Hello, ladies and gentlemen. Thank you for standing by for RLX Technology, Inc.’s Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] 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 2022 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 CEO, Ms. Kate Wang; our CFO, 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, expect, targets, estimates, intend, believe, potential, continue or other similar expressions. Forward-looking statements involve inherent risks and uncertainties. The accuracy of these statements maybe 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 and representatives do not undertake any obligation to update these forward-looking statements, except as required under the applicable law. Please note that RLX Technology’s earnings press release and this conference call 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 to Ms. Kate Wang. Please go ahead.

Thank you, Sam and thanks everyone for making time to join our earnings conference call today. 2022 was a year filled with unprecedented challenges. A combination of COVID-related disruptions and a substantial new set of industry regulations and policy updates impact our operations in the e-vapor sector as a whole. We carefully evaluated the market landscape in response to the volatile environment and quickly pivot to embrace the new policies and standards. Thanks to our effective strategy and strong execution. We maintained steady operations and achieved meaningful development during the year. For today’s call, I would like first to review the past year’s regulatory developments and highlight our efforts to respond to new requirements before moving to our outlook for 2023 and the ESG-related activities. Let’s start with the landmark new regulations. In March and April, the administrative measures for e-cigarettes and National Standards were introduced successively embarking upon a new regulatory year for the e-vapor industry. A set of detailed guidelines, rules and measures rolled out in the following months. To ensure most of the adjustments, the authorities granted industry participants, a transition period ending September 30, 2022. During the transition period, we proactively adapt our business and prepare to comply with the new requirements when the regulation came into full effect on October 1, 2022. We focus on designing compliant new products we call it Guo Biao in Chinese or GB products and applied for the relevant license and approvals. We readied ourselves to move all of our sales to the national transition platform as required. Meanwhile, we strove to optimize our supply chain and streamline our organization, enhancing the company’s agility and flexibility to better respond to the evolving regulatory environment as well as COVID-related disruption. In addition to our internal adjustments, we also provide timely support…

Thank you, Kate, and hello, everyone. I will now provide an overview of our financial results for the fourth quarter and the full year of 2022. We concluded unpredictable full year 2022 with an especially challenging fourth quarter. Not only was it our first quarter under the new regulatory framework, it also coincided with substantial changes in China’s COVID conditions and policies. Amid the complex environment we continue to prioritize cost control, a key component of our strategy throughout 2022, improved our supply chain efficiency and product design and adjusted our pricing to mitigate the impact of these external influences. In the fourth quarter, we delivered net revenue of RMB340 million. As I mentioned, our performance was negatively affected by the pandemic and erosion from illegal products resulting from the cracks of implementing the new regulation. With respect to COVID, around 40% of the regions, including Hunan, Hubei, Guizhou, Shandong, Yunnan, Jilin, Henan, Jiangxi, etcetera, suspended their orders for nearly 1 month during the fourth quarter because of pandemic-related disruptions. Meanwhile, off-line traffic decreased substantially due to lockdowns and the massive wave of infections nationwide, significantly impacting our sales. Encouragingly, we saw off-line traffic gradually beginning to recover as the peak wave of infections passed. The second factor was illegal flavored products. Per the national standards, only tobacco flavored products may be sold in licensed retail stores as of October 1. We strictly comply with the regulations and have maintained our leading position in the organized market. However, our sales have been affected by illegal non-tobacco flavored products as certain consumers are slow to adopt GB products while non-tobacco flavored products remain available. On the bright side, governments across the country have increased their efforts to combat these illegal products. We are pleased to see an increase in consumer acceptance…

Pardon me, interruption, everybody. This is the conference operator. It appears we have lost the speaker line, I would dial back after them, in the mean time I am going to place some hold music in. We ask that you please stay on the line. And once again we will rejoin the speakers in a moment apparently. Thank you. And pardon me everybody. This is the conference operator. We have rejoined our speaker location. Please proceed with your presentation. Thank you.

Sure. Sorry, apologies for the line connection. As we embark upon 2023, we will continue to optimize our operational efficiency and cost control measures, enhancing our agility and ability to compete amid the new regulatory environment. Our strong cash position will also empower us to make quality investments in R&D and product development. We believe our company’s resilience and solid fundamentals will enable us to overcome near-term hurdles and thrive in this new era. As always, we remain dedicated to creating long-term sustainable value for our stakeholders. This concludes our prepared remarks today. Please refer to our earnings press release for further details of our fourth quarter and full year 2022 financial results. We will now open the call to questions. Operator, please go ahead.

[Operator Instructions] Today’s first question comes from Lydia Ling at Citi. Please go ahead.

Hi management. Thanks for the presentation. This is Lydia from Citi Research. And so I have two questions here. The first one is, could you share about your recent trend like in January and also February. And what’s the user feedback on your new products and also these new prices? And given the reopening and also government efforts on the counter like the illegal products, so how do you expect your demand would recover to which level this year? So, this is my first question. And my second question is on the margins side. So, as a result of the price increase adjustments along the value chain and also including tax – consumption tax impact, so how do you actually expect your margin trends this year and also in the long-term? Thank you.

