Earnings Labs

RLX Technology Inc. (RLX)

Q4 2020 Earnings Call· Fri, Mar 26, 2021

$2.21

+1.15%

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Transcript

Operator

Operator

Hello, ladies and gentlemen. Thank you for standing by for RLX Technology Inc.'s Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded and is expected to last for about 40 minutes. I will now turn the call over to your host Mr. Sam Tsang, Head of Investor Relations of the company. Please go ahead, Sam.

Sam Tsang

Analyst

Thank you very much. Hello, everyone, and welcome to RLX Technology Incorporation Fourth Quarter and Full Year 2020 Earnings Conference Call. The company's financial and operational results were released through PR 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.relxtech.com. Participants on today's call will include our Co-Founder, Chairperson of the Board of the directors and Chief Executive Officer; Ms. Kate Wang; and myself, Sam Tsang, Head of Investor Relations. 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, targets, estimates, intent, belief, 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 affiliated advisers, representatives, and underwriters do not undertake any obligation to update this forward-looking information, except as required under the applicable law. Please note that RLX Technology Incorporation 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 financial measures to the unaudited GAAP measures. I will now turn the call to Ms. Kate Wang. Please go ahead.

Wang Ying

Analyst

Thank you, Sam. And thank you, everyone, for making your time to join our earnings conference call today. Just a little over 2 months ago, on [ January 27, 2021 ], we successfully listed our shares on our New York Stock Exchange and started our new journey as a public company. On behalf of the management team, I would like to extend our gratitude to our employees, business partners and all our shareholders and stakeholders who have been following and supporting us. I believe many of you are joining us today, not only to learn about our fourth quarter earnings result and full year achievements, but also to hear more about our response to the regulatory developments that occurred earlier this week. We are as attentive to these developments as you are, and we'll best answer any questions you have during the Q&A session. Now I will talk you through our operational performance in the last year and then sharing our strategies going forward. Throughout last year, we remain focused on our mission and strategies and we have achieved a solid that of results despite the challenging macro environment. First of all, looking at the overall e-vapor market in China, user penetration has been growing steadily. According to the CIC report, China's e-vapor user penetration rate grew from 0.4% in 2016 to 1.2% in 2019 and witnessed further growth in 2020. As the industry leader of the e-vapor market in China, we are well positioned to make RELX attractive brand for adult smokers providing better alternatives for them. Secondly, on our commercial front, we pioneered and integrated offline distribution and branded store plus retail model, tailored to China's e-vapor market. Under this model, we identified and the leveraged a rarity of distribution and retail channels that allow us our products…

Sam Tsang

Analyst

Thank you, Kate. I will now provide a brief overview of our financial results for the fourth quarter and the full year of 2020. Net revenues increased by 44% to RMB 1.62 billion in the fourth quarter of 2020 from RMB 1.12 billion in the first quarter of 2020. The increase was primarily due to an increase in net revenues from sales to offline distributors, which was mainly attributable through the expansion of our distribution and retail network. Gross profit increased by 59% to RMB 694 million in the fourth quarter of 2020 from RMB 438 million in the first quarter of 2020. Gross margin increased to 42.9% in the fourth quarter of 2020 compared to 39.1% in the first quarter of 2020. Operating expenses were RMB 853 million in the fourth quarter of 2020, representing an increase of 124% from RMB 380 million in the third quarter of 2020. Selling expenses increased by 127% to RMB 197 million in the fourth quarter of 2020 from RMB 87 million in the third quarter of 2020. The increase was mainly driven by an increase in share-based compensation expenses and an increase in branding material expenses. General and administrative expenses increased by 75% to RMB 447 million in the fourth quarter of 2020 from RMB 255 million in the third quarter of 2020. The increase was primarily due to an increase in share-based compensation expenses and an increase in professional service fees. Research and development expenses increased by 442% to RMB 209 million in the fourth quarter of 2020 from RMB 39 million in the third quarter of 2020. The increase was primarily driven by an increase in share-based compensation expenses and an increase in software and technical service expenses. Share-based compensation expenses recognized in selling expenses, general and administrative expenses and…

Operator

Operator

[Operator Instructions] Our first question today comes from Lydia Ling with Citigroup.

Lydia Ling

Analyst

Hello, management can you hear me?

Sam Tsang

Analyst

Hi, Lydia.

Lydia Ling

Analyst

Hello, management, can you hear me?

Sam Tsang

Analyst

Yes. We can hear you.

Lydia Ling

Analyst

This is Lydia from Citi. I have three questions, one is on the regulation side. So as for the monthly announcement, so could management just share a bit more of your views on this announcement and also its implication. So what do you think of the future regulation trends looking forward in China's e-cigarette industry? And also, how will the company cope with these changes anything should happen? And my second question is about expansion. And the company has achieved very impressive expansion in the first quarter for the branded stores, as just mentioned. So could you also talk about the company's expansion for this year. The competition looks more intense for this year as more players also ramp up our store openings with very aggressive pace. So how do you view the competitive landscape and the potential impact on your margin? And my last question is regarding the product. We noticed that the company has introduced a few new product here in this year and also some entry level products. So how about the feedback so far? And could you talk about your product strategies for this year?

Sam Tsang

Analyst

Sure. So I mean, there are 3 questions. First is on regulations, and the second is on the store plan, and the third 1 is on our product feedback. So it's like a lengthy questions and we'll go 1 by one. So I mean, on Monday, we are aware that the Department of Industry Policies and Regulation of the MIIT, which is the Ministry of Industry and Information Technology, they made an announcement seeking for public comments requiring the authority proposal to revise detailed implementation regulations of the tobacco monopoly law of the PRC. So such comments or feedback shall be submitted by April 22, i.e., they give 1 month for submission of such comments. So there are also like 2 attachments were included in the announcements. So the first attachment proposed new rule under the implementation regulation as rule 65 (sic) [Article 65] indicating that the implementation rules for next-generation tobacco products, including e-cigarettes shall take reference to the relevant rules in respect to see with under the implementation recreation of the tobacco monopoly law. And there are also the second attachment they have provided free considerations for making suggestion of adding the proposed rule 65 (sic) [Article 65]. So the first consideration is to make progress in the regulatory development of e-vapor products and the second consideration is to -- due to the similarities between e-vapor products and cigarettes, which is also taking reference to the regulation on e-vapor products internationally. And the first consideration is to enhance the effectiveness of regulating the e-vapor industry, including effectively regulating the operating activities of the e-vapor industry and tackling potential product safety issues of e-vapor products, false advertisement issue, et cetera, in order to protect the rights of e-vapor users. So I generally repeat what happened for [ unknown ] Chinese reader has a basic understanding of such regulation first. So as a company point of view, in response to the regulation, the announcement, we plan to submit our feedback regarding the proposed revision of implementation plans by April 22. So we are also well aware of the considerations mentioned in the attachment, including regulating the operating activities, tackling potential product safety issues, concerns over the [ underage ] issue, which has been our focus in daily operations. So I think your last bit of your question is mainly about how we adjust our operations. Given that the regulations or the proposal amendment is still in the process of seeking public feedback, it's premature to speculate about the potential change on the commercial front. So this is our response on your first question. So may you repeat your second question again, as I may have missed that?

Lydia Ling

Analyst

Yes, sure. The second question is about -- so could you talk about your expansion plan for this year given you already have 10,000 branded store already. And also the competition looks more intense for this year because some small brands also ramped up their expansion with very aggressive subsidies. So we also want to hear management view on the competitive landscape in the China's e-vapor industry and also your potential -- the potential impact on your margins?

