Hello, ladies and gentlemen, thank you for standing by for RLX Technology Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's remarks, there will be a question-and-answer session. Today's conference call is being recorded and is expected to last for about 40 minutes. I will now turn the call over to your host, Mr. Sam Tsang, Head of Capital Markets for the company. Please go ahead, Sam.

Thank you very much. Hello everyone, and welcome to RLX Technologies second 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.rlxtech.com. Participants on today's call will include our Chief Executive Officer, Ms. Kate Wang; our Chief Financial Officer, Mr. Chao Lu, and myself, Sam Tsang, Head of Capital Markets of the company. 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, target, estimates, intent, believe, potential, continued, 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 affiliated advisors and representatives do not undertake any obligation to update this forward-looking information, except as required under the applicable law. Please note that RLX Technology's earnings press release and this conference call include discussions of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. RLX press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to Ms. Kate Wang. Please go ahead.

Thank you, Sam, and thanks to everyone for making time to join our earnings conference call today. I would like to start with a strategic overview highlighting our key achievements in product innovation and R&D. Following this, our CFO will provide a detailed review of our financial performance. We delivered another solid set of results for the second quarter of 2024 as we deepen our exploration of overseas markets. Given the diverse and evolving regulatory environment across the region we operate in, compliance remains our top priority, and our refining our localized strategy. Furthermore, varying income and penetration levels necessitate tailored product offerings across regions. As such, R&D and product design are playing an increasingly vital role in our international expansion. Let me walk you through more -- some details. This quarter, we focused on adapting our product design to compliance with various regional e-liquid volume, and nicotine level requirements. We also incorporated child-lock (ph) features that automatically engage after 10 minutes of inactivity to prevent underage use. This innovation demonstrating our commitment to use protection, [indiscernible] represents a significant step forward in our pursuit of safety and global compliance. In terms of localized product strategies, we continue to research demand trends and economic factors influencing users' consumption habits and tailor our offerings accordingly. The prevailing high inflation environment has prompt many users, both domestically and internationally, to seek products that offer enhanced value for their money. In response, we launched the mega-sized Phantom series in Mainland China with 6 ML and 10 ML pods at a low price -- lower price than our Infinity pods. Internationally, we introduced the RELX [indiscernible] series, which offers up to 1,000 puffs per pod, or nearly double the quantity of our standard pod to provide exceptional value. Our keen understanding of the consumer…

Thank you, Kate, and hello, everyone. Before I start the detailed discussion of our financials, please note, unless otherwise stated, all the financials I will present today are in RMB terms. Following the termination of our non-compete agreement with Relx, Inc., in November 2023, we have consistently expanded our international presence. Our overseas business is thriving, resulting in a significant uptick in our top line. Our net revenues grew to RMB627 million in the second quarter of 2024, up 66% year-over-year from RMB378 million in the second quarter of 2023, and 14% quarter-over-quarter from RMB552 million in the first quarter of 2024. We anticipate continued revenue growth as our international expansion progresses. Furthermore, as Kate mentioned, we are continuously refining our regional strategy for maximum effectiveness, including both route-to-market and go-to-market plan, tailoring our strategies to each region's unique market dynamics and consumer behaviors optimizes our market penetration and enhances our competitive edge, driving sustained growth. Turning to profitability. Our overall gross profit margin for the second quarter was down slightly year-over-year at 25.2%, largely due to changes in our revenue composition, including both channel and product mixes. On the other hand, the gross profit margins of several key revenue streams demonstrated year-over-year improvement on a like-for-like basis. To mitigate the impact of these mix changes, we have proactively implemented strategies to enhance operational efficiencies and cost management practices, including product design optimizations and supply chain efficiency improvement. We recorded a total operating loss of RMB33 million for the second quarter. However, excluding the impact of share-based compensation, we achieved a positive non-GAAP operating profit of RMB45 million, our third consecutive quarter of non-GAAP profitability, thanks to strong cost management and profitable contribution from our international market. Although, our gross profit margin may fluctuate quarterly, we are confident that our…

We will now begin the question-and-answer session [Operator Instructions] The first question comes from Lydia Ling with Citi. Please go ahead.

