RLX Technology Inc. (RLX) Q2 2026 Earnings Call Transcript

Hello, ladies and gentlemen. Thank you for standing by for RLX Technology Inc.'s second quarter 2026 earnings conference call. At this time, all participants are in a 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 Sung, Head of Capital Markets for the company. Please go ahead, Sam.

Thank you very much. Hello, everyone, and welcome to Irish Technology's second quarter 2026 earnings conference call. The company's financial and operational results were released through PR on these wire services earlier today and have been made available online. You can also view the earnings price release by visiting our IR website at ir.relaxcat.com. Participants on today's call include our Chief Executive Officer, Ms. Kate Wang, our Chief Financial Officer, Mr. Chao Lu, and me, Sam Tseng, Head of Capital Markets. Before we continue, please note that today's discussions will contain four looking statements made under the safe harbor provisions of the U.S. Prefect Securities Licitation Reform Act of 1995. These statements typically contain words such as may, will, expect, anticipate, aim, estimate, intent, plan, believe, potential, continue, or other similar expressions. Working 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, related, many of which are factors that are beyond our control. The companies it affiliates, advisors, and representatives do not undertake any obligation to update this forward-looking information, except as required under the electrical law. Please note that RX Technologies earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Our express release contains a reconciliation of the unaudited non-GAP measures to the unaudited GAP measures. For today's call, management will use English as the main language. It will also provide simultaneous interpretation on the Chinese line. Please note that the Chinese line is in listen-only mode and Chinese interpretation is for convenience purposes only. In case of any discrepancy, management statements in the original language will prevail. I will now turn the call over to Ms. Case 1. Please go ahead.

Thank you, Sam, and thank you all for joining today's call. We delivered solid second-quarter financial and operational results, supported by our commitment to quality-driven, resilient, and compliant global growth. Our top line grew 14.8% year-over-year in the second quarter, mainly driven by our expanding international footprint. Gross profit increased 47.8% year-over-year to 357.8 million RMB. As expected, revenue and gross profit moderated sequentially, not due to any softening in the amount, but rather reflecting a trade inventory normalization following the first quarter's shipment, pull-forward driven by regulatory export adjustments. Because our distribution partners manage multi-brand portfolios, first quarter, pre-stocking temporarily secured visibility into sell-out rates, leading to the shipment of adjustments we saw this quarter. Underlying demand across our key international markets remains healthy and resilient. Against this backdrop, we focus on two strategic priorities, sharpening retail execution and optimizing our global operational infrastructure. These deliberate requirements are designed to lay the foundation for our next era of sustainable, profitable growth. Rather than chasing low-margin volume, we're directing our capital towards building an agile, confined global platform that can absorb regulatory shifts and quickly adapt to evolving demand. Regulatory sites across our international market is becoming more detailed and more restricted enforced, from customs enforcement priorities to refined frameworks. The United Kingdom is a case in point. Proposed regulations cover plain packaging, standardized device authentic retail display ban, restricted flavor descriptions, and limits on duct store operations. As an industry leader, we welcome these regulatory shifts. It poses the operational agility required to address them proactively, engaging these stakeholders to foster high-standard sustainable compliance frameworks. Over the long term, clear and consistently enforced boundaries push out non-compliant, low-quality competition, and risk barrier to entry. Our robust compliance infrastructure, R&D, and the supply chain enables us to meet those standards early, enhancing our platform's operational predictability and long-term sustainability. Our hands-on operation experience across the international markets has taught us valuable lessons. In maturing moments, traditional wholesaling models are no longer sufficient to sustain high-quality margin growth. As hardware technology and product standards stabilized, competition is shifting from pure product development to real-to-market execution, direct retail, proximity, and channel agility. As such, we are aggressively upgrading our distribution architecture through a targeted mix of direct channel investments, strategic distribution alliance, operational support, and channel innovation, and moving away from reliance on a single rigid distribution model In Asia, where our brand equity and consumer trust remains exceptionally strong, we are selectively broadening our footprint through localized commercial entities and proprietary channel models. The barriers to entry are higher. We are expanding through capitalization, strategic partnerships, and equity investments. By combining our work-class supply chain with local distribution leaders, we empower existing trading ecosystems while securing direct sell-out visibility and dedicated retail shelf space, establishing a durable, competitive mode. Europe is the cornerstone of our global growth strategy, where we are methodologically spending our presence on the dual-engine model that's balanced, targeted MMA with organic growth across channels. In May 2025, we acquired a long-established European e-vapor company with an integrated with local retail and online footprint, and have been supporting its expansion as a collaborative partner ever since. Over the past year, this integration has brought us deep localized market insights, and demonstrates the immense commercial value of aligning our global supply chain with trusted local operators. Building on that acquisition, in July 2026, we made a strategic controlling investment in a leading B2B and FMCG physical distribution leaders in Western Europe. This entity has a robust offline footprint, directly serving retail endpoints across the market. In B2B digital commerce, its proprietary ordering app connects with over 50% of independent retail points of sales in the country. Our integrations, it's all philosophy centers on empowerment, not operational disruption. We do not intend to restructure their core operations or convert the platform into an exclusive outlet for our own products. They will remain an open, multi-brand marketplace serving the broader retail ecosystem. By applying our global supply chain scale and portfolio brand relationships, we are confident that we can reduce these platform distribution costs and optimize sourcing terms. While expanding our distribution reach, we are also accelerating our transformation into a multi-category next-generation smoke-free product platform, extending beyond our leadership in eVapor into a broader smoke-free portfolio. We have commercialized our modern oral nicotine pouch line and steadily wrapping up manufacturing capacity and the channel distribution. In the heat-up burn category, we hold extensive proprietary technology and patent reserves, as well as the pipeline of market-ready products awaiting optimal market and regulatory conditions for commercial launch. To support these multi-category expansion and reduce our exposure to trade friction in the macroeconomic and geopolitical uncertainties, we are currently construct constructing a state-of-the-art manufacturing hub in Southeast Asia the facility will cover multi-product categories improve our terrorist position and streamline logistics supporting long-term scale sales resilience across our international markets Our mandate is clear, leverage our R&D capabilities, regulatory infrastructure, and newly strengthened virtual market networks to capture market share and establish leading position across the global smoke-free ecosystem. To sum up, we made meaningful progress this quarter, executing from a position of balance sheet strength. A solid capital position gives us flexibility and the patience to say no to suboptimal marginal diluted projects. We remain financially disciplined, ensuring capital is deployed exclusively toward high quality value of creative assets. By pairing direct channel control with multi-category product innovation, we are building a more resilient, diversified global platform structure to deliver sustainable long-term growth as the industry matures. Now I will hand the call over to Charles to review our financial results in detail.

