Hello, ladies and gentlemen, thank you for standing by for RLX Technology, Inc.’s First Quarter 2022 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 Investor Relations for the company.

Please go ahead, Sam..

Thanks very much. Hello, everyone and welcome to RLX Technology’s first quarter 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 CFO, 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, expect, target, estimate, 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 rates 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 with affiliates, advisors and representatives do not undertake any obligations to update this forward-looking information except as required by 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 over the call to Mr. Chao Lu.

Please go ahead..

first, share-based compensation expenses of positive RMB41.9 million recognized in selling expenses; two share-based compensation expenses of positive RMB230.1 million recognized in general and administrative expenses; and three, share-based compensation expenses of positive RMB53.2 million recognized in research and development expenses.

The decrease in share-based compensation expenses was primarily due to the changes in the fair value of the share incentive awards that the company granted to its employees as affected by the fluctuation of the share price of the company.

Selling expenses decreased by 73.9% to RMB75.9 million in the first quarter of 2022 from RMB291.5 million in the same period of 2021. The decrease was primarily driven by, first, a decrease in share-based compensation expenses, second, a decrease in salaries and welfare benefits, and third, a decrease in branding material expenses.

General and administrative expenses decreased by 109.3% to a positive RMB66.4 million in the first quarter of 2022 from RMB$712.8 million in the same period of 2021.

The decrease was mainly driven by, one, a decrease in share-based compensation expenses, and two, a decrease in salaries and welfare benefits, partially offset by increase in legal and other consulting expenses.

Research and development expenses decreased by 88.7% to RMB24 million in the first quarter of 2022 from RMB211.6 million in the same period of 2021.

The decrease was primarily driven by, first, a decrease in share-based compensation expenses, second, a decrease in salaries and welfare benefits, partially offset by, one, an increase in depreciation and amortization expenses, and two, an increase in software and technical service expenses.

Income from operations was RMB623.4 million in the first quarter of 2022, compared with a loss from operations of RMB111.9 million in the same period of 2021. Income tax expenses was RMB112.6 million in the first quarter of 2022 compared with RMB176.3 million in the same period of 2021. U.S.

GAAP net income was RMB687.1 million in the first quarter of 2022 compared with the U.S. GAAP net loss of RMB267 million in the same period of 2021. Non-GAAP net income was RMB361.8 million in the first quarter of 2022 compared with RMB610.5 million in the same period of 2021. The U.S.

GAAP basic and diluted net income per ADR were RMB0.528 and RMB0.521, respectively, in the first quarter of 2022, compared with the U.S. GAAP basic and diluted net loss per ADS of RMB0.174 in the same period of 2021.

Non-GAAP basic and diluted net income per ADS were RMB0.284 and RMB0.281, respectively, in the first quarter of 2022 compared with RMB0.398 in the same period of 2021.

Moving to the balance sheet, as of March 31, 2022, the company had cash and cash equivalents, restricted cash, short-term bank deposits, short-term investments and long-term bank deposits net of RMB14.9 billion compared with RMB14.4 billion as of March 31, 2021. Among them approximately $1.6 billion was denominated in U.S.

dollars as of March 31, 2021 – sorry, 2022. Looking ahead, we will continue to focus on the business elements under our control, such as product innovation, cost optimization and operating efficiency to reinforce our fundamentals and position ourselves to seize future opportunities.

We are confident in the future of our company, together with our industry and therefore, we have been steadily implementing our share repurchase program creating value for our shareholders and long-term investors. This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Lydia Wang with Citi. Please go ahead..

Hi management. This is Lydia from Citi, and thanks for the presentation and update for the first quarter and on the regulation side. So, I have two questions here. So, the first question, so as you just mentioned, there are quite a few updates on the regulation side for the first quarter.

And we also see many comments now have detailed out the – like the retail management measures. So, we are very keen to have more color from you that in terms of your license application.

For example, like what timeline you expect for – you can get your production license? And also your expectation on what percentage of your retailers make at the retail license. And we are also very interested to know that what could be the initial feedback from your new products, this will be very helpful to us.

And my second question is on the – we also know that there will be the non-exclusive retail terms, on the retail side. So, how do management see the competitive landscape looking forward as your retailers might tend to increase – include more brands at store level in order to get a license. So, thank you. I have two questions..

Thanks very much, Lydia. So, the first one is on the license application regarding the product development to accommodate new opportunities is mainly on the exclusivity term that has been removed in the later declarations. So, I mean first one is on the license.

So, we have already submitted our manufacturing license application to State Tobacco Monopoly Administration. So, now we are still waiting for the regulatory approval for our [indiscernible]. And we are confident that we would be the first batch of brand manufacturer to obtain such manufacturing license.

And regarding your question regarding the retail license, we believe that most of the retailers that operate the mono brand store model of our industry to obtain a retail license during the transitional period. And regarding the new product development, we are still undergoing the final testing phase with both small and large user testing groups.

Fully strive to accelerate in the pace of our new tobacco flavor target, now which fully comply with the national standards, while at the same time, also ensuring our pro safety. And for your question, second question is mainly on the exclusivity term of the retailers.

