RLX Technology Inc. (RLX) Q1 2021 Earnings Call Transcript

RLX Technology Inc. (RLX -0.54%)
Q1 2021 Earnings Call
Jun 02, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for the RLX Technology Incorporated's first-quarter 2021 earnings conference call.  At this time, all participants are in a 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'll now turn the call over to your host, Sam Tsang, head of investor relations of the company. Please go ahead, Sam.

Sam Tsang -- Head of Investor Relations

Thank you very much. Hello, everyone, and welcome to RLX Technology first-quarter 2021 earnings conference call. The company's financials and operational results were released through PR Newswire press release 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 achievement and strategic processes going forward. Then, our chief financial officer, Mr. Chao Lu, will elaborate further on a specific initiative and take us through our financial results for the first quarter ended March 31, 2021.

Before we continue, please note that today's session contains 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, target, estimates, intent, belief, potential, continue, or similar expressions. Forward-looking statements involve inherent risks and uncertainties.

The accuracy of these statements may be impacted by a number of 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 obligations to update its forward-looking information except as required under the applicable law. Please note that RLX Technology's earnings press release and this conference include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.

RLX Technology's 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 -- Co-Founder, Chairperson, and Chief Executive Officer

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 for a more solid leadership in scientific research, technology, and product development, supply chain production, and distribution of the retail network. Our net revenue for the first quarter grew 48% quarter over quarter. In March, the authorities made an announcement seeking public comment regarding a proposal to require rules and regulations aimed at strengthening the supervision of e-cigarettes and solving the quality and safety risk and false advertising problem among other guests. Just yesterday the newly revised law on the protection of minors was enacted, partial process addresses the prevention of the 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 a key pillar of everything we do. It is relentless to view these values that make us the most trusted brand of choice and a leading force in our industry. The dynamic market and regulatory environment serve us to continue the inspiration for all to keep pioneering all products at vape and e-cigarette makers. For our users, we focus on that of creation through product development to meet their diverse needs and through distribution in the great new networking content to ensure their seamless investing costs purchase experience.

While accomplishing stakeholders and partners, we focus on value creation through investing in science and technology to enforce -- reinforce our sustainable one page and empower everyone in our value chain. For society, we focus on value creation through providing products of the 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 capabilities. In the first quarter, we appoint Mr.

Chao Lu as our chief financial officer. He brings over a pack of investment banking experience and a comprehensive understanding of the timeless healthcare industry. We are pleased to welcome him to our management team, and we believe he will be an invaluable addition to our company. With that, I will turn the call over to Chao, who has been with us for more than two 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.

Chao Lu -- Chief Financial Officer

Thank you, Kate, and hello, everyone. It has been an honor and a great pleasure to join the RLX 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], for more affordable pricing. We will keep expanding and enhancing our product offerings 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 e-vapor products among adult smokers. As of March 31, 2021, we partnered with over 15,000 RELX branded partner stores nationwide.

And we are excited to see an increase in 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 capability.

In terms of our efforts in scientific research, the Journal of Applied Technology published RELX lab site study on the cooling agent, WS-23. The peer-reviewed journal article form 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 our commitments to profit social responsibility, we remained dedicated to building and strengthening our trusted brand by consistently adhering to our strong ethical principles.

We have continued investing in the Golden Shield Program to combat sales of counterfeit products, having delisted almost 100,000 online links, and seized over 170,000 counterfeit products. In late April, we published our first ESG 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 among 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 coming 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 among adult smokers. We remained 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 of 2020. The growth was primarily due to an increase in net revenues from sales to offline distributor, 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 of 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 450 -- 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 operation 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 for ADS were both 0.7 -- 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 US$1.65 billion, equivalent to RMB 10.8 billion was denominated in U.S. dollars. Now, turning to guidance. For the second quarter of 2021, the company expects -- 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.

Questions & Answers:

Operator

Thank you. [Operator instructions] For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Our first question comes from Lydia Ling from Citi. Please go ahead.

Lydia Ling -- Citi -- Analyst

Hi, management Hi, Kate. Hi Chao. And hi, Sam. And thanks for the presentation and this is here from Citi.

So, first, congratulations on the strong result achieved in the first quarter. I actually have two questions. Would like to share your -- hear your views. And the first question is to -- on the regulation side.

So, at the -- after the opinion in March and also like the public feedback and it -- in the -- at late April. So, could you share with us any regulatory updates in this industry -- for this industry and like what's your view on the current programs and the like, your expectation on the timeline for the detailed regulations. And my next -- second question is on some like your -- what's your views on the latest competitive landscape for the China e-cigarette market. And so, any changes have you observed after the March opinion announcement and the like.

How does your competitive market share evolve? And we also observed the opening has been very aggressive in the first quarter, so how about your peers? And also, did you observe any pushback in the opening in the second quarter after the announcement. Thank you.

Sam Tsang -- Head of Investor Relations

Sure. Thank you very much, Lydia. It's nice to see you again. So, I mean, on the first one is about the regulatory update.

So, in response to the announcement made MIIC 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 announcements on March 22, which includes to regulate operating efficiencies 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 about this kind of situation have been always our focus in our daily operations.