Thank you, Kate, and hello, everyone. We delivered solid second-quarter top-line results with net revenues reaching RMB $1.01 billion, representing a 14.8% year-over-year increase from RMB $880 million in the prior year period. Our top-line growth was primarily driven by organic volume expansion in international markets. alongside incremental contributions from our acquisitions completed in May 2025. For the quarter, international revenues remained our principal growth engine, accounting for approximately 70% of total net revenues. As anticipated, second quarter net revenues moderated sequentially from first quarter 2026, which benefited from a one-time policy adjustment boost. Turning to profitability, growth profit 47.8% year-over-year to RMB 357.8 million in the second quarter and expanded sequentially to 35.4%, up 790 basis points year-over-year and up 360 basis points, mainly due to supply chain optimization. manufacturing yield, and favorable geographic. We delivered our 11th consecutive quarter of positive non-GAAP operating profit, driven by top-line expansion, favorable product mix, and disciplined operating cost. Non-GAAP income from operations reached RMB 149.6, 28.8% year-over-year. Non-GAAP net income for the quarter stood at RMB 230. Now, let me provide additional financial and strategic context regarding the Western European transaction Kate highlighted earlier. July 2026, we made a controlling investment in one of Western Europe's leading distributors of next-generation smoke-free products and FMCG goods. This entity brings to an extensive offline network directly serving over 30,000 retail endpoints and specialized retail and a proprietary B2B digital for 20,000 independent merchants to unlock significant operational and supply chain synergies from this transaction. We are confident we lose margin profile over time by integrating RLX's global supply chain scale and brand portfolio. Entity's financial and operational results will be fully consolidated into RLX technology's financial statements starting in the third quarter of 2026. Find our financial and operational is a deep commitment to corporate sustainability and long-term value creation. We published our 2025 ESG report this quarter, highlighting our advancements across corporate governance, product quality and safety, youth access prevention protocols, supply chain labor ethics, and environmental stewardship. expanding employee welfare initiatives to enforcing ESG compliance across our supplier base. We continue to elevate our standards by embedding eco-friendly materials and adhering to responsible marketing practices expansion in both ethical and sustainable. These ESG principles into our core operations strengthens trust amongst adult consumers, regulators, employees, and commercial partners, creating enduring value for all stakeholders. It continues to serve as the bedrock of our global expansion strategy. As of June 30, 2026, our total capital resources, price in cash, cash equivalent, restricted cash, short-term bank deposits, and liquid invested at RMB 13.9 billion, performance underscores our operational and financial strengths. Supported by this quarter's structural gross margin expansion, disciplined capital allocation, and a healthy balance sheet strengthen our market leadership and deliver long-term value to our shareholders. Now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. 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. The first question today comes from Christine Peng with UBS. Please go ahead.

