Hello, ladies and gentlemen. Thank you for standing by for RLX Technology, Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] After management's remarks, there will be a question-and-answer session. Today's conference call is being recorded and is expected to last 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 sir.

Thank you very much. Hello, everyone, welcome to RLX Technology's Second Quarter 2025 Earnings Conference Call. The company's financial and operational results were released through PR News Wire earlier today and have been made available online. You can also view the earnings press release by visiting our IR website at ir.relxtech.com. Participants on today's call will include our Chief Executive Officer; Ms. Kate Wang, our Chief Financial Officer, Mr. Chao Lu and me. Before we continue, please note that today's discussion 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, belief, potential, continue or other similar expressions. Forward-looking information 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, its affiliates, advisers and representatives do not undertake any obligation to update this forward-looking information except as required under the applicable law. Please note that RLX Technologies 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 thanks everyone for making time to join our earnings conference call today. First off, we were pleased to deliver impressive second quarter results amidst shifting consumer trends and the rapidly evolving macro and the regulatory environment, highlighted by a 40% year-over-year increase in net revenues to RMB 880 million, and a non-GAAP operating profit of RMB 116 million. This strong performance underscores our effective strategic execution in our international expansion and outstanding ability to quickly adapt to change in regulation and consumer demand. With our matchless innovation and go-to-market capabilities. We are confident in our ability to lead this industry realignment and continue driving sustainable growth. Let's move on to an overview of the global smokeless alternative market and the latest e-vapor consumer behaviors and regulations relating to the e-vapor segment as well as our correspondingly strategic initiatives. The transition towards smokeless nicotine products continues to gain traction worldwide, while, e-vapor remains a key driver of the shift with solid momentum. Other categories such as heat-not-burn devices and modern oral nicotine products also contributing collectively reshaping the tobacco alternative landscape. Most consumers enter the small place market by moving away from traditional cigarettes rather than switching between smokeless products. Since each smokeless segment addresses distinct consumer needs. These 3 categories are more complementary than directly competitive, creating an ecosystem where multiple smokeless segments can thrive simultaneously. E-vapor products that are favored by those who value device performance, portability and often engage in outdoor activities. Heat-not-burn products appeal to long-time smokers seeking an [indiscernible] closer to conventional smoking. At the same time, modern oral nicotine fits seamless into the lifestyle of office workers and frequent travelers. Collectively, these categories are expected to capture a significantly larger share of the total nicotine market over the next 5 to…

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. First, top line. We delivered another strong quarter with net revenues reaching RMB 880 million, representing a 40% year-over-year increase and a 9% quarter-over-quarter increase. This impressive performance highlights our successful internationalization strategy and our ability to capture the opportunities presented by the accelerating global shift towards reduced risk smokeless alternative. The consolidation of our recently acquired European e-vapor company in June, also contributed to our robust growth figures. Meanwhile, our China business also achieved significant year-over-year growth, thanks to stricter control aimed at combating illegal products as well as our successful launch of a disposable product series in the second half of last year. Next turn to profitability. We drive a 2.3 percentage point expansion in our gross margin year-over-year to 27.5%, reflecting a favorable revenue mix from international markets and our continued cost optimization efforts. Sequentially, excluding the effects of amortization and depreciation of assets arising from fair value step-up in business acquisitions in the second quarter of 2025, which increased our cost of revenue. Our gross margin remained stable quarter-over-quarter, showcasing our ability to maintain steady profitability amid intense competition and regulatory changes in international markets. The second quarter of 2025 marked our seventh consecutive quarter of positive non-GAAP operating profit at RMB 116 million, with non-GAAP operating margin expanding by more than 5 percentage points year-over-year to 13.2%. This improvement was driven by contributions from our fast-growing international business, and enhanced operating leverage. Looking forward, we are positioned to further improve profitability as we scale globally by maintaining -- by remaining focused on efficiency and maintaining a lean organizational structure. Next, on cash. In…

[Operator Instructions] For the benefit of all participants on the call, if you will ask your question to management in Chinese, please immediately repeat your question in English. The first question today comes from Lydia Ling with Citi.

Lydia from Citi. So I have 2 questions. So first, on the regulation side. So it looks like there's some overseas market has started tightening regulations. So do you feel that the management of the noncompliant products has become more standardized? And do you expect or have you seen positive impact on your compliant products and also your business development? And then my second question is on the overseas business. So your group revenue had some sequential improvement in the second quarter. So how is the organic growth of the overseas business in the second quarter? And you also give us some updates on the progression of the overseas expansion and also your outlook for the second half and beyond?

