RLX Technology Inc

NYSE:RLX

Earnings Call Analysis

Company Turns Profitable, Boosts Shareholder Value

The company significantly improved its financial position, evidenced by a robust turnaround from an operating loss of RMB 133 million in Q1 to a non-GAAP operating profit of RMB 76 million in Q4 due to stringent cost control efforts and positive contributions from overseas markets. Total salaries and welfare benefits decreased by 49%, while other expenses saw a 48% decrease year-over-year. The firm reported RMB 15 billion in total assets and an operational cash inflow of RMB 305 million in the fourth quarter. Shareholders were rewarded with approximately $112 million in buybacks and dividends, with the share repurchase program extended through December 31, 2025. Moving into 2024, the company aims to fuel domestic growth with product innovation and seeks to penetrate new markets internationally, leveraging its strong financial base to enhance stakeholder value.

A Transformative Year and Earnings Recovery

The year 2023 marked a significant turning point for RLX, with the company executing strong strategic moves that enabled an impressive earnings recovery despite facing external challenges.

Navigating Through Regulatory Hurdles

RLX adeptly handled new regulations requiring prior approvals for e-vapor products and a 36% excise tax on sales by ensuring strict adherence to the rules. Furthermore, the company expanded its approved product selection more than twofold, improving its position in China's legal e-vapor market and seeking to mitigate the impact of illegal products.

Expanding Horizons Beyond China

In response to a growing global demand for smokeless alternatives, RLX terminated a non-compete agreement with Relx Inc., opening opportunities for international expansion, particularly in markets where e-vapor is perceived as a healthier smoking alternative.

Financial Highlights and Strategic Shifts

Despite a significant year-over-year revenue decrease due to regulatory changes, RLX saw a rebounding trend, culminating in a 53.1% revenue increase for the fourth quarter of 2023. Efforts to diversify the product portfolio and meet consumer needs have been fruitful. However, gross margin declined to 24.4% due to excise taxes, but supply chain optimizations are underway.

Operating Costs and Profitability

RLX faced an operating loss of RMB 497 million in 2023, but has since seen improvements, recording a non-GAAP operating profit of RMB 76 million for the fourth quarter. The company has cash and cash equivalents, along with other assets totaling RMB 15 billion, securing a strong financial position .

Shareholder Returns and Repurchase Programs

The company is demonstrating its commitment to shareholders through significant share repurchases and dividends, having returned approximately $112 million and repurchasing about $195.5 million of its ordinary shares .

Future Growth Strategies

Looking ahead, RLX plans to continue innovating products, strategically examining potential markets, particularly in Asia where the company has already established a strong presence. The focus on operating efficiency is anticipated to yield additional earnings and help achieve margin targets .

Positioning for 2024 and Margins Outlook

The company maintains a revenue guidance for 2024 in the range of RMB 18 billion to RMB 20 billion, acknowledging seasonal revenue fluctuations expected in the first quarter. Nevertheless, it aims to sustain stable quarterly adjusted EBITDA margins between 20% to 30%, driven by disciplined investment and expenditure .

Earnings Call Transcript 2023-Q4

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for RLX Technology, Inc.'s Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] 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, executive]

Thank you very much. Hello, everyone, and welcome to RLX Technologies Incorporation's Fourth Quarter and Full Year 2023 Earnings Conference Call. The company's financial and operational results will be released through PR Newswire 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 CFO, Mr. Chao Lu and myself. Before we continue, please note that today's discussion could contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reforms Act of 1995. These statements typically contain risks 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 these factors are beyond our control. The company, it's affiliates, advisers and representatives do not undertake any obligation to update this forward-looking information except as required under the applicable law.

Please note 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 the reconciliation of the unaudited non-GAAP methods to the unaudited GAAP measures. I will now turn the call over to our CFO, Mr. Chao Lu. Please go ahead.

[Chao Lu, executive]

Thank you, Sam, and thanks, everyone, for making time to join our earnings conference call today. 2023 was a transformative year for RLX. Despite external challenges, our outstanding product portfolio and strong strategic execution propelled an impressive recovery throughout the year.

