Hello, ladies and gentlemen. Thank you for standing by for RLX Technology Inc's. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's remarks, there will be a question-and-answer session. Today's conference call is being recorded and is expected to last for about 45 minutes.

I will now turn the call over to your host. Mr. Sam Tsang, Head of Investor Relations of the Company. Please go ahead, Sam..

Thank you very much. Hello, everyone, and welcome to RLX Technologies Third Quarter 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 discussions 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, target, estimate, intend, belief, potential, continue, or other similar expressions.

Forward-looking statements in loss inherent risks and uncertainties. The accuracy of these payments will impact 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 Technologies earnings press release, and this conference call include discussions of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. RLX's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to Ms. Kate Wang.

Please go ahead..

A National Public Service [Indiscernible] For Standards Information " under the state's administration for market regulation, seeking public comment regarding national electronic-cigarette product standards.

Yesterday, December 2nd, 2021, that State Tobacco Monopoly Administration released a consultation paper entitled Administrative Measures for Electronic-Cigarettes, seeking public comments regarding administrative measures, electronic cigarettes, covering various aspect, including production, distribution, and the retail sales, import and export, and inspections.

We firmly support this amendment to the detail implementation regulations and have begun making any required change to fully compliant with the new regulations and administrative measures. We believe the amendment will pave the way for long -term and sustainable growth in this sector.

We are also aware of meaningful worldwide regulatory developments, which reflects similar trends globally. In the U.S., the FDA has made substantial progress, reviewed PMTA applications and granted its first e-vapor product authorization in October, demonstrating its reclamation of certain e-vapor products harm reduction effect.

We hopefully follow global regulatory developments and uses regulation of e-vapor products as the global trend. In view grow, as countries worldwide recognized universal products harm reduction benefits for adult smokers.

With these regulatory developments specially in China, we believe the sector will enter a new era of development, an era marked by enhanced productivity and qualities. Hoffman takes social responsibilities, and an improved electoral property protection.

As some of you may be aware, the third quarter was challenging on the commercial front for the entire industry value chain, which had been reflected in our key value chain partners financial results, previously. Misinformation from temporary negative public Jiong e-vapor sector, and the Walgreen Co.

in our teen restrictions, in response to outbreaks in China, which we discussed during last quarter's earnings call, has a significant adverse impact on the retail sales and product procurement, our branded stores, since the latter half of the second quarter. As a result, we have record 34% quarter-over-quarter decline in our net revenue.

But we believe this revenue decline to be temporary and have a clear plan to achieve long-term healthy growth which Chao will explain in detail later. Despite those industry [Indiscernible], we continued to focus on building a solid foundation for sustainable success.

In the third quarter, we redoubled our scientific research efforts and continue to attract and recruit top talent to strengthen our sales, supply chain, and R&D capabilities. We are committed to providing adult smokers with innovative harm reduction production of the highest quality. Also, at RLX, we also plan and act for the long-term.

Corporate social responsibilities have been an integral part of values since day one. Into the third quarter, we unveiled our 2020 to 2021 corporate social responsibility report. Where in, we shared our progress with respect to our CSR initiatives.

Some highlights, you put our industry-leading age verification system, sound flower system 3.0, with a cost of features to prevent under-18s. use. Our RLEX Care community service program to promote role revitalization in common prosperity. These accomplishments are a testament to our dedication to fulfilling our social responsibilities.

We strive to positively impact our users, employees, and communities in which we live. With that, I will now turn the call over to our CFO, Chao Lu. He will elaborate further on some of our last quarter's initiatives and go over our operational and financial results in more detail. Chao, please go ahead..

Thank you, Kate. And hello, everyone. I will start by sharing some of this quarter's major initiatives and developments and then walk you through our key financial metrics. We believe that offering the right products to the right use of segments through the optimal route-to-market will be the key to our sustainable, high-quality growth.

To this end, we continue to expand our product offerings to meet the needs of diverse user segments and optimize our distribution and retail networks to ensure quality growth. With respect to product, we are focused on offering better and more tailored vaping products for various user groups to help engage new users with the right products.

This quarter, we introduced E-cigarette, a new brand targeting adult smokers with a long history of smoking. Our goal is to recreate an authentic smoking experience for adult smokers by launching 8 tobacco flavored cartridges in our initial stage.

At the same time, we further upgraded [Indiscernible] phone, a more accessible product line catering to price sensitive user’s needs. We also recently re-launched stellar or [Indiscernible] in China, a premium device lines with upscale stack styling, including leather, lace, and other fashionable materials.