Thank you very much, Lydia. Regarding the first question, the global regulatory landscape for RLX products is becoming increasingly well defined and straight and forth, bringing greater clarity to compliance requirements, such as product standards and excise tax. For leading and compliant corporations like our company, this shift is delivering tangible benefits. We anticipate that the brand share and distribution share of the current gray and black markets will decline as regulators continue to enforce regulations, particularly by implementing stricter custom control and test collection practices and shutting down illegal operations and stores. This transition towards compliance also presents an opportunity for us to gain market share. Many markets are implementing stricter product standards this year. With clear rules and strong enforcement, we are seeing a transition from illegal products offered by competitors to our compliant offerings, including our cartridge-based closed system and open system products. Lastly, reputable retail channels, particularly key accounts such as convenience stores and petrol stations are steering away from gray market products. Instead, they are prioritizing partnerships with compliant businesses with a leading market share in house. This trend not only creates a more stable operating environment, but also open up significant growth opportunities for the company. Regarding your question about our organic growth of overseas business, despite the China export data reporting a year-over-year decline in the low teens for the first half of the year, our company achieved moderate year-over-year growth organically in overseas business, showcasing our resilience and ability to capture increasing market share from various types of competitors. We have gained market share progressively in many Asian markets in the first half of 2025. Our successful expansion into the European market this quarter marked a major step forward in the overseas business and made a meaningful contribution to our revenue growth during the quarter. For the second half of 2025, our priority will be to strengthen distribution and retail capabilities in Asia, Europe while optimizing our product portfolio to boost our competitiveness. Looking ahead, we plan to expand into additional European countries and selected Asian countries and perhaps an additional continent by early 2026. However, this plan remains in its early stages and will depend on further developments. Thank you for your questions.

The next question comes from Charlie Chen with China Renaissance.

Management I have a question regarding the domestic market. So can you give us more color on the current situation of the China market right now in addition to the regulatory side. And also, how is RLX business performance in Chinese market so far?

Thanks very much, Charlie. So we have observed a moderate recovery in domestic compliance market this year, primarily driven by stricter custom control at China's border, which have limited the reselling of overseas business back into the domestic market. This is certainly encouraging news though there remains significant room for improvement. At present, over 80% to 90% of the domestic market continues to be dominated by illegal products. The majority of which are produced by small local workshops. These products are often of subpar quality contribute no test revenue to the society and are potentially associated with criminal activities. As the largest compliance brand in the domestic legal markets, we have been actively collaborating with regulators, providing over 4,000 needs and pieces of evidence concerning illegal retailers and manufacturers in this year. We believe that a greater regulations on these local manufacturers and retailers are enforced, compliance product share of the overall domestic market will steadily increase. In terms of performance, our domestic revenue grew in line with the overall industry during the first half of 2025 with our market share in the compliance segment remaining consistently strong. This is reflected by growth in the excise tax on product line of our income statement. From a product perspective, cartridge pods has faster growth than devices, reflecting a trend of existing users increasingly adopting compliance products with growing retention. Additionally, alongside the crack down on non-compliance products the launch of our disposable products Fadio in the second half of 2024 has played a key role in driving the incremental recovery of our domestic business. Thank you for your question.

The next question comes from Zhuonan Xu with CICC.

Management [ Dolly ] from CICC. My first question is about dividends. We noticed that company has totally announced dividends in November, but this year, distance were announced in August. Will there be any additional dividend this year. And we also noticed that the company's share repurchase program will acquire by the end of this year. And is there any plan to extend or launch a new share repurchase program?

Thank you, , for your question. First to the forced decision and approval, we do not foresee there will be additional dividend announcements this year. Same as the last 2 years, our plan in 2025 is to distribute a cash dividend of $0.01 per ordinary share or ADS. Regarding the share purchase program, we have been purchasing our shares since December 2021. By the end of 2024 we had repurchased over USD 300 million of our shares or ADS. We have also made additional share repurchase throughout 2025 through open market purchases and privately negotiated transitions. Looking ahead, we plan to remain a progressive shareholder return program. Our scale and profitability has been growing in the past 3 years and recent quarter's achievements have been encouraging. As always, we'll diligently evaluate our financials and strive to generate robust shareholder returns and profitability growth. We are also looking at more efficient means for providing future shareholder returns. Thank you for your question.

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

Thanks management. This is Yun Guo from Citic. My question is about investment agreement. We noticed that the company entered into an investment agreement with an [ EVA ] company based in Europe during the first half of 2025 and its annual report. Could management provide more details to this agreement?

Thank you very much for your question. So in March 2025, we entered into an investment agreement with a leading compliant e- vapor company in Europe, which has been consolidated into our financial statements starting in June. The acquired company has a 17-year track record and operates a full industry chain business model and encompasses in research and development, manufacturing, warehousing distribution, retailing and e-commerce. With less placed significant value on the company's brand, business and operations. Following the acquisition, we have adopted a new approach in regions where the company operates. We now position ourselves as a retailer, distribution partner and brand operator rather than focusing solely on selling RLX branded products in these regions. Within the acquired company channel, RLX products will compete on a square footing with other brands. Looking ahead, we aim to leverage the company's distribution and retail capabilities to gain first-hand insight into European market trends. This smart partnership has also enabled us to build belts previous selecting in Europe, expand our operational footprint and increase local market share. These advancements will allow us to strengthen retail capabilities, achieve localized operations and force greater diversity and visibility in our business strategy. Thank you for your question.

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 Technologies Investor Relations team through the contact information provided on our website or Piacente Financial Communications.

The conference has now concluded. Thanks for attending today's presentation. You may now disconnect.