Turning the page for new ventures. I will begin with an update on our domestic operations before evolving into our international endeavor, followed by a review of our financial performance. For our domestic business, 2023 was the first full year under the e-vapor industry's new regulatory framework in Mainland China. The regulations necessitate prior approvals for e-vapor products, with strict flavor to tobacco only and imposed a 36% excise tax on sales to distributors. As a compliant player, we have strictly have adhered to the new rules since day 1, continuously innovating to offer premium compliant products amid competition from unauthorized flavored products.

Leveraging our strong R&D capabilities and these industry insights, we more than doubled our selection of approved packages this year from [ 15 ] in January to 32 by December. Additionally, we broadened our [indiscernible] clearly to 4 compared with 3, 1 year ago. Enhancing our offerings to meet the diverse needs of adult smokers with more value-driven options. With a growing product portfolio, we believe we are well positioned to see opportunities in China's legal e-vapor market, especially once enforcement against illicit products becomes more effective. While we have made meaningful progress in 2023, the adverse impact of illegal product it is still lingering.

Given the broad availability of popular flavors through unauthorized products, their sales still account for a significant portion of domestic sales volume, weighing heavily on compliant product sales. Unauthorized products are also often cheaper than compliant products as their manufacturers particularly do not pay excise tax and duties.

More importantly, they are manufactured without oversight and marketed irresponsibly, resulting in quality control issues that could potentially harm users. This damages the reputation of the entire e-vapor industry. E-vapor products are meant to reduce harm, not cause or increase it. As our industry offers one of the few smoking harm reduction options available, effective regulation enforcement is critical in ensuring users safety and essential to the e-vapor industry's development. We will continue actively working with regulatory authorities, advocating for responsible and well-regulated e-vapor industry.

[indiscernible] we will remain focused on what we can control, that is meeting users' harm reduction needs with a diverse and growing portfolio of high-quality compliant products.

That leads me to our off-fleet business. We believe that adult smokers seeking smokeless alternative face a global trend. As such, we terminated our non-compete agreement with Relx Inc. in November 2023, enabling our company to explore prospects outside China, where the demand for e-vapor as a convenient and healthier smoking alternatives is growing. With mounting evidence from reputable sources like the United -- like the U.K. National Health Service, highlighting vapor as a lower health risk compared to traditional smoking, more countries are recognizing e-vapor role in tobacco harm reduction.

According to NHS, burning cigarettes release thousands of different chemicals, of which many are poisonous and carcinogenic. Most harmful chemicals, including tar and carbon monoxide are not contained in vape aerosol, which can completely from smoking to vaping significantly reduced its exposure to toxins associated with risking of cancer, lung disease, heart disease and stroke. RLX track record of regulatory compliance and product excellence is ideally positioned to leverage the global shift. That's another reason we believe it's the right time for us to expand outside China.

Strategically, our first step is to increase our product accessibility in international markets. We are working with partners around the globe to bring our harm reduction products to more users worldwide responsibly. Increased access to our quality products will build brand recognition among global adult smokers, driving progress in our expansion efforts.

Second, leveraging our extensive industry resources and expertise. We will target key markets and product categories with high growth potential. This, in turn, will boost profitability as margins will expand with scale. Our recent expansion into Southeast and North Asia has shown promising progress, validating our approach of combining our industry expertise with local insights to refine our market strategies. As we do for our domestic business, we will respond quickly to changing consumer preferences, tailor our product portfolio to local needs and help local teams improve operating efficiencies.

Going forward, we will continue to expand our business across new markets based on careful evaluation, while developing innovative premium products to meet global users evolving needs. Before I move on to our financial performance, I'm pleased to share that our ESG efforts continued to win recognition from leading global ESG rating agencies.

We received AA rating from MSCI for the second consecutive year for our outstanding performance in responsible marketing, commercial assets and product security. In addition, our company's score in the 2023 S&P Global Corporate Sustainability Assessment improved by 13%. Our commitment to integrating ESG best practices remains unwavering, reflecting our dedication to social responsibility and value creation for all stakeholders.

