, 2022, 8:00 a.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Contributors

Ready Remarks:

Operator

Howdy, women and gents. Thanks for standing by for RLX Know-how Inc. second quarter 2022 earnings convention name. [Operator instructions] I’ll now flip the decision over to your host, Mr.

Sam Tsang, head of investor relations for the corporate. Please go forward, Sam.

Sam Tsang — Head of Investor Relations

Thanks very a lot. Howdy, everybody, and welcome to RLX Know-how’s second quarter 2022 earnings convention name. The corporate’s monetary and operational outcomes had been launched for PR Newswire companies earlier in the present day and have been made obtainable on-line. You may also view the earnings press launch by visiting the IR part of our web site at ir.relxtech.com.

Contributors on in the present day’s name will embrace our CEO, Ms. Kate Wang; our CFO, Chao Lu; and myself, Sam Tsang. Earlier than we proceed, please be aware that in the present day’s dialogue will comprise forward-looking statements made beneath the Protected Harbor provisions of the U.S. Personal Securities Litigation Reform Act of 1995.

This assertion usually comprise phrases, corresponding to might, will, count on, goal, estimate, intend, consider, potential, proceed, or different related expressions. Ahead-looking statements contain inherent dangers and uncertainties. The accuracy of those statements could also be impacted by quite a lot of enterprise charges, and uncertainties that would trigger precise outcomes to vary materially from these projected or anticipated. Lots of which elements are past our management.

The corporate’s associates, advisors, and representatives don’t undertake an utility to replace this forward-looking info, besides as required by relevant regulation. Please be aware that RLX Know-how’s earnings press launch and this convention name embrace discussions of unaudited GAAP monetary metrics, in addition to unaudited non-GAAP monetary measures. RLX press launch incorporates a reconciliation of the unaudited non-GAAP measures to the analytic measures. I’ll now flip over the decision over to Kate.

Please go forward.

Kate Wang — Chief Government Officer

Thanks, Sam. And thanks, everybody, for making time to affix our earnings convention name in the present day. I am happy with the wholesome monetary efficiency we delivered within the second quarter as we proactively continued to adapt to the brand new regulatory framework. We stay targeted on enhancing the complete vary of our capabilities from scientific analysis, product growth, to manufacturing development, and operation optimization, all of which empowers us to navigate the extremely dynamic market and the evolving regulatory panorama.

Amidst robust macro headwinds and the weak client sentiment, our strong second quarter outcomes underscore the resilience of our defensive enterprise fashions and our dedication to constructing and strengthening our model’s trustworthiness. Earlier than taking a better take a look at enterprise updates, I wish to begin with a short recap of the milestone regulatory developments in our {industry}. Starting within the first quarter of 2022, the related authorities authorities in China have issued a collection of implementing guidelines and guiding opinions to strengthen oversight of e-cigarette merchandise and regulate the e-cigarette {industry}, together with the executive measures for e-cigarettes that is coming to impact in Could and the brand new nationwide requirements that can turn out to be efficient on October 1, 2022. Now let me share our progress on the related license functions as required by the administration measures.

Thus far, two of our subsidiaries have obtained the license for manufacturing enterprise from the State Tobacco Monopoly Administration, STMA, to conduct manufacturing actions beneath the regulatory steerage. Particularly, one is accredited to fabricate e-liquids and the opposite is accredited to personal the RELX model and manufacture RELX model e-vapor rechargeable units, cartridge merchandise, and different related merchandise. Acquiring this license marked an essential milestone in our strategic street map that can actively embrace the brand new paradigm that comes from regulatory compliance. We consider our strong fundamentals, industry-leading analysis and growth capabilities, and seasoned groups illustrates furthering our mission to attain full regulatory compliance to our operation in keeping with requirements.

To construct on this progress, we now have redoubled our efforts to develop new merchandise that meet the relevant necessities whereas fulfilling customers’ calls for. A few of our new merchandise had been among the many first flagship merchandise within the {industry} to acquire approvals beneath the brand new nationwide requirements, a strong validation of our industry-leading R&D capabilities. We look ahead to bringing the accredited merchandise to market that assume in our confidence that our merchandise’ high quality, efficiency, and security will proceed to resonant properly with our customers. At present, we now have a number of further newly developed merchandise within the means of technical critiques and lots of extra within the utility pipeline.

