Good morning, ladies and gentlemen, and thank you for standing by for Waterdrop Inc.'s Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Xiaojiao Cui. Please go ahead, Ms. Cui.

Thank you, operator. Hello everyone, thank you for joining Waterdrop’s fourth quarter and fiscal year 2021 earnings conference call. Please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC. The Company does not undertake any obligation to update any forward-looking statement, except as required under applicable law. Also, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP. Joining us today on the call are Mr. Shen Peng, our Founder, Chairman and CEO; Mr. Yang Guang, Co-founder, Director and General Manager of Insurance Marketplace; Mr. Hu Yao, Co-founder, Director and General Manager of Medical Crowdfunding and Healthcare, and Mr. Kevin Shi, our CFO. We will be available for a Q&A session after the remarks. Now I would like to turn the call over to our CEO Mr. Shen Peng. Please go ahead.

[Foreign Language] Hello everyone, thank you for joining our fourth quarter 2021 earnings conference call. Since the beginning of the third quarter, the capital market has experienced further volatility and the growth of the insurance industry has somewhat slowed down. But no matter how the market changed, we have been keeping our commitment to developing our business in customer-centric manner, leveraging technology to improve operational efficiency in insurance and healthcare business, solidifying business fundamentals, and creating sustainable long-term value for our shareholders. [Foreign Language] Firstly, we will be confident in the future and be patient in the present. While the insurance industry has had various challenges in the last half months, we see those challenges as good opportunities for us to strengthen the fundamentals of the company. No matter the operating environment, we have stayed true to our commitments and given our utmost efforts more proactively and relentlessly. [Foreign Language] As a top-tier player in China’s insurtech and online healthcare market, we strive to make our business strategies more responsive and move full steam ahead. In Q4 2021, we seriously adjusted our business strategy and implemented devotedly in response to the changing environment. [Foreign Language] Previously, Waterdrop pursued a fast growth in user base and total revenue while keeping ROI within a reasonable range. Starting in the second half of 2021, we have more pragmatically pursued a higher quality development. To achieve healthy and sustainable growth, we have continued to invest in and strengthen our advantages in some businesses, and meanwhile strive to generate revenues and profits on other businesses. [Foreign Language] Our fourth quarter results have affirmed the execution ability and determination of our management team, and the company achieved non-GAAP profit in this quarter. We are still working hard, and have also reinforced our ongoing commitment to creating…

Thank you. In the year 2021, China’s insurance industry underwent a period of adjustment with downside pressure. According to the statistics from the CBIRC, the annual growth in gross written premium, or GWP, for the health insurance sector was only 3% in 2021, and the lowest in the past 10 year. And the GWP saw a decrease of 3% year-over-year for both the third and fourth quarters. In 2021, the total profit of life and health insurance companies decreased by 47% year-over-year, 63 percentage points lower than the growth in the year 2020. So to summarize in short, transformation would be the keyword that best represents the current state of the insurance industry. Regulatory authorities have issued a series of new policies that aimed at guiding the orderly development of the industry. So currently, many life insurance companies are proactively undergoing business restructuring and accelerating the pace of high-quality transformations. So these insurance companies are returning to the mission of providing protection for users instead of simply pursuing market scale. Besides, they are focusing more on the profit contribution on new policies. So in such environment, Waterdrop's FYP increased by13.4% year-over-year to RMB16.3 billion in the year 2021. Against the backdrop of industry slowdown and new regulatory directions, we have transformed our user acquisition model from the first month discount price products to the first month original price products since the end of the third quarter. [later changed by the company to RMB 5.9 million]: So next, I'm going to summarize the major progress we have made in Q4 from three [ph] perspectives. Firstly, we have achieved preliminary success in our business transformation and have significantly improved our operating efficiency. Q4 is the first full quarter as of the first month discount price model for our online short-term insurance products…

