RLX Technology Inc. (NYSE:RLX) Q1 2023 Earnings Call Transcript May 17, 2023
Operator: Hello, ladies and gentlemen. Thank you for standing by for the RLX Technology Incorporated First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s remarks, there will be a question-and-answer session. 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 Capital Markets for the company. Please go ahead, Sam.
Sam Tsang: Thank you very much. Hello, everyone, and welcome to RLX Technology’s first quarter 2023 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 CEO, Ms. Kate Wang; our CFO, Mr. Chao Lu and myself. 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, 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, its affiliates, advisors and representatives do not undertake any obligation to update these forward-looking information, except as required under the applicable law. Please note that RLX Technology’s 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 measures to the unaudited GAAP measures.
I will now turn the call over to Ms. Kate Wang. Please go ahead.
Kate Wang: Thank you, Sam, and thanks, everyone, for making time to join our conference – earnings conference call today. During the first quarter, we continued optimizing our compliant GB product offerings under, the new regulatory framework and made steady progress, thanks to our effective product strategy, and constant efforts to enhance our R&D capabilities. However, as we strive to develop new improved product to meet our users’ diverse demand, the prevalence of illegal products continues to pose near-term challenges, to our business in the broader industry. First, let me provide some color on recent market conditions affected by illegal products. Then I will also discuss, our first quarter endeavors in greater detail. The biggest obstacles, we faced in the first quarter of 2023, was competition from illegal products.
These include flavored products manufactured by companies that haven’t yet obtained licenses, some flavor product manufactured for exports that are illegally sold in the domestic market and counterfeit products. The existence of these illegal products not only break – our sales, but also disrupt the recovery pace of those whole industry, by slowing consumers’ conversation to – conversion to products that meet the national standards. But on the bright side, the government has increased its efforts to crack down on illegal products, recently conducting special operations to focus on two major offenders, manufacturing companies that continue to produce flavored products illegally, and retail participants that use the Internet as a distribution channel.
The results of these government endeavors are encouraging thus far. We have noticed more and more unlicensed manufacturing companies, deleting illegal products from their business scopes in business licenses. Also, a number of retailers from distributing illegal flavored products have been fined. Our sales have gradually recovered following, the execution of these special actions. Our CFO will elaborate on this a bit later. We believe the government’s crackdown on illegal products still ongoing, and we are hopefully that it will effectively support the creation of fair and orderly market conditions, prompting a return to sustainable growth by – for law-abiding companies such as RLX. However, we remain vigilant on any potential rebound of these illegal activities.
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Amid the first quarter’s external challenges, we remain focused on strengthening our core competitiveness and pursuing high-quality development. Let’s take a closer look at the details. Enhancing our product development and scientific research capabilities has always been a key element of our strategy. We partnered with Shenzhen Bay Laboratory in the first quarter to establish the new optimization technology, research and development platform. Together, we will explore and develop new peptide drugs based on the electronic atomization technology, leveraging our DP clearance and industry-leading and atomization technology to improve absorption efficiency for the – and enhance user experience. Furthermore, we continue to execute our prudent product strategy in reaching and optimizing our product portfolio to meet the needs of different user groups.
As of now, we have received approvals for 20 cartridge SKUs and 22 device SKUs. Encouragingly, we have received some positive feedback and constructive suggestions from users who have switched to our new products. We’ll continue collecting user feedback and developing products accordingly, seeking superior performance, and quality while helping adult smokers transition to GB products. We remain dedicated to shouldering, our social responsibility alongside our efforts to offer high-quality compliant products, for adult smokers. An outstanding example is our Pods Reborn program, one of our key sustainability initiatives to help reduce plastic waste. The program has grown by leaps and bounds since its inception in 2021. As of the first quarter of 2023, we have accumulatively collect over 3 million cartridges from over 80,000 users across 297 cities nationwide.
What more, users can now use our officially to have account to find recycling locations near them or book a pickup appointment online. The used pods are recycled into cement then used to construct roads, bridges and other robotization infrastructure projects. As of today, we have invested RMB20 million in the first phase of our low robotization project, providing better instructions for rural villagers – while conserving precious resources. To sum up the first quarter, was a mix bag. While we made solid progress in improving our GB product offerings, we also experienced significant headwinds from illegal products. However, we firmly believe that – as our users gradually adapt to GB products and the government’s effort to protect market order and fairness take effect, illegal products will eventually be push out to the mainstream market.
