RLX Era Inc. (RLX 1.63%)
Q2 2022 Profits Name
Sep 21, 2022, 8:00 a.m. ET
Contents:
- Ready Remarks
- Questions and Solutions
- Name Members
Ready Remarks:
Operator
Hi, women and gents. Thanks for status through for RLX Era Inc. 2d quarter 2022 income convention name. [Operator instructions] I will be able to now flip the decision over in your host, Mr.
Sam Tsang, head of investor family members for the corporate. Please move forward, Sam.
Sam Tsang — Head of Investor Family members
Thanks very a lot. Hi, everybody, and welcome to RLX Era’s 2d quarter 2022 income convention name. The corporate’s monetary and operational effects had been launched for PR Newswire products and services previous these days and feature been made to be had on-line. You’ll additionally view the income press liberate through visiting the IR segment of our website online at ir.relxtech.com.
Members on these days’s name will come with our CEO, Ms. Kate Wang; our CFO, Chao Lu; and myself, Sam Tsang. Prior to we proceed, please word that these days’s dialogue will include forward-looking statements made underneath the Protected Harbor provisions of the U.S. Non-public Securities Litigation Reform Act of 1995.
This commentary usually include phrases, comparable to might, will, be expecting, goal, estimate, intend, consider, doable, proceed, or different equivalent expressions. Ahead-looking statements contain inherent dangers and uncertainties. The accuracy of those statements could also be impacted through quite a lot of industry charges, and uncertainties that might reason precise effects to vary materially from the ones projected or expected. Lots of which elements are past our regulate.
The corporate’s associates, advisors, and representatives don’t adopt an utility to replace this forward-looking knowledge, excluding as required through acceptable legislation. Please word that RLX Era’s income press liberate and this convention name come with discussions of unaudited GAAP monetary metrics, in addition to unaudited non-GAAP monetary measures. RLX press liberate comprises a reconciliation of the unaudited non-GAAP measures to the analytic measures. I will be able to now flip over the decision over to Kate.
Please move forward.
Kate Wang — Leader Government Officer
Thanks, Sam. And thank you, everybody, for making time to sign up for our income convention name these days. I am happy with the wholesome monetary efficiency we delivered in the second one quarter as we proactively persevered to evolve to the brand new regulatory framework. We stay concerned about improving the overall vary of our functions from medical analysis, product construction, to production development, and operation optimization, all of which empowers us to navigate the extremely dynamic marketplace and the evolving regulatory panorama.
Amidst robust macro headwinds and the vulnerable client sentiment, our forged 2d quarter effects underscore the resilience of our defensive industry fashions and our dedication to construction and strengthening our logo’s trustworthiness. Prior to taking a better take a look at industry updates, I would love initially a temporary recap of the milestone regulatory traits in our {industry}. Starting within the first quarter of 2022, the related executive government in China have issued a chain of imposing regulations and guiding critiques to support oversight of e-cigarette merchandise and keep watch over the e-cigarette {industry}, together with the executive measures for e-cigarettes that is coming to impact in Would possibly and the brand new nationwide requirements that can turn into efficient on October 1, 2022. Now let me percentage our growth at the related license packages as required through the management measures.
To this point, two of our subsidiaries have got the license for production undertaking from the State Tobacco Monopoly Management, STMA, to behavior production actions underneath the regulatory steerage. In particular, one is authorized to fabricate e-liquids and the opposite is authorized to possess the RELX logo and manufacture RELX logo e-vapor rechargeable gadgets, cartridge merchandise, and different related merchandise. Acquiring this license marked a very powerful milestone in our strategic street map that can actively include the brand new paradigm that comes from regulatory compliance. We consider our forged basics, industry-leading analysis and construction functions, and seasoned groups illustrates furthering our project to succeed in complete regulatory compliance to our operation consistent with requirements.
To construct in this growth, we now have redoubled our efforts to increase new merchandise that meet the acceptable necessities whilst pleasing customers’ calls for. A few of our new merchandise had been a number of the first flagship merchandise within the {industry} to procure approvals underneath the brand new nationwide requirements, an impressive validation of our industry-leading R&D functions. We sit up for bringing the authorized merchandise to marketplace that think in our self belief that our merchandise’ high quality, efficiency, and protection will proceed to resonant smartly with our customers. Lately, we now have a number of further newly advanced merchandise within the technique of technical evaluations and plenty of extra within the utility pipeline.