We will continue to monitor user-experiences very closely and launch innovative targeted products at the right time. We also made several advancements in user-retention and engagements during the quarter. We successfully upgraded our membership system, enabling members to enjoy more benefits as they accumulate reward points.

A growing number of users are scanning the QR codes on their cartridges to collect ruble points, which will allow us to empower uses with instant product authentication. Separately, we have established more effective communication channels to provide unbiased, fact-based, scientific e-vapor product information to our users and the community.

Finally, we are concentrating on distribution and retail channel optimization. Instead of engaging more distributors and expanding the number of our RELX branded stores, this quarter, we prioritized our existing distributors organizational upgrade.

We encourage our distributors to hire exceptional talent and refine their team structure within each department. We optimize existing RELX branded partner store’s locations by identifying areas with high-retail sales potential and encouraging store owners to adjust their operation accordingly.

In addition, we provided online and offline training for store owners and sales personnel to enhance their communication skills and enrich their product knowledge, in order to counter the diverse effect from misinformation resulting from periodic negative publicity on all categories.

We have also upgraded our digitalization system for branded partner stores, providing improved functionality and additional user portals to assist store owners and salesperson personnel in their daily operations.

For our other retail outlets, our focus in the third quarter was to identify prime outlets for expansion through trials in various channels. These trials resulted in several initial successes, including strong momentum in lifestyle channels and other key accounts.

In addition to our entities on high-quality growth, we are deeply committed to fulfilling our corporate social responsibilities. We believe the healthy relationship between our products, users, shareholders and the community, has been essential to the growth we have achieved over RELX 's 4-year history.

With this in mind, we'll work tirelessly to introduce new technologies to tackle industry pinpoints. For example, minor protection is one of RELX 's highest priority. We spend all efforts in our minor protection initiative, from product labels to trade channels and technology innovation.

In June 2021, we began upgrading Sunflower System our technology driven minor protection system, to version 3.0, and currently equipped all of our branded store with the upgraded software. On the Sunflower System 3.0, all uses are required to complete name, plus ID number, plus face recognition, three-step clarification before purchasing.

After the amendment to China's national standards become effective, we will strictly comply with any upgraded product requirements. For example, we are prepared to include minor protection features such as child safety locks, similar to the feature which we have incorporated into our RELX ICE product lines back in 2019.

As a Company that values long-term, high-quality growth, our commitment to social corporate responsibility is at the core of our daily operation.

To echo what Kate has pointed out previously, our game has entered the second half with the State Council 's decision to amend the detail implementation regulations of that tobacco monopoly law and the subsequent release of consultation paper regarding National Electronics Cigarette Product Standards by the State Tobacco Monopoly Administration, as well as last night's release of a consultation paper regarding an administrative measures on electronic cigarettes, covering various aspects, including production, distribution, and retail sales, import and export and inspections.

Different from the first half of the game when the sector lacked clear regulatory guidelines, this second half is marked by enhanced product safety and quality, authentic social responsibility, and improved intellectual property protection.

The investments we made in products, talents, research, and compliance in the third quarter and beyond, will place us in an advantageous position on the new regulatory paradigms. We expect these investments to year-steady and sustainable growth soon, and to reward us and our shareholders in the long term.

Turning to our financial results for the third quarter of 2021, net revenues decreased by 34% to RMB 1.68 billion, equivalent to $260.2 million, in the third quarter of 2021, from RMB 2.54 billion in the second quarter of 2021. The decrease was the result of volatile market conditions, including 1.

negative e-vapor industry publicity, since the latter half of the second quarter, 2. the fact that the draft new rules announced on March 22nd, 2021 had not been formerly confirmed, and no new implementation details has been revealed during the quarter. And 3.

evolving restrictions in response to COVID-19 outbreaks in China, which had an adverse impact on our sales and channel inventory management. Gross profit decreased by 42.8% to RMB 656.0 million (US$101.8 million) in the third quarter of 2021 from RMB 1.15 billion in the second quarter of 2021.

Gross margin was 39.1% in the third quarter of 2021 compared with to 54 -- 45.1% in the second quarter of 2021. The decrease was primarily due to 1. an increase in direct costs related to promotional activities and 2. an increase in inventory provisions.

Operating expenses were positive RMB 241.3 million equivalents to $37.5 million in the third quarter of 2021, representing a decrease of 244.4% from RMB 167.2 million in the second quarter of 2021.

This significant decrease in operating expenses was primarily due to a recognition of share-based compensation expenses of positive RMB 523.7 million equivalents to $81.3 million, consisting of 1. share-based compensation expenses of positive RMB 90.8 million equivalents to U.S. $14.1 million recognizing selling expenses.