Sooner or later, we are going to stay dedicated to fulfilling our customers’ demand for protected, high-quality merchandise, new strict compliance with rules, whereas exploring new development alternatives within the {industry}. Particularly, we strongly consider that R&D is a key to our success within the sustainable future development. It’s R&D’s [Inaudible] to shortly rollout compliant new merchandise and keep our model’s competitiveness. Listed here are a set of metrics monitoring our R&D spending.

Our non-GAAP R&D expense ratio has elevated from 1.5% in 2018 to three.6% within the first half of 2022 and is anticipated to additional enhance within the coming years. Past product R&D, we’re additionally devoted to elementary scientific analysis to guard our customers’ well being working relentlessly to raised perceive and reduce the well being dangers related to the merchandise. To that finish, along with swarming our personal scientific labs, we now have partnered with varied main analysis establishments together with 10 universities, two hospitals, and a number of other unbiased educational analysis homes to conduct associated analysis and growth, constructing a agency basis for ongoing product growth and innovation. Moreover, within the second quarter, we collaborated with Shenzhen Institutes of Superior Know-how and Chinese language Academy of Sciences and e-vapor cooling agent inhalation research, which concludes that e-vapor merchandise containing WS-23 have decrease rewarding results than pure nicotine merchandise, a breakthrough, we consider, that afford us to ship higher, safer [Inaudible] for grownup people who smoke.

Turning now to our operations, alongside our efforts to adjust to relevant rules, we proceed to streamline our enterprise construction and operational workflow through the second quarter to reinforce our skill and suppleness. Our strategy has yield good preliminary outcomes with non-GAAP expense we present reducing quarter over quarter. Chao will elaborate on this additional a bit later. We consider the excellent operational enhancements will allow us to deal with crucial adjustments and swiftly adapt to the market evolution, boosting each our speedy and long-term efficiencies.

In conclusion, we stay assured within the inherent potential of China’s e-vapor market. We consider that as a contemporary model to grownup people who smoke, our main applied sciences and scientific developments, high-quality consumer base, resilient enterprise mannequin, and agile general execution, our elementary essence that can empower us to sustainable, high quality development in the long term and additional strengthen our management place within the {industry}. Extra importantly, we are going to proceed to hunt regulatory approval to satisfy all relevant necessities on schedule whereas creating certified merchandise to ship [Inaudible] efficiency, additional enhancing operational effectivity and capturing the {industry}’s development alternatives forward of us. With that, I’ll now flip the decision over to our CFO, Chao Lu, who will elaborate additional on a few of our final quarter initiatives and go over our operational and monetary leads to extra element.

Chao, please go forward.

Chao Lu — Chief Monetary Officer

Thanks, Kate, and hiya, everybody. I’ll now present a abstract overview of our monetary outcomes for the second quarter of 2022. Within the context of a difficult macro surroundings and COVID resurgence, client sentiment went to a document low within the second quarter. In keeping with the Nationwide Bureau of Statistics of China, the general client confidence index fell from 121.5 in January 2022 to 88.9 in June 2022.

Additionally, general retail gross sales in China decreased by 0.7% yr over yr within the first half of 2022. Proactively adapting our enterprise to the market and diligently enhancing our operational efficiencies, we delivered strong and wholesome outcomes for the second quarter recording web income of RMB 2.2 billion. Nevertheless, we consider that elevated degree of income within the second quarter was primarily because of frontloading of gross sales within the downstream worth chain in anticipation of the discontinuation of our older merchandise because the {industry} transition interval neared its finish within the third quarter. Income decreased yr over yr, nevertheless.

It was primarily because of the suspension of retailer expansions and new product launches through the regulatory transition interval as work to strictly adjust to the related necessities. Our gross revenue was roughly RMB 1 billion within the second quarter with gross margin development 43.8% for the second quarter, in contrast with 45.1% in the identical quarter of 2021. The lower was primarily because of an unfavorable product combine shift, a rise in stock provision and an impairment loss acknowledged for PP&E to adjust to latest regulatory developments. As a consequence of a major enhance in share-based compensation bills to RMB 193.2 million from a optimistic RMB 172.5 million in the identical quarter of final yr, our working bills reached RMB 530.9 million within the second quarter of 2022, in contrast with RMB 167.2 million in the identical interval of final yr.

