Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yeltsin Fourth Quarter and Full Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Liu of Strategic Investment and Capital Markets. Please go ahead.

Irene Liu Thank you, Operator. Please note that discussions today will contain forward-looking statements relating to the company's future performance, and are intended to qualify for the safe harbor from liability, as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect Yasin's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. Joining us today on the call from Yasin's senior management are Mr. Xinfeng Huang, our founder, chairman, and CEO, and Mr. Donghao Yang, our CFO and director. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on Yasen's investor relations website at ir.yasenglobal.com. I will now turn the call over to Mr. