RLX Technology Inc. (RLX) Q1 2021 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by for the RELX Technology Inc.'s First Quarter 2021 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.

Thank you very much. Hello, everyone, and welcome to RELX Technology's First Quarter 2021 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. On today's call, our co-founder, Chairperson of the Board of Directors and Chief Executive Officer, Ms. Kate Wang, will make some general remarks on our first quarter achievements and strategic focuses going forward. Then, our Chief Financial Officer, Mr. Chao Lu, will elaborate further on our specific initiatives and take us through our financial results for the first quarter ended March 31, 2021. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. These statements typically contain words such as may, will, expect, targets, estimates, 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 does not undertake any obligation to update its forward-looking information, except as required under the applicable law. Please note that RELX Technology earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. RELX Technology 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.

Thank you, Sam. Thanks, everyone, for making your time to join our earnings conference call today. First quarter 2021 was an eventful one for our company and the industry. In January, we successfully listed on New York Stock Exchange. After listing, we continued [ through the goal ] on product leadership in scientific research, technology and product development, supply chain production and distribution and retail network. Our net revenues for the first quarter grew 48% quarter-over-quarter. In March, the authorities made an announcement seeking public comments regarding a proposal to revise rules and regulations aimed at strengthening the supervision of e-cigarettes and solving the quality and safety risk and the false advertising problems among others. Just yesterday, the newly revised law on the protection of minors was enacted. [ Partial ] process address the prevention of underage use of alcohol and tobacco, e-cigarettes included. And with that, we have always been upholding user value, corporate value and social value as the key pillars of everything we do. It is the relentless pursuit of these values that makes us the most trusted brand of choice and a leading force in our industry. The dynamic market and regulatory environment serve as continued inspiration for us to keep pioneering in all fronts at speed and with purpose. For our users, we focus on value creation through product development to meet their diverse needs, and through distribution and the great new network enhancements to ensure the seamless and best-in-class purchase experience. For our corporate stakeholders and partners, we focus on value creation through investing into science and technology to reinforce our sustainable advantage and empower everyone in our value chain. For the society, we focus on value creation through providing products of highest quality and safety standards to adult smokers for harm reduction, and through fighting against counterfeit products and against illegal marketing and sales to minors. To keep pace with our business development, we have been steadily attracting and developing high-caliber talent to strengthen our capability. In the first quarter, we appointed Mr. Chao Lu as our Chief Financial Officer. He brings over a background of investment banking experience and comprehensive understanding of China's health care industry. We are pleased to welcome him to our management team and believe he will be an invaluable addition to our company. With that, I will now turn the call over to Chao who has been with us for more than 2 months now. He will elaborate further on some of the initiatives taken during the past quarter and go over our operational and financial results in more detail. Chao, please go ahead.

