Hello, ladies and gentlemen. Thank you for standing by for RLX Technology Inc.'s third quarter 2024 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 forty 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..

Thanks very much. Hello, everyone, and welcome to RLX Technology's third quarter 2024 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 Chief Executive Officer, Kate Wang, our Chief Financial Officer, Chao Lu, and myself, Sam Tsang, Head of Capital Markets.

Please note that today's discussions will contain forward-looking information 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, target, estimate, 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's affiliates, advisors, and representatives do not undertake any obligation to update its forward-looking information except as required under 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. Our 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..

Thank you, Sam. And thank you to everyone for joining our earnings conference call. Today, I would like to begin with an overview of our strategy for thriving in markets outside of China, followed by an update on our current and recent developments in the China market and a review of our intellectual property achievements.

Finally, I will hand over to our CFO for a detailed financial review. We delivered a robust performance in the third quarter of 2024, demonstrating our ability to consistently excel in diverse markets despite a rapidly evolving demand and regulatory landscape. This positions us as a leading brand beyond China.

Following the termination of our non-competition agreement last year, we have successfully expanded into multiple international markets. During this period, two key trends have emerged within the overseas e-vapor industry. First, we have observed an increase in regulatory activity across various markets.

Governments are implementing new regulations, including bans on disposable products, new tax policies, and stricter enforcement against illegal goods. While these developments can foster sustainable growth within this industry, they also complicate operations for compliant brands like RLX.

This makes it essential for us to dedicate local strategies, create multi-category product lines to facilitate user transitions, enhance inventory management across the value chain, and optimize costs to align with and adapt to regulatory changes.

The second trend is the growing demand from consumers for enhanced product functionality and cost-effective daily e-vapor products. Certain segments of adult smokers are seeking more advanced features in e-vapor products, akin to the rising expectations in the consumer electronics sector. Personalization and technological innovation are paramount.

Simultaneously, as inflation poses challenges in several countries, some other user groups are demanding daily vapor products that offer good value for money.

To meet these diverse needs, brand manufacturers must possess strong user insights, capabilities, and in-house product development expertise to create tailored solutions for different local markets and different user segments.

To address these trends comprehensively, we have developed an integrated business model supported by our talented workforce, which empowers our success in various local markets and product categories.

This model includes targeted go-to-market strategies, a comprehensive product portfolio, refined supply chain management, and focused user engagement strategies. We have refined this model in China and are now successfully replicating it in international markets, making necessary adjustments based on local conditions.

Looking ahead, we anticipate that the international e-vapor industry will experience an annual growth rate in the teens over the next few years as more adult smokers transition from cigarettes to e-vapor products.

Additionally, we expect a growing number of e-vapor users to shift from dual use of cigarettes and e-vapor products to exclusive e-vapor use. Given the increased regulatory activities and rising user demand, we believe that only leading players with an integrated model will succeed.

We are confident in our ability to capture incremental market share in international e-vapor markets over the coming years. Turning to the latest developments in China, we note that illegal e-vapor products continue to dominate the market. Our internal estimates indicate that these products account for 80% to 90% of the total e-vapor market in China.

Generally, illegal products are of subpar quality and fail to meet national product standards, often being non-tobacco flavored. Furthermore, they do not contribute to consumption tax revenues.

As a compliant and responsible brand, we are actively combating these illicit sales through various initiatives, including targeting illegal sales on social media, delisting illegal zero-nicotine products from e-commerce platforms, and collaborating with authorities to shut down counterfeit production facilities.

We remain committed to cooperating with regulators in these efforts and appreciate their support. While addressing illicit sales, we have also launched a new product series to enhance our competitiveness. This quarter, we launched our first compliant disposable product line since the implementation of national standards.

We offer two disposable products with e-liquid volumes of 6 ml to 10 ml, designed for adult smokers seeking convenience at a lower entry cost compared to cartridge-based products. Feedback from retailers and users has been overwhelmingly positive, and we plan to expand this launch nationwide.

Finally, I am pleased to announce that our team has successfully passed the certification exam for the enterprise intellectual property compliance management system requirements.

This certification, which encompasses research and development, production, and sales of e-vapor and electronic components, signifies that RLX has established a comprehensive intellectual property management system.

This includes trademarks, patents, original designs, and software copyrights, forming a robust framework for technology and brand protection on a global scale. In conclusion, RLX Technology is well-positioned to lead both domestically and internationally in an evolving e-vapor landscape.

As regulatory shifts reshape this industry, we are leveraging our integrated model to remain agile, proactive, and focused on delivering value to adult smokers worldwide.

Moving forward, we will continue to prioritize regulatory compliance, in-house product innovation, and strategic adaptability to navigate compliance invariants while meeting rising user expectations and driving sustainable growth for the company. I will now turn the call over to our CFO, Chao Lu, for a detailed financial review..

