RLX Know-how Inc. (NYSE:RLX) This fall 2022 Earnings Convention Name March 10, 2023 7:00 AM ET
Firm Individuals
Sam Tsang – Head, Investor Relations
Kate Wang – Chief Government Officer
Chao Lu – Chief Monetary Officer
Convention Name Individuals
Lydia Ling – Citi
Charlie Chen – China Renaissance
Peihang Lyu – CICC
Operator
Hiya, women and gents. Thanks for standing by for RLX Know-how, Inc.’s Fourth Quarter and Full Yr 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
Thanks very a lot. Hiya, everybody and welcome to RLX Know-how’s fourth quarter and full yr 2022 earnings convention name. The corporate’s monetary and operational outcomes had been launched by way of PR Newswire companies earlier right now and have been made obtainable on-line. You can even view the earnings press launch by visiting the IR part of our web site at ir.relxtech.com. Individuals on right now’s name will embody our CEO, Ms. Kate Wang; our CFO, Chao Lu; and myself, Sam Tsang, Head of Investor Relations.
Earlier than we proceed, please word that right now’s dialogue will comprise forward-looking statements made beneath the Secure Harbor provisions of the U.S. Personal Securities Litigation Reform Act of 1995. These statements sometimes comprise phrases similar to could, will, anticipate, targets, estimates, intend, imagine, potential, proceed or different related expressions. Ahead-looking statements contain inherent dangers and uncertainties. The accuracy of those statements perhaps impacted by quite a few enterprise dangers and uncertainties that might trigger precise outcomes to vary materially from these projected or anticipated, lots of which components are past our management. The corporate, its associates, advisors and representatives don’t undertake any obligation to replace these forward-looking statements, besides as required beneath the relevant legislation. Please word that RLX Know-how’s earnings press launch and this convention name embody discussions of unaudited GAAP monetary measures as effectively as unaudited non-GAAP monetary measures. RLX press launch accommodates a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.
I’ll now flip the decision to Ms. Kate Wang. Please go forward.
Kate Wang
Thanks, Sam and thanks everybody for making time to affix our earnings convention name right now. 2022 was a yr stuffed with unprecedented challenges. A mix of COVID-related disruptions and a considerable new set of {industry} rules and coverage updates impression our operations within the e-vapor sector as an entire. We rigorously evaluated the market panorama in response to the risky surroundings and rapidly pivot to embrace the brand new insurance policies and requirements. Because of our efficient technique and powerful execution. We maintained regular operations and achieved significant growth in the course of the yr.
For right now’s name, I would love first to evaluation the previous yr’s regulatory developments and spotlight our efforts to reply to new necessities earlier than shifting to our outlook for 2023 and the ESG-related actions. Let’s begin with the landmark new rules. In March and April, the executive measures for e-cigarettes and Nationwide Requirements had been launched successively embarking upon a brand new regulatory yr for the e-vapor {industry}. A set of detailed tips, guidelines and measures rolled out within the following months. To make sure a lot of the changes, the authorities granted {industry} individuals, a transition interval ending September 30, 2022.
In the course of the transition interval, we proactively adapt our enterprise and put together to adjust to the brand new necessities when the regulation got here into full impact on October 1, 2022. We concentrate on designing compliant new merchandise we name it Guo Biao in Chinese language or GB merchandise and utilized for the related license and approvals. We readied ourselves to maneuver all of our gross sales to the nationwide transition platform as required. In the meantime, we strove to optimize our provide chain and streamline our group, enhancing the corporate’s agility and suppleness to higher reply to the evolving regulatory surroundings in addition to COVID-related disruption.
Along with our inside changes, we additionally present well timed help for our retailer homeowners and distributors to facilitate a seamless transition for our complete worth chain. These actions proved efficient and positioned us effectively to enter the brand new interval. Importantly, in June and July 2022, two of our subsidiaries obtained license for manufacturing enterprise from the State Tobacco Monopoly Administration. Particularly, when acquired approval to fabricate e-liquid and the opposite acquired approval to personal the RELX model and manufacture RELX branded e-vapor rechargeable units, cartridge merchandise and different related merchandise.