Thank you, Kate, and hello, everyone. It has been an honor and a great pleasure to join RLX's management team [ to advocate ], value creation has been at the center of all our initiatives. Next, I will share some specifics regarding the initiatives we have taken in the first quarter. Then I will walk you through our financial results for the first quarter and our guidance for the second quarter. In March, in response to user demand, we released a new product, [ RELX Lite ], also known as [Foreign Language], with more affordable pricing. We will keep expanding and enhancing our product offering as we seek to serve the diverse needs of our users in China. We also continued our expansion of offline distribution networks and retail channels across the nation to further penetrate the e-vapor products amongst adult smokers. As of March 31, 2021, we've partnered with over 15,000 RELX Branded Partner Stores nationwide. And we are excited to see an increasing number of branded store partners willing to start business with us to open RELX Branded Partner Stores, working together to better serve adult smokers in China. Meanwhile, as part of our consistent efforts to expand our industry-leading retail model nationwide, we have also been collaborating with various forms of retailers to diversify our distribution and retail network. In the first quarter of 2021, we opened our Quality Lab to further strengthen our quality assurance and control capability. We also started developing our second and third exclusive production plants to enhance our production capabilities. In terms of our efforts in scientific research, the Journal of Applied Toxicology published RELX Lab's science study on the cooling agent WS-23. The peer-reviewed journal article formed part of our ongoing emphasis on scientific research. Looking ahead, we will keep investing in in-house lab research related to product quality and safety, physical chemistry, psychological and clinical elements and the evaluation of long-term use of e-vapor products. Keeping up to our commitment to corporate social responsibility, we remain dedicated to building and strengthening our trusted brands by consistently adhering to our strong ethical principle. We have continued investing in the Golden Shield Program to combat sales of counterfeit products, having delisted over 100,000 online links and ceased over 170,000 counterfeit products. In late April, we published our first ESP program, detailing our efforts and commitment to our stakeholders. Yesterday, after newly revised law on the protection of minors was enacted, we were the first amongst all our peers to call on the entire industry participants to thoroughly study the relevant laws and regulations and strictly abide by all. Turning to financial performance. We started 2021 with good momentum as our first quarter results came in above our expectations. Our robust top line growth continued as a result of the expansion of our distribution and retail network, driving increased user penetration amongst adult smokers. We remain devoted to implementing our cost optimization strategy and enhancing operating leverage. I will now provide a brief overview of our key financial results for the first quarter of 2021. Our net revenues increased by 48.2% to RMB 2.4 billion in the first quarter of 2021 from RMB 1.62 billion in the fourth quarter 2020. The growth was primarily due to an increase in net revenues from sales to offline distributors, which was driven by the expansion of our distribution and retail network. Gross profit increased by 59.1% to RMB 1.1 billion in the first quarter of 2021 from RMB 694.1 million in the fourth quarter of 2020. Gross margin increased to 46% in the first quarter of 2021 compared to 42.9% in the fourth quarter 2020. Operating expenses were RMB 1.2 billion in the first quarter of 2021 compared to RMB 852.6 million in the fourth quarter of 2020. Selling expenses increased by 48.2% to RMB 291.5 million in the first quarter of 2021 from RMB 196.7 million in the fourth quarter of 2020. The increase was mainly driven by, one, an increase in salaries and welfare benefits; two, an increase in branding material expenses; and three, an increase in shipping expenses. General and administrative expenses increased by 59.5% to RMB 712.8 million in the first quarter of 2021 from RMB 447 million in the fourth quarter of 2020. The increase was primarily due to, first, an increase in salaries and welfare benefits; and second, an increase in share-based compensation expenses, partially offset by a decrease in legal and other consulting fees. Research and development expenses increased to RMB 211.6 million in the first quarter of 2021 from RMB 208.9 million in the fourth quarter of 2020. The increase was primarily driven by an increase in salaries and welfare benefits, partially offset by, first, a decrease in share-based compensation expenses; and second, a decrease in material expenses. Share-based compensation expenses recognized in selling expenses, general and administrative expenses and research and development expenses in total were RMB 877.5 million in the first quarter of 2021 and RMB 656.1 million in the fourth quarter of 2020. Loss from operations was RMB 111.9 million in the first quarter of 2021 compared with RMB 158.5 million in the fourth quarter of 2020. Income tax expenses was RMB 176.3 million in the first quarter of 2021 compared with RMB 110.6 million in the fourth quarter of 2020, primarily due to an increase in taxable income. GAAP net loss was RMB 267 million in the first quarter of 2021 compared with RMB 236.7 million in the fourth quarter of 2020. Non-GAAP net income reached RMB 610.5 million in the first quarter of 2021. GAAP basic and diluted net loss per ADS were both RMB 0.174 in the first quarter of 2021 compared to RMB 0.165 in the fourth quarter of 2020. Non-GAAP basic and diluted net income per ADS were both RMB 0.398 in the first quarter of 2021 compared to RMB 0.292 in the fourth quarter of 2020. As of March 31, 2021, the company had cash and cash equivalents, restricted cash, short-term bank deposits, short-term investments and long-term bank deposits of RMB 14.4 billion compared to RMB 3.4 billion as of December 31, 2020. The increase was primarily due to net proceeds raised in the company's IPO in January. As of March 31, 2021, approximately USD 1.65 billion, equivalent to RMB 10.8 billion that is denominated in U.S. dollars. Now turning to guidance. For the second quarter of 2021, the company currently expects net revenue to exceed RMB 2.85 billion, and non-GAAP net income to exceed RMB 720 million. The above outlook is based on the current market conditions, including those related to COVID-19 pandemic and reflects the company's primary -- preliminary estimate of the market and operating conditions and user demand, which are all subject to change. This concludes our prepared remarks today. We will open the call to questions. Operator, please go ahead.

