Hello, ladies and gentlemen. Thank you for standing by for RLX Technology, Inc.'s Fourth Quarter and Full Year 2021 Earnings Conference Call [Operator Instructions]. Today's conference call is being recorded and is expected to last for about 50 minutes. I will now turn the call over to your host, Mr. Sam Tsang, Head of Investor Relations for the company. Please go ahead, Sam.

Thank you very much. Hello, everyone, and welcome to RLX Technology's Fourth Quarter and Full Year 2021 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.relxtech.com. Participants on today's call will include our Co-founder, Chairperson of the Board of Directors and Chief Executive Officer, Ms. Kate Wang; Chief Financial Officer, Mr. Chao Lu; and myself, Sam Tsang, Head of Investor Relations. 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, expects, targets, 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 company, its affiliates, advisors, representatives, and underwriters do not undertake any obligations 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 will 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 over the call to Ms. Kate Wang. Please go ahead.

Thank you, Sam. And thanks, everyone, for making time to join our conference call today. As many of you might have become aware, just hours ago The State Tobacco Monopoly Administration released an updated draft consultation paper regarding national electronic cigarette product standards. At the same time, administrative measures for electronic cigarettes have been made official effective starting on May 1, 2022. While we didn't expect the announcement of these regulatory developments to coincide with our earnings growth, we welcome the finalization of these regulatory measures as it delivers certainty regarding timeline, mode of transaction, product specifics amongst others. The removal of these uncertainties and accelerated timeline will provide our organization with more concrete directions in our business operations and planning. We believe the new standards and measures will significantly improve adult smoker populations positive recognition of our product safety in the nature of harm reduction. We are confident that the likely restriction on flavors will not impact the core needs of our users and millions of traditional cigarette smokers for harm reduction. The experience [endeavors] from other markets supports the same view. Against the backdrop of the evolving regulatory landscape for e-cigarettes and the recurring COVID-19 outbreaks throughout 2021, we remained committed to enhancing our vision and executing our founding strategy and mission further cementing our industry leading position as the trusted e-vapor brand for adult smokers. We ended 2021 on a solid note with our core strength and fundamentals driving although we faced our share of challenges during the year, Our financial highlights include fourth quarter revenue growth of 17.7% year-over-year. which propelled a year-over-year increase of 123.1% in our full year 2021 net revenue. Our CFO, Chao, will share more details regarding our financial results and underlying drivers later. With that, I'd like to start by outlining…

Thank you, Kate, and hello everyone. I will start by sharing some major initiatives and developments from the fourth quarter and then walk you through our key financial results. As Kate mentioned earlier, despite the backdrop of regulatory impact, we delivered quarterly net revenues of RMB 1.9 billion, up 13.6% sequentially and by 17.7% year-over-year reflecting the momentum behind our efforts to optimize our distribution and retail channel network and to enhance our diversified product portfolio. Notably, we witnessed that there have been increasingly more fact-based and neutral public voices commenting on the e-vapor industry and e-vapor products in recent months. According to a survey in light of the relief of the proposed draft national standards, 69% of our potential users are aware of the regulatory changes and 87% expressed increased or unchanged willingness to purchase e-vapor products in light of the national standards as they believe that the regulations will have a positive impact on product safety and quality. Since December 2021, orders from our distributors and retailers have remained solid as end user demand has remained strong. We have been closely monitoring the trade inventory level of our distributors and retailers and cautiously fulfilling their orders to mitigate risks related to any excess inventory in our trade channels. In addition, we continued investing in our Golden Shield Program to combat sales of counterfeit products and made meaningful progress during the fourth quarter. In December 2021, we successfully assisted Shenzhen Police in busting a counterfeit factory site located in the Huaqiangbei electronics market seizing over 20,000 counterfeit products. Since launching the Golden Shield Program in 2019, we have assisted the police in solving more than 130 administrative and criminal cases of intellectual property rights infringement and helped to seize more than 1.5 million counterfeit products, a testament to our…

[Operator Instructions] Today's first question comes from Louise Li of Bank of America.

So my question is, could you share with us the latest year-to-date shipment and sell-through trend? Do you expect to see there are any significant changes from now to 1st of May and after 1st of May? So just another quick question on the newly released regulation. So according to the China National Standard file so we see that only tobacco flavor can be sold. So if this is the case, why do you still put a list of -- a positive list of ingredients? So is there any conflict?

Louise, so I will talk about more on the year-to-date shipment trends first and then I'll respond to your question regarding the latest regulations. So till December, we have still seen a continuous improvement in multiple operating metrics thus we are confident in our commercial development including the number of potential e-vapor users, which have been driven by the increasing willingness to consider e-vapor products by us as mentioned by Chao, a retention of new users and the number of cartridge per user, which we think is reflecting a higher number of potential users together with a higher user lifetime value. We believe the primary reason is that increasing users have higher confidence in e-vapor products and our products after the release of the first draft of national standards being released in December recognizing the benefits of harm reduction tobacco alternatives. So due to the above trends, we have then gradually optimized our shipment level to respond to latest developments. And regarding the latest regulations given that it was released article, it require more time for us to value it internally and like to see how it will evolve regarding the commercial results. Thank you for your question.

