Hello, ladies and gentlemen. Thank you for standing by for RLX Technology, Inc.’s Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] I will now turn the call over to your host, Mr. Sam Tsang, Head of Investor Relations for the company. Please go ahead, Sam..

Thank you very much. Hello, everyone and welcome to RLX Technology’s fourth quarter and full year 2022 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, Chao Lu; and myself, Sam Tsang, Head of Investor Relations.

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 maybe 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 statements, 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 to Ms. Kate Wang.

Please go ahead..

Thank you, Sam and thanks everyone for making time to join our earnings conference call today. 2022 was a year filled with unprecedented challenges. A combination of COVID-related disruptions and a substantial new set of industry regulations and policy updates impact our operations in the e-vapor sector as a whole.

We carefully evaluated the market landscape in response to the volatile environment and quickly pivot to embrace the new policies and standards. Thanks to our effective strategy and strong execution. We maintained steady operations and achieved meaningful development during the year.

For today’s call, I would like first to review the past year’s regulatory developments and highlight our efforts to respond to new requirements before moving to our outlook for 2023 and the ESG-related activities. Let’s start with the landmark new regulations.

In March and April, the administrative measures for e-cigarettes and National Standards were introduced successively embarking upon a new regulatory year for the e-vapor industry. A set of detailed guidelines, rules and measures rolled out in the following months.

To ensure most of the adjustments, the authorities granted industry participants, a transition period ending September 30, 2022. During the transition period, we proactively adapt our business and prepare to comply with the new requirements when the regulation came into full effect on October 1, 2022.

We focus on designing compliant new products we call it Guo Biao in Chinese or GB products and applied for the relevant license and approvals. We readied ourselves to move all of our sales to the national transition platform as required.

Meanwhile, we strove to optimize our supply chain and streamline our organization, enhancing the company’s agility and flexibility to better respond to the evolving regulatory environment as well as COVID-related disruption.

In addition to our internal adjustments, we also provide timely support for our store owners and distributors to facilitate a seamless transition for our whole value chain. These actions proved effective and positioned us well to enter the new period.

Importantly, in June and July 2022, two of our subsidiaries obtained license for manufacturing enterprise from the State Tobacco Monopoly Administration.

Specifically, when received approval to manufacture e-liquid and the other received approval to own the RELX brand and manufacture RELX branded e-vapor rechargeable devices, cartridge products and other relevant products.

We also gradually discontinued our older products and began launching our approved new products in an orderly fashion national-wide while successfully moving our sales to the national transaction platform.

We now offer four distinct lines of compliant devices across various price points to meet the needs of diverse groups of adult smokers from price-sensitive customers to those who value premium finish and personalized appearance. We are also gradually rolling out new cartridges to evaluate our customer smoking experience.

We are delighted to see an increasing number of adult smokers using our new GB product. As we forged into the fourth quarter, we entered another challenge, the excise tax on e-cigarettes, which was introduced on October 25 and enacted on November 1.

As an e-vapor manufacturer, we have been subject to a 36% excise tax on our distributor sales since then, adversely impacting our margins. In response, we have further addressed our cost structure to enhance our efficiency and maintain our profitability at a healthy level. Our CFO will elaborate it later – a bit later.

Although these regulations and process challenge our company and the broader industry in the near term, we believe they also create order and healthy operating environment that will benefit all industry participants in the long-term.

Moving forward to 2023, we intend to reap the benefits of the clearer regulatory frameworks and China’s reopening by leveraging three of our core competencies. The first is product development.

Our industry-leading R&D capabilities and ongoing investments in scientific research enable us to swiftly develop and launch compliant products that meet evolving consumer needs and preference. Our non-GAAP R&D expense ratio has grown from less than 2% 3 years ago to 5.7% in 2022.

Recently, we offer the most diversified product portfolio in the market, catering to various demands of adult smokers. We believe our R&D advantages will enable us to maintain this leadership in the post regulatory era. Second, product quality and brand equity.

For most e-vapor users, the RELX brand is synonymous with quality in e-vapor products, especially for devices that heat e-liquid into an aerosol inhaled into lungs, quality matters to adult smokers and it is per month to IRX. We will continue to focus intensely on this cornerstone of our brand.

Finally, we will reply on our business resilience and strong execution. This is now the first time we have encountered changes and challenges in the industry. Back in 2019, a ban on online sales of e-vapor products forced us to change our strategy overnight.