Particularly, our promoting bills decreased by 2.7% to RMB 122.6 million within the second quarter of 2022 from RMB 126 million in the identical interval of 2021, primarily pushed by a lower in salaries, welfare advantages and branding materials bills, whereas partially offset by a rise in share-based compensation bills. Common and administrative bills elevated to RMB 290.7 million within the second quarter of 2022 from RMB 46.1 million in the identical quarter of 2021 primarily pushed by the will increase in share-based compensation, salaries, and welfare advantages. As we stay targeted on strengthening our R&D functionality, our analysis and growth bills had been RMB 117.6 million within the second quarter of 2022, in contrast with a optimistic RMB 4.9 million in the identical interval of 2021. The rise was primarily pushed by will increase share-based compensation bills, salaries, and welfare advantages, and consulting bills.

To echo what Kate talked about about our enterprise construction enhancements, our proactive price optimization initiatives additionally continued to bear fruits this quarter. If we exclude share-based compensation, our non-GAAP expense ratio decreased to fifteen.1% within the second quarter from 20.9% within the prior quarter. Notably, non-GAAP promoting expense ratio decreased to 4.7% within the second quarter from 6.9% within the previous quarter. If we exclude the affect of one-off objects, corresponding to impairment loss, our adjusted expense ratio was much like that of — much like the extent than similar interval of final yr.

We consider the adjusted metrics might higher replicate our efforts and achievements with respect to operational enhancements through the quarter. Because of this, our non-GAAP web earnings elevated to RMB 634.7 million from RMB 351.8 within the prior quarter. Non-GAAP primary and diluted web earnings per ADS had been RMB 0.494 and RMB 0.492 respectively within the second quarter of 2022. Shifting on to our steadiness sheet, we now have a strong steadiness sheet, particularly our money place stays robust with money and money equivalents, restricted money, short-term financial institution deposits, short-term investments, and long-term financial institution deposits web of RMB 16.8 billion as of the top of June 2022, in contrast with RMB14.9 billion a yr in the past.

As well as, we generated a optimistic money — working money movement of RMB 1.4 billion with a rise within the working money movement over non-GAAP web earnings ratio to 228% within the second quarter of 2022 from 100% in the identical interval of final yr. Our robust money place and ample working money movement, money influx allow us to agilely modify our enterprise whereas dealing with challenges and help our efforts to seize potential development alternatives within the {industry}. In gentle of the regulatory adjustments, we’re off to a sluggish however regular begin of the gross sales of our new merchandise which can be compliant with the nationwide requirements by the brand new transaction system amended by the regulatory. In closing, we consider that e-vapor merchandise will proceed enjoying an important half in hurt discount for grownup people who smoke within the new {industry}, new regulatory period.

With our product’s superior high quality and security, our model will proceed to resonate properly with grownup people who smoke. Shifting ahead, we are going to deal with price optimization, whereas persevering with to strengthen our product competitiveness to create sustainable long-term development for our shareholders. This concludes our ready remarks in the present day. We are going to now open the decision to questions.

Operator, please go forward.

Questions & Solutions:

Operator

[Operator instructions] Our first query comes from Lydia Ling from Citi. Please go forward.

Lydia Ling — Citi — Analyst

Hello, everybody. Thanks, administration. And that is Lydia from Citibank. And it is also in your presentation.

And if OK, I’ve three questions. And the primary one is definitely a few of the new merchandise that you simply launched within the lesser areas. So, one, what is the consumer suggestions thus far? And likewise as transition interval and improve it later, and so what’s your ideas on new flavors affect on the gross sales quantity within the following quarters? So, that is the primary query. And the second query is, really, we noticed that the retailers now might have over three manufacturers on the retailer degree.

So, we wish to know your view on the aggressive panorama wanting ahead. And the final query is, really, now we’re in September. So, might you share with us order-to-date efficiency and in addition your outlook for the fourth quarter and 2023? Thanks.