Someday, we will be able to stay dedicated to pleasing our customers’ call for for secure, fine quality merchandise, new strict compliance with laws, whilst exploring new expansion alternatives within the {industry}. Specifically, we strongly consider that R&D is a key to our good fortune within the sustainable long term expansion. It’s R&D’s [Inaudible] to briefly rollout compliant new merchandise and take care of our logo’s competitiveness. Listed here are a collection of metrics monitoring our R&D spending.
Our non-GAAP R&D expense ratio has greater from 1.5% in 2018 to three.6% within the first part of 2022 and is anticipated to additional build up within the coming years. Past product R&D, we also are devoted to basic medical analysis to give protection to our customers’ well being running relentlessly to higher perceive and reduce the well being dangers related to the goods. To that finish, along with swarming our personal medical labs, we now have partnered with more than a few main analysis establishments together with 10 universities, two hospitals, and several other impartial instructional analysis properties to behavior similar analysis and construction, construction a company basis for ongoing product construction and innovation. Moreover, in the second one quarter, we collaborated with Shenzhen Institutes of Complicated Era 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 natural nicotine merchandise, a step forward, we consider, that find the money for us to ship higher, more secure [Inaudible] for grownup people who smoke.
Turning now to our operations, along our efforts to conform to acceptable laws, we proceed to streamline our industry construction and operational workflow all through the second one quarter to improve our talent and versatility. Our manner has yield excellent preliminary effects with non-GAAP expense we display lowering quarter over quarter. Chao will elaborate in this additional a bit of later. We consider the excellent operational improvements will allow us to take on crucial adjustments and impulsively adapt to the marketplace evolution, boosting each our speedy and long-term efficiencies.
In conclusion, we stay assured within the inherent doable of China’s e-vapor marketplace. We consider that as a contemporary logo to grownup people who smoke, our main applied sciences and medical developments, fine quality consumer base, resilient industry fashion, and agile general execution, our basic essence that can empower us to sustainable, high quality expansion ultimately and additional support our management place within the {industry}. Extra importantly, we will be able to proceed to hunt regulatory approval to fulfill all acceptable necessities on agenda whilst creating certified merchandise to ship [Inaudible] efficiency, additional improving operational potency and taking pictures the {industry}’s expansion alternatives forward folks. With that, I will be able to now flip the decision over to our CFO, Chao Lu, who will elaborate additional on a few of our ultimate quarter projects and move over our operational and fiscal leads to extra element.
Chao, please move forward.
Chao Lu — Leader Monetary Officer
Thanks, Kate, and hi, everybody. I will be able to now supply a abstract evaluation of our monetary effects for the second one quarter of 2022. Within the context of a difficult macro setting and COVID resurgence, client sentiment went to a document low in the second one quarter. Consistent with the Nationwide Bureau of Statistics of China, the entire client self belief index fell from 121.5 in January 2022 to 88.9 in June 2022.
Additionally, general retail gross sales in China reduced through 0.7% 12 months over 12 months within the first part of 2022. Proactively adapting our industry to the marketplace and diligently bettering our operational efficiencies, we delivered forged and wholesome effects for the second one quarter recording internet income of RMB 2.2 billion. Then again, we consider that increased degree of income in the second one quarter was once basically because of frontloading of gross sales within the downstream price chain in anticipation of the discontinuation of our older merchandise because the {industry} transition duration neared its finish within the 3rd quarter. Income reduced 12 months over 12 months, then again.
It was once principally because of the suspension of retailer expansions and new product launches all through the regulatory transition duration as paintings to strictly conform to the related necessities. Our gross benefit was once roughly RMB 1 billion in the second one quarter with gross margin expansion 43.8% for the second one quarter, when put next with 45.1% in the similar quarter of 2021. The lower was once basically because of an destructive product combine shift, an build up in stock provision and an impairment loss identified for PP&E to conform to fresh regulatory traits. Because of a vital build up in share-based repayment bills to RMB 193.2 million from a favorable RMB 172.5 million in the similar quarter of ultimate 12 months, our working bills reached RMB 530.9 million in the second one quarter of 2022, when put next with RMB 167.2 million in the similar duration of ultimate 12 months.