We quickly moved offline pivot to our branded stores price model and on the favor of adult smokers with our unique combination of convenience, value and outstanding products. Thanks to our team’s creative – our robust business fundamentals and a mountain of hard work. We are also steadily moving past the obstacles posed by the new regulations.

Before I conclude, I would like to share some update on our ESG initiatives. Alongside our efforts to develop our business under the new regulatory framework, we remain devoted to fulfilling our social responsibilities in 2022.

For example, our Pods Reborn recycling program, which we started in September 2021, has achieved several meaningful milestones. As of the end of 2022, over 10,000 stores in 282 cities nationwide had done the program with over 2.8 million cartridges collected.

Those recycled parts are centralized processed into cement clinkers and intermediary products in cement production, which we then use to construct roads, bridges and toilet in rural revitalization project. This eco-friendly approach allows us to reduce precious resources to provide better homes through rural villages.

In December 2022, our Pods Reborn recycling program was named in innovative enterprise for rural revitalization at southern metropolis states 2022 ESG annual ceremony, a price award to China’s most forward-thinking ESG programs. Furthermore, we have integrated United Nations sustainable development goals into our social responsibility strategies.

In April 2022, we launched our net zero emission plan Aim for Zero to achieve carbon neutrality in our direct operations by 2033 and along value chain by 2050.

We plan to launch zero emission products and zero emission factories, establish a green supply chain partner, eliminate unnecessary single-use plastic packaging and reduce waste to achieve our goal.

We also encourage employees to adopt low carbon offices practice to promote realizing the company’s carbon neutrality commitments throughout its value chain. Dedication to corporate responsibility has been one of our core values since our inception. We will continue to seek new and innovative ways to deepen this commitment to our society.

In summary, 2022 was a tough year for RLX and the entire e-vapor industry. Nevertheless, we believe our efforts and progress throughout the year pave the way for better 2023. As China reopens and the industry adjust to the new normal, we will remain committed to offering premium products with superior performance to satisfy adult smokers’ needs.

We are confident that our core competitive advantages will empower us to seize opportunities and unleash our growth potential as we continue to lead the industry in this new era.

With that, I will now turn the call over to our CFO, Lu Chao, he will elaborate further some of our last quarter’s initiatives and go over our operational and financial results in more detail..

first, a decrease in share-based compensation expenses; and second, a decrease in branded material expenses. General and administrative expenses decreased by 14% to RMB577 million in 2022 from RMB673 million in the prior year, primarily due to a decrease in share-based compensation expenses.

R&D expenses increased by 76% to RMB317 million in 2022 from RMB180 million in the prior year, primarily due to an increase in salaries and welfare benefits, partially offset by a decrease in share-based compensation expenses. Excluding share-based compensation, our non-GAAP operating expenses were RMB1.1 billion in 2022, down 6.5% year-over-year.

We will continue to concentrate on cost control in 2023. Now turning to profitability. Thanks to our effective cost management and strong execution, we maintained a healthy level of profitability during 2022. Our non-GAAP net income was RMB250 million in the fourth quarter of 2022 compared with RMB537 million in the same period of 2021.

Non-GAAP basic and diluted net income per ADS were RMB0.188 and RMB0.186 respectively, in the fourth quarter of 2022. Compared with non-GAAP basic and diluted net income per ADS of RMB0.398 and RMB0.394 respectively, in the same period of 2021.

For the full year 2022, our non-GAAP net income was RMB1.6 billion, and non-GAAP margin improved slightly by 3.1 percentage points to 29.5% in 2022.

Non-GAAP basic and diluted net income per ADS were RMB1.218 and RMB1.210 respectively, in 2022 compared with non-GAAP basic and diluted net income per ADS of RMB0.604 and RMB1.591 respectively, in the prior year. Moving to our balance sheet.

As of December 31, 2022, we had cash and cash equivalents, restricted cash, short-term bank deposits, short-term investments, long-term bank deposits and long-term investment securities of RMB15.73 billion, compared with RMB14.86 billion as of December 31, 2021.

As we embark upon 2023, we will continue to optimize our operational efficiency and cost control measures, enhancing our agility and ability to compete amid the new regulatory environment. Our strong cash position will also empower us to make quality investments in R&D and product development.

We believe our company’s resilience and solid [Technical Difficulty].

