Q1 2025 RLX Technology Inc Earnings Call

Thomson Reuters StreetEvents

Fri, May 16, 2025, 9:31 PM 15 min read

Participants

Sam Tsang; Head of Capital Markets; RLX Technology Inc

Chao Lu; Chief Financial Officer; RLX Technology Inc

Lydia Ling; Analyst; Citigroup Global Markets Asia Limited

Bojia Feng; Analyst; CITIC Securities Co. Ltd

Presentation

Operator

Hello, ladies and gentlemen. Thank you for standing by for RLX Technology Inc.'s first-quarter 2025 earnings conference call. (Operator Instructions)
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.

Sam Tsang

Thank you very much. Hello, everyone, and welcome to RLX Technology's first-quarter 2025 earnings conference call.
The company's financial and operational results were released through PR Newswire services earlier today and has 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 include our Chief Financial Officer, Mr. Chao Lu, and myself, Sam Tsang, Head of Capital markets.
Before we continue, please note that today's discussions will contain forward-looking information made under the Safe Harbor provisions of the US Private Securities Reform Act of 1995. These statements typically contain words such as may, will, expect, targets, estimates, 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 cost 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 this forward-looking information except as required under the applicable law.
Please note that our technologies, earnings press release, and this conference call can 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 Mr. Chao Lu. Please go ahead.

Chao Lu

Thank you, Sam, and thank you, everyone, for joining our earnings conference call today. I will start with an update on the global regulatory landscape and the market trends, followed by our recent business development and financial overview.
We were pleased to deliver impressive results in the first quarter of 2025 amid a challenging macro and regulatory environment, underscored by a 47% year-over-year increase in net revenues to RMB808 million and a non-GAAP operating profit of RMB106 million.
Since the beginning of 2025, the e-vapor industry has faced growing global scrutiny and an increasingly stringent regulatory environment. Industry-wide, e-vapor exports from China decreased year over year in the first quarter, mainly due to bans on disposable e-vapor products or e-vapor products, in general, excise tax and enhanced regulatory enforcement in certain countries.
Specifically, the UK, the world's second largest e-vapor market, and also New Zealand announced a ban on disposable e-vapor products effective next month, prompting local distributors to adopt a more cautious approach to importing. Additionally, Spain imposed heavier taxes on e-vapor products in April, while Mexico, Vietnam, and Kazakhstan banned e-vapor products completely.
Regulatory shifts will continue to impact the whole industry and compel manufacturers to adapt throughout 2025 and beyond. These regulatory changes drive changes in user trends and the e-vapor industry. For example, the ban on disposable e-vapor products inspired the industry to develop alternatives for disposable users.
Now the big puff trend that started in Europe has spread into Asia and the rest of the world, spurring innovation and impacting industry-wide revenue models. Big puff vapes are rechargeable, cartridge-based or disposable e-vapor products that offer a significantly larger volume of e-vapor -- e-liquid and higher puff counts than traditional vapes.
For example, our previous disposable and classic closed system cartridge-based e-vapor products contain just 2 milliliters of e-liquid. In comparison, our most recently launched big puff products can contain up to between 14 milliliters and 20 milliliters of e-liquid.
Since most manufacturing cost for e-vapors come from hardware rather than the e-liquid, the marginal cost of adding more e-liquid to big puff products is relatively low. Despite the significant increase in e-liquids volume, the per unit selling price of big puff products is not as proportionally higher than that of the traditional products.
As a result, the big puff products have effectively lowered the per milliliter consumption expense of e-liquid for users. Furthermore, the larger e-liquid capacity of big puff products reduces the frequency of replacement, making them especially appealing to disposable users, many of whom initially switched to disposable to avoid the hassle of cartridge replacement. Due to the enhanced cost effectiveness and convenience, the big puff products have attracted numerous former disposable users and gained global popularity, a trend few in the industry had anticipated before.
The sweeping big puff trend has driven an increase in e-liquid consumption by volume, but the lower milliliters average selling price has stunted revenue growth across all brands, causing a drop in industry dollar value. This has made 2025 a transitional year for the big puff shift with most industry participants expecting to experience negative growth in industry dollar value this year.
Starting next year, we anticipate that the industry dollar value growth will align more closely with the increase in e-liquid consumption and return to a normal growth trajectory. While evolving regulations and trends can prompt industry sustainability and create opportunities for innovation, that also presents significant operational challenges for brands. RLX is addressing these challenges by focusing on factors we can control.
As a brand with advanced in-house product development capabilities, we are uniquely positioned to quickly create market-specific compliant products that align with user trend. For instance, we have launched several new large capacity big puff products since the second half of last year, including disposable closed-system cartridge-based and open-system cartridge-based devices.
Our ability to stay ahead of trends and swiftly meet of evolving demand is what keeps us at the forefront of the industry. Our robust inventory management system also helps safeguard against potential unexpected regulatory changes. Furthermore, by operating in multiple global markets, we mitigate the risks associated with overreliance on any single major market.
Although we are not immune to industry shifts or the broader macro environment, we remain committed to growing at a pace that outperforms in the industry. We are confident that we will achieve positive dollar growth while the industry is experiencing negative growth this year.
Now let's move on to our financial results for the first quarter 2025. In the first quarter of 2025, our strategic emphasis on international markets drove a 46.5% year-over-year increase in net revenue to RMB808 million. However, due to seasonal factors and the fact that the fourth quarter is traditionally the peak season for overseas markets, quarter-over-quarter growth remained subdued, with net revenues staying largely consistent with the previous quarter.
Turning to profitability. Our gross profit margin improved to 28.6% in the first quarter of 2025, a 2.7 percentage point increase year over year and 1.6 percentage points quarter over quarter. This improvement was primarily due to a more favorable revenue mix from international markets and cost optimization initiatives.
We also achieved our sixth consecutive quarter of positive non-GAAP operating profit, reaching RMB106 million. Our non-GAAP operating profit margin increased by 9 percentage points year over year, mainly driven by incremental contribution from our international business and operating leverage.
In terms of cash flow, we achieved an operating cash inflow of RMB207 million in the first quarter of 2025, up from RMB4 million in the same quarter of the previous year. This reflects our business scale growth and working capital efficiency improvement.
As we mentioned on the last call, we are currently experiencing a negative cash conversion cycle with inventory turnover days of 25 days, receivable turnover days of 13 days and payable turnover days of 81 days in the first quarter of 2025.
Our cash position remains solid. As of March 31, 2025, our total financial assets, including cash and cash equivalents, restricted cash, and various short-term and long-term deposits and investments stood at RMB16.2 billion compared to RMB15.9 billion as of December 31, 2024.
By conclusion, we started 2025 on a strong note with robust top-line growth supported by our international strategy, sustained profitability improvements, and a solid cash position. As we continue to expand globally, we remain confident in our ability to drive sustainable growth and create long-term value for our shareholders.
This concludes our prepared remarks today. We will now open the call to your questions. Operator, please go ahead.