Ladies and gentlemen, our next question today comes from Lydia Ling at Citi.

I have two questions here. The first one is on the regulatory side and so regarding today's regulators update, including administrative measures and also the second draft on the natural standard. So can management value the potential impact on your business and how to deal with the evolving regulation and increased penetration among the adult smokers, particularly the restrictions on the flavor part? So could you give us more color on that? And my second question is on the product side. So any -- in light of the new national standards, so could you share any progress on the new product line?

So two questions, one is on the regulations and the other one is on how is the changes to new product launches. So for today, the State Tobacco Monopoly Administration announced the administrative measures of e-vapor to further strengthen the supervision of next generation tobacco products such as easy growth, to regulate the market order, to ensure the health and safety of adult smokers and promote the legalization and standardization of the industry, which will be effective on the 1st of May. So we have to see the key changes when you compare with the public consultation paper being released in early December includes having a greater emphasis on underage access prevention, dissuading minors to use e-vapor products, retailers obtain integrated retail license to procure products from local license e-cigarette wholesalers and shall not exclusively distribute listed e-cigarette products and finally, prohibits exhibition and events promoting e-vapor products. And also the regulators have announced to seek for the public opinion regarding the second draft of national standards with a commission deadline of March 17. Some key changes include such products should not be inducted to minors and shall not have flavors other than tobacco. But in contrast, we do see that key components in the existing product portfolio have been included. For example [Technical Difficulty] agents, which would publish a scientific study in the Journal of Applied Technology. So we believe such a wide list will be continuously evolving with [Technical Difficulty] shown inside the research and through effective back-based communication. So we are delighted to see the formalized regulations which has been significantly improving health makers' positive recognition of e-vapor product safety with the nature of harm reduction compared with tobacco products. And we believe that these measures could to better progress the development of our industry with higher…

And our next question today comes from Charlie Chan at Sana Renaissance.

I have one question. So during this transition period where you cannot extend your sales network, you cannot launch new products. So what is the main focus of your day-to-day work during this period? And can you share with us some of your major achievements or progress in your work for the past quarter?

So I can share our progress for last quarter in 3 aspects. And the first is on the sales and distribution. We have been closely monitoring our partners' operating and financial performance. So we have been putting great efforts into driving single store sales by introducing operational efficiencies and trainings. And after the regulations and draft measures been released, we do see that distributors and retailers have high confidence in the e-vapor industry and RLX, which drives our robust order book. We have also launched internal trainings to equip our sales experts with the right skill set considering the potential change of our industry. And on the product development front, part of modifying our portfolio as mentioned in previous Q&A, we have invested resources in developing new technology and products and they have a couple of new product pipelines. So far, the process will continue to invest in developing new products and technology and expect to obtain approvals after national standards become effective. And lastly, on organization upgrade, we have invested heavily in digitalization and optimizing work efficiency. We have been building an all-in-one digitalization system that monitors and tracks our operating and financial performance from front to back end, from the supply chain, sales and distribution channels. These new initiatives could better our day-to-day decision-making and increase our operating efficiency.

And the next question comes from Peihang Lyu with CICC.

I have two questions here. And the first one is we converted a shortage of certain flavors in your stores and could you provide some color on your [Technical Difficulty]? And the second question is how will the second draft of national standards affect all the existing portfolio?

So the line is not very clear. But I think the first question is mainly you have seen that some of our flavors are off stock in our store and the second one is on flavor again and what we'll see how the national standard's affecting our current portfolio. So on the first one. So after the administrative measures being released back in December, we have taken a prudent approach in lowering our trade and inventory as we consider multiple factors, including restrictions on product launches and new store openings during the transitional period. Time required to evaluate distributors and retailers order sentiments together with the fact that production capacity is more than enough to be increased again in a timely manner. Since December until now, we have seen continued improvement in operating metrics as mentioned, including user related metrics and store inventory metrics for single store sales. As a result, order book from distributors has been robust and we have been cautiously fulfilling those orders. And therefore, our trade channel inventory has stood at a low level since the first quarter of last year to date. In light of the potential regulations together with the draft national standards, we will monitor and adjust our shipment level to fulfill our distributors and user needs. And the second one is about our flavors. So to advocate, the primary reason for our smokers to use e-vapor products mainly is the harm reduction effects compared with other tobacco products, mainly cigarettes. And together with other cigarette factors, for example more hygienic with no flame, more convenient and have less disturbance to peoples around it based on our internal user survey. Flavors contained in cartridge are not the main reason for adult smokers switching from cigarettes to e-vapor products. And also in preference to overseas market experiences, when there is a restriction on flavor, it will only cause short-term turbulence to the trade channel especially on existing inventory management and preparation, but has limited impacts on the long-term trend for adult smokers switching from cigarettes to e-vapor products. We are strongly confident that China e-vapor users will continue to use RLX after the draft national standards become effective. Those affected are likely to switch from their best preferred flavor to tobacco flavor. Thank you for your question.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to management for closing remarks.

Thank you, 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 TPG Investor Relations.

Ladies and gentlemen, this concludes today's conference call. We thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.