[Foreign Language] Next, I will give you an update on the latest development of our Waterdrop Medical Crowdfunding and healthcare businesses, as well as the progress of our R&D and technological innovations. [Foreign Language] Firstly, let me update on our medical Crowdfunding business. Our Waterdrop Medical Crowdfunding business grew in an orderly manner, further reinforcing its market-leading position. As of the end of Q4, the cumulative number of donors reached 394 million, helping 2.36 million patients and pushing the cumulative funds raised to over RMB48.4 billion. [Foreign Language] To support the common prosperity initiative, we began in-depth cooperation with local governments. Our cooperation with the Jinyun County government on [indiscernible], a medical insurance poverty relief project has been working well. In 2021, Waterdrop has assisted Jinyun County in the active identification and management process of more than 15,000 people in need of medical aid. According to our estimates, the platform helped reduce the out-of-pocket medical expenses of the needy by over RMB14 million in 2021 or a year-on-year decline in such expenses of about 12%. In 2021, the number of people in poverty caused by diseases reduced by 77% year-over-year. The Jinyun Project was ranked No. 7 in the list of Best Applications in Digital Society selected by the Zhejiang Provincial Development and Reform Commission. [Foreign Language] In addition, in Q4, we cooperated with media and charity organizations including China Social Assistance Foundation, People's Daily Health App, Chinese Red Cross Foundation, and Henan Charity General Federation, to explore the establishment of a supplementary medical aid program. We also launched the Waterdrop Critical Illness Charity Aid Project, which operates under the self-aid plus charity-aid model, to provide supplementary medical aid funds to patients with critical illness and in need of financial assistance. As of December 2021, there have been more than…

Okay. Thank you, Hu Yao. Hello everyone. I will now walk you through our key financial results for the fourth quarter of 2021. Before I go into details on the financial performance, please be reminded that all numbers quoted here will be in RMB, and please refer to our earnings release for detailed information on our comparative financial performance on a year-over-year basis. Our net operating revenue decreased by 27.3% year-over-year to RMB604 million from RMB830 million and decreased by 25.6% on a comparable basis, which means, without taking into account the management fee income from Mutual Aid business which we already ceased in the first quarter of 2021. The decline in revenue was due to the decrease in FYP outweighing the improvement of our take rate year-over-year. In recent months, we have seen our take rate stabilized and began to pick up resulting from the improvement in our business quality. Operating costs and expenses for quarter four decreased significantly by 38.6% year-over-year to RMB678 million. On a quarter-over-quarter basis, operating costs and expenses decreased significantly by 47.5% compared to the last quarter, showing our measures on cost control have had a significant effect. In the fourth quarter, we took a series of measures to reduce operating costs and expenses, including reducing spending and improving the effectiveness and ROI of traffic acquisition, optimizing our organization structure, reducing the redundant headcount of employees, and improving operating efficiency. To break it down, the operating costs were RMB197 million, a decrease of 21.4% year-over-year, mainly due to the decrease of RMB66 million in professional and outsourced customer service fees, partially offset by an increase of RMB19 million in personnel cost as our consultants and insurance agents team expansion compared to last year. Sales and marketing expenses decreased by 63.8% year-over-year to RMB441 million…

Thank you. [Operator Instructions] We will take our first question today from Qingqing Mao of CICC. Please go ahead. Your line is open.

Okay, thanks. This is Jensen from CICC. Congrats on the results. I have two questions. The first is about the operation of existing customers. Could you talk more about the renewal rate, what's the trend? And what's your strategy to further serve the existing customers? The second question is, what did you do to drive the significant improvement in profitability. Can we expect these operating margin to continue in 2022? That's all for me. Thanks.

Okay. This is Yang Guang speaking, thank you for the question. In terms of our renewal, the premium renewal rate improved to 89% in December 2021 from 62% [ph] in September 2022 - 2021, up by 43%. So we have achieved great improvement in our renewal rate. I think our strategy to improve renewal rate is focus on three main areas. And why is that, we improved our renewal rates by upgrading our renewal products. For example, we increased the coverage for users and providing premium discounts for customized policyholders. And secondly, we provided renewal users with more product coverage options. So a differentiated add-on products strategy that made our premium renewal rates up by 5%. And thirdly, we support users with diverse terms of payments, such as auto renewal, monthly payment or annually payment and reach manual renewal users through message and phone calls. So in terms of the LTV per user, we continue to convert our users and increase per user LTV mainly through Enterprise WeChat and O2O model. So the LTV of Q4 was up by 93% compared to Q3. Hope that answers your question. And for your next question regarding the operating margin, I'm going to hand it over to our CFO, Kevin.