We additionally regularly discontinued our older merchandise and commenced launching our authorized new merchandise in an orderly vogue national-wide whereas efficiently shifting our gross sales to the nationwide transaction platform. We now supply 4 distinct strains of compliant units throughout varied value factors to fulfill the wants of numerous teams of grownup people who smoke from price-sensitive clients to those that worth premium end and customized look. We’re additionally regularly rolling out new cartridges to guage our buyer smoking expertise. We’re delighted to see an rising variety of grownup people who smoke utilizing our new GB product.
As we solid into the fourth quarter, we entered one other problem, the excise tax on e-cigarettes, which was launched on October 25 and enacted on November 1. As an e-vapor producer, we now have been topic to a 36% excise tax on our distributor gross sales since then, adversely impacting our margins. In response, we now have additional addressed our price construction to reinforce our effectivity and preserve our profitability at a wholesome degree. Our CFO will elaborate it later – a bit later. Though these rules and course of problem our firm and the broader {industry} within the close to time period, we imagine additionally they create order and wholesome working surroundings that may profit all {industry} individuals within the long-term.
Transferring ahead to 2023, we intend to reap the advantages of the clearer regulatory frameworks and China’s reopening by leveraging three of our core competencies. The primary is product growth. Our industry-leading R&D capabilities and ongoing investments in scientific analysis allow us to swiftly develop and launch compliant merchandise that meet evolving shopper wants and desire. Our non-GAAP R&D expense ratio has grown from lower than 2% 3 years in the past to five.7% in 2022. Lately, we provide essentially the most diversified product portfolio available in the market, catering to varied calls for of grownup people who smoke. We imagine our R&D benefits will allow us to take care of this management within the submit regulatory period.
Second, product high quality and model fairness. For many e-vapor customers, the RELX model is synonymous with high quality in e-vapor merchandise, particularly for units that warmth e-liquid into an aerosol inhaled into lungs, high quality issues to grownup people who smoke and it’s monthly to IRX. We’ll proceed to focus intensely on this cornerstone of our model. Lastly, we are going to reply on our enterprise resilience and powerful execution. That is now the primary time we now have encountered adjustments and challenges within the {industry}. Again in 2019, a ban on on-line gross sales of e-vapor merchandise pressured us to vary our technique in a single day. We rapidly moved offline pivot to our branded shops value mannequin and on the favor of grownup people who smoke with our distinctive mixture of comfort, worth and excellent merchandise. Because of our staff’s inventive – our strong enterprise fundamentals and a mountain of exhausting work. We’re additionally steadily shifting previous the obstacles posed by the brand new rules.
Earlier than I conclude, I want to share some replace on our ESG initiatives. Alongside our efforts to develop our enterprise beneath the brand new regulatory framework, we stay dedicated to fulfilling our social tasks in 2022. For instance, our Pods Reborn recycling program, which we began in September 2021, has achieved a number of significant milestones. As of the tip of 2022, over 10,000 shops in 282 cities nationwide had completed this system with over 2.8 million cartridges collected. These recycled components are centralized processed into cement clinkers and middleman merchandise in cement manufacturing, which we then use to assemble roads, bridges and bathroom in rural revitalization mission. This eco-friendly method permits us to cut back treasured assets to offer higher houses by way of rural villages. In December 2022, our Pods Reborn recycling program was named in revolutionary enterprise for rural revitalization at southern metropolis states 2022 ESG annual ceremony, a value award to China’s most forward-thinking ESG applications.
Moreover, we now have built-in United Nations sustainable growth objectives into our social duty methods. In April 2022, we launched our internet zero emission plan Intention for Zero to realize carbon neutrality in our direct operations by 2033 and alongside worth chain by 2050. We plan to launch zero emission merchandise and 0 emission factories, set up a inexperienced provide chain accomplice, eradicate pointless single-use plastic packaging and cut back waste to realize our objective. We additionally encourage workers to undertake low carbon places of work apply to advertise realizing the corporate’s carbon neutrality commitments all through its worth chain. Dedication to company duty has been one in all our core values since our inception. We’ll proceed to hunt new and revolutionary methods to deepen this dedication to our society.