Thank you, Kate. And hello, everyone. Before I start the detailed discussion of our financials, please note that unless otherwise stated, all the financials I will present today are in RMB terms. Since terminating our non-competition agreement with RLX Inc.

in November 2023, we have substantially expanded our international presence, driving top-line growth. Our net revenues grew to RMB 756 million in the third quarter of 2024, up 52% year-over-year from RMB 499 million and 21% quarter-over-quarter from RMB 627 million. Both our China and non-China businesses showed sequential growth this quarter.

We anticipate continued revenue growth as we expand into more international markets, capturing incremental market share and benefiting from anticipated category growth. Turning to profitability, our overall gross profit margin improved to 27.2% in the third quarter of 2024, marking a 3.2 percentage points increase year-over-year.

This improvement is primarily due to favorable changes in our revenue mix, including both channel and product diversification. On a like-for-like basis, gross profit margins across various revenue streams have also improved year-over-year. We recorded a total operating loss of RMB 11 million this quarter.

However, excluding the impact of share-based compensation, we achieved our fourth consecutive quarter of positive non-GAAP operating profit at RMB 82 million, driven by incremental contributions from our international business and effective cost reduction strategies.

While our gross profit margin may fluctuate quarterly due to variations in revenue contribution and cost optimization efforts, we expect our overall non-GAAP operating profit margin to improve as we scale our business while maintaining consistent middle and back-office support during our regional expansion.

Consequently, operating expenses are expected to grow at a slower pace than our top-line growth. As a result, our non-GAAP net income for the third quarter of 2024 increased by 30% year-over-year to RMB 262 million. For the same period, our non-GAAP basic net income per ADS was RMB 0.21, and non-GAAP diluted net income per ADS was RMB 0.20.

In terms of cash flow, we achieved operating cash inflow of RMB 157 million in the third quarter of 2024, up from RMB 83 million in the same quarter of the previous year, driven by enhanced working capital and inventory management. Additionally, we are currently experiencing a negative cash conversion cycle exceeding one month.

Our inventory turnover days stood at just 16 days in the third quarter of 2024, a sharp decrease from over 100 days in the first quarter of 2023 and 30 days in the first quarter of 2024, as we continuously optimize slow-moving SKUs while growing our scale.

As of September 30, 2024, our total financial assets, including cash and equivalents, restricted cash, and various short-term and long-term deposits and investments, stand at RMB 15.4 billion. Finally, we are pleased to announce our second cash dividend since our IPO, reaffirming our commitment to delivering value to our shareholders.

Our objective is to return substantially all of our non-GAAP net profits, at a minimum, through share repurchase programs and cash dividends, continuing the practice we have upheld over the past two years. We remain dedicated to generating sustainable, growing profits and enhancing returns for our shareholders.

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

The question and answer session. To ask a question, you may press star then one. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, press star then two.

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. At this time, we will pause momentarily to assemble our roster. The first question today comes from Lydia Ling with Citi. Please go ahead..

Hi, management. This is Lydia from Citi. So here I have two questions regarding your overseas business. Firstly, we see some progress for your overseas business this year, and congratulations on that progress. We are keen to understand your plan for the next year as we approach year-end.

We are very keen to understand what will be your overseas expansion plan for 2025. My second question is about the countries or regions that you have already entered this year. We are very interested to understand how you will further drive your organic growth and, as you mentioned, target to gain your market share in the following years.

What will be your strategies to further gain your market share, and what is the target market share looking ahead? Any product or marketing strategies and any color on that would be very helpful. Thank you..

an optimal product development portfolio and the right route-to-market strategies. Together, these create the right product-market fit. We deeply analyze the local market environments and user behavior, including new regulatory changes and user preferences in each market.

For example, we have a leading market share in one of our markets, but we are currently only strong in small volume cartridge-based e-vapor products. A disposable ban will become effective soon there, and user preferences are trending towards large volume disposable products.

Therefore, we have launched large volume cartridge-based products and advocate for users to converge in new channels. Regarding route-to-market strategies, we usually have one to two retail channels in which we excel, such as CVS, with store channels, or RLX branded store channels. Each country has a specific development path and reason behind it.

In the past couple of quarters, we have been focusing on developing and enhancing retail channels by reaching out to new distributors and retailers. With user preferences and market landscape in mind, we may launch a designated product series for these channels. This also shows we have great potential to further increase our market share.

The e-vapor category is expected to grow by double digits each year in the next couple of years, and we believe we are on the right track to gain further market share and show growth as the category expands. Thank you for your questions..

The next question comes from Peihang Lyu with CICC. Please go ahead..