So, based on our observation, we do not see that the competitive landscape has changed much recently nor changed in the short and medium-term. We believe that what edemas a difference to a brand market share is NPS, net promoter score, brand equity, user base and also the R&D capabilities. And these are equally important rather than the exclusivity.

So, during the transitional period from this month, we have sensed some retailers who are previously on mono-brand stores in the industry start selling other brands products. Indeed, we have invested in non-exclusivity costs provide us with access to retailers who previously were other brands and in stores.

So before these retailers may not have sold our products or only sold our products on at-home and informal basis. So, with the cost being removed they now chose to lease our products as we are the largest player in the market, and our brand recognition can definitely help them to drive the single store sales.

So, on the other hand, for some retailers who are previously exclusive brand partner stores, they also started listing other brand products, as these brands might provide them with some freebies or promotional products.

However, based on our observation, these brands have not significant retail sales, given their NPS brand equity user base and product capabilities are less robust than us.

So, in summary, we believe that our market leadership is based on these key backers rather than the exclusivity and we can still maintain a relatively high market share going forward..

Thank you..

Thanks for your question..

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

Thank you, management for taking my questions. I have two questions as well. The first one is regarding the sales momentum in second quarter of this year, as we know that effectively all of your products are actually sold offline.

So, can you share us with us some color on how these COVID control measures could impact your sales and what’s the sales momentum so far.

And my second question is regarding the status of your distribution channels, in particular, I would like to get some sense on whether there is kind of distributor creating this business or they are leaving you because of the regulatory restrictions? And also, how about the retailers, for example, the – how is the sales or retailers and distributors in the pilot areas in Huizhou and Xiamen? Thank you..

Thank you very much, Charlie. So, regarding our second quarter sales. So, as mentioned in our opening remarks, our net revenues in the first quarter were mainly being affected by the COVID restrictions in Shenzhen, which affected our production volume and also our shipment volume.

So, I mean we have been better fulfilling our distributor orders since the latter part of March and our quarter-to-date performance has been robust and is in line with our expectation. So, currently we do see that there are some COVID restrictions in certain areas nationwide, for example, in Shanghai and Beijing.

So, these areas do not contribute material sales from a retail perspective. And regarding your question about the entire program and also how is the current distributors and retailers. So, regarding the past program, the collaboration has been very smooth in both Xiamen and Huizhou and we do see a very strong sales pace as well.

So, we believe that such program put to be a good indicator and could help the industry better adapt to the new regulatory. And regarding the distribution channels, so our current distributors who are the private companies who still distribute the products during the transitional period.

And given that the business performance has been robust and base profits are making the transaction. So, as of today, we have not seen any significant attrition of our existing distributors. Thank you for your question..

Thank you..

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

Hi there, management. This is Peihang with CICC. Actually, I have two questions to ask. And the first one is, how is the comp inventory level? And especially, how is the channel inventory level. We also noticed that consumers were stocking at cartridges recently. So, from your opinion, how many cartridges are estimated to be stored by user.

And my second question is that from the perspective of cost reduction, what actions have you taken so far? And how would you plan to do in the future? Thank you..

Thanks Peihang. So, the first one is on the inventory level for each of our stakeholders and also us. And the second one is mainly on the cost optimization measures.

So, for the first question, as you can review our balance sheet, inventory has remained at a relatively low level, down from close to 600 million in the fourth quarter to 264.7 million in the first quarter. And out of these amount, only a small portion of that in finished goods.

So, in light of the effectiveness of the national standards and also some of the slow-moving SKUs, we have been very prudent and have established adequate inventory provisions in the last two quarters.

So, regarding our trade inventory, i.e., the inventory in our distribution channels, it has been significantly decreased throughout the first quarter due to the co-financing restrictions in our Shenzhen factory.

And this situation has been gradually improved since the second quarter, but we have been cautiously distributing our products as we don’t want the infinity to have – don’t want channels to have too much inventory. And finally is regarding our users inventory.

So, based on our membership data, we are aware that the average cartridge purchase per user per month has increased by a moderate level since December of last year.

Given this, currently we are still in the transitional period till September 30, we will by then have better visibility regarding our users estimated inventory turnover days of our existing product portfolio. So, our second question is on the cost optimization initiatives.

So, we strive to optimize our costs in many effects from the unit cost of each bond and also the packaging and also the logistics and warehousing costs. So, previously, we have been able to reduce our packaging and warehousing costs by changing our packaging design and increasing our warehousing utilization rates.

Regarding the unit cost of each bond, we have consistently communicating with our suppliers we have been driving down our procurement costs, thanks to the technological advancements and automation of our supply chain.

So, going forward, we will still optimize our cost in these assets from a unit cost of each bond to our product design as well as our continuous improvement in the utilization of supply chain process. Thank you for your question..

It’s very clear and comprehensive. Thank you..

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference 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 Investor Relations team for the contact information provided on our website or TPG Investor Relations. Thank you..

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