Thank you, management, for the result summary as well as the strategy outlook. So I have two questions for the management. So the first question is about the capital allocation strategy. Obviously, Mr. Lu just mentioned there is abundant cash resources on the balance sheet. So I was just wondering what's going to be the capital allocation strategy going forward by leveraging on this very strong cash balance. The second question is about the acquisition strategy, which has become a very important driver of the company's development going forward. So I was wondering what is the criteria in terms of valuation multiple, poll, as well as the revenue and profit contribution from the acquisition going forward. Thank you.

Thank you, Christine, for your two questions. So the first question is on the capital allocation strategy. Our capital allocation strategy is financially disciplined and designed to drive sustainable long-term total shareholder returns. We allocate capital across three core priorities. The first one is organic growth and high ROI core business initiatives. This includes funding multi-category R&D, supply chain localization, specifically our manufacturing hubs currently under construction in Southeast Asia, and strategic product launches. When regulations and tire shifts in a given market, we take an ROI-gated approach. Sustainable organic growth remains our primary engine. We selectively deploy capital into highly accretive M&A. We target assets that build strategic capabilities across R&D, local manufacturing, proprietary brands, and route-to-market distribution, while meeting clear financial standards. We remain committed to direct shareholder returns. Our strong cash generation and liquid capital reserves allow us to consistently reserve excess capital through systematic share repurchases and dividend distribution to board approvals and prevailing market conditions. Regarding your second question about our M&A criteria, we do not have a specific valuation cap or top-line contribution threshold, but we do adhere to straight financial and operational standards. On valuation, we benchmark targets directly against transitioning preparables and our own public trading multiple. Every potential transaction must have a clear timeline for cash payback, be structurally non-dilutive, and generate EPS accretion. Execution, we actively empower our investing company by providing capital supports, supply chain integration, procurement optimization, and operational capabilities to a non-structural value. While we prioritize strategic fit and synergy potential across arbitrary size slots, our fitness operational bandwidth means we intentionally focus on larger-scale opportunities that can move the financial needle and meaningfully enhance our global infrastructure. In summary, we deploy capital only where validation discipline and clear strategic synergies full Thank you very much for your questions.

Thank you. The next question comes from Lydia Ling with Citi.

Please go ahead.

Hi, management. This is Lydia from Citi. I also have two questions. The first one is on what's your expectation on the overseas growth in the second half of the year. and especially considering both from the acquisition as well as your organic growth in the overseas market. And my second question is on the margin side, and what's your outlook for the second half, especially considering the acquisition impact on your operation profitability?

Thank you very much, Lydia, for questions regarding our growth outlook and margin expectations. So regarding our growth outlook, for the second half of the year, we are taking a quality-focused, pragmatic approach to driving international growth. On organic performance, we are prioritizing retail cell food velocity and channel infantry health rather than pushing volume into channels at any cost. This prudence recalibration establishes a solid, sustainable baseline for our ongoing operations. In addition to our organic baseline, the financial consolidation of our newly acquired Western Europe distribution platform starting in the third quarter will deliver a step-change increase in reported international revenue growth for the second half. Beyond the immediate top-line expansion, we anticipate compounding commercial synergies across medium to long term. While our organic growth rates reflects discipline infantry management, the consolidation of our European platform combined with operational synergies gives us full confidence in delivering strong overall overseas performance in the second half. Regarding our margin trajectory, the gross margin expansion observed in the second quarter was primarily driven by temporary products and revenue mix shifts. As our product mix and shipment flows normalize in the second quarter, we expect gross margin to settle back a healthy balance range. While non-operating factors such as macroeconomic interest rate movements and foreign exchange dynamics from reporting in RMB while generating revenue in U.S. dollars and sterling may create minor headline fluctuations, we maintain straight operational cost controls. Regarding our European acquisition, as we mentioned earlier, starting in the third quarter, we will consolidate the Western Europe downstream distribution platform. Distribution businesses naturally operate on a lower percentage gross margin profile than proprietary brand operations. Consequently, while percentage margins will reflect this structural mix shift on an absolute dollar basis, this transaction will meaningfully expand our operating profits and net profit scale.