In abstract, 2022 was a tricky yr for RLX and your complete e-vapor {industry}. However, we imagine our efforts and progress all year long pave the best way for higher 2023. As China reopens and the {industry} modify to the brand new regular, we are going to stay dedicated to providing premium merchandise with superior efficiency to fulfill grownup people who smoke’ wants. We’re assured that our core aggressive benefits will empower us to grab alternatives and unleash our progress potential as we proceed to guide the {industry} on this new period.
With that, I’ll now flip the decision over to our CFO, Lu Chao, he’ll elaborate additional a few of our final quarter’s initiatives and go over our operational and monetary ends in extra element.
Chao Lu
Thanks, Kate, and good day, everybody. I’ll now present an outline of our monetary outcomes for the fourth quarter and the complete yr of 2022. We concluded unpredictable full yr 2022 with an particularly difficult fourth quarter. Not solely was it our first quarter beneath the brand new regulatory framework, it additionally coincided with substantial adjustments in China’s COVID situations and insurance policies. Amid the advanced surroundings we proceed to prioritize price management, a key part of our technique all through 2022, improved our provide chain effectivity and product design and adjusted our pricing to mitigate the impression of those exterior influences.
Within the fourth quarter, we delivered internet income of RMB340 million. As I discussed, our efficiency was negatively affected by the pandemic and erosion from unlawful merchandise ensuing from the cracks of implementing the brand new regulation. With respect to COVID, round 40% of the areas, together with Hunan, Hubei, Guizhou, Shandong, Yunnan, Jilin, Henan, Jiangxi, etcetera, suspended their orders for practically 1 month in the course of the fourth quarter due to pandemic-related disruptions. In the meantime, off-line site visitors decreased considerably because of lockdowns and the huge wave of infections nationwide, considerably impacting our gross sales.
Encouragingly, we noticed off-line site visitors regularly starting to recuperate as the height wave of infections handed. The second issue was unlawful flavored merchandise. Per the nationwide requirements, solely tobacco flavored merchandise could also be bought in licensed retail shops as of October 1. We strictly adjust to the rules and have maintained our main place within the organized market. Nevertheless, our gross sales have been affected by unlawful non-tobacco flavored merchandise as sure customers are gradual to undertake GB merchandise whereas non-tobacco flavored merchandise stay obtainable. On the brilliant aspect, governments throughout the nation have elevated their efforts to fight these unlawful merchandise. We’re happy to see a rise in shopper acceptance amongst customers who’ve switched to GB merchandise. For the complete yr, our internet income fell 37% year-over-year to RMB5.3 billion. The lower was primarily because of the suspension of recent product launches and retailer growth in the course of the transition interval and the discontinuation of older merchandise within the second half of 2022.
Subsequent, gross revenue. We delivered a gross revenue of roughly RMB148 million within the fourth quarter of 2022 in contrast with RMB766 million in the identical interval final yr. Our gross margin elevated by 3.4 share factors year-over-year to 43.6% within the fourth quarter, because of the development of our provide chain effectivity and a lower in stock provisions. Nevertheless, the gross margin declined by 6.4 share factors quarter-over-quarter, primarily because of the November implementation of a 36% excise tax on the e-vapor merchandise.
As I discussed, we now have adjusted our pricing, product design and provide chain accordingly and achieved significant outcomes. We’ll proceed to hunt different means to alleviate the impression additional. On a full yr foundation, our gross revenue was RMB2.3 billion in contrast with RMB3.7 billion within the prior yr. Gross revenue margin remained steady at 43%, primarily as a result of a rise in stock provision offset our enhancements to provide chain efficiencies.
Transferring on to price management, which has been our strategic focus all year long. Our efforts in 2022 had been remarkably profitable and will save us greater than RMB141 million yearly going ahead. Within the fourth quarter, our working bills had been RMB620.4 million in contrast with RMB231.5 million in the identical interval of 2021. The rise in working bills was primarily because of the change in share-based compensation bills because of our value fluctuation. Together with share-based compensation, our non-GAAP working bills had been RMB146 million within the fourth quarter, a lower of 23% year-over-year.