Now an overview of our operational and financial results for the fourth quarter and full year of 2023. Please note that unless otherwise stated, all the financials will present today are in RMB term. In 2023, we strategically adjusted our business model to align with China's new regulatory requirements, focusing on efficiency and profitability. These adjustments have resulted in steady financial improvements throughout the year.

First on top line. On a full year basis, our net revenues were RMB 15.9 billion, a significant year-over-year decrease as 2023 was the first full year of the new regulatory era. Our domestic businesses recovery pace were uneven. Released a products researched quickly after the regulatory -- after the regulators special action ended in April 2023, impacting ourselves.

We quickly adjusted our strategy on operations in response to the change in market dynamics and further diversified our product portfolio to meet more adult smokers needs. For example, we launched [ lately ], a line of cost-effective products to target price sensitive users. I'm pleased to report that these efforts paid out. The year-over-year decline in our quarterly net revenues narrowed from 89% for the first quarter to 83% in the second quarter to just 52% for the third quarter.

For the fourth quarter of 2023, our net revenues were up 53.1% year-over-year to RMB 520 million, marking our first quarter of positive year-over-year growth at 7 consecutive quarters of decline. The increase was mainly driven by our international expansion, which began with Southeast and North Asia. Such encouraging results in a short time framework validate our decision to diversify our revenues geographically.

As I mentioned earlier, we believe adult smokers seeking smokeless alternative as a long-term global trends. With our deep industry know-how and outstanding leadership team, we are confident that RLX will quickly win the trust and loyalty of adult smokers worldwide.

Next, our gross profit margin. Our full year gross margin fell [ 18.8 percent ] points to 24.4% primarily due to 46% excise tax implemented in Mainland China in November 2022. However, thanks to our efforts to optimize supply chain efficiency, improve product design and increase utilization of our exclusive manufacturing plant, gross profit margins for our core domestic business improved quarter-over-quarter throughout the year. Our fourth quarter gross margin remain stable quarter-over-quarter at 23.7% as unfavorable change in the revenue mix offset the margin improvement we achieved for our domestic business.

In 2023, we recorded an operating loss of RMB 497 million. Excluding the impact of stock-based compensation, our non-GAAP operating loss was RMB 134 million. Since the introduction of the new regulatory framework, we have been actively adjusting and streamlining our business for greater agility. These efforts are bearing fruit with stringent cost control driving a 49% decrease in the full year total salaries and welfare benefits and a 48% decrease in nonsalaried and welfare benefits year-over-year.

For the fourth quarter, we recorded our first positive non-GAAP operating profit of RMB 76 million after 3 consecutive quarters of operating loss, thanks to our cost reduction initiatives and positive profit contribution from outside China. This significant turnaround from an operating loss of RMB 133 million in the first quarter, to an operating profit of RMB 76 million in this quarter reflects our robust rebound and growth trajectory. Moving forward, we will remain focused on optimizing operating efficiency and profitability as we pursue high-quality growth domestically and abroad.

Our balance sheet remains solid. As of December 31, 2023, the company has cash and cash equivalents, restricted cash, short-term bank deposits net, short-term investments, long-term bank deposits net and long-term investment securities net of RMB 15 billion. Also, we recorded an operating cash inflow of RMB 305 million in the fourth quarter of 2023, primarily due to improved working capital and inventory management.

Supported by our financial strength and solid balance sheet, we extended our commitment to enhancing shareholder returns. In 2023, we return value to our shareholders through a total of approximately $112 million in share repurchases and cash dividends, comprising $98.5 million from our share repurchase program and $13 million from cash dividend payout.

As of December 31, 2023, the company has repurchased about $195.5 million of its ordinary shares represented by ADSs. Our Board of Directors has authorized the extension of this system share repurchase program established in December 2021 for an additional 24-month period through December 31, 2025. The expanded program demonstrates our confidence in the company's long-term prospects.

