RLX Technology Inc. (RLX) Q4 2021 Earnings Call Transcript

RLX Technology Inc. (RLX 2.19%)
Q4 2021 Earnings Call
Mar 11, 2022, 7:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for RLX Technology Inc.'s fourth quarter and full year 2021 earnings conference call. [Operator instructions] Today's conference call is being recorded and is expected to last for about 50 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.

Sam Tsang -- Head of Investor Relations

Thank you very much. Hello, everyone, and welcome to RLX Technology's fourth quarter and full year 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 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 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 company, its affiliates, advisors, representatives, and underwriters do not undertake any obligation to update this forward-looking information, except as required under the applicable law.

Please note that RLX Technology's earnings press release and this conference call will 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.

Kate Wang -- Co-Founder, Chairperson, and Chief Executive Officer

Thank you, Sam. And thanks, everyone, for making time to join our conference call today. As many of you might have become aware, just hours ago The State Tobacco Monopoly Administration released an updated draft consultation paper regarding national electronic cigarette product standards. At the same time, administrative measures for electronic cigarettes have been made official effective starting on May 1, 2022.

While we didn't expect the announcement of these regulatory developments to coincide with our earnings growth, we welcome the finalization of these regulatory measures as it delivers certainty regarding timeline, mode of transaction, product specifics among others. The removal of these uncertainties and accelerated timeline will provide our organization with more concrete directions in our business operations and planning. We believe the new standards and measures will significantly improve adult smoker populations positive recognition of our product safety in the nature of harm reduction. We are confident that the likely restriction on flavors will not impact the core needs of our users and millions of traditional cigarette smokers for harm reduction.

The experience [Inaudible] from other markets supports the same view. Against the backdrop of the evolving regulatory landscape for e-cigarettes and the recurring COVID-19 outbreaks throughout 2021, we remained committed to enhancing our vision and executing our founding strategy and mission. Further cementing our industry leading position as the trusted e-vapor brand for adult smokers. We ended 2021 on a solid note with our core strength and fundamentals driving.

Although we faced our share of challenges during the year, our financial highlights include fourth quarter revenue growth of 17.7% year-over-year, which propelled a year-over-year increase of 123.1% in our full year 2021 net revenue. Our CFO, Chao, will share more details regarding our financial results and underlying drivers later. With that, I'd like to start by outlining the backdrop with regulatory environment in the fourth quarter. The fourth quarter ushering in the meaningful regulatory development for China's vapor industry with the introduction of the draft of administrative measures and draft national standards for e-vapor products.

The regulators have introduced an electronic filing system to provide a means for all value chain participants and compelling manufacturers, distributors, dealers and supply chain partners to register their business details. In addition, all e-vapor brands are also required to register each of their products or SKUs, including product characteristics and classifications. We believe that as these new rules and policies take hold, the barriers to entry in China's e-vapor industry will become more difficult to penetrate given the substantial compliance and product development requirements. Moreover, given ongoing regulatory scrutiny of e-vapor product quality, sales of counterfeit products will be further curbed and the users rights will be better protected.

In sum, we firmly believe that the new regulatory framework will support the overall e-vapor industry and allow its participants to move forward confidently and embrace healthy, sustainable long-term growth. In response to updated regulations announced in December 2021, in the fourth quarter we proactively implemented an array of refinement across both the front and back end of our operations. On the product and supply chain, we swiftly adjusted certain features in our product suite and pipeline product based on the draft national standards, drawing on our state-of-the-art product development capabilities to enhance our child-lock design, e-liquid bottlers and other technical design elements. Although we embraced a more ideal approach to compliant management prudently managing our key components and material procurement orders according to the draft national standards, which may impact our inventory preparation.

On the sales and channel management front, we adopt a nimble approach to managing active inventory for distributors and retailers to avoid over or under supply. In addition, we offer assistance to our distributors and retailers with the required registration on the electronic filing system and maintain active communication with them to understand their needs and track the potential impact of the new policy enforcement on their operations. Now I'd like to provide some updates on our scientific research progress. We worked diligently to improve our scientific research capabilities and are firmly convinced that scientific evidence-based communication is paramount when addressing users and shareholders concerns about the harm reduction efficacy of the e-cigarettes.