For full yr 2022, working bills had been RMB1.2 billion in 2022, a lower of 10% from RMB1.4 billion for the prior yr. Particularly, our promoting bills decreased by 33% to RMB348 million in 2022 from RMB521 million within the prior yr, primarily pushed by: first, a lower in share-based compensation bills; and second, a lower in branded materials bills. Normal and administrative bills decreased by 14% to RMB577 million in 2022 from RMB673 million within the prior yr, primarily because of a lower in share-based compensation bills. R&D bills elevated by 76% to RMB317 million in 2022 from RMB180 million within the prior yr, primarily because of a rise in salaries and welfare advantages, partially offset by a lower in share-based compensation bills. Excluding share-based compensation, our non-GAAP working bills had been RMB1.1 billion in 2022, down 6.5% year-over-year. We’ll proceed to focus on price management in 2023.
Now turning to profitability. Because of our efficient price administration and powerful execution, we maintained a wholesome degree of profitability throughout 2022. Our non-GAAP internet revenue was RMB250 million within the fourth quarter of 2022 in contrast with RMB537 million in the identical interval of 2021. Non-GAAP primary and diluted internet revenue per ADS had been RMB0.188 and RMB0.186 respectively, within the fourth quarter of 2022. In contrast with non-GAAP primary and diluted internet revenue per ADS of RMB0.398 and RMB0.394 respectively, in the identical interval of 2021. For the complete yr 2022, our non-GAAP internet revenue was RMB1.6 billion, and non-GAAP margin improved barely by 3.1 share factors to 29.5% in 2022. Non-GAAP primary and diluted internet revenue per ADS had been RMB1.218 and RMB1.210 respectively, in 2022 in contrast with non-GAAP primary and diluted internet revenue per ADS of RMB0.604 and RMB1.591 respectively, within the prior yr.
Transferring to our stability sheet. As of December 31, 2022, we had money and money equivalents, restricted money, short-term financial institution deposits, short-term investments, long-term financial institution deposits and long-term funding securities of RMB15.73 billion, in contrast with RMB14.86 billion as of December 31, 2021. As we embark upon 2023, we are going to proceed to optimize our operational effectivity and value management measures, enhancing our agility and skill to compete amid the brand new regulatory surroundings. Our robust money place will even empower us to make high quality investments in R&D and product growth. We imagine our firm’s resilience and stable [Technical Difficulty]
Operator
Pardon me, interruption, everyone. That is the convention operator. It seems we now have misplaced the speaker line, I’d dial again after them, in the interim I’m going to position some maintain music in. We ask that you simply please keep on the road. And as soon as once more we are going to rejoin the audio system in a second apparently. Thanks.
And pardon me everyone. That is the convention operator. We now have rejoined our speaker location. Please proceed together with your presentation. Thanks.
Chao Lu
Positive. Sorry, apologies for the road connection. As we embark upon 2023, we are going to proceed to optimize our operational effectivity and value management measures, enhancing our agility and skill to compete amid the brand new regulatory surroundings. Our robust money place will even empower us to make high quality investments in R&D and product growth. We imagine our firm’s resilience and stable fundamentals will allow us to beat near-term hurdles and thrive on this new period. As all the time, we stay devoted to creating long-term sustainable worth for our stakeholders.
This concludes our ready remarks right now. Please seek advice from our earnings press launch for additional particulars of our fourth quarter and full yr 2022 monetary outcomes. We’ll now open the decision to questions. Operator, please go forward.
Query-and-Reply Session
Operator
[Operator Instructions] Immediately’s first query comes from Lydia Ling at Citi. Please go forward.
Lydia Ling
Hello administration. Thanks for the presentation. That is Lydia from Citi Analysis. And so I’ve two questions right here. The primary one is, may you share about your latest development like in January and in addition February. And what’s the consumer suggestions in your new merchandise and in addition these new costs? And given the reopening and in addition authorities efforts on the counter just like the unlawful merchandise, so how do you anticipate your demand would recuperate to which degree this yr? So, that is my first query. And my second query is on the margins aspect. So, because of the value enhance changes alongside the worth chain and in addition together with tax – consumption tax impression, so how do you truly anticipate your margin tendencies this yr and in addition within the long-term? Thanks.
