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spk01: Ladies and gentlemen, thank you for standing by for RLX Technologies' 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.
spk07: Thank you very much. Hello, everyone, and welcome to IRIS Technology's second quarter 2024 earnings conference call. The company's financial and operational results were released through PL Newswire services earlier today and have been made available online. You can also view the earnings press release by visiting the IIL section of our website at il.resetstack.com. Participants on today's call will include our Chief Executive Officer, Ms. Kate Huang, our Chief Financial Officer, Mr. Chao Lu, and myself, Sam Tsang, Head of Capital Marketers 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 Dedication 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 companies, its affiliates, advisors, and representatives do not undertake any obligation to update this forward-looking information, except as required under the applicable law. Please note that Rx Technologies' earnings press release and this conference call include discussions of unaudited gap financial measures as well as unaudited non-gap financial measures. Our Rx 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.
spk05: Thank you, Tim, 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 in 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 some details. This quarter, we focused on adapting our product design to comply with various regional e-liquid volume and nicotine level requirements. We also incorporated child lock features that automatically engage after 10 minutes of activity to prevent underage youth. This innovation demonstrating our commitment to youth protection represents a significant step forward in our pursuit of safety and global compliance. In terms of localized product strategies, we continued to research demand trends and economic factors influencing users' consumption habits and tailored our offerings accordingly. The prevailing high inflation environment has prompted many users, both domestically and internationally, to seek products that offer enhanced value for their money. In response, we launched the MegaSize DaQian series in mainland China with 6ml and 10ml parts at a lower price than our Infinity parts. Internationally, we introduced the Relax Pod Real series, which offers up to 1,000 pods per pod, or nearly double the quantity of our standard pods to provide exceptional value. Our keen understanding of the consumer trend also keeps us at the forefront of product innovation. a critical factor driving user engagement in this highly competitive industry. Smart features like Bluetooth for usage tracking and device setting control, as well as screens for monitoring battery and liquidators are becoming standard at every price point. As a leading global eVapor brand, with substantial R&D advantages, we are poised to capitalize on these trends with an exciting pipeline of new products for the rest of the year. This includes an open system device and a modular closed system device at different price points. with various innovative features to meet a broad range of user needs. Notably, the module device allows users to mix and match flavors with batteries and screens to create their own unique waiting area. It also features an interactive screen for checking battery life, monitoring inhalation duration, and adjusting air flow. I'm also pleased to share that our quality and safety laboratory passed the CNAS for conformity assessment expansion and modification assessment. The assessment certified our laboratory's capabilities in 10 testing areas based on International Battery Safety Standard IEC 62133 and North America Electronic Cigarette Safety Standard UL 8139. Enabling our lab to issue authoritative reports for 43 monitoring items including waterproofing, pressure relief safety, and drop strength, based on national and international standards. This milestone achievement will ensure global recognition of our testing reports, facilitating our entry into new markets worldwide. In short, We are successfully navigating the domestic landscape and our international expansion by remaining alert, agile, and responsive. We will continue to invest in R&D to maintain our competitive edge as we grow and expand globally. Before I wrap up, I will I would like to share an ESG update. We have recently published our third ESG report, which highlights our contribution to society, welfare, and sustainability efforts throughout 2023. Our golden shield program to combat the proliferation of counterfeit vaping products was one of the year's major success stories. In 2023, we assessed the authorities in 187 anti-counterfeiting cases, seizing over 16 million counterfeit cartridges and 77,000 devices. The potential increases from 35 cases 49,000 cartridges, and 5,600 devices in 2022. This program not only protects our consumers, but also upholds the integrity of the vaping industry by ensuring that only safe, high-quality products reach the market. We also prioritize public health in our ESG efforts, investing in technological innovation to minimize the impact of e-vapor products on society. Through our 1 plus 4 research chain, we conduct systematic scientific evaluation and research on harm reduction efforts that continue to bear fruit in 2023. We partnered with renowned academic institutions such as Sun Yixian University, Qilu University of Technology, and Chang'an University to publish studies on harm reduction as well as the impact of smoking and vaping on public health and the environment. This research not only contributes to the development of well-informed environmental and health policies but also guides our targeted smoking prevention strategies and supports our goal of providing safer, harm-reducing alternatives to traditional cigarettes. Going forward, we will continue to advance public health initiatives and promote an orderly, well-regulated vaping industry through forward-thinking ESG initiatives that benefit our company, stakeholders, and community alike. In conclusion, our dedication to compliance innovation and sustainability is shaping a promising future for our company. As a trusted evaper brand for adult smokers, we will continue to deliver high-quality, compliant products while capitalizing on diverse growth opportunities on the global stage. I will now turn the call over to our staffer, Chao Lu, for a detailed financial review.