[Operator Instructions] Our first question comes from Lydia Ling from Citi.

And this is Lydia from Citi. So first, congratulations on the strong results achieved in the first quarter. I actually have 2 questions would like to share -- or hear your views. And the first question is still on the regulation side. So actually, after the opinion in the March and also like the public feedback ended in the late April. So could you share with us any regulatory update in this -- for this industry? And like what's your view on the current progress and like your expectation on the time line for the detailed regulation? And my second question is on some -- like what's your view on the latest competitive landscape for the China e-cigarette market. And so any changes have you observed up to the March opinion announcement and like how does your competitive market share evolved? And we also observed the store opening has been very aggressive in first quarter. So how about your peers? And also did you observe any pushback in the openings in the second quarter after the announcement?

Sure. Thank you very much, Lydia. So I mean on the first one is about the regulatory update. So in response to the announcement made by MIIT on March 22, so we have submitted our feedback regarding the announcement before the deadline of April 22. So we are absolutely supportive on the considerations being mentioned in the attachment of the announcement on March 22, which includes to regulate operating activities of the e-vapor industry and tackle the potential safety issues of some of the e-vapor products in the market. Some past advertisements made by some market participants as well, these considerations have been always our focus in our daily operations. Regarding the time line or updates, there has been no updates regarding the announcement according to the website of the regulatory authorities. We will keep monitoring the regulatory developments very closely. So I think the question -- second question is on the competitive landscape side. So stepping on to 2021, so far this year, as mentioned by both Kate and Chao, our business has remained on very strong growth momentum as evidenced by our operational and financial results. So alongside our expansion, we also try to identify more diversified demand to better serve adult smokers in China through our advanced technologies and product development, nationwide distribution and retail network as well as our enhanced supply chain and production capabilities. So I mean, regarding the market share or the landscape itself, according to our knowledge, most of our peers have witnessed a deceleration of growth or even decline in financial results or operating results from the beginning of the year. I believe the major reason is that our commercial and product strategies have kept us competitive. So as mentioned in the opening remarks, so we plan to adhere to our own strategies of value creation and throw more investments into scientific research, product developments, et cetera, supply chain distribution, and most importantly, underage prevention, to widen our lead over other market players in the e-vapor market in China.

The next question comes from Charlie Chen from China Renaissance.

I have 2 questions. Number one is since the announcement on March 22, have you seen any material changes or impacts on, I mean, consumer behavior or your business? Or any color would be appreciated. Second question will be, do you have visibilities towards your production capacity and whether your largest supplier has sufficient capacity reserved for your growth for the rest of the year?

Thanks, Charlie, for the question. On your first question, since March 22 announcement, we have been closely monitoring the macro environment and market condition and our own operating results. We have also been gathering feedback from our business partners, including retailers, distributors and suppliers through daily communication. We have also been closely monitoring our operating and financial metrics, including the retail sales value, frequency of purchases and inventory levels through our own system. We continue to see sustained support from our business partners and users for our business development and our products. We have not yet experienced material negative impact on our operating results since that announcement. We will keep monitoring the industry landscape, including the regulatory framework. We're maintaining the active communication with our trusted partners and monitoring key operating metrics. We will aim at deliver value creation to our users, stakeholders and the society as a whole. On your second question regarding production capability visibility and our capacity with the partners, right, with our supply chain partners, we strive to be agile in managing our supply chain and production plants. We formed our supply chain and production plants for various time frame works based on the multiple factors, including user demand, distributors and retail sales, commercial goals, inventory levels to ensure that we could achieve an optimal inventory level while fulfilling users' demand for our e-vapor products. Our e-vapor products contain multiple components, including e-liquid packaging, battery and various materials, and we currently have hundreds of SKUs. We have been discussing and communicating with our production needs with our suppliers and manufacturers periodically over the past year and the past quarter. Our suppliers and manufacturers have fulfilled our needs effectively. We remain vigilant on our suppliers and manufacturers capability -- or capacity and their actual production volume. I think we can manage that capacity and expand or adjust accordingly. We expect our suppliers and manufacturers to be able to meet our needs under the current supply chain planning mechanism and fulfill our future expansion plans.