Chao Lu
Positive. Thanks very a lot, Lydia for the questions. So, the primary one is concerning the – how demand will evolve and in addition the consumer suggestions. And the second is principally on the consumption tax and the way are the margin tendencies. So, concerning the primary one, which is the demand outlook and in addition the consumer habits. So, we lately do see a sequential enchancment month-over-month. And we imagine there are just a few causes. So, the primary one is about conversion. As customers devour their pre-GB merchandise, so they may naturally buy GB merchandise that’s produced by us as e-vapor merchandise has been their main supply of nicotine consumption. And the second is the launch of extra SKUs as we now have regularly launched extra SKUs with varied tobacco flavors to the market. So, customers may very well be extra accessible to seek out their most popular cost of tobacco flavored cartridge. And concerning our full yr outlook and in addition the extent of restoration, to be trustworthy, I believe proper now it’s nonetheless very early and tough to offer an correct quantitative estimates for the explanations that we talked about earlier within the remarks. The supply of unlawful merchandise, to a sure extent have delayed the conversion course of for our customers switching from pre-GB merchandise to GB merchandise that adjust to the nationwide requirements. However lately, we do see there are enhancements because the STMA has initiated and campaigned to fight non-GB unlawful merchandise on a bigger scale and equally supportive of such campaigns. So, we do see and we anticipate to see extra customers switching to tobacco flavored GB merchandise that will adjust to the latest necessities as soon as the vast majority of non-compliance merchandise has been faraway from the market. And concerning the consumer habits, as we talked about within the final earnings name, we see that the Web Promoter Rating, i.e., the NPS has been enhancing when as soon as customers have extra incessantly used the merchandise and in addition the launch of extra SKUs with varied tobacco flavors, having a variety of product choices may additional improve our merchandise’ NPS. And by way of our pricing, we now have additionally made the primary value adjustment on our ex-factory promoting value and in addition the advised retail value following the impose of consumption exams in final November. So, most of our customers have tailored to the change provided that our merchandise are their necessity. However we additionally see that there are a small portion of customers that the pricing could also be a bit excessive for them, so thought-about our ongoing provide chain effectivity enhancements and in addition these consumer wants. So, we are going to modify our product pricing for sure SKUs beginning in April. And likewise, we now have supplied varied product choices with varied value factors, together with the entry degree merchandise like Xin Yu [ph] to be extra accessible for our merchandise by bringing them to market in additional provinces. For instance, we supplied Xin Yu in 23 provinces in January this yr versus 16 provinces in final yr’s November. So, we do see a restoration in demand. And concerning your second query is concerning the consumption tax impacts and in addition the margin development. Our GPM truly fell by 6.4% quarter-over-quarter final quarter, primarily because of the impose of consumption tax launch most likely handed on November 1st. So, buyers and analysts may see a extra full image concerning the impact of our consumption tax within the first quarter of 2023. And naturally, we now have already taken some steps to mitigate the impression. So first, we now have adjusted our ex-factory promoting value. And second, we now have continued to enhance our provide chain effectivity and product designed to decrease our variable unit prices. So, these two initiatives have helped us mitigate the impression because of the impose of consumption tax. Though we now have adjusted the value and lowered our unit prices to partially shield our gross margins, we want to remind analysts and buyers that we even have incurred mounted prices, like depreciation in line gadgets of our price of income. So, this impacts distributable to OpEx price relying on the extent of restoration in our gross sales quantity. So briefly, within the brief and medium-term, we imagine our gross margin will regularly enhance, primarily because of the gross sales quantity restoration. In the long term, we are going to proceed to enhance our provide chain effectivity and product combine to additional strengthen our margin profile. Thanks very a lot.
Operator
Thanks. And our subsequent query right now comes from Charlie Chen at China Renaissance. Please go forward.
Charlie Chen
Thanks, operator. I’ve two questions as effectively. The primary one truly is a follow-up on the – associated to the value adjustment. So, you talked about that it is best to have an enhancing gross margin. So, I’ve two questions on this. One is, given you might have completed all these working efficiencies, how do you see your working margin going ahead? And likewise, what’s the rationale behind this value changes in addition to do you might have any additional plan for value changes sooner or later? So, that’s associated to the value changes. And my subsequent query is concerning the share repurchase – share buyback. So, how a lot you might have completed and what’s your share buyback plan within the subsequent few months or a yr or so? Thanks.