Pardon me, interruption, everybody. This is the conference operator. It appears we have lost the speaker line, I would dial back after them, in the mean time I am going to place some hold music in. We ask that you please stay on the line. And once again we will rejoin the speakers in a moment apparently. Thank you. And pardon me everybody.

This is the conference operator. We have rejoined our speaker location. Please proceed with your presentation. Thank you..

Sure. Sorry, apologies for the line connection. As we embark upon 2023, we will continue to optimize our operational efficiency and cost control measures, enhancing our agility and ability to compete amid the new regulatory environment. Our strong cash position will also empower us to make quality investments in R&D and product development.

We believe our company’s resilience and solid fundamentals will enable us to overcome near-term hurdles and thrive in this new era. As always, we remain dedicated to creating long-term sustainable value for our stakeholders. This concludes our prepared remarks today.

Please refer to our earnings press release for further details of our fourth quarter and full year 2022 financial results. We will now open the call to questions. Operator, please go ahead..

[Operator Instructions] Today’s first question comes from Lydia Ling at Citi. Please go ahead..

Hi management. Thanks for the presentation. This is Lydia from Citi Research. And so I have two questions here. The first one is, could you share about your recent trend like in January and also February.

And what’s the user feedback on your new products and also these new prices? And given the reopening and also government efforts on the counter like the illegal products, so how do you expect your demand would recover to which level this year? So, this is my first question. And my second question is on the margins side.

So, as a result of the price increase adjustments along the value chain and also including tax – consumption tax impact, so how do you actually expect your margin trends this year and also in the long-term? Thank you..

Sure. Thanks very much, Lydia for the questions. So, the first one is about the – how demand will evolve and also the user feedback. And the second one is mainly on the consumption tax and how are the margin trends. So, regarding the first one, which is the demand outlook and also the user behavior.

So, we recently do see a sequential improvement month-over-month. And we believe there are a few reasons. So, the first one is about conversion. As users consume their pre-GB products, so they will naturally purchase GB products that’s produced by us as e-vapor products has been their major source of nicotine consumption.

And the second is the launch of more SKUs as we have gradually launched more SKUs with various tobacco flavors to the market. So, users could be more accessible to find their preferred charge of tobacco flavored cartridge.

And regarding our full year outlook and also the level of recovery, to be honest, I think right now it’s still very early and difficult to provide an accurate quantitative estimates for the reasons that we mentioned earlier in the remarks.

The availability of illegal products, to a certain extent have delayed the conversion process for our users switching from pre-GB products to GB products that comply with the national standards.

But recently, we do see there are improvements as the STMA has initiated and campaigned to combat non-GB illegal products on a larger scale and equally supportive of such campaigns.

So, we do see and we expect to see more users switching to tobacco flavored GB products that would comply with the recent requirements once the majority of non-compliance products has been removed from the market.

And regarding the user behavior, as we mentioned in the last earnings call, we see that the Net Promoter Score, i.e., the NPS has been improving when once users have more frequently used the products and also the launch of more SKUs with various tobacco flavors, having a range of product offerings could further enhance our products’ NPS.

And in terms of our pricing, we have also made the first price adjustment on our ex-factory selling price and also the suggested retail price following the impose of consumption tests in last November. So, most of our users have adapted to the change given that our products are their necessity.

But we also see that there are a small portion of users that the pricing may be a bit high for them, so considered our ongoing supply chain efficiency improvements and also these user needs. So, we will adjust our product pricing for certain SKUs starting in April.

And also, we have provided various product offerings with various price points, including the entry level products like Xin Yu [ph] to be more accessible for our products by bringing them to market in more provinces. For example, we offered Xin Yu in 23 provinces in January this year versus 16 provinces in last year’s November.

So, we do see a recovery in demand. And regarding your second question is about the consumption tax impacts and also the margin trend. Our GPM actually fell by 6.4% quarter-over-quarter last quarter, mainly due to the impose of consumption tax release probably passed on November 1st.

So, investors and analysts could see a more full picture regarding the effect of our consumption tax in the first quarter of 2023. And of course, we have already taken some steps to mitigate the impact. So first, we have adjusted our ex-factory selling price.

And second, we have continued to improve our supply chain efficiency and product designed to lower our variable unit costs. So, these two initiatives have helped us mitigate the impact due to the impose of consumption tax.

Although we have adjusted the price and lowered our unit costs to partially protect our gross margins, we would like to remind analysts and investors that we also have incurred fixed costs, like depreciation in line items of our cost of revenue. So, this impacts distributable to OpEx cost depending on the level of recovery in our sales volume.