Two, share-based compensation expenses of positive RMB 320.1 million equivalents to $49.7 million, recognized in general and administrative expenses. And 3 share-based compensation expenses of positive RMB 112.8 million, equivalent to $17.5 million, recognized in research and development expenses.

The significant fluctuations in share-based compensation expenses were primarily due to the changes in fair value of the share incentive award that the Company granted to its employees, as affected by significant fluctuations of the Company's share price.

Selling expenses decreased by 55.1% to RMB 56.5 million, equivalent to $8.8 million in third quarter of 2021, from RMB 126 million in the second quarter of 2021. The decrease was primarily driven by, first, the fluctuation of share-based compensation expenses.

And second, a decrease in salaries and welfare benefits, partially offset by an increase in branding material expenses. General and administrative expenses decreased by 649.8% to positive RMB 253.2 million, equivalent to $39.3 million in the third quarter of 2021 from RMB 46.1 million in the second quarter of 2021.

The decrease was primarily driven by the fluctuation of share-based compensation expenses and the decrease in salaries and welfare benefits. Research & Development expenses decreased by 808.3% to positive RMB 44.6 million, equivalent to $6.9 million in the third quarter of 2021, from positive RMB 4.9 million in the second quarter of 2021.

The decrease was managed driven by the fluctuation of the share-based compensation expenses and a decrease in salaries and welfare benefit, partially offset by an increase in software and technical expenses, and second, an increase in consulting expenses.

Income from operations was RMB 897.3 million, equivalent to $139.3 million, in the third quarter of 2021, compared with RMB 979.3 million, in the second quarter of 2021. Income tax expenses was RMB 121.4 million, equivalent to $8.8 million, in the third quarter of 2021, compared to RMB 204.2 million, in the second quarter of 2021.

The decrease was primarily due to a decrease in taxable income. U.S. GAAP net income was RMB 976.4 million, equivalent to $151.5 million, in the third quarter of 2021, compared to RMB 824.3 million in the second quarter of 2021.

Non-GAAP net income was RMB 452.7 million equivalent to $70.3 million in the third quarter of 2021, representing a decrease of 30.5% from RMB 651.8 million in the second quarter 2021. U.S.

GAAP basic and diluted net income per ADS were RMB 0.724 equivalent to $0.112 and RMB 0.717 which was equivalent to $0.111, respectively, in the third quarter of 2021. Compared to U.S. GAAP basic and diluted net income per ADS of RMB 0.595 and RMB 0.591, respectively, in the second quarter of 2021..

[Later changed by the company to RMB 0.334]:.

[Later changed by the company to RMB 0.332]:.

[Later changed by the company to $0.051]:.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And for the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Today's first question comes from Lydia Ling and Citi. Please go ahead..

Hi everyone. Hi Management. And thanks for the presentation, and this is Lydia Ling from Citi. I have two questions.

My first question is, given the recent regulation update developments, would you like to share with us, how are your products portfolio involved going forward, and what changes can we expect to see in your existing product portfolio? And then my second question is, we saw further slowdown in the third quarter.

Could you actually share more color on your fourth quarter to date operations trends and also your outlook for next year given the current regulation update and also the COVID situation. Thank you..

Thanks very much, Lydia. So, regarding your first question, regarding our product portfolio. We do have already clear our current development strategy. As mentioned in the opening remarks, we try to offer device products to the rights future settlements, for the optimal route-to-market channel.

So, we too are aware of the press conference held by the State Tobacco Monopoly Administration yesterday and also the announced product consultation of the National Electronic Cigarettes [Indiscernible] vendors.

So, if in the transition period of our new [Indiscernible] requirement to become effective, [Indiscernible] comply with the regulatory guidelines. So, regarding what would we change to our current product offerings, if and or when the draft National Electronic Cigarettes [Indiscernible] vendors become effective.

We anticipate we may need to monetize some of our current offerings. However, we are very confident that such changes once be complex for our Company, technically. And we believe, as of course, we'll still continue to seek out and use our products as harm reduction alternatives. So, regarding your second question about our 4Q outlooks and 2020.

We currently do not have any guidance for the quarter together with next year. So, we hope to share more when we have better clarity..

Our next question today comes from Charlie Chen, in China Renaissance. Please go ahead..

Thank you, managements, to take my questions. I have 2 questions [Indiscernible]. The 1st one is could you please share your observations on the current competitive landscape for this industry.

Are there any changes compared to the first half of this year? And also, what are your thoughts on the retail pricing for the [Indiscernible] environments? So that's the 1st question. And my 2nd question is regarding single-store sales.