In particular, our promoting bills reduced through 2.7% to RMB 122.6 million in the second one quarter of 2022 from RMB 126 million in the similar duration of 2021, principally pushed through a lower in salaries, welfare advantages and branding subject material bills, whilst in part offset through an build up in share-based repayment bills. Basic and administrative bills greater to RMB 290.7 million in the second one quarter of 2022 from RMB 46.1 million in the similar quarter of 2021 principally pushed through the will increase in share-based repayment, salaries, and welfare advantages. As we stay concerned about strengthening our R&D capacity, our analysis and construction bills had been RMB 117.6 million in the second one quarter of 2022, when put next with a favorable RMB 4.9 million in the similar duration of 2021. The rise was once principally pushed through will increase share-based repayment bills, salaries, and welfare advantages, and consulting bills.
To echo what Kate discussed about our industry construction improvements, our proactive value optimization projects additionally persevered to undergo end result this quarter. If we exclude share-based repayment, our non-GAAP expense ratio reduced to fifteen.1% in the second one quarter from 20.9% within the prior quarter. Particularly, non-GAAP promoting expense ratio reduced to 4.7% in the second one quarter from 6.9% within the previous quarter. If we exclude the affect of one-off pieces, comparable to impairment loss, our adjusted expense ratio was once very similar to that of — very similar to the extent than similar duration of ultimate 12 months.
We consider the adjusted metrics might higher mirror our efforts and achievements with appreciate to operational enhancements all through the quarter. Because of this, our non-GAAP internet source of revenue greater to RMB 634.7 million from RMB 351.8 within the prior quarter. Non-GAAP elementary and diluted internet source of revenue in step with ADS had been RMB 0.494 and RMB 0.492 respectively in the second one quarter of 2022. Transferring directly to our stability sheet, we now have a forged stability sheet, particularly our money place stays robust with money and money equivalents, limited money, temporary financial institution deposits, temporary investments, and long-term financial institution deposits internet of RMB 16.8 billion as of the top of June 2022, when put next with RMB14.9 billion a 12 months in the past.
As well as, we generated a favorable money — working money glide of RMB 1.4 billion with an build up within the working money glide over non-GAAP internet source of revenue ratio to 228% in the second one quarter of 2022 from 100% in the similar duration of ultimate 12 months. Our robust money place and enough working money glide, money influx allow us to agilely modify our industry whilst going through demanding situations and enhance our efforts to seize doable expansion alternatives within the {industry}. In mild of the regulatory adjustments, we’re off to a gradual however secure get started of the gross sales of our new merchandise which might be compliant with the nationwide requirements thru the brand new transaction device amended through the regulatory. In ultimate, we consider that e-vapor merchandise will proceed enjoying an essential component in hurt aid for grownup people who smoke within the new {industry}, new regulatory technology.
With our product’s awesome high quality and protection, our logo will proceed to resonate smartly with grownup people who smoke. Transferring ahead, we will be able to focal point on value optimization, whilst proceeding to give a boost to our product competitiveness to create sustainable long-term expansion for our shareholders. This concludes our ready remarks these days. We will be able to now open the decision to questions.
Operator, please move forward.
Questions & Solutions:
Operator
[Operator instructions] Our first query comes from Lydia Ling from Citi. Please move forward.
Lydia Ling — Citi — Analyst
Hello, everybody. Thank you, control. And that is Lydia from Citibank. And it is usually to your presentation.
And if OK, I’ve 3 questions. And the primary one is in truth probably the most new merchandise that you simply presented within the lesser areas. So, one, what is the consumer comments to this point? And likewise as transition duration and improve it later, and so what is your ideas on new flavors affect at the gross sales quantity within the following quarters? So, that is the primary query. And the second one query is, in truth, we noticed that the shops now can have over 3 manufacturers on the retailer degree.
So, we need to know your view at the aggressive panorama searching ahead. And the ultimate query is, in truth, now we’re in September. So, may you percentage with us order-to-date efficiency and likewise your outlook for the fourth quarter and 2023? Thanks.