So in short, in the short and medium-term, we believe our gross margin will gradually improve, mainly due to the sales volume recovery. In the long run, we will continue to improve our supply chain efficiency and product mix to further strengthen our margin profile. Thank you very much..

Thank you. And our next question today comes from Charlie Chen at China Renaissance. Please go ahead..

Thank you, operator. I have two questions as well. The first one actually is a follow-up on the – related to the price adjustment. So, you mentioned that you should have an improving gross margin. So, I have two questions on this.

One is, given you have done all those operating efficiencies, how do you see your operating margin going forward? And also, what’s the rationale behind this price adjustments as well as do you have any further plan for price adjustments in the future? So, that’s related to the price adjustments.

And my next question is regarding the share repurchase – share buyback. So, how much you have done and what’s your share buyback plan in the next few months or a year or so? Thank you..

So thanks, Charlie. So the first one is about the price adjustments and the second one is about the share repurchase. So, from the perspective of the absolute amount of our merchandise gross profit before deducting the fixed costs such as D&A and rental costs.

So, the absolute gross profit amount per cartridge will decrease by mid-single digits following the price adjustments in April if the unit cost stays the same. In the meantime, our ex-factory selling price per cartridge will decrease by an even higher degree post the price adjustments.

And therefore, if mathematically calculate, our GPM will improve slightly. As our new ex-factory selling prices will be effective on April 17, 2023, we do not expect to make price adjustments in the near-term. So far, the operating margins, it depends on our top line recovery.

Currently, we cannot provide a quantitative guidance on margins for this year, but we have already taken steps to improve our efficiency to limit the impact of reduced sales. Taking 2022 as an example, our efforts in operating cost savings could save us more than RMB140 million on an annual basis. And second one is about share rep.

As we announced our $500 million share rep in December 2021 for a term of 2 years, we will disclose the exact amount in our 20-F filings next month. The share rep program is largely on track with our internal plan.

So, our Board and management consistently monitor the capital market conditions and we will make the corresponding repurchases from time-to-time. Thank you for your questions..

Thank you. And our next question today comes from Peihang Lyu with CICC. Please go ahead..

Hi dear management, this is Lyu Peihang at CICC and thank you for your time and presentation. I have two questions to ask.

The first one is, how is your recent cartridge sales volume of the GB standard products, excluding the interference of illegal products? And could you show us some outlook for the upcoming recovery then? And my second question is, we have noticed that your ex-factory price and retail price has been lowered recently.

So, I am wondering the reason for this action and how do you project the future project sales volume and GPM change after the price reduction? Thank you..

Thank you for your question, Peihang. So, the first one is mainly on the sales due to the impact of illegal products. And the second one is about the price adjustments was the impact on our GB. So, I think it’s difficult for us to estimate the impact due to illegal sales as these products are sold on the black market.

And especially, these products are non-compliance and these entities do not pay for any tax. And therefore, they don’t transact even on the national transaction platform. And that’s why I think it’s difficult for us to estimate their volume and also our impact – and also the impact on our sales.

And looking at the sales outlook for the year, if these illegal products could be mitigated on the market, what we can share on this stage is that the stores, which only sell GB products, for example, like our direct own stores, we could see that in recent months, their sales per store has been gradually improving.

However, definitely these stores are impacted by the nearby stores that sell illegal products. So, we think the recovery will be even faster than our observance, these illegal products has been mitigated from the market. And the second question is about the price adjustments that will be impacted in April 2023.

The main reason behind the price adjustment is that we have seen that our supply chain efficiency has been further improved, which provides some room for us to make price adjustments. And therefore, we decided to adjust our ex-factory selling price to better help our retailers to navigate the hard times alongside us.

After our ex-factory selling part adjustments, the gross profit per cartridge will increase, generating higher profits at the end. Meanwhile, difference we have four product lines with various price points. These price adjustments are designed to mix the gross profit margins for each series more reasonable from the retailer’s point of view.

This will better incentivize retailers to promote our various series of our GB products. Lastly, we would like to make our products more accessible to price-sensitive users. After the adjustments, we hope to see these users who have delayed their conversions due to pricing to have separate incentives to use our GB products.

Thank you for your question..

Thank you. And due to the time constraints, now I would like to turn the call back over to the company for closing remarks..

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..

Thank you. This concludes this conference call. You may now disconnect your lines. Thank you very much..