Thank you, Yang Guang. Thank you, Jensen. Thank you for your question. As a successful rollout of the cost control plan, we actually - we have two consecutive quarters, effective cost control and profitability enhancement. Compared with quarter three, our total operating costs and expenses further reduced significantly this quarter, and quarter-over-quarter declined 47.5% in total costs and expenses was mainly due to first, a decrease of 69.2% saving in marketing expense, and the second is 33.5% decrease in operating costs quarter-over-quarter. In terms of our marketing expense, if we look at our earnings release in previous quarters, let me explain [ph] that, our sales and marketing expenses in quarter two exceeded RMB1.2 billion, of which about 80% was traffic acquisition cost. In quarter three, sales and marketing expenses was around RMB781 million of which around 68% was our traffic acquisition cost. So we can see that the various measures of our refined operation have produced certain results in quarter three. But with our continuous efforts, we have achieved more remarkable results in the first quarter. Sales and marketing expenses significantly reduced to RMB241 million, and only less than one third of sales and marketing expenses were incurred for traffic acquisition. Regarding measures to control company expenses, in terms of sales and marketing expenses, our [indiscernible] limited to first further reduction in marketing expenditure and stricter criteria to select traffic acquisition platforms. And second, we're also leveraging our AI powered platform to come back to more intelligence and targeted marketing. And in terms of operating costs, specific measures include, firstly, reviewing key task and our business procedures to identify where and how to optimize. And the second, integrating organizational functions with higher synergies. And third, strengthening the control over selection of suppliers. And the fourth, measuring certain officers who are moving to areas with more reasonable rents. So we are moving faster on the right track to achieve breakeven. And we have delivered good results towards particular objective for the two consecutive quarters. We originally plan to procure in terms of this year - in 2023, we have already increased our efforts to control costs and expenses and now we're already made profits in non-GAAP terms in quarter four. Marketing expenses, which used to be our largest expense item have been significantly reduced in the third and fourth quarter. And we also managed to control over costs and company wide. So going forward, we expect this trend to continue in year 2022. So our goal is that our established business will make profits for the full year of 2022 on a non-GAAP basis. Thank you.

Our next question from Michael Li of Bank of America. Please go ahead.

Thank you. Thank you, management. This is Michael Li calling from Bank of America. And my question is about the quality of your earnings and also the volume growth. You see very strong quality improvement in fourth quarter last year, and also the cost control last year, and fourth quarter led to the first profitable quarter of non-GAAP basis. But we also see the decline, year-on-year decline and quarter-on-quarter decline of your commission income growth. I know there's kind of seasonality to this and I know that last year second quarter to fourth quarter sector premium growth was weaker than first quarter last year. And we still want to know that what is the target of your volume growth as a first year premium growth next year, and how are you going to achieve that kind of target? This is my first question. The second question is that, we know that you are going to charge Waterdrop [indiscernible] So what is the purpose of this kind of change of policies? Thank you.

Thank you for the question. I think as mentioned earlier, the entire industry is undergoing cyclical adjustment. So I think the [indiscernible] the old gross model focusing on scale expansion cannot adapt to the current market conditions. And the launch of stricter regulatory policies has intensified the industry adjustment. And so the tightening regulations and cyclical adjustment have made the competitive environment of online insurance services more favorable to our company. So for example, the number of peers have actually [indiscernible] the market and our external customer acquisition has improved. So under this environment, our accumulated human resource insurtech capabilities and one [indiscernible] in lower tier cities will enable us to welcome patient to fuel for future growth, from over the entire insurance industry exploring new growth model which will benefit companies raise stronger innovation G&A, just like us. So in the meantime, we'll create new growth drivers by looking on our open platform to offer more services to empower the industry. I think after five years of exploration, we have accumulated strong technology and capabilities in the insurtech area. Now we are building our open platform to offer all the technology service to the partners in the market. So we'll be only be companies with larger user group and ability to tap into the customer value - able to navigate the unfavorable industry cycle to demonstrate their business resilience and adapt ability. So every member will be the ones that can transform and upgrade the business as early as possible, making necessary strategic adjustments and actually respond to regulatory costs and directions in long run. So simply a pursuit across all growth is not in the current optimal solution. So to answer the question regarding the SIP target, I think we expect our revenue growth will stabilize this year, when our minimal cost control remains unchanged. And in fact, our profitability improvements will continue to do. So this means that the slowdown growth due to a bit smaller transformation and industry adjustment has basically reached an inflection point in the near future, and the company will follow those healthier and most sustainable model for the future development. Hope that answers your question.

We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Have a good day.