Chao Lu — Chief Monetary Officer

Thanks very a lot, Lydia. So, the primary query is especially on the gross sales quantity 43% and the second is especially on how the aggressive panorama goes, and the ultimate one is on the outlook for the fourth quarter and so. So, relating to the primary one how can be the affect after we launch merchandise that adjust to the nationwide requirements. As we simply launched these merchandise just a few weeks in the past, so, to be sincere, I feel the overwhelming majority of our enterprise occurred to have the possibility to attempt our merchandise.

And on condition that we’re nonetheless within the transition interval, which is able to final till the September 30, it is tough for us to present a quantitative steerage relating to future quarters, on condition that there are some merchandise are nonetheless being accredited in the intervening time. However after we look again the teachings and knowledge realized from the [Inaudible] in america impact in 2020, we put few quarter for customers within the U.S. market to adapt to the brand new flavors, and we lined the {industry} quantity. So, there have been increasingly more merchandise been accredited previously few weeks which we consider to be launched very quickly and to cater extra consumer wants.

So, we’ll have extra clearer image of our consumer demand modified within the late 4Q after customers have tailored their taste inventories available. And relating to the second query that the a number of manufacturers promoting in a single single retailer going ahead, so the final word purpose for the retailer is to maximise their retailer publicity and their very own profitability. As an alternative of promoting just one model in a single retailer, so retailers need to promote a number of manufacturers beneath the brand new regime. We do not count on any materials impacts on the aggressive panorama as retailers have all the time have the possibility to pick their definitive model to collaborate.

So, we consider the model share of the shop ought to be decided by product high quality, model fairness, and consumer base. And primarily based on our observations, our model share stays strong previously few months. However sooner or later, we are going to proceed to spend money on strengthening our R&D capabilities and our non-GAAP R&D expense has been steadily growing previously quarters. And we count on it to additional enhance within the coming quarters.

With our elevated efforts in R&D, we are going to proceed to supply a greater, safer expertise for grownup people who smoke. So, the final query is on the fourth quarter’s outlook, as we ready in our opening remarks, our second quarter income benefited from the frontloading of gross sales within the downstream worth chain in anticipation of the discontinuation of our older merchandise because the {industry} transition interval close to its finish within the third quarter. The ensuing prior intervals for comparability will affect our sequential third quarter outcomes. And in the meantime, we regularly decreased our shipments of previous merchandise all through the third quarter to raised transit into the brand new regime, which is able to have an effect on our fourth quarter quantity.

So, on condition that the transition interval will finish on the September 30, it’ll take extra time for us to additional venture the longer term outlook particularly for the fourth quarter. Thanks in your questions.

Lydia Ling — Citi — Analyst

Thanks.

Operator

Our subsequent query comes from Charlie Chen from China Renaissance. Please go forward.

Charlie Chen — China Renaissance — Analyst

Thanks administration for taking my questions. I’ve received two questions. The primary one is relating to your product pipeline, particularly the brand new merchandise which ought to be — abide with the brand new rules or new nationwide commonplace. So, what I wish to ask is, what’s the standing of your new product utility? Particularly, what number of has been accredited? What number of now nonetheless pending? And likewise, what number of has been rejected, if there’s any? And what’s your product portfolio plan for the approaching yr, for the subsequent twelve months or so? So, that is my first query.

And my second query is in regards to the schedule of your product recycling or any reshuffling, I keep in mind, final time you stated, you deliberate to part out your older merchandise within the second quarter or third quarter. So, I simply wish to know when precisely have you ever phased out or stopped producing older merchandise, which isn’t abide by the nationwide — new nationwide requirements. And when is the time when you might have new merchandise began manufacturing or began to promote to the markets? So, that is my two questions. Thanks.

Chao Lu — Chief Monetary Officer

Thanks, Charlie. So, the primary one is especially on the product approvals, and the second is on the previous product outcomes. So, I imply, for the brand new regime, each new product should get approval earlier than in launch and the allocation consequence will likely be an ongoing course of. So, we are going to proceed diversifying our product portfolio beneath the brand new regime and different high quality merchandise for grownup people who smoke.

As of in the present day, we now have retained product approvals for low teenagers of units and low teenagers of cartridge merchandise. And a few of our functions are nonetheless beneath overview, and we count on the variety of our accredited merchandise will continue to grow. And relating to the second is in regards to the previous product part outs. We regularly slower our tempo in manufacturing all through the third quarter with the vast majority of our manufacturing occurring within the first half of third quarter.

