RLX Technology Inc.

Gentlemen, thank you for standing by for RLX Technology, Inc.' 's fourth quarter and full year 2022 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 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.

Thank you very much. Hello, everyone, and welcome to Irish 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.relaxtech.com. Participants on today's call will include our CEO, Ms. Kate Wang, our CFO, Chao Lu, and myself, Sam Zhang, 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, estimates, intent, belief, potential, continual, 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 companies, 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 RxTechnologies' earnings press release and this conference call include discussions of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. Our LXPress 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 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 and the evaporation sector as a whole. We carefully evaluated the market landscape in response to the volatile environment and quickly prepared to embrace the new policies and standards. Thanks to our effective strategy and strong execution, we maintained steady operations and achieved meaningful developments 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 in parking upon a new regulatory year for the e-vapor industry. A set of detailed guidelines, rules, and measures rolled out in the following month. To ensure a smooth adjustment, the authorities granted industry participants a transition period ending September 30, 2022. During the transition period, we proactively adapted our business and prepared to comply with the new requirements. when the regulation came into full effect on October 1st, 2022. We focused on designing compliant new products. We called it GuoBiao 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 disruptions. In addition to our internal adjustments, we also provide timely support for our store owners and distributors to facilitate a seamless transition for our whole value chain. These actions proved effective and positioned us well to enter the new period. Importantly, in June and July 2022, two of our subsidiaries obtained a license for manufacturing enterprise from the state tobacco monopoly administration, specifically One received approval to manufacture e-liquid, and the other received approval to own the RELAX brand and manufacture RELAX branded EVAPOR rechargeable devices, cartridge products, and other relevant products. We also gradually discontinued our older products and began launching our approved new products. in an orderly fashion nationwide, while successfully moving our sales to the national transaction platform. We now offer four distinct lines of compliance devices across various price points to meet the needs of diverse groups of ideal smokers, from price sensitive customers to those who value premium finish and personalized appearance. We are also gradually rolling out new cartridges to evaluate our customers' smoking experience. We are delighted to see an increasing number of adult smokers using our new GB products. As we forged into the fourth quarter, we entered another challenge, the excise tax on e-cigarettes, which was introduced on October 25th and enacted on November 1st. As an evaper manufacturer, we have been subject to a 36% excess tax on our distributor sales since then, adversely impacting our margins. In response, we have further addressed our cost structure to enhance our efficiency and maintain our profitability at a healthy level. Our CFO will elaborate it later, a bit later. Although these regulations and policies challenge our company and the broader industry in the near term, we believe they also create order in a healthy operating environment that will benefit all industry participants in the long term. Moving forward to 2023, we intend to reap the benefits of the clearer regulatory frameworks and China's reopening by leveraging three of our core competencies. The first is product development. Our industry-leading R&D capabilities and ongoing investments in scientific research enable us to swiftly develop and launch compliant products that meet evolving consumer needs and preference. Our non-GAAP R&D expense ratio has grown from less than 2% three years ago to 5.7% in 2022. Recently, we offer the most diversified product portfolio in the market, catering to various demands of adult smokers. We believe our R&D advantages will enable us to maintain this leadership in the post-regulatory era. Second, product quality and brand equity. For most eVapor users, the RELAX brand is a synonymous with quality in eVapor products, especially for devices that heat the liquid into an aerosol inhaled into the lungs. Quality matters to adult smokers, and it pays paramount to ILX. We will continue to focus intently on this cornerstone of our brand. Finally, we will reply on our business resilience and strong execution. This is now the first time we have encountered changes and challenges in the industry. Back in 2019, a ban on online sales of e-vapor products forced us to change our strategy overnight. We quickly moved offline, pivoted to our branded stores plus model, and owned the favor of adult smokers with our unique combination of convenience value in outstanding products. Thanks to our team's creativity, our robustness fundamentals, and a mountain of hard work, we are also steadily moving past the obstacles posed by the new regulations. Before I conclude, I would like to share some updates on our ESG initiatives. Alongside our efforts to develop our business under the new regulatory framework, we remain devoted to fulfilling our social responsibilities in 2022. For example, our Paws Reborn recycling program, which we started in September 2021, has achieved several meaningful milestones. As of the end of 2022, over 10,000 stores in 282 cities nationwide had joined the program, with over 2.8 million cartridges collected. Those recycled paths are centralized processed into cement clinkers, an intermediary product in cement production, which we then used to construct roads, bridges, and toilets in rural revitalization projects. This eco-friendly approach allows us to reuse precious resources to provide better homes for rural villagers. In December 2022, our Path Reborn Recycling Program was named an innovative enterprise for rural revitalization. at Southern Metropolitan State's 2022 ESG Annual Ceremony, a prize award to China's most forward-thinking ESG programs. Furthermore, we have integrated United Nations Sustainable Development Goals into our social responsibility strategies. In April 2022, we launched our Net Zero Emission Plan, aim for zero to achieve carbon neutrality in our direct operations by 2033 and along the value chain by 2050. We plan to launch zero emission products and zero emission factories, establish a green supply chain partner, eliminate unnecessary single-use plastic packaging, and reduce waste to achieve our goal. We also encourage employees to adopt low carbon offices practice to promote realizing the company's carbon neutrality commitment throughout its value chain. Dedication to corporate social responsibility has been one of our core values since our inception. we will continue to seek new and innovative ways to deepen this commitment to our society. In summary, 2022 was a tough year for RLX and the entire evaporator industry. Nevertheless, we believe our efforts and progress throughout the year paved the way for a better 2023. As China reopens and the industry adjusts to the new normal, we will remain committed to offering premium products with superior performance to satisfy adult smokers' needs. We are confident that our call compatible with the volunteers will empower us to seize opportunities and unleash our growth potential as we continue to lead the industry in this new era. With that, I will now turn the call over to our CFO, Lou Chao. He will elaborate for some of our last quarter's initiatives and go over our operational and financial results in more detail.