Thanks, management. So I'm Lydia from Citi. So here I have two questions actually related to your overseas business. So, the first one, if we look at your first half results, we did see that your company actually made some progress in the overseas market. So could you share with us, like, what's the biggest challenges that you might face during your actually overseas expansion? And also looking into the second half, how would you actually facilitate your expansion in the overseas market? Is there any detailed targets that you may share with us, such as like, what countries or regions that you target to enter in the, like, second half or consolidate in the second half? And then, my second question is, for the markets that you already entered for the overseas market and so what could be the growth targets that management is thinking about our target? How to further drive the market share in those lighter countries? And also, if any color on the product or the channel strategies that you target or planning for the looking forward? That will be very helpful. Thank you.

Thank you very much, Lydia for your question. So uncertainties in regulatory environments remains our primary challenge. So one significant concern is the upcoming ban on disposable products in certain countries. So some nations, such as Poland have proposed the implementation of this ban. It was originally scheduled for a start of summer, but it has been delayed until early 2025. Regulatory changes in local markets require us to frequently adjust our product development and inventory management plans. Another challenge is how to learn to conduct business locally. So far, consumer brands like us, we need to expand beyond our home markets. So challenge includes identifying specific products, design, and flavors that resonates with consumers in different regions to cater to local demand. Despite these two major challenges, we have prepared a series of products for launch in various markets and we are confident that we can earn the trust of adult smokers across different countries. We are on track to meet the targets we set at the beginning of the year. Regarding the country stats, we plan to enter for the rest of the year, we will continue to focus on expanding in Asia where we first started our international expansion before gradually entering into other continents. So regarding your second question is about how to grow the local market share in overseas market. So compared to Mainland China where we have established market share, we are still relatively new in many parts of the world. This presents significant opportunities to expand our user base and point of sales penetration. As discussed in previous earnings call, our primary focus will be increasingly -- the availability of our products to reach more potential consumers. The main distribution channels for our category remain modern trade channels, including convenience stores, supermarkets, and specialty vape shops. We have different products in the pipeline tailored for these channels, which you will see in the market soon. Thank you very much for two questions.

Thank you.

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

Okay. Thank you, management. This is Peihang from CICC. I have two questions here. The first one is about overseas competition. We have noticed currently overseas brands like IMiracle, Elf Bar and GEEKVAPE are aggressively entering the pod system and four in one categories. How does the company perceive your product advantages among other competitors? And my second question is, with regard to the domestic market and what is the current status of new GB products submitted for approval in China, and what is the approval progress? And how has the market share of illegal products changed along with enhancing of regulatory enforcement in the second quarter? Thank you.

Thank you very much Peihang for your questions. So the first question is about the overseas competition. So I mean since months after our inception, we have been the leader in the pod system category in Mainland China. So as we expand into other countries, we are confident that our pod system products will continue to win the trust of adult smokers worldwide. We can also leverage our long-established brand equity as a reputable e-vapor brand, compared with other brands primarily known for disposable products, this is one of our key competitive advantages. Furthermore, we have been increasingly and independently developing e-vapor products since the release of our second generation pod system products, RELX Alpha and we have in-house e-liquid R&D and manufacturing capabilities. These industry-leading capabilities allow us to collaborate closely with our consumer insights team and respond quickly to the changing user behavior and other significant advantage that set us apart. So regarding your second question is about our current status of national products in China, as well as the market share of illegal products. So as mentioned in previous quarters, we are submitting new products on a rolling basis. We are seeing more products being approved by the regulators. To give you an idea of the progress. As of the end of last year, we had 21 flavors approved and as of June 2024 over 30 flavors have received approval, including our newly launched product series, Phantom. We understand the market concerns regarding the prevalence of illegal products, which significantly threaten the recovery of compliance products in Mainland China. However, tracking illegal products' market share has become increasingly difficult as more sales shift online and transactions are conducted more discretely. Based on our on-the-ground assessment, illegal products still account for a significant majority of sales in China. And of course, I mean our market share amongst the compliance products has been stable and healthy. Thanks for your questions.

That's very helpful. Thank you, Sam.

The next question comes from Yun Guo (ph) with CITIC. Please go ahead.