Our next question comes from Junhao Fan from CICC.

I'm Junhao from CICC. I have 2 questions. The first question is what's your latest number of members and how will the membership system will help the company's operation? And the second question is, does the industry's upstream raw material price increase affected the company's cost, especially some electronic components such as chips has -- the price has gone up. What's the effect of the company's cost?

Sure, Junhao. So there are 2 questions. One is on the membership system and the other one is on the macro cost increase. So on the membership side, we've been developing our own membership system since 2019, so to better serve our users with our reward system and enhanced experience. So I think, for us, the membership system can also improve our understanding of our user needs and how we can deliver the best possible products. So currently, we have over 10 million of members in our membership system on a registered basis, where we can keep updating them on our scientific information, some introduction of our products, store location and also after-sale services. So we will continue to improve and enhance the membership system in a bid to better serve and reward our members as we try to assist our smokers in using e-vapor products as [ harm ] reduction alternative. So on the second question is on the raw material pricing on macro level. So we do aware that there has been a challenging global economic situation. Prices of raw materials in electronic industry like chips have indeed having an upward trend. So as part of this, we also see that some of our suppliers have experienced an increase in costs in part of the supply chain process. However, so far, our costs have not experienced any material adverse impact from the change in the price of raw materials. So I mean, for us, as a brand manufacturer, so we'll continue to closely monitor the latest developments throughout our supply chain and some of the operating or financial issues that to be faced by our suppliers. So if the cost of our products do increase, so we'll do seek for very active solutions. So in most case, any potential impact on our financials or operating results.

The next question comes from Stephanie Lam from Haitong International.

Congratulations on a strong result. I have 2 questions. First one is regarding the store opening target. We noticed that some of your peers have been accelerating their store opening in China. So I just wanted to check if we have any adjustment on our current store opening plans. This is my first question. The second question is related to the new product side. Could you talk about the price positioning of our future products? It would be great if you can also share the sales and testing progress of our sixth generation low-priced products.

Sure. Thank you very much, Stephanie. So for our store opening plan, so I can explain the logic of this. So far, our logic of our Branded Partner Stores operating model remains intact. And it's largely dependent on whether there are enough potential users for our products in a given area or a district. So for each district or area where we have our Branded Partner Stores, we will monitor and evaluate the store productivity in combination with other macro or micro factors to decide whether more stores are needed to be there open instead of looking at our peer group. The implementation of our Branded Partner Stores' operating model has achieved great success in the past. We have partnered with over 15,000 RELX Branded Partner Stores nationwide as of March 31 this year. So we have been consistently monitoring the speed of store opening based on a comprehensive set of metrics, including productivity of existing stores. So far, we will continue to expand on our -- based on the above criteria with careful management of potential user traffic. We will also pay a very close attention to avoid cannibalization amongst stores by enforcing distance requirements for most of the region. So this is the first one on the store opening plan and how we adjust in accordance with our competitors as well. So the second one is the product pricing and also our latest achievement. So I mean, for us, the product pricing strategy has been dynamic. It really depends on user penetration in the industry together with actual commercial feedback. We will continue to offer a range of products at various price as we seek to fulfill differentiated needs of different types of adult smokers. For example, we will introduce [ more ] other features for high-end products and manage the cost for lower-end products to make various types of our smokers still affordable. Regarding the sixth generation product, we have been conducting the product testing of the [indiscernible] in multiple cities. We are still in the process of collecting preliminary feedback from our users and business partners. It will require more time for us to better evaluate the performance of such products and better design the scale and availability of such products. So thank you very much for the question.

There are no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you again for joining us today. If you have any further questions, please feel free to contact our RELX Technology's Investor Relations team through the contact information provided on our website or TPG investor relations.

This concludes the conference call, you may now disconnect your line. Thank you.