So, what are the single-store sales will tax branded partner stores for now, from your perspective, do you consider to be a healthy [Indiscernible] store sales level? Thank you very much..

Thanks very much, Charlie. I mean, there are 2 questions. One is on the competitive landscape and the other one is on our RLX branded stores. So, I mean, on the first one, as mentioned before or during the latter half of the second quarter, we do see that the industry that analysts did not progress as expected.

So indeed, these has carried into the third quarter where we do see that there are external factors affecting the entire industries, including our Company and also our peers to varying degrees. But indeed, regarding competitive landscape, we have observed good deals, industry combination as compared to the first half of 2021.

So, regarding retail price that you have mentioned, so we do have increase our promotional assets in the third quarter are trying to drive our retail sales and reduce inventory pressure of our value chain.

And we have also seen that given the third quarter decline, in general consumer spending in China, many other companies similarly incremental subtleties or other sales incentives. For the overall magnitude of our subsidies are promotional efforts is relatively insignificant compared to other consumer goods Company in China.

And we have started already reducing this further. So, going forward, we will continue to monitor our inventory level, together with user demand and adjust our promotional efforts promptly, to maintain reasonable retail price for our end-users.

So, regarding your second question about the single-store sales and also how you mentioned healthy as the indicator. So indeed, single store sales together with their profitability and every operating metrics, has been a really core focus in our day-to-day operations.

As we also aware of the industry-wide [Indiscernible] in retail sales, starting in the second half of 2021. But however, we also see that's been a recovery for many of our stores in recent months. As our stores are operating in a wide variety of location, some of them is in shopping malls, and some of them is on the streets.

And they also place different working environments. We believe each star situation is very unique. So indeed, the entire thing will not have a healthy parameter for single as far south as we look at it one-by-one.

So, for a brand at e-vapor Company, we have been devoting resources and tools to update star owners and sales personnel in their data operations, including providing branding materials, POSM, training resources, digital hightation tools, and enhanced star site selection assistance.

Indeed, for this quarter, we have also launched several new products and also upgraded our membership system to drive user engagement and retention better. So, with these initiatives, we believe we can, and we will continue to drive single store sales as we [Indiscernible]. Thank you very much..

Thank you. The next question comes from Louise Lee at Bank of America. Please go ahead..

Hi, management. Thank you for taking my questions. So, my question is only for the -- also for the Q4 outlook. I understand that you don't have the guidance, but you just mentioned that you have seen some recovery during the past months.

So, could you share with us more color on the recovery in terms of the single store sales? And what is the store count as for now, and what is our target for the year end. And also, what is the [Indiscernible] driver for the return in Q3..

Thank very much, Louise. So, based on our preliminary, a cause this data, we do see sequential improvements in retail sales, and also channel inventory managements. So, we could share more about our strategies in the following aspects.

So, for RLX brand-stores, for quarter-to-date, we have been focusing on increasing single-store sales throughout initiatives being mentioned, and up till now is -- we do see that initial success. And for our retail is, we do see strong growth momentum in store counts, in multiple channels.

And our retail channel has become more diversified from call-to-dates. But of course, we are also keenly aware of the recent developments in the regulator events, especially yesterday's press release held by the State Tobacco Monopoly Administration. So, it was gratefully followed to any new regulations and administrative measures.

Thank you very much..

Thank you. Our next question today comes from Jung with X CICC, please go ahead..

Hi, good management and pay hardly XCICC. I have one question, is what is the outlook for [Indiscernible] development and the nicotine limit of 2%. Thank you very much..

Thanks very much, Jung Hao. So, I believe, you are actually referring to the [Indiscernible] drop in the current cigarettes, product spenders. So indeed, as a U.S. registered China Company, we have been long been aware of product requirements globally, including in the European Union and also the initial draft of National process vendors.

Looking at the well-developed markets penetration, we believe lowering nicotine concentration will affect some user [Indiscernible] satisfaction. However, most of the [Indiscernible] could still satisfy with special nicotine content or limits in the long run.

Both from the perspective of product developments, our technology developments, we have picked up process rate up to low nicotine concentration, better satisfaction since 2019. And we do have the pinnacle know-how and part of research. So currently, as you may know, most of our cartridge nicotine concentration is 3%.

If such national standards become effective, we'll straight fully comply with other requirements listed on the National Product Standards, including on nicotine contents. Thank very much..

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the Company for final remarks..

Thank you once again for joining us today. If you have further questions, please feel free to contact RLX Technologies Investor Relations team for the content information provided on our websites Ir. relxtech.com..

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Have a wonderful day..