Regarding the timeline or updates, there have been no updates regarding the announcement according to the best sites 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, starting on to 2021, so far this year, as mentioned by both Kate and Chao, our business has remained 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 additional portions in China through our advanced technologies and product development, nationwide distribution, and retail network, as well as our enhanced supply chain and production services. So, I mean, regarding the market share or the landscape itself, according to our knowledge, most of our peers have weakness on operational 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 sales creation and for more investments into scientific research, product development, etc., supply chain distribution for -- and most importantly, underage protection to widen our lead over other market players in the e-vapor market in China.

Next question.

Kate Wang -- Co-Founder, Chairperson, and Chief Executive Officer

Thank you, Sam.

Operator

The next question comes from Charlie Chen from China Renaissance. Please go ahead.

Charlie Chen -- China Renaissance -- Analyst

Thank you, management. Thanks for taking my questions. I have two 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 anything.

Any color would be appreciated. Second question will be do you have visibilities toward your production capacity and whether your largest supplier has sufficient capacity reserves for your growth for the rest of the year. Thank you.

Chao Lu -- Chief Financial Officer

Thanks, Charlie for your 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 a 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. You know, we will aim at delivering 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 timeframe work based on a multiple of factors, including user demand, distributors and retail sales, commercial goals, inventory levels to ensure that we could achieve our optimal inventory level while fulfilling user demand for our e-vapor products. Our e-vapor products contain multiple components including easy, quick 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 the manufacturers have fulfilled our needs effectively. We remain vigilant on all our suppliers and manufacturers' capability -- capacity and their actual production volumes.

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 [Inaudible] mechanism and fulfill our future expansion plans.

Charlie Chen -- China Renaissance -- Analyst

Thank you very much.

Operator

Our next question comes from Chen Haofei from CICC. Please go ahead.

Haofei Chen -- CICC -- Analyst

OK. Thanks, management. I'm Chen Haofei from CICC. I have two questions.

The first question is what's your latest number of members, and will the membership system helps the company's operation? And the second question is does the industry's upstream raw material price increase affects the company's cost especially some electronic components such as chips had -- the price had go up. What's the effects on the company's cost?

Sam Tsang -- Head of Investor Relations

Sure, Chun How. Nice to talk to you again. So there are two questions. One is on the membership system and the other one is on the macro cost increase.

So on the membership side, which means development our own membership system since 2019 to better serve our users with our [Inaudible] system and enhance experience. So I mean, for us, the membership system can also improve our understanding of our user needs and how we can deliver the best possible product. So currently, we have over 10 mil of members in our membership system on a registered basis, where we can keep updated them on our scientific information, some introduction of our product, store locations, and also offers our services. So we will continue to improve and enhance the membership system in a bid to better serve, and we want our members, as we tried a safe approach in using [Inaudible] products as harm reduction alternatives.

So on the second is on the raw material pricing on a macro level. So we feel 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 could be faced by [Inaudible]. So if the cost of our products do increase, so we do seek for very active solutions to mitigate any potential impact on our financial or operating results.

Operator

The next question comes from Stephanie Lam, Haitong International. Please go ahead.

Stephanie Lam -- Haitong International -- Analyst

Hi, management. Thank you for taking my questions and congratulations on the strong result. I have two questions. First one is regarding the store opening target.

We noticed that some of your peers have been accelerating the store opening in China. So just want 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 site.

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 [Inaudible] products. Thank you.

Sam Tsang -- Head of Investor Relations

Sure. Thanks very much, Stephanie. So for store opening plan, so I can explain the logic of this. So for -- our logic of our branded kind of stuff, operating model remains intact, and it is likely dependent on whether there are enough potential users for our products in a given area or district.

So for each district or area where we have our branded kind of stuff, we would monitor and evaluate the site productivity in combination with other macro or micro factors to decide whether more stores are needed to be there open instead of looking what's our [Inaudible]. Early implementation of our branded kind of stuff operating model has achieved great success in the past. We have finally offered RMB 15,000 branded kind of stuff nationwide as of March 31 this year. So we have been consistently monitoring the theme of store openings based on a comprehensive set of metrics including participation of existing store.

So for us, we will continue to expand on [Inaudible] based on the above criteria with careful measurements of potential use of topic. We have lots of -- we are paying a very close attention to avoid cannibalization among stores by enforcing distance requirements for most of the region. So it 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 [Foreign language].

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 our smokers. For example, looking for these, [Inaudible] for high-end products and manage the cost for lower-end product to make various types of our smokers to affordable.

Regarding the sixth-generation products, we have been conducting the path testing of the [Inaudible] 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 properly evaluate the performance of such products and better decide the scale and availability of such products. So thanks very much for your question.

Stephanie Lam -- Haitong International -- Analyst

Thank you.

Operator

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.

Sam Tsang -- Head of Investor Relations

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

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Sam Tsang -- Head of Investor Relations

Kate Wang -- Co-Founder, Chairperson, and Chief Executive Officer

Chao Lu -- Chief Financial Officer

Lydia Ling -- Citi -- Analyst

Charlie Chen -- China Renaissance -- Analyst

Haofei Chen -- CICC -- Analyst

Stephanie Lam -- Haitong International -- Analyst

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