One area of particular focus for RLX is [Inaudible] fundamental research, amortization mechanism through which we explore the long-term health effects of vaping. As China's pioneering e-vapor brand, we initiated China's first clinical research on vaping [Inaudible] citing the acute effects of traditional cigarettes and electronic cigarettes on the human respiratory and cardiovascular system. In February 2022, we successfully registered our clinical research on the China Clinical Trial Registry, a primary registry in the World Health Organization registry network, further validating the strength of our scientific research capability and underscoring our progress in advancing these studies. As China's national standards for e-cigarettes come into effect, RLX will continue to devote more resources to R&D and support a regulatory framework that recognize these harm reduction opportunity for adult smokers population.

Our accomplishments in 2021 positions us for a good start as we head into the new year of 2022. I'm pleased with our achievements so far in 2022. Our strategic initiatives are designed to capture any growth potential ahead of us within a clearer regulatory regime. As we continue to improve our product performance [Inaudible] scientific research and promote digitalization upgrades, we are poised to further grow and increase the value we bring to all of our stakeholders.

With that, I will now turn the call over to our CFO, Chao Lu. He will elaborate further some of the quarter's initiatives and go over our operational and financial results in more detail. Thank you.

Chao Lu -- Chief Financial Officer

Thank you, Kate, and hello, everyone. I will start by sharing some major initiatives and developments in the fourth quarter, and then walk you through our key financial results. As Kate mentioned earlier, despite the backdrop of regulatory impact, we deliver the quarterly net revenue of RMB1.9 billion, up 13.6% sequentially, and by 17.7% year-over-year, reflecting the momentum behind our efforts to optimize our distribution and retail channel network, and to enhance our diversified product portfolio. Notably, we witnessed that there have been increasingly more fact-based and neutral public voices commenting on the e-vapor industry and e-vapor products in recent months.

According to a survey, in light of the release of the proposed draft national standards, 69% of all potential users are aware of the regulatory changes, and 87% expressed increased or unchanged willingness to purchase e-vapor products in light of international standards as they believe that the regulations will have a positive impact on product safety and quality. Since December 2021, orders from our distributors and retailers have remained solid and end user demand has remained strong. We have been closely monitoring the trade inventory level of our distributors and retailers. And cautiously fulfilling their orders to mitigate risk related to any excess inventory in our trade channels.

In addition, we've continued investing in our -- Golden Shield program to combat sales of counterfeit products and made meaningful progress during the fourth quarter. The December -- in December 2021, we successfully assisted Shenzhen police in busting a counterfeit factory site located in the [Inaudible] electronics market, seizing over 20,000 counterfeit products. Since launching the Golden Shield program in 2019, we have assisted the police in solving more than 130 administrative and criminal cases over intellectual property rights infringement, and helped to seize more than 1.5 million counterfeit products. A testament to our commitment to protecting the rights and interests of consumers, as a responsible corporate citizen.

We also strove to optimize our supply chain and extreme streamline our operations. Our efforts, of course, control and active supply chain management have been effective, further reducing the unit cost of our product. Meanwhile, as we have become more agile in managing our supply chain, for example, we have significantly increased the utilization rate of our logistics and warehousing facilities in recent months by closing unused or in low usage warehouses. Moreover, our distributor survey showed that in the second half of 2021, our distributor satisfaction level with our supply chain management improved immensely compared with the first half of 2021.

Validating our relentless efforts to improve our supply chain capabilities and strengthen our relationship with our value chain partners. As we mentioned last quarter, we continue to strategically introduce new products tailored to various segments with the goal of engaging new users to support our sustainable and quality growth. To that end, we launched several new targeted products during the fourth quarter, and have recently seen enough of a trend in our new user retention rate, which we believe is partially attributable to our successful product strategy. Our starting products targeting adult smokers with a long history of smoking complement our current product portfolio with a unique compelling product design.

Meanwhile, we also release [Inaudible], a premium device line with a classy and trendy design. Aimed that fashion conscious users who are willing to pay a premium for an exquisite design. We will continue to expand and enhance our product offering to cater to China's distinct user groups, differentiated preferences and price sensitivity. To further increase user engagement and build our brand equity, we also introduced accessories including cartridge cases, device stands, and necklace lanyards, which can be purchased with cash or use a loyalty program point.

