RLX Technology, Inc. Q3 FY2024 earnings call

• Overseas Strategy: Since terminating the non-competition agreement last year, expanded into multiple international markets. Observed two trends in overseas e-vapor industry: increased regulatory activity and growing demand for enhanced functionality and cost-effective products. Developed integrated business model including targeted go-to-market strategies, comprehensive product portfolio, refined supply chain management, and focused user engagement strategies, replicating in international markets with adjustments based on local conditions.
• China Market: Illegal e-vapor products dominate the market (80%-90% of total). Actively combating illicit sales through initiatives like targeting illegal sales on social media, delisting illegal zero-nicotine products, and collaborating with authorities. Launched new compliant disposable product line, with positive feedback, and plan to expand nationwide. Successfully passed enterprise intellectual property compliance management system requirements certification.
• Financial Review: Net revenues grew, gross profit margin improved, non-GAAP operating profit and net income increased, operating cash inflow improved, and total financial assets were substantial. Announced second cash dividend since IPO.

RLX Technology Inc. reported net revenues of 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 China and non-China businesses saw sequential growth. Non-China business revenue accounted for more than half of net revenues in the third quarter of 2024. Overall gross profit margin improved to 27.2% in the third quarter of 2024, a 3.2 percentage points increase year-over-year. The company recorded a total operating loss of RMB 11 million this quarter, but excluding share-based compensation, achieved positive non-GAAP operating profit of RMB 82 million. Non-GAAP net income for the third quarter of 2024 increased by 30% year-over-year to RMB 262 million. Operating cash inflow was RMB 157 million in the third quarter of 2024, up from RMB 83 million in the same quarter of the previous year. Total financial assets as of September 30, 2024, stood at RMB 15.4 billion.

• 2025 overseas expansion: Considering entering a couple of countries in EMEA region and Central America, depending on stable regulatory development, built business model, and right team in place. - For organic growth in current operating countries: Focus on optimal product development portfolio and right route-to-market strategies to create product-market fit, analyzing local market environments and user behavior, and adjusting product and marketing strategies accordingly. The e-vapor category is expected to grow double digits in the next couple of years, and the company believes it is on track to gain further market share.

• Overseas: Increased regulatory activity across various markets, complicating operations for compliant brands. - China: Illegal e-vapor products dominate the market, being of subpar quality, non-tobacco flavored, and not contributing to consumption tax revenues.

Q: 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.

A: Thank you very much, Lydia. So there are two questions. The first one is about the overseas expansion plan for 2025, and the other one is about organic growth. Since the termination of our non-competition agreement last year, we have entered into multiple international markets. This quarter marks the first anniversary of our company's entry into markets outside of China. As of the third quarter of 2024, we operate directly in five countries in East Asia, Southeast Asia, and Oceania. Based on our internal estimates, we are currently the number one brand in three out of the top five countries in terms of revenue from the closed system e-vapor category. We are also one of the leading brands in the remaining two countries. We also sell products to affiliates that sell to their overseas distributors. In the third quarter of 2024, non-China business revenue accounted for more than half of our net revenues. Looking ahead to 2025, we are considering entering a couple of countries which could be in the EMEA region and Central America. As we mentioned last quarter, we only enter a country when its regulatory development is stable, our business model is built, and we have the right team in place to operate there. We currently think a couple of candidates may be ready for entry next year, but this will depend on internal and external factors. Regarding the organic growth of the countries that we are currently operating in, we mainly focus on two aspects to gain incremental market share: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.