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions)
Lydia Ling, Citi.

Lydia Ling

Thanks, management team. This is Lydia from Citi. I have two follow-up questions. And the first one is, still interested to understand more on the progression of the overseas expansion. So could you share any latest update? And particularly, any plan to enter or consolidate new markets in the following quarters? This is my first question.
And second one is as the management just mentioned, they actually continue to have the involving regulatory changes in the industry. So how would you assess the potential impact on your business? And how do you plan to address these challenges? Thank you.

Sam Tsang

Thanks very much, Lydia, for your questions. Regarding the first question about our international expansion, as we have discussed in the previous quarters, we have been maintaining a prudent approach towards expanding into new markets, especially as the global macro and regulatory environments have evolved substantially over the past two to three quarters.
In several countries, we have considered regulatory shifts have led us to pause or adjust our entry plan. Given these ongoing changes, we expect to make another one to two quarters to carefully evaluate and decide on any further market expansion.
And regarding your second question about the regulatory landscape, it continues to evolve rapidly this year, with new policies being introduced across multiple regions. In Southeast Asia, we are seeing stricter rules and clearer guidelines, which help clarify what's allowed what isn't, leaving less room for ambiguity in the industry. In North Asia, countries are reviewing e-vapor regulations or considering the introduction of national standards.
Meanwhile, in Europe and Oceania, the focus has shifted to environmental concern, with markets such as the UK and New Zealand introducing bans on disposable products. These changes like the UK and New Zealand upcoming disposable ban set for June are driving innovation and encouraging the development of alternative products.
Thanks to our strong in-house product development capabilities, we are well positioned to adapt our offerings to meet the unique needs of each market as regulations evolve. We believe the increasing regulatory requirements will make it harder for smaller players without robust product development and supply chain capabilities to keep up.
While our longstanding commitment to compliance may have created more initial constraints for us compared with our peers with less stringent standards, we are confident that our approach set us up for sustainable long-term success as the industry matures. Thank you for your question.

Operator

Bojia Feng, CITIC Securities.