As the user centric company, RLX always puts our users first. They are the core of our business. Doing the transitional regulatory period, we will continue to prioritize our youth needs by creating new innovative products that comply with a national standard and can be launched upon regulatory approval. Last but not least, I'd like to share with you some updates on our corporate social responsibility initiative.

RLX Technology has always been committed to CSR. We believe that prioritizing and fulfilling our social responsibility is essential to corporate growth. Activating his popularity grow, the photo of used cottages has become a major concern, for both e-vapor companies and user. To solve the problem and create additional economic value, we launched China's first cartridge recycling program in September 2021, covering more than 16 cities in the program's first phase.

Users can pick up special recycling bags in selected RLX branded stores in China to collect used cartridges and return them to install recycling [Inaudible]. The program has enjoyed great initial success, with over 200,000 cottages recycled to date. By enhancing [Inaudible] between RLX and our users, we believe that environmentally friendly program will encourage more youth to choose our products as we fulfill our corporate social responsibility and inspire eco consciousness through our industry. In recognition of these efforts, our 2021 CSR report recently received a grade AAA rating from the Ministry of Industry and Information Technology and my team, MIIT.

This rating is a powerful endorsement of our work and commitment to advancing CSR initiatives nationwide. MIIT affect our RELX's strong performance across a broad range of CSR's metrics and commended our report's clear guidance and the company strategic planning and governance with respect to sustainable investment concepts. Moving forward, we will continue to increase RLX's positive social impact with substantive work and engaging products to address industry, community, and environmental issues. I will now provide a summary overview of our financial results for the fourth quarter and for the full year of 2021.

Net revenues increased by 17.7% to RMB1.9 billion in the fourth quarter of 2021 from RMB1.62 billion in the same period of 2020. The increase was primarily due to an increase in net revenue from sales to offline distributors, which was mainly attributable to the expansion of the company's distribution and retail network. Gross profit increased by 10.3% to RMB765.5 million in the fourth quarter of 2021 from RMB694.1 million in the same period of 2020. Gross margin was 40.2% in the fourth quarter of 2021, compared with 42.9% in the same period of 2020.

The decrease was primarily due to an increase in direct costs related to promotional activities and to an increase in the inventory provision. Operating expenses were RMB231.5 million in the fourth quarter of 2021, representing a decrease of 72.8% from RMB852.6 million in the same period of 2020. A decrease in operating expenses was primarily due to the change in share-based compensation expenses, which decreased by 93.6% to RMB42.1 million in the fourth quarter of 2021, from RMB656.1 million in the same period of 2020. The decrease in share-based compensation expenses was primarily due to the changes in the fair value of the share incentive award that the company granted to its employees as affected by the fluctuation of the share price of the company.

Selling expenses decreased by 76.3% to RMB46.6 million in the fourth quarter of 2021, from RMB196.7 million in the same period of 2020. The decrease of mainly driven by, first, an increase in 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 increased by 62.6% to RMB167.1 million in the fourth quarter of 2021, from RMB447 million in the same period of 2019. 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 an increase in software and tech technical service expenses.

Research and development expenses decreased by 91.5% to RMB17.8 million in the fourth quarter of 2021, from RMB208.9 million in the same period of 2019. The decrease was mainly driven by a decrease in share based compensation expenses, and second, a decrease in salary and welfare benefits, partially offset by an increase in consulting expenses. Income from operations was RMB534 million in the fourth quarter of 2021, compared with a loss from operations of RMB158.5 million in the same period of 2020. Income tax expense was RMB129.5 million in the fourth quarter of 2021, compared with RMB110.6 million in the same period of 2020.

U.S. GAAP net income was RMB494.4 million in the fourth quarter of 2021, compared with the U.S. GAAP net loss of RMB236.7 million in a period of 2000. Non-GAAP net income was RMB536.5 million in the fourth quarter of 2021, compared with RMB419.3 million in the same period of 2020. U.S.

GAAP basic and diluted net income per ADS were RMB3.367 equivalent to U.S. dollar 2.058, and RMB0.363 equivalent to U.S. dollar 0.057 respectively, in the fourth quarter of 2021, compared with the U.S. GAAP basic and diluted net loss, per ADS of RMB0.165 in the same period of 2020.