And the worst seems to have been behind us. As a trusted e-vapor brand for adult smokers, we remain confident in our core competitiveness. We will deepen our commitment to providing compliant premium products that meet our users’ needs as we explore growth opportunities in this evolving industry. With that, I will now turn the call over to our CFO, Chao Lu. He will elaborate further on some of our latest quarter’s initiatives and go over our operational and financial results in more detail.
Chao Lu: Thank you, Kate, and hello, everyone. I will now provide an overview of our operational and financial results for the first quarter of 2023. Given the severe impact of illegal flavored products, we experienced an incredibly challenging first quarter, especially in January and February. These enticing flavored, but unsafe and illegal products caused users to shift more slowly than expected to our GB products, driving a significant decrease in our net revenue to RMB189 million in the first quarter. However, our sales have recently shown clear signs of recovery, partly thanks to the government’s large-scale operations to combat illegal products. Specifically, our monthly sales experienced sequential improvement, especially after the government’s special actions in March.
In fact, monthly sales almost doubled in March compared with that in January. However, the negative impact of illegal products is still lingering, as it will take some time for the market to digest inventories, much like in the fourth quarter of last year when it took a couple of months for users to consume our older products. The near-term challenges from illegal products will gradually ease, and become more manageable, and users will gradually adapt to GB products. Now turning to gross margin, the first quarter of 2023 was our first full quarter under the new excise tax policy on e-vapor products, which came into effect in November 2022. As a result, our gross margin fell to 24.2% in the first quarter of 2023 from 38.3% in the same period of last year.
If we exclude the impact of excise tax, on an adjusted basis, using net revenues, which deducts excise tax we paid from the reported net revenues as denominator, our adjusted gross margin fell only by 1.6 percentage points. This result reflects our continued efforts to improve our supply chain efficiency and product design to mitigate the deleveraging effect of reduced sales. Additionally, fixed costs, including the rent we paid for exclusive manufacturing plants and depreciation we booked for PP&E, dragged on our gross margin by a low single-digit percentage in the first quarter. Our gross margin will gradually improve along with our top line recovery in the coming quarters as the deleveraging effect, I just mentioned will shrink. Alongside with these – cost optimization efforts, we continue to focus on improving operational efficiency.
As a result, excluding share-based compensation, our non-GAAP operating expenses were down by 50.1% year-over-year in the first quarter of 2023. However, due to our reduced sales, we recorded a non-GAAP operating loss of RMB133 million in the first quarter. Furthermore, we recorded a net loss of RMB56.3 million in the first quarter of 2023. Excluding share-based compensation, our non-GAAP net income was RMB184 million in the first quarter of 2023. Non-GAAP basic and diluted net income per ADS, were RMB0.139 and RMB0.136, respectively, in the first quarter of 2023. Our cash position remains solid. As of March 31, 2023, we had cash and cash equivalents, restricted cash, short-term bank deposits, short-term investments, long-term bank deposits, and net long-term investment securities totaling RMB15,369 million.
Since the second half of 2022, we have been working to maximize the interest and investment income on our solid RMB15.4 billion cash position. Our strategic effort now paying off, we generated RMB170 million interest and investment income in the first quarter of 2023, implying an annualized interest rate above 4%, a significant improvement from less than 2% a year ago. Before I conclude, I’d like to provide an update on our share repurchase program. Our Board of Directors approved a share repurchase plan on December 8, 2021, under which we may repurchase up to US$500 million of our shares until December 31, 2023. As of December 31, 2022, we have repurchased about US$100 million of our shares under this program. Looking ahead, we will continue investing in our core capabilities and improving overall efficiency.
We believe our sales and profitability will gradually pick up as the industry regains momentum. Our resilient business model and solid cash position will support us as we navigate the market dynamics, enabling us to deliver sustainable value to our shareholders and stakeholders in the long-term. We will now open the call to questions. Operator, please go ahead.
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Q&A Session
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Operator: Thank you. [Operator Instructions] Our first question comes from Lydia Ling from Citi. Please go ahead.
Operator: The next question comes from Peihang Lyu from CICC. Please go ahead.
Operator: The next question comes from Charlie Chen from China Renaissance. Please go ahead.
Operator: Due to time constraints, now I would like to turn the call back over to the company for closing remarks.
Sam Tsang: Thank you once again for joining us today. If you have further questions, please feel free to contact RLX Technology’s Investor Relations team through the contact information provided on our website or TPG Investor Relations.
Operator: This concludes – this conference. You may now disconnect your line. Thank you.