Chao Lu
So thanks, Charlie. So the primary one is concerning the value changes and the second is concerning the share repurchase. So, from the angle of absolutely the quantity of our merchandise gross revenue earlier than deducting the mounted prices similar to D&A and rental prices. So, absolutely the gross revenue quantity per cartridge will lower by mid-single digits following the value changes in April if the unit price stays the identical. Within the meantime, our ex-factory promoting value per cartridge will lower by an excellent greater diploma submit the value changes. And due to this fact, if mathematically calculate, our GPM will enhance barely. As our new ex-factory promoting costs might be efficient on April 17, 2023, we don’t anticipate to make value changes within the near-term. Thus far, the working margins, it is determined by our high line restoration. Presently, we can’t present a quantitative steering on margins for this yr, however we now have already taken steps to enhance our effectivity to restrict the impression of decreased gross sales. Taking 2022 for example, our efforts in working price financial savings may save us greater than RMB140 million on an annual foundation. And second one is about share rep. As we introduced our $500 million share rep in December 2021 for a time period of two years, we are going to disclose the precise quantity in our 20-F filings subsequent month. The share rep program is essentially on monitor with our inside plan. So, our Board and administration persistently monitor the capital market situations and we are going to make the corresponding repurchases from time-to-time. Thanks on your questions.
Operator
Thanks. And our subsequent query right now comes from Peihang Lyu with CICC. Please go forward.
Peihang Lyu
Hello pricey administration, that is Lyu Peihang at CICC and thanks on your time and presentation. I’ve two inquiries to ask. The primary one is, how is your latest cartridge gross sales quantity of the GB normal merchandise, excluding the interference of unlawful merchandise? And will you present us some outlook for the upcoming restoration then? And my second query is, we now have seen that your ex-factory value and retail value has been lowered lately. So, I’m questioning the rationale for this motion and the way do you mission the long run mission gross sales quantity and GPM change after the value discount? Thanks.
Chao Lu
Thanks on your query, Peihang. So, the primary one is principally on the gross sales because of the impression of unlawful merchandise. And the second is concerning the value changes was the impression on our GB. So, I believe it’s tough for us to estimate the impression because of unlawful gross sales as these merchandise are bought on the black market. And particularly, these merchandise are non-compliance and these entities don’t pay for any tax. And due to this fact, they don’t transact even on the nationwide transaction platform. And that’s why I believe it’s tough for us to estimate their quantity and in addition our impression – and in addition the impression on our gross sales. And searching on the gross sales outlook for the yr, if these unlawful merchandise may very well be mitigated available on the market, what we will share on this stage is that the shops, which solely promote GB merchandise, for instance, like our direct personal shops, we may see that in latest months, their gross sales per retailer has been regularly enhancing. Nevertheless, undoubtedly these shops are impacted by the close by shops that promote unlawful merchandise. So, we expect the restoration might be even sooner than our observance, these unlawful merchandise has been mitigated from the market. And the second query is concerning the value changes that might be impacted in April 2023. The principle cause behind the value adjustment is that we now have seen that our provide chain effectivity has been additional improved, which gives some room for us to make value changes. And due to this fact, we determined to regulate our ex-factory promoting value to higher assist our retailers to navigate the exhausting instances alongside us. After our ex-factory promoting half changes, the gross revenue per cartridge will enhance, producing greater earnings on the finish. In the meantime, distinction we now have 4 product strains with varied value factors. These value changes are designed to combine the gross revenue margins for every sequence extra cheap from the retailer’s perspective. This may higher incentivize retailers to advertise our varied sequence of our GB merchandise. Lastly, we want to make our merchandise extra accessible to price-sensitive customers. After the changes, we hope to see these customers who’ve delayed their conversions because of pricing to have separate incentives to make use of our GB merchandise. Thanks on your query.
Operator
Thanks. And because of the time constraints, now I want to flip the decision again over to the corporate for closing remarks.
Chao Lu
Thanks as soon as once more for becoming a member of us right now. When you’ve got additional questions, please be at liberty to contact RLX Know-how’s Investor Relations staff by way of the contact info supplied on our web site or TPG Investor Relations.
Operator
Thanks. This concludes this convention name. You could now disconnect your strains. Thanks very a lot.