Non-GAAP basic and diluted net income per ADS were RMB0.398 equivalent to U.S. dollar $0.062, and RMB0.394 equivalent to U.S. dollar $0.062 respectively in the fourth quarter of 2021, compared with RMB0.292 in the same period of 2020. Moving to the full year of 2021, net revenues increased by 123.1% to RMB8.52 billion in 2021, from RMD3.82 billion in the prior year.

The increase was primarily due to an increase in net revenue from sales to offline distributed, which was mainly attributable to the expansion of the company's distribution and retail network. Gross profit increased by 140.4% to RMB3.67 billion in 2021, from RMB1.53 billion in the prior year. Growth market increased to 43.1% in 2021, compared with 40% in the prior year. Operating expenses were RMB1.37 billion in 2021, representing a decrease of 9.3%, from RMB1.51 billion in the prior year.

The decrease in operating expenses was primarily due to the change of share-based compensation expenses, which decreased by 76% to RMB223.3 million in the fiscal year 2021 from RMB929.1 million in the prior year. The decrease in share-based compensation expenses was primarily due to the changes in the fair value of the share incentives awards that the company granted to its employees as affected by the fluctuations of the share price of the company. Selling expenses increased by 17.5% to RMB520.7 million in 2021, from RMD443.2 million in the prior year. The increase was mainly driven by, first, an increase in branding material expenses.

Second, an increase in shipping expenses. And third, an increase in salaries and welfare, partially offset by the decrease in share based compensation expenses. General and administrative expenses decreased by 12.9% to RMB672.7 million in 2021, from RMB772 million in the prior year. The decrease was primarily attributable to the decrease in share-based compensation expenses, partially offset by an increase in salaries and welfare benefits, and to an increase in legal and other consulting fee.

Research and development expenses decreased by 39.9% to RMB179.9 million in 2021, from RMB299.3 million in the prior year. The decrease was primarily due to the decrease in share-based compensation expenses, partially offset by, first, an increase in salaries and welfare benefits. Second, an increase in software and technical expenses. And third, an increase in consulting expenses.

Income from operations was RMB2.3 billion in 2021, compared with RMB13.1 million in the prior year. Income tax expense was RMB631.4 million in 2021, representing an increase of 173.9%, from RMB230.5 million in the prior year. The increase was primarily due to an increase in taxable income. U.S.

GAAP net income was RMB2.03 billion in 2021, compared with U.S. GAAP net loss of RMB128.1 million in the prior year. Non-GAAP net income was RMB2.25 billion in 2021, compared with RMB801 million in the prior year. U.S.

GAAP basic and diluted net income per ADS were RMB1.445 equivalent to U.S. dollar $0.227 and RMD1.436 equivalent to U.S. dollar $0.225 respectively in the fiscal year 2021, compared with U.S. GAAP basic and diluted net loss per year of RMB0.089 in the prior year.

Non-GAAP basic and diluted net income per ADS were RMB1.604, equivalent to U.S. dollar $0.252 and RMB1.595 equivalent to U.S. dollar 0.25 respectively, in the fiscal year 2021, compared with RMB0.557 in the prior year. Moving to the balance sheet.

As of December 31, 2021, the company had cash and cash equivalents, restricted cash, short-term bank deposits, net short-term investments, and long-term bank deposits, net of RMB14.86 billion, compared with RMB3.42 billion as of December 31, 2020. As of December 31, 2021, approximately US dollar 1.62 billion was -- denominated in US dollars. Lastly, turning to our share repurchase program. On December 8, 2021, the company announced that -- its board of directors authorized the share repurchase program, under which the company may repurchase up to 500 million U.S.

dollars of its share over a period until December 31, 2023. The program, which is [Inaudible] to our commitment to providing shareholder value, its precedence mostly, and demonstrate our continued confidence in our core capabilities, business growth, long-term market potential, and to further development of e-vapor industry. This concludes our prepared remarks today. We will now open the call to questions.

Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] Today's first question comes from Louise Li of Bank of America. Please go ahead.

Louise Li -- Bank of America Merrill Lynch -- Analyst

Hi. Thank you, management. Thank you for your presentation, and thank you for taking my question. So my question is, could you share with us the latest at year-to-date shipment in [Inaudible]? Do you expect to -- there are any significant changes from now to 1st of May and after first of May.