Our merchandise that adjust to nationwide requirements, we started and take part the testing of the transition platform this month. We’ve been receiving extra approvals previously few weeks, and they’re in all probability are nonetheless within the early stage of approving of those new merchandise. Our entrance gross sales of those new merchandise will not be precisely mentioned [Inaudible] demand as our customers nonetheless have entry to our previous merchandise. And these new merchandise are simply being accredited, as an illustration.

So, we will present extra updates after the transition interval. Thanks.

Charlie Chen — China Renaissance — Analyst

Thanks.

Operator

The subsequent query comes from Peihang Lyu from CICC. Please go forward.

Peihang Lyu — Citi — Analyst

Hello there administration. That is Peihang at CICC, and thanks for the chance to take my questions. I’ve three questions really. And the primary one is, might you please introduce a bit in regards to the present stock degree of your authentic merchandise? And can there be any additional stock impairment? The second query is, I’d like to know what are? your latest changes after shops can’t be operated solely.

And my final one is, because the nationwide e-cigarette on-line buying and selling platform had been launched, I wish to know what’s your newest progress with regard to the cooperation with tobacco administration and different [Inaudible]? Thanks.

Chao Lu — Chief Monetary Officer

Thanks, Peihang. So, the primary one is on the stock lack and in addition stock impairment observe, and the second is on the exclusivity time that we’re fairly glad about retailer homeowners, and the ultimate one is newest developments relating to the transition platform. So, relating to the stock lack for our new merchandise and requirement stock impairments, there was a gradual however regular begin with our gross sales of our new product compliant with nationwide requirements. And likewise, our customers will want extra time to digest the inventories and modify their consumer behaviors.

So, the stock degree for brand new merchandise is comparatively low in contrast with the shortage that we now have for clearly we had earlier than the transition interval. And relating to the stock positions, the present stock positions for our product units don’t adjust to new nationwide requirements and uncooked supplies which can be not relevant because the fourth quarter of 2021. We do not count on we are able to incur extra important stock provisions relating to merchandise in compliance with nationwide requirements within the coming quarters. And the second query is on the exclusivity time period that we now have for retailer homeowners beforehand.

After the STMA introduced the rule that the unique distribution agreements will not be allowed for branded shops in March 2022, we started terminating our agreements with retailer homeowners and returning their deposits. So, as of the top of second quarter, most of this work has been accomplished. In our [Inaudible] non-exclusivity will allow us to [Inaudible] perform solely at a model. Sooner or later manufacturers with substantial model fairness and consumer mindshare, I’ll chill out.

There nonetheless be retailer platform homeowners and such course of will assist them to incorporate they’ve [Inaudible]. Based mostly on our personal observations, because the termination of their exclusivity, many further retailer homeowners have began promoting RELX branded merchandise. And eventually, relating to the method that we now have for the developments at launch, so in these months starting, a number of areas throughout the nation have begun to trace the nationwide transition platform. As a frontrunner in China’s e-vapor {industry}, we had been happy to be among the many first two manufacturers chosen to take part.

The transition course of has been clean, and we’re grateful for the merchandise supplied by the STMA. As an illustration, our inventory has been supplied trainings from researched industries, high quality supervision, check distributors, and the scientific testing cooperation by the STMA on the nationwide requirements. Thanks for his or her assist and help, our new merchandise had been among the many first batch of merchandise within the {industry} to acquire approval beneath the brand new regime. Thanks.

Peihang Lyu — Citi — Analyst

That is very clear. Thanks very a lot.

Operator

As a consequence of time constraints, now, I wish to flip the decision again over to the corporate for closing remarks.

Sam Tsang — Head of Investor Relations

Thanks as soon as once more for becoming a member of us in the present day. In case you have additional questions, please be happy to contact RLX Know-how investor relations workforce by the contact info supplied on our web site or TPG investor relations.

Operator

[Operator signoff]

Period: 0 minutes

Name individuals:

Sam Tsang — Head of Investor Relations

Kate Wang — Chief Government Officer

Chao Lu — Chief Monetary Officer

Lydia Ling — Citi — Analyst

Charlie Chen — China Renaissance — Analyst

Peihang Lyu — Citi — Analyst

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