Thanks, management. This is [indiscernible] from CITIC. I have two questions here. The first question is, which product categories are showing strong growth momentum in overseas markets? What's the current contribution of disposable products to overseas revenue? And my second question is that since the second quarter of this year, there has been a surge in product innovation. How does the company plan to capture market opportunities in Europe before the disposable ban takes effect? Thank you.

Thanks, [indiscernible] for your questions. So the first one is about the subcategory of our product category, and the second question is about the potential European disposable ban. So for the first question, the popularity of different subcategories varies from country to country and is largely dependent on local regulation, including taxation and product restrictions. So in markets where disposable products are still permitted with the restrictions on liquidity content, we are seeing strong traction among products with high e-liquid volume. Additionally, some disposables now feature smart technologies such as Bluetooth and display screens, which are gaining popularity among users. In these markets, disposables continue to contribute a significant portion of sales. In countries where a ban on disposables is announced or anticipated, pod and open systems are gaining market share. This shift is partly driven by distributors and retailers actively reducing their disposable inventories and migrating users to pod or open systems to prepare for upcoming regulatory changes. To capitalize on this trend, we are launching our open system products Relx Prime this month, which will pair perfectly with our e-liquid solutions. Regarding your second question about the European safer ban. So, as mentioned previously, our leading product development capabilities coupled with our consumer insights team enable us to quickly identify emerging product trends and rapidly develop products that can cater to demand. Accordingly, we have several new products in the pipeline. It is worth noting that our presence in Europe is smaller than in Asia. So we focus on gaining market share from competitors as users migrate from disposables to our subcategories, we will leverage our brand equity, in pod systems to attract them. This migration pays to our strengths and presents a significant opportunity to us. Thank you for your questions.

Very helpful. Thank you.

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

Thank you, management for taking my questions. I have two questions. The first one is about China market and second one is about operations. So for the first one, I just want to take a step back and see the overall Chinese market size. So in the past year, there are a lot of changes in the e-vaping market in China. So I just want to know based on your best estimate, is the e-vaping market in China still growing or at what kind of growth rate? And also how is the penetration rate in adult Chinese smokers as well as how is the market share changed between GB products and non-GB products? Also, can you comment a little bit on the overall product price, including tax? I mean, how much does Chinese consumers are paying for e-vaping? Is that increasing or going down because of competition? So second question is about the operations. I noticed that there are some volatility in your gross margin in this quarter. So going forward, how do we -- how should we think about the gross margin as well as the cost of goods sold of your products? Thank you.

Thank you for your questions, Charlie. So the first one is about the domestic market, market sizing, etc. So first, I think it's important to note that the data for the European market is changing the track. So as mentioned, sales in this segment tend to be more consumed, which is difficult to capture accurate pickers. The demand for compliance products remain relatively stable, though there are occasional fluctuations occur due to adjustments in channel inventory. So currently, non-compliance products still dominate the market. So regarding the market penetration, the overall penetration rate, including the compliance and non-compliance products in combined, has slightly declined compared to the period before the regulations. This decline is primarily due to some life users discontinuing using e-vapor products because of labor restrictions. In contrast, usage of compliance product gradually returned to their previous per capita consumption level, which have not fully recovered, which previously have not been fully recovered. So the market share between compliance and non-compliance products has yet to stabilize fully. As previously discussed, the share of non-compliance products remains high despite regulatory efforts. The compliance segment is gradually stabilizing, with the prevalence of non-compliance product influence the overall market dynamics. So as for pricing, the average selling price for compliance products has remained stable over the past year, partially because of regulatory measures have limited brand promotional activities. We have also yet to make any price adjustments in the past year. However, with more e-liquid products like [indiscernible], the average selling price per pod of our products may decrease if the sales of these product series increase. At the same time, the average selling price per unit is likely to remain stable or increase slightly. So regarding the outlook of the overall gross margin. So our gross profit margin level has remained impressively stable. So we have continuously to enhance supply chain efficiency for each SKU and improve product design and packaging to boost profitability. Also, certain regions have introduced excise tax on vape products and conduct annual rate adjustments. To address these external challenges, we typically adjust our pricing accordingly to maintain a sustainable and stable gross profit margin from a reporting perspective. Thank you very much for your questions.

Thank you.

Due to 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 Piacente Financial Communications. Thank you very much.

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