In conclusion, we are proud of our clinical progress during the past year's challenges. Thanks to our excellent execution and effective strategy as well as our team's dedication and our partner's deep trust and support, our business remains resilient and strong. Our commitment to meeting adult smokers needs with premium harm reduction products and advocating for a responsible and well-regulated e-vapor industry were never waver.

Heading into 2024, we will continue to propel the recovery in our domestic business through product innovation, while tapping into new markets abroad to unleash growth potential. We believe our strong financial foundation and solid balance sheet will empower us to see development opportunities that create value for all of our stakeholders.

This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

[Operator]

[Operator Instructions] The first question comes from Peihang Lyu with CICC.

[Peihang Lyu, analyst]

This is Peihang from CICC. I have two questions here. The first one is regarding your oversea disposable products, WAKA, which have sold very well. And how do you view the growth trend of these possible products oversea given the intensifying competition and changing regulations in some countries?

And my second question is that in the domestic market, has there been an enhancement in the enforcement and has the approval process for new products accelerated compared to the past. Those are my questions?

[Sam Tsang, executive]

Thank you very much, Peihang. During the last 10 years, the category of e-vapor has evolved from time to time. From open system to close systems, from Pod system to disposables. One thing that hasn't changed is the overall penetration of e-vapor has been growing among other smokers.

The evolving regulatory landscape and intensified competition presents challenges and opportunities in specific markets such as proposed ban on disposable vaping products in countries like U.K. and France. Both market staff may have banned disposable products. This won't affect the overall demand of e-vapor category over a longer time frame. Users can move from one product subcategory to another and we are a global leader in the Pod system and has a significant presence in disposable products.

The post of ban on disposable product is impacted in some markets, in fact they still encourage users using disposables to use our Pod product as we can provide a similar or even better user experience. For countries that have yet to announce regulatory changes, we will continue to offer and launch various products in various forms, including disposables, Pod system and illiquid solutions that may fit different user groups to capture the growth of the overall category.

And regarding your second question about the domestic market enforcement as well as the product approval. Regulators have been continuously tracking down on illegal sales [indiscernible] e-vapor products. And we have long assisted and supported their enforcement. Multiple enforcement actions have been recently carried out nationwide among manufacturers and distributors. One example is [ Zhejiang ] province, where regulators have been working with the police force. We have arrested 23 suspects, closed 7 warehouses and 1 production facility and illegal e-vapor products valued at [ RMB 15 million ].

We continue to assist regulators in tracking them on illicit sale of e-vapor products. We have continuously applied for new approvals for cartridges and devices as new products must undergo several rounds after build to ensure they meet the national standard requirements including the packaging inspection and clinical review of quality and ingredients, obtainment approvals take time, especially since the Chinese New Year holiday just passed a few days ago. We can bring you more exciting new products soon, once approved. Thank you for the question.

[Operator]

[Operator Instructions] The next question comes from Lydia Ling with Citi.

[Lydia Ling, analyst]

I have two questions related to the overseas expansion. And the first one is like the overseas expansion like kick-off the first quarter last year. And as we're looking into this year and also beyond. So can you actually in detail the like more your -- more of your like overseas expansion plan. And so such as which countries and also regions that you plan to expand for this year and also any other acquisition plan looking forward?

And the second question is on the profitability of your like overseas business. And so could you share like a little bit more like how is the profitability of your existing overseas business you entered? And also how to further drive the profitability looking forward? And so what kind of the normalized margins that you would target looking forward for overseas business and then versus by the domestic business?

[Wang Ying, executive]

Thank you very much, Olivia. So regarding the international expansion, our 2 strategic priorities is to increase our product acceptability and enhance our profitability in international market. So we theoretically examine different markets and decide whether to expand to that market.

We expanded to North and Southeast Asia in late 2023, and plan to expand to more Asian market in 2024. We are confident in many Asian markets and have built a strong presence. We have been and we expand to more markets and we hope Asian markets can contribute significantly to our company in 2024.