So -- just another quick question on the newly released the regulation. So according to the China National Standard file, so we see that only tobacco flavor can be sold. So if this is a case, why do you still put a list of -- a possible list of ingredients? So -- any conflict? Thank you.

Chao Lu -- Chief Financial Officer

Thank you, Louise. So I will talk about more on the year-to-date shipment trends first, and then in response to a question regarding the latest regulation. So in December, we have still see a continuous improvement in multiple operating leverage that we are confident in our commercial developments, including the number of potential e-vapor users, which have been driven by the increasing willingness to consider e-vapor products by [Inaudible] as mentioned by Tsang, our retention of new users and the number of cartridge per user, which we think is reflecting a high number of potential users, together with a higher -- user lifetime value. We believe the primary reason is that, the increase in users have high confidence in e-vapor products, and our products after the release of the first official standards being released in December, recognizing the benefits of harm reduction tobacco alternatives. [Inaudible] above trends, we have and we're gradually optimize our shipment level on how to respond to these heinous developments.

And regarding the latest regulations, given it was released hours ago. it'll require more time for us to validate internally and let us see how it will evolve regarding the commercial results. Thank you for the question.

Operator

Thank you, ladies and gentlemen, our next question comes from Lydia Ling at Citi. Please go ahead.

Lydia Ling -- Citi -- Analyst

Hi, management. Thanks for taking my question. I have two questions here. And the first one is on the regulation side.

And so regarding today's regulation update, including administrative measures and also the second draft on the national standard, [Inaudible] the potential impact on your business and how to deal with the evolving regulation and increase the penetration amount to adult smokers, particularly the restrictions on the flavor pod. So could you give us more color on that? And then my second question is on the product side. And so, in light of the new national standards, could you share any progress on the new product line? Thank you.

Chao Lu -- Chief Financial Officer

Sure. Thank you very much, Lydia. So two questions, one is on the regulations and the other one is going to be how big the changes to a new product launches. So far today, the State Tobacco Monopoly Administration announced the administrative measures [Audio gap] the supervision of next generation tobacco products, such as e-cigarettes to regulate the market order, to ensure the health and safety of adult smokers, and promote the legalization and standardization of the industry, which will be effective on the 1st of May.

So we have to see the key changes when you compare it to the public consultation paper being released in [Inaudible] December includes having a greater emphasis on [Inaudible] as prevention dissuading [Inaudible] to use e-vapor products. Retailers obtain e-cigarette with a license [Inaudible] products from local licensed e-cigarette wholesalers, and shall not exclusively distribute lists of e-cigarette products. And finally, prohibits exhibition and events promoting products. And also, the regulators have announced plans to follow public opinion regarding the second draft of national standards with a submission deadline of March 17.

So key changes include such products should not be impacted to minors, that aren't in tobacco. But in contrast, we do see that key components in the existing portfolio have been included, for example, [Inaudible], the [Inaudible] agents, which we last left to publish a scientific study in the Journal of Applied Technology. So we believe such a [Inaudible] will be continuously evolving its opponents strong in scientific research and effective fact based communication. So Tobacco [Inaudible], we are delighted to see the formalized regulations, which have been some [Inaudible] including our smoker's positive vaccination of e-vapor products for safety if the measure of harm reduction compared with tobacco products.

And we believe that these measures could better progress the development of our industry with higher standards, [Inaudible] and higher clarity with a promising --  prospects for each [Inaudible] participants. And regarding the product launches, given that is there a draft national standard, so we have to wait till the national standards are being finalized in order to have our product being approved. But for the process, we have been diligently to modify our products together with some potential new product launches -- so first thing on safety, so we include the change of requirements for raw materials, including ingestion and released [Inaudible] and safety requirements on electronic products. For example, factory waterproofing, application protection, [Inaudible] and suspension of accidental device [Inaudible].

And in these, our product safety standards has been always in line, if not higher than for those standards, including the draft national standards. For example, [Inaudible] for ingested and released substances that are much higher than expected requirements. Regarding child lock and the prevention of accidental device [Inaudible]. We are technically fully prepared to comply with the new standards, and our product prototypes are fully ready.