Thank you, management. This is Peihang Lyu from CICC. My questions are about domestic regulation. We have recently noticed several e-cigarette companies being penalized for adding illegal ingredients. Does the management see there has been a change in domestic regulation or law enforcement? As Ms.

Wang mentioned in the beginning, illegal products do account for the dominant part in China.

How do you perceive the future of the illegal market?.

Thank you very much, Peihang, for your question. According to the news release on the State Tobacco Administration's official website last week, three brand manufacturers illegally produced e-vapor products that were inconsistent with the solution or formula previously approved by regulators.

These brand manufacturers have been fined a total of RMB 5 million, and one must stop operating for two months. Some industry participants have said that these brands' motivation for producing a non-compliant e-liquid solution is that by increasing components like coolants, they can better attract users and increase their product competitiveness.

As a compliant brand, we strongly support the regulatory crackdown on non-compliant e-liquid solutions and regulatory actions against illegal e-vapor products in China.

The overall regulatory framework and actions have been consistent over the past two years, and we have consistently collaborated with regulators in combating illegal products now and also in the future. Thank you for your questions..

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

Thanks, management, for taking my questions. This is Charlie Chen from China Renaissance. I have two questions here. The first one is regarding the overall consumer market in China. With the softening consumer sentiment in China, we noticed that Chinese consumers' purchasing behavior has been rather conservative this year.

Have you noticed any changes in consumer behavior or the competitive landscape in China's e-vaping market this year? My second question is about interest income, which has been a substantial part of your earnings in the past couple of years. With the U.S.

Federal Reserve starting to take rate cuts and possibly taking more cuts going forward, how do you see interest income going forward? Thank you..

Thanks, Charlie, for your questions. The first one is about the confidence of Chinese consumers, especially in the e-vapor markets, and the second one is about the U.S. Fed rate cuts. For the first question, in the last two years, China's e-vapor industry has been deeply affected by illegal products.

The number of industry-led retail stores has declined from about fifty thousand in the pre-regulatory era to about ten thousand stores. We estimate the compliant e-vapor category has fallen by 80% to 90% from the pre-regulatory era.

However, since the start of this year, our sales, number of points of sales, and market share have been relatively stable, with some uptick in certain months. Furthermore, the sales proportion among our three cartridge-based product series, Qingyu, Phantom, and Phantom Plus, has been stable. This series spans the category's low to high price points.

This demonstrates that the e-vapor category has not been affected by the economic headwinds in the Chinese consumer markets. In the last two quarters, we have launched the Daqen series, a cartridge-based e-vapor product series with a higher liquid volume, and the Feiyue series, a high-volume disposable e-vapor product.

Users seeking products with good value for money can consider these two new series. Regarding your second question, as of September 30, 2024, our company's total financial assets are RMB 14.8 billion, approximately $2.1 billion. Approximately 70% of this total is USD denominated, with the remaining 30% in Chinese yuan or other currencies.

Although the Fed cut rates in mid-September and early November, short and medium treasury yields began falling in late April and have been going up since mid-November due to key events in the U.S. Like other market participants, we have been actively monitoring money markets and are aware of interest rate movements.

Given this, we have been expecting interest rates to come down since the second quarter. We have about 50% of our financial assets in long-term vehicles as of the third quarter of 2024. We do not expect any drag on our 2024 interest and investment income due to the Fed's recent interest rate cuts.

Based on the current yield curve, we expect a slight decline in 2025 interest and investment income, but we believe the impact will be relatively minor. Thank you, Charlie..

The next question comes from Yan Guo with Citic Securities. Please go ahead..

Thanks, management, for taking my question. This is Yan Guo from Citic Securities. My question is about R&D products. I want to know how the new products are performing and what are the future product plans? Thank you..

Thanks, Yan, for your questions. In the China market, we have launched the Daqen and Feiyue series in the second quarter and fourth quarter. We will advocate for adult smokers to use these new series instead of illicit e-vapor products or cigarettes. We hope that Daqen will become a clear player in the Chinese market in the short to medium term.

We may also launch special products or series for different occasions, subject to regulatory approval, and explore products with other functionalities, more advanced materials, and better core components.

Regarding international markets, we will continue to enhance our comprehensive product portfolio, which will help us craft the right product lineup for various local markets. For instance, we have launched RLX Prime open system products with one kit and sixteen flavors.

We have received positive feedback from users for their minimal e-liquid leakage issues, longer usage time, and affordable prices. Our new product is RLX Bin, which allows users to enjoy two flavors in one device and switch the mouthpiece to change flavors. We will continue to innovate new products to cater to different e-vapor needs.

Thank you for your questions..

Due to time constraints, I would now 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 and through Teneo Financial Communications. Thank you..

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