Thank you for your questions.

The next question comes from Yun Kuo with Cinex.

Please go ahead.

Hi, management. I also have two questions. And the first question is about the U.S. market. British-American tobacco is propelling to sell flavored e-cigarettes in the U.S. starting in the third quarter. What is our forward strategy for the U.S. market? And the second question is about the domestic market. With the regulations on illegal e-cigarettes becoming increasingly strict in China, what is the impact on the company?

Thank you, Boyun, for our questions. One is on the U.S. market, and the other one is on the China market. So for the U.S. markets, we closely monitor U.S. regulatory developments and peers' action regarding PMTA enforcement. While adult smoker demand for diverse alternative processes, regulatory compliance and visibility remain the critical determinants for long-term commercial commitments in the U.S. Our strategic stance toward the U.S. market is disciplined, agile, and strictly ally-driven. Notably, our non-listed affiliates previously submitted PMP applications, which are currently in advanced stages, awaiting regulatory approvals. However, we will not commit large-scale capital growth to aggressively commercial rollouts until regulatory pathways and enforcement standards provide long-term credibility. We are directing our capital and management bandwidth towards regulatory transparency markets across Europe and Asia, alongside scalable reduced risk categories, such as modern oral nicotine pouches. Regarding your question on the mainland China market, we will be tightening domestic regulatory environments and crackdown on illegal, non-compliant products as an overwhelming, positive, long-term development for the industry. and for our company as well. Eliminating illicit trade, restores order to retail channels, removes back actors, and redirects consumer demand back to legal, tax-paying brands like us. In the near term, as regulatory bodies intensify enforcement and refine administrative oversight, procedural timelines for government approval have become more conservative. We have adopted a prudence baseline in our internal forecasting and expect mainland China-South for the free year to be broadly fed year-over-year compliance and continue to work closely with regulators to support a transparent, legally compliant industry ecosystem.

Thank you for your questions.

The next question comes from Zoe Zhu with CICC.

Please go ahead.

It's Zoe from CICC. I have two questions. First, with Philip Morris, both actually in Europe, how do you see competition in modern hats? Secondly, could you walk us through the strategic plan for new categories like oral pouches? Thank you.

Thanks, Zoe, for your question. So one is on the European market competition, and the second one is on the oral nicotine pouches. So for the first one, while we do not directly comment on our peers, multi-category execution across vaping, modern oil, and heat-not-burned tobacco products has clearly become mandatory for all major industry participants. While legacy tobacco companies have the capital to pay for key account listing fees, Rx holds distinct competitive advantages. First, we are a pure play, non-cigarette business, meaning we are fully committed to harm reduction and replace combustible cigarettes without any internal channel conflict. Second, we possess strong supply chain efficiency and product innovation capabilities, which, combined with our deep relationships in specialty retail, position us to expand further into large chain channels. Furthermore, through our strategic investments, we are actively strengthening our route to market and shelf space control. Combining our agile supply chain with direct control of local distribution gives us strong confidence in capturing market share across Europe. So regarding our plans of the nicotine pouches, we think that more than oral nicotine pouches represent a pivotal growth driver in our business expansion. We have embedded specialized pouch production lines into our manufacturing hub currently under construction in Southeast Asia. Once construction is complete and production wrap-ups ensure supply chain resilience, scale, and cost efficiency. Upon scaling, we will plug our auto-pouch line directly into our strengthened European distribution architect, gaining immediate access to retail point-of-sales and B2B platforms across Western and Northern Europe. Supported by a dedicated internal team, we are leveraging our proprietary R&D capabilities to continuously optimize product attributes. We are confident that our modern euro pouches will become a meaningful contributor to revenue and profits in the future.

Thank you very much for your question.

Due to time constraints, now I would like to turn the call 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 RS Technologies' Investor Relations team through the contact information provided on our websites of Pierre Chante Financial Communications.

This concludes this conference call. You may now disconnect your line. Thank you.