Chao Lu — Leader Monetary Officer
Thanks very a lot, Lydia. So, the primary query is principally at the gross sales quantity 43% and the second is principally on how the aggressive panorama is going, and the overall one is at the outlook for the fourth quarter and so. So, in regards to the first one how will be the affect once we release merchandise that conform to the nationwide requirements. As we simply introduced those merchandise a couple of weeks in the past, so, to be truthful, I believe nearly all of our industry came about to have the danger to check out our merchandise.
And for the reason that we’re nonetheless within the transition duration, which is able to ultimate till the September 30, it is tricky for us to offer a quantitative steerage relating to long term quarters, for the reason that there are some merchandise are nonetheless being authorized nowadays. But if we glance again the teachings and knowledge realized from the [Inaudible] in the USA impact in 2020, we put few quarter for customers within the U.S. marketplace to evolve to the brand new flavors, and we coated the {industry} quantity. So, there were increasingly more merchandise been authorized previously few weeks which we consider to be introduced very quickly and to cater extra consumer wishes.
So, we will have extra clearer image of our consumer call for modified within the overdue 4Q after customers have tailored their taste inventories available. And relating to the second one query that the more than one manufacturers promoting in a single unmarried retailer going ahead, so without equal objective for the store is to maximise their retailer exposure and their very own profitability. As an alternative of promoting just one logo in one retailer, so shops must promote more than one manufacturers underneath the brand new regime. We do not be expecting any subject material affects at the aggressive panorama as shops have all the time have the danger to make a choice their definitive logo to collaborate.
So, we consider the logo percentage of the shop will have to be decided through product high quality, logo fairness, and consumer base. And in response to our observations, our logo percentage stays forged previously few months. However sooner or later, we will be able to proceed to spend money on strengthening our R&D functions and our non-GAAP R&D expense has been continuously expanding previously quarters. And we think it to additional build up within the coming quarters.
With our greater efforts in R&D, we will be able to proceed to supply a greater, more secure enjoy for grownup people who smoke. So, the ultimate query is at the fourth quarter’s outlook, as we ready in our opening remarks, our 2d quarter income benefited from the frontloading of gross sales within the downstream price chain in anticipation of the discontinuation of our older merchandise because the {industry} transition duration close to its finish within the 3rd quarter. The ensuing prior classes for comparability will affect our sequential 3rd quarter effects. And in the meantime, we step by step reduced our shipments of outdated merchandise right through the 3rd quarter to higher transit into the brand new regime, which is able to have an effect on our fourth quarter quantity.
So, for the reason that the transition duration will finish at the September 30, it is going to take extra time for us to additional undertaking the longer term outlook particularly for the fourth quarter. Thanks to your questions.
Lydia Ling — Citi — Analyst
Thanks.
Operator
Our subsequent query comes from Charlie Chen from China Renaissance. Please move forward.
Charlie Chen — China Renaissance — Analyst
Thanks control for taking my questions. I have were given two questions. The primary one is relating to your product pipeline, particularly the brand new merchandise which will have to be — abide with the brand new laws or new nationwide same old. So, what I need to ask is, what’s the standing of your new product utility? Specifically, what number of has been authorized? What number of now nonetheless pending? And likewise, what number of has been rejected, if there may be any? And what’s your product portfolio plan for the approaching 12 months, for the following three hundred and sixty five days or so? So, that is my first query.
And my 2d query is concerning the agenda of your product recycling or any reshuffling, I be mindful, ultimate time you mentioned, you deliberate to segment out your older merchandise in the second one quarter or 3rd quarter. So, I simply need to know when precisely have you ever phased out or stopped generating older merchandise, which isn’t abide through the nationwide — new nationwide requirements. And when is the time in case you have new merchandise began manufacturing or began to promote to the markets? So, that is my two questions. Thanks.
Chao Lu — Leader Monetary Officer
Thank you, Charlie. So, the primary one is principally at the product approvals, and the second is at the outdated product effects. So, I imply, for the brand new regime, each and every new product will have to get approval earlier than in release and the allocation outcome shall be an ongoing procedure. So, we will be able to proceed diversifying our product portfolio underneath the brand new regime and different high quality merchandise for grownup people who smoke.
As of these days, we now have retained product approvals for low teenagers of gadgets and occasional teenagers of cartridge merchandise. And a few of our packages are nonetheless underneath overview, and we think the choice of our authorized merchandise will continue to grow. And relating to the second is concerning the outdated product segment outs. We step by step slower our tempo in manufacturing right through the 3rd quarter with the vast majority of our manufacturing happening within the first part of 3rd quarter.