Bojia Feng

This is [Bojia Feng], CITIC Securities, and I have two questions here. So my first question is, what's the progress of Europe's transition from disposable e-cigarettes to big puff products? And how do you see future product trends? And the second one is, what strategies will you adapt to further capture market share? And what are your competitive advantages in marketing and channel development? Thank you.

Sam Tsang

Thanks, Bojia, for your question. So the first question is about the product transition. And the second question is about our strategies to capture incremental market share. So taking the UK, the largest market in the region, as an example, we have seen distributors respond proactively since the announcement of the disposable ban even before its official enforcement.
Demand for big puff products have been steadily increasing, and we are seeing a gradual shift as users of small puff disposables migrate to these alternatives. Some users have also switched to open system or small puff closed-system cartridge products.
That said, until the ban takes effect, small puff disposables still dominate and hold a significant market share. Once the ban is fully enforced in June, we anticipate most small puff disposable users to transition to alternatives, mostly big puff devices. We expect this conversion to be largely completed by the end of this year. Looking ahead, we don't expect this trend toward even large capacity products to continue indefinitely as current products are already at the upper limits of what's convenient for users to carry and use.
And regarding your second question about how we can gain our market share, our strategies are highly customized to each market, taking into account local user habits, regulatory environment, and channel structures. Broadly, our approach focuses on two main areas.
First is product development. We will continue to optimize our product portfolio by grossly tracking market trends and sales data. The insights we glean enable us to launch new products or improve existing ones rapidly. We'll look at all aspects when considering product upgrades, including functionality, convenience, cost-effectiveness and e-liquid solutions.
The second is channel strategy. We've adopted a localized approach to distribution and retail. Leveraging our successful experiences in other leading markets, we focus on refining channel structures and carefully selecting local partners. For instance, in select Asian markets, we've introduced a franchise model for exclusive stores, converting certain vape stores into our branded owners to gather first-hand market insights and further enhance our route-to-market strategy.
We are also building local teams to collect retail data, which help us better serve both retailers and consumers. While these initiatives may lead to higher short-term sales expenses, we believe they will make our RTM strategy more effective in the long run by improving product channel fit and benefiting our distribution partners, which ultimately leads to greater value and profits. Thank you for your question.

Operator

Yuying Zhao, CICC.

This is Zoey from CICC. I have two questions for the management. The first one is about the overseas market. So regarding the category conversion in Europe, how is the competitive landscape? And what's our advantage compared to the global leaders like BAT or disposable brands like Air Bar?
And as for the domestic business, are there any potential [regulatory] change? And how do you foresee the future growth? Thank you.

Sam Tsang

Thanks, Zoey, for your questions. Regarding the first question about the competition in Europe, we are well prepared to capture incremental market share during this global and categorical shifts. Our comprehensive product portfolio, combined with a clear pipeline of large volume cartridge-based and open-system products set to launch in the coming quarters position us strongly.
Our agile supply chain and robust distribution and retail channels also gives us a competitive edge during this period of transition. Compared to traditional tobacco companies, our more flexible organization allows us to bring our products to market much faster and respond promptly to changing trends or regulatory updates. Unlike some peers who operate across multiple categories, we are fully committed to the e-vapor segment, giving us deeper insights and the ability to invest wisely in optimizing our distribution and retail strategies for each market.
Furthermore, in contrast to brands that focus mainly on distribution, our long-term compliance-driven approach and in-house R&D capabilities ensure that our product development always aligns with both regulatory requirements and user needs. Our systematic management of payment terms and inventory also help minimize operational risk, helping us to maintain stability even as the markets and regulatory environments evolve.
Regarding your second question about our Mainland China business, in Mainland China, the regulatory framework has remained stable in the last two years, following the rollout of management measures and new national standards back in 2022. We have made some commercial progress under the new rules. For instance, we launched a line of disposable products that has received positive market feedback.
Meanwhile, enforcement against illegal markets has improved, helping us to achieve a modest year-over-year revenue growth in Mainland China. But it's still limited due to the dominance of illegal products in the market.
Looking ahead, we believe the best way to boost growth in China's legal e-vapor market is to encourage regulatory approval of compliant yet competitive products. For example, those with slightly higher levels of cooling agents within national standards. If there are no significant regulatory changes, we expect the legal markets to remain stable or see only modest growth. Thank you for your questions.

Operator

Due to time constraints, now I would like to turn the call back over to the company for closing remarks. Please go ahead.

Sam Tsang

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.

Operator

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

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