And next is on the e-vapor solutions, so we do see that we have provided greater clarity with respect to the allow ingredients based on these other things that are permitted for use in [Inaudible] additives. While non list of additives will be subject to piracy assessments. So we will continue to make modifications in response to the second draft of national standards that are released today. Thank you for the question.

Lydia Ling -- Citi -- Analyst

Thank you.

Operator

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

Charlie Chen -- China Renaissance -- Analyst

 Thank you, management for taking my questions. I have one question. So, during this transition period where you cannot expand your sales networks, you cannot launch new products. So what is the major focus of your work day to day work during this period? And can you share with us some of your major achievements or progress in your work for the past quarter? Thank you.

Chao Lu -- Chief Financial Officer

Sure. Thanks very much, Charlie. So I can share our progress for our last quarter in three aspects. And fortunately, on the sales and distribution, we have been closely monitoring our progress in operating and financial performance.

So we have been putting great effort into driving singles [Inaudible], by introducing operational activities and trainings. And after the regulations and draft measures being released, we do see that the contributors and retailers have high confidence in the e-Bay [Inaudible] and RLX. We strike our robust order books. We have also launched internal trainings to equip [Inaudible] experts with the right skills at considering the potential change of our industry.

And on the product development front, [Inaudible] and modifying our portfolio, as mentioned in previous Q&A, we have invested resources in developing new technology and products, and there have a couple of new product lines. So far, the process will continue to invest in developing new products and technology and expect to obtain approvals after national standards become ineffective. And lastly, on organizational upgrade, we have invested heavily in digitalization and optimizing work efficiency. We have been building an all-in-one digitalization system, that monitors and tracks our operating and financial performance from front to back end, from the supply chain, our sales and distribution channels.

This new initiative could [Inaudible] our day to day decision making and increase our operational efficiency. Thank you for your question.

Operator

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

Peihang Lyu -- CICC -- Analyst

[Audio gap] I have two questions here. And the first one is we converted a shortage of cartridge flavors in your stores, and could you provide some color on your [Inaudible]? And the second question is how will the second draft of national standards affect all the existing portfolio?

Chao Lu -- Chief Financial Officer

Thank you, Peihang. So the line is not very clear. But I think the first question is mainly on you have seen that some of our flavors are off stock in our store? And the second one is, on flavor again, and what we'll see how the national standard's affecting our current portfolio? So on the first one. So after the administrative measures being released back in December, we have taken a prudent approach in lowering our trade and inventory as we consider multiple factors, including restrictions on product launches and new store openings during the transitional period.

Time required to evaluate distributors and retailers order sentiments together with the fact that production capacity is more than enough to be increased again in a timely manner. Since December until now, we have seen continued improvement in operating metrics as mentioned, including user related metrics and store inventory metrics for single store sales. As a result, order book from distributors has been robust and we have been cautiously fulfilling those orders. And therefore, our trade channel inventory has stood at a low level since the first quarter of last year to date.

In light of the potential regulations together with the draft national standards, we will monitor and adjust our shipment level to fulfill our distributors and user needs. And the second one is about our flavors. So to advocate, the primary reason for our smokers to use e-vapor products mainly is the harm reduction effects compared with other tobacco products, mainly cigarettes. And together with other cigarette factors, for example more hygienic with no [Inaudible], more convenient and have less disturbance to peoples around it based on our internal user survey.

Flavors contained in cartridge are not the main reason for adult smokers switching from cigarettes to e-vapor products. And also in preference to overseas market experiences, when there is a restriction on flavor, it will only cause short-term turbulence to the trade channel especially on existing inventory management and preparation, but has limited impacts on the long-term trend for adult smokers switching from cigarettes to e-vapor products. We are strongly confident that China e-vapor users will continue to use RLX after the draft national standards become effective. Those affected are likely to switch from their best preferred flavor to tobacco flavor.

Thank you for your question.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to management for closing remarks.

Sam Tsang -- Head of Investor Relations

Thank you, 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.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Sam Tsang -- Head of Investor Relations

Kate Wang -- Co-Founder, Chairperson, and Chief Executive Officer

Chao Lu -- Chief Financial Officer

Louise Li -- Bank of America Merrill Lynch -- Analyst

Lydia Ling -- Citi -- Analyst

Charlie Chen -- China Renaissance -- Analyst

Peihang Lyu -- CICC -- Analyst

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