spk08: Thank you, Kate, and hello, everyone. Before I start the detailed discussion over 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 Relax, 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 RMB 627 million in the second quarter of 2024. up 66% year-over-year from RMB 378 million in the second quarter of 2023, and 14% quarter-over-quarter from RMB 552 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 strategies for maximum effectiveness, including both route-to-market and go-to-market plans. 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 mixed changes, we have proactively implemented strategies to enhance operational efficiency and cost management practices, including product design optimization and supply chain efficiency improvement. We recorded a total operating loss of RMB 33 million for the second quarter. However, excluding the impact of share-based compensation, we achieved a positive non-GAAP operating profit of RMB 45 million. our third consecutive quarter of non-GAAP profitability thanks to strong cost management and profitable contributions from our international market. Although our growth profit margin may fluctuate quarterly, we are confident that our overall operating profit margin will continue to improve, driven by the strategic leveraging of our existing workforce during our regional expansion. Consequently, operating expenses are expected to increase at a much slower rate than our top line growth. As a result, our non-GAAP net profit for the second quarter of 2024 increased by 147% year over year to RMB 213 million. For the same period, our non-GAAP basic net income per ADS was RMB 0.171 and non-GAAP diluted net profit per ADS was RMB 0.164. In terms of cash flow, we recorded an operating cash inflow of $197 million in the second quarter of 2024. a substantial increase from 41 million in the same quarter of the previous year. This notable improvement is primarily attributed to our enhanced working capital and inventory management strategy. Additionally, we are currently experiencing a negative cash conversion cycle. Inventory turnover day stood at just 21 days in the second quarter of 2024. significantly reduced from over 50 days in the second quarter of 2023 and 30 days in the first quarter of 2024. As of June 30, 2024, our total financial assets, including cash and equivalents, restricted cash, and various forms of short-term and long-term deposits and investments, totaled 14.9 billion RMB. In summary, we built a strong foundation for sustained growth and operational efficiency around the globe in the first half of 2024. Our international expansion is flourishing, supported by our healthy balance sheet and effective strategic execution. As we continue to expand our presence domestically and internationally, we remain committed to delivering sustained value to our shareholders. This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. 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, please press star then two. At this time, we will pause momentarily to assemble our roster. 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. The first question comes from Lydia Ling with Citi. Please go ahead.
spk03: Thanks, management. So I'm Lydia from Citi. So here I have two questions 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 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 what countries or regions that you target to enter in the second half or consolidate in the second half? And my second question is, for the market that you already entered for the overseas market, and so what could be the growth targets that management is thinking about or target? How to further drive the market share in those light countries? And also, if any color on the product or light channel strategies that you target for or planning for the looking forward, that would be very helpful. Thank you.
spk07: 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 the 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 infantry 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. Such 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 countries that 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. Regarding your second question, it's about how to grow the local market share in overseas markets. 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 wave 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 your two questions.
spk03: Thank you.
spk01: The next question comes from Peiheng Liu with CICC. Please go ahead.
spk02: Okay, thank you, management. This is Pei Hong from CICC. I have two questions here. The first one is about overseas competition. We have noticed currently overseas brands like iMiracle or Alphard and JigBabe 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.
spk07: Thank you very much, Peihang, for your questions. So first question is about the overseas competition. So I mean, since months after our inception, we have been the leader in the pot system category in mainland China. So as we expand into other countries, we are confident that our pot 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-waper 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 eVapor products since the release of our second generation hot system products, Relax Alpha. And we have in-house illiquid 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 use of behavior and other significant advantage that set us apart. Regarding your second question, it's about our current status of national products in China as well as the market share of illegal products. 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 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, Da Qian. 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 discreetly. 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.
spk02: Yes, they're helpful. Thank you, Sam.
spk01: The next question comes from Yun Guo with Citix. Please go ahead.
spk04: Thanks, management. This is Guilin from Citix. I have two questions here. The first question is that 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 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.
spk07: Thanks, Guoyun, 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 countries to countries, and it largely depends on local regulations. including taxation and product restrictions. So in markets where disposable products are still permitted, there are restrictions on nicotine 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 infantries 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 Relax Prime this month, which will pair perfectly with our illiquid solutions. Regarding your second question about the European flavor band, 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 getting market share from competitors. As users migrate from disposables to our subcategories, we will leverage our grant equity in pot systems to attract them. This migration plays to our strengths and presents a significant opportunity to us. Thank you for your questions.
spk04: Very helpful. Thank you.
spk01: The next question comes from Charlie Chen with China Renaissance. Please go ahead.
spk06: Thank you, management, for taking my questions. I have two questions. The first one is about China market, and the 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 were a lot of changes in the evaping market in China. 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 change 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 a second question is about the operations. I noticed that there are some volatility in your gross margin in this quarter. So going forward, how should we think about the gross margin as well as the cost of goods sold of your products. Thank you.
spk07: Thank you for your questions, Charlie. So the first one is about the domestic market, market sizing, et cetera. So first, I think it's important to note that the data for the EU market is challenging to track. So as mentioned, sales in this segment tend to be more concealed, which can be difficult to capture accurate figures. 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 a some light users discontinuing using evapoproducts because of flavor restrictions. In contrast, users of compliance products gradually return to their previous per capita consumption level, 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 remain high despite regulatory efforts. The compliance segment is gradually stabilizing, but the prevalence of non-compliance products influence the overall market dynamics. As for pricing, the average selling price for a compliance product 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 illiquid products like Dachshund, the average selling price per millimeter 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. Regarding the outlook of the overall gross margin So our gross profit margin level has remained relatively 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 UAP 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 our reporting perspective. Thank you very much for your questions. Thank you.
spk01: Due to time constraints now, I would like to turn the call back over to the company for closing remarks.
spk07: Thank you once again for joining us today. If you have further questions, please feel free to contact RxTechnologies' Investor Relations team through the contact information provided on our website or P.S. Yen Pei Financial Communications. Thank you very much.
spk01: This concludes the conference call. You may now disconnect your line. Thank you.
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