Our merchandise that conform to nationwide requirements, we started and take part the checking out of the transition platform this month. We now have been receiving extra approvals previously few weeks, and they’re most definitely are nonetheless within the early level of approving of those new merchandise. Our entrance gross sales of those new merchandise is probably not as it should be mentioned [Inaudible] call for as our customers nonetheless have get admission to to our outdated merchandise. And those new merchandise are simply being authorized, as an example.
So, we will supply extra updates after the transition duration. Thanks.
Charlie Chen — China Renaissance — Analyst
Thanks.
Operator
The following query comes from Peihang Lyu from CICC. Please move forward.
Peihang Lyu — Citi — Analyst
Hello there control. That is Peihang at CICC, and thanks for the chance to take my questions. I’ve 3 questions in truth. And the primary one is, may you please introduce a bit of concerning the present stock degree of your unique merchandise? And can there be to any extent further stock impairment? The second one query is, I would like to understand what are? your fresh changes after shops can’t be operated completely.
And my ultimate one is, because the nationwide e-cigarette on-line buying and selling platform have been introduced, I want to know what’s your newest growth in regards to the cooperation with tobacco management and different [Inaudible]? Thanks.
Chao Lu — Leader Monetary Officer
Thanks, Peihang. So, the primary one is at the stock lack and likewise stock impairment apply, and the second is at the exclusivity time that we’re lovely satisfied about retailer house owners, and the overall one is newest traits in regards to the transition platform. So, in regards to the stock lack for our new merchandise and requirement stock impairments, there was a steady however secure get started 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 quite low when put next with the shortage that we’ve got for clearly we had earlier than the transition duration. And in regards to the stock positions, the present stock positions for our product units don’t conform to new nationwide requirements and uncooked fabrics which might be not acceptable because the fourth quarter of 2021. We do not be expecting we will incur extra vital stock provisions relating to merchandise in compliance with nationwide requirements within the coming quarters. And the second one query is at the exclusivity time period that we’ve got for retailer house owners in the past.
After the STMA introduced the rule of thumb that the unique distribution agreements don’t seem to be allowed for branded shops in March 2022, we started terminating our agreements with retailer house owners and returning their deposits. So, as of the top of 2d quarter, maximum of this paintings has been finished. In our [Inaudible] non-exclusivity will allow us to [Inaudible] perform handiest at a logo. Someday manufacturers with considerable logo fairness and consumer mindshare, I will be able to calm down.
There nonetheless be store platform house owners and such procedure will lend a hand them to incorporate they have got [Inaudible]. In accordance with our personal observations, because the termination in their exclusivity, many further retailer house owners have began promoting RELX branded merchandise. And after all, in regards to the procedure that we’ve got for the developments at release, so in those months starting, a number of areas around the nation have begun to trace the nationwide transition platform. As a pacesetter in China’s e-vapor {industry}, we had been happy to be a number of the first two manufacturers decided on to take part.
The transition procedure has been easy, and we’re thankful for the goods supplied through the STMA. As an example, our inventory has been introduced trainings from researched industries, high quality supervision, check distributors, and the scientific checking out cooperation through the STMA at the nationwide requirements. Thank you for his or her lend a hand and help, our new merchandise had been a number of the first batch of goods within the {industry} to procure approval underneath the brand new regime. Thanks.
Peihang Lyu — Citi — Analyst
That is very transparent. Thanks very a lot.
Operator
Because of time constraints, now, I want to flip the decision again over to the corporate for ultimate remarks.
Sam Tsang — Head of Investor Family members
Thanks as soon as once more for becoming a member of us these days. If in case you have additional questions, please be happy to touch RLX Era investor family members workforce in the course of the touch knowledge supplied on our website online or TPG investor family members.
Operator
[Operator signoff]
Period: 0 mins
Name individuals:
Sam Tsang — Head of Investor Family members
Kate Wang — Leader Government Officer
Chao Lu — Leader Monetary Officer
Lydia Ling — Citi — Analyst
Charlie Chen — China Renaissance — Analyst
Peihang Lyu — Citi — Analyst