For European markets, we are still evaluating -- the regulatory changes in certain markets. And it will take some time for us to expand and decide. Regarding acquisition plans, we do have discussions with potential partners occasionally. We will share more details once we have any meaningful progress. And regarding the profitability of our overseas business, it is still in early stages of development, and we have been expanding to certain markets. And the profitability of each market depends on the volume, the competitive landscape, cessation and pricing across the value chain. Expanding to new markets could change our overall profitability. Given that we are in the process of expanding, the profitability varies across different time periods.

Our strategic focus is to optimize product portfolios and expand international staff channels, which could contribute to our top and bottom lines. Looking at our non-GAAP operating profit this quarter, our efforts to optimize domestic operations, operating efficiency and generate additional earnings from our international franchise has benefited us. As we are still expanding to manage international markets, it is premature to share specific margin target. However, directional-wise, sales volume, which could have economies of scale, is the most crucial quarter for profitability. Thank you for your question.

[Operator]

The next question comes from Eileen Lin with China Renaissance.

[Eileen Lin, analyst]

I have two questions. The first one is on domestic market. Can management share some comments on the momentum of domestic sales by month? Is there any changes in the chain? In particular, I also want to get the sense of where are non-JV products now? And what's the latest trend to this product from the regulator's perspective?

My second question is on the overseas market. U.K. government recently made some changes in the policies on the e-cigarettes, including restrictions on some disposable and flavor products. And there is a new potential tax on e-cigarettes starting on 2026. Have you seen any changes in the market after this announcement? And how do you think it might impact RLX?

[Sam Tsang, executive]

Thanks very much, Eileen. So regarding our domestic business, the sales trend in the domestic market are influenced by seasonality. With stable monthly averages observed over longer periods. For instance, in February this year, the Chinese New Year holiday lasts for 8 days with minimal sales of days before and after the holidays.

We also have a relatively strong sales in January before the CNY. We remain vigilant in monitoring the illicit market and assist regulators in combating these challenges. Our commitment to compliance and market integrity supports regulatory efforts to secure consumption types and can position us as leaders in promoting responsible market practices.

Our proactive stance on compliant and collaboration with authorities will foster a healthier market environment and support sustainable growth. So regarding your second question about recent proposed policy in the U.K. I think the U.K. regulatory changes could present a nuance landscape. Opportunities to adapt and capture new consumer segments. We can share our view on the 3 topics that you mentioned. First is the proposed disposable brand.

[Wang Ying, executive]

As you have mentioned, the prohibition of disposables will not -- as has mentioned earlier, the prohibition of disposables will not change the overall demand in the long run as most users will migrate from disposables to other forms like the Pod system. We have seen early signs that some distributors and retailers have started encouraging users to convert from disposables to Pod system, which allow us to expand to the market and acquire new users in the medium term.

The ban may create short-term chaos in the market, just like what happened in the U.S. and China, but we are well prepared for the changes. Second, regarding proposed paper restriction, British regulators have been encouraging adult smokers to switch from cigarettes to reduced-risk products like e-vapors. Regulators are concerned about appearing packaging, use appealing flavor and advertising. But at the same time, we also invest on a [indiscernible] grow in other smokers transition.

In other words, products with plain [ papers ] and packaging that are not marketed and appealing to manage shall not be restricted. We are confident that such restrictions should be reasonable and might have minimal impact on adult smokers. Finally, excise tax could level the playing field. We have seen this introduced in many countries and regions, including the countries where we are currently operating. The current adjusted tax rate is moderate compared to other countries globally. This will foster a healthier industry ecosystem and provide incremental incentives for regulated compact vehicle products. Thank you for your question.

[Operator]

At this time, there are no further questions. I would like to turn the call back over to the company for closing remarks.

[Wang Ying, executive]

Thank you once again for joining us today. If you have further questions, please feel free to contact RLX Technology Investor Relations team through the contact information provided on our website or Piacente Financial Communication. Thank you.

[Operator]

This concludes the conference call. You may now disconnect your line. Thank you.