Sure. Thanks very much, Lydia for the questions. So, the first one is about the – how demand will evolve and also the user feedback. And the second one is mainly on the consumption tax and how are the margin trends. So, regarding the first one, which is the demand outlook and also the user behavior. So, we recently do see a sequential improvement month-over-month. And we believe there are a few reasons. So, the first one is about conversion. As users consume their pre-GB products, so they will naturally purchase GB products that’s produced by us as e-vapor products has been their major source of nicotine consumption. And the second is the launch of more SKUs as we have gradually launched more SKUs with various tobacco flavors to the market. So, users could be more accessible to find their preferred charge of tobacco flavored cartridge. And regarding our full year outlook and also the level of recovery, to be honest, I think right now it’s still very early and difficult to provide an accurate quantitative estimates for the reasons that we mentioned earlier in the remarks. The availability of illegal products, to a certain extent have delayed the conversion process for our users switching from pre-GB products to GB products that comply with the national standards. But recently, we do see there are improvements as the STMA has initiated and campaigned to combat non-GB illegal products on a larger scale and equally supportive of such campaigns. So, we do see and we expect to see more users switching to tobacco flavored GB products that would comply with the recent requirements once the majority of non-compliance products has been removed from the market. And regarding the user behavior, as we mentioned in the last earnings call, we see that the…

Thank you. And our next question today comes from Charlie Chen at China Renaissance. Please go ahead.

Thank you, operator. I have two questions as well. The first one actually is a follow-up on the – related to the price adjustment. So, you mentioned that you should have an improving gross margin. So, I have two questions on this. One is, given you have done all those operating efficiencies, how do you see your operating margin going forward? And also, what’s the rationale behind this price adjustments as well as do you have any further plan for price adjustments in the future? So, that’s related to the price adjustments. And my next question is regarding the share repurchase – share buyback. So, how much you have done and what’s your share buyback plan in the next few months or a year or so? Thank you.

So thanks, Charlie. So the first one is about the price adjustments and the second one is about the share repurchase. So, from the perspective of the absolute amount of our merchandise gross profit before deducting the fixed costs such as D&A and rental costs. So, the absolute gross profit amount per cartridge will decrease by mid-single digits following the price adjustments in April if the unit cost stays the same. In the meantime, our ex-factory selling price per cartridge will decrease by an even higher degree post the price adjustments. And therefore, if mathematically calculate, our GPM will improve slightly. As our new ex-factory selling prices will be effective on April 17, 2023, we do not expect to make price adjustments in the near-term. So far, the operating margins, it depends on our top line recovery. Currently, we cannot provide a quantitative guidance on margins for this year, but we have already taken steps to improve our efficiency to limit the impact of reduced sales. Taking 2022 as an example, our efforts in operating cost savings could save us more than RMB140 million on an annual basis. And second one is about share rep. As we announced our $500 million share rep in December 2021 for a term of 2 years, we will disclose the exact amount in our 20-F filings next month. The share rep program is largely on track with our internal plan. So, our Board and management consistently monitor the capital market conditions and we will make the corresponding repurchases from time-to-time. Thank you for your questions.

Thank you. And our next question today comes from Peihang Lyu with CICC. Please go ahead.

Hi dear management, this is Lyu Peihang at CICC and thank you for your time and presentation. I have two questions to ask. The first one is, how is your recent cartridge sales volume of the GB standard products, excluding the interference of illegal products? And could you show us some outlook for the upcoming recovery then? And my second question is, we have noticed that your ex-factory price and retail price has been lowered recently. So, I am wondering the reason for this action and how do you project the future project sales volume and GPM change after the price reduction? Thank you.

Thank you for your question, Peihang. So, the first one is mainly on the sales due to the impact of illegal products. And the second one is about the price adjustments was the impact on our GB. So, I think it’s difficult for us to estimate the impact due to illegal sales as these products are sold on the black market. And especially, these products are non-compliance and these entities do not pay for any tax. And therefore, they don’t transact even on the national transaction platform. And that’s why I think it’s difficult for us to estimate their volume and also our impact – and also the impact on our sales. And looking at the sales outlook for the year, if these illegal products could be mitigated on the market, what we can share on this stage is that the stores, which only sell GB products, for example, like our direct own stores, we could see that in recent months, their sales per store has been gradually improving. However, definitely these stores are impacted by the nearby stores that sell illegal products. So, we think the recovery will be even faster than our observance, these illegal products has been mitigated from the market. And the second question is about the price adjustments that will be impacted in April 2023. The main reason behind the price adjustment is that we have seen that our supply chain efficiency has been further improved, which provides some room for us to make price adjustments. And therefore, we decided to adjust our ex-factory selling price to better help our retailers to navigate the hard times alongside us. After our ex-factory selling part adjustments, the gross profit per cartridge will increase, generating higher profits at the end. Meanwhile, difference we have four product lines with various price points. These price adjustments are designed to mix the gross profit margins for each series more reasonable from the retailer’s point of view. This will better incentivize retailers to promote our various series of our GB products. Lastly, we would like to make our products more accessible to price-sensitive users. After the adjustments, we hope to see these users who have delayed their conversions due to pricing to have separate incentives to use our GB products. Thank you for your question.

Thank you. And due to the time constraints, 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 Technology’s Investor Relations team through the contact information provided on our website or TPG Investor Relations.

Thank you. This concludes this conference call. You may now disconnect your lines. Thank you very much.