Sam Tsang

Analyst

Sure. So we'll talk about -- the other first one first, regarding our costs. So as we have mentioned, so the number of Branded Partner Stores have been growing steadily. So as of end of September last year, we have partnered with over 5,000 stores. And as of end of last year, in the opening remarks made by Kate, we have already partnered with 10,000 Branded Partner Stores, yes. So we do see that the growth momentum on store opening remains strong, as we see that many of our existing Branded Partner Stores partners seeking to open more stores, i.e., second store, third stores, fourth stores. And definitely, we also received applications from potential new store owners as well. However, from an operational or a commercial strategy point of view, number of stores is not the first parameter or the paramount important parameter from our view. We always prioritized our Branded Partner Stores owners' productivity. So we will always closely monitor the latest sales of our Branded Partner Stores to evaluate the number of stores to be opened and then to determine and assess the number of requests or applications made by these store owners. So under our current understanding, as you can see, we have beat our internal projections. So we believe such trend will continue in the near future regarding the growth trajectory based on our projections. And I think your second question -- second sub-question is mainly on the margin side. So I mean, on the margin side, our gross margin has been growing steadily with our cost optimization initiatives and better supply chain management. And we also have achieved operating leverage as shown in the fourth quarter or the past few quarter results. However, we will also still focus on investing in our strategy as mentioned in Kate's opening remarks. So you have your third question. May you talk about that again?

Lydia Ling

Analyst

Sure. The last question is about the products. And so we noticed that the company also introduced some products in early this year, like some entry products, including the [ cotton vape ]. And so about the feedback so far? And also could you share about your views on your product strategies and also some technologies looking forward?

Sam Tsang

Analyst

Sure. So we have been always using the user-centric approach to have a diversified product portfolio in order to meet the increasing needs of e-vapor users as we see the penetration has been increasing. So in March, so we have introduced the affordable version of rechargeable e-vapor products. But given that is still at the early stage of development, we would like to share more thoughts requiring that when we have more results internally. So thank you very much, Lydia, for the questions.

Operator

Operator

Our next question is from Charlie Chen with China Renaissance.

Charlie Chen

Analyst

This is Charlie Chen from China Renaissance. I guess 3 questions here as well. First, how do you think ceramic atomizers versus cotton atomizers? I mean, how did these 2 different materials fit into your future business strategies in both supply chain and product portfolio management? So that's the first question. Second question is about consumer loyalty. Do you have any data in terms of average number of e-vapor brands your consumers regularly uses or how often or how difficult for consumer to switch brands? And how -- what are the factors to help them to make these kind of decisions? Any consumer insights in this area will be very helpful. And lastly, on distribution, what kind of index such as like sales or traffic et cetera, if you have -- do you use to monitor your store density in a city or in the market like in Beijing, how many stores do you think is enough? And what makes you to think so? And also that relates to what kind of store expansion plan you have in other cities. So that's my 3 questions.

Sam Tsang

Analyst

Thanks very much, Charlie. So I mean, for the first question is about the ceramic and also the cotton heating elements that you mentioned. So for us, we always prioritize user-centric needs, that's our first priority. So as mentioned before, so we used a product development framework called [AIPI ] to develop the e-vapor product for adult smokers in China. So I mean for the supply chain [ 1 side ] it largely depends on user feedback. On which products are used from time to time, which includes -- which elements to use as mentioned in your question. So far as we have been using both cotton and ceramic heating elements in our supply chain, to currently products with ceramic heating elements still account for the majority of our rechargeable cartridge. So for us, we will continue to monitor user preferences closely. And the improvement of the product and technology, providing the right product mix to adult smokers in China. So I mean, I hope this answers your question. So your question -- your second question is on the -- like the brand loyalty and the user preference side. So for us, there are differences between us and also other brands. So it includes very strong user loyalty for e-vapor products as more and more adult smokers and our users have been increasingly recognized the benefits of using better alternatives. So I think for us, we can share about like more insight in the following perspective. So I mean for the first perspective I can share is about the user experience side. So according to our internal data, we observed that our users have continued to purchase our e-vapor products after the second consecutive month of their initial purchases, i.e., after M1. We can also see improvement in terms of…

Operator

Operator

Due to the time constraint, now I'd like to turn the call back over to the company for any closing remarks.

Sam Tsang

Analyst

Thank you very much. So thanks, everyone, for your time. So feel free to look at further information through our website, ir.relxtech.com for through the corporate information provided through us, or through TPG Investor Relations team. Thank you very much.

Operator

Operator

This concludes this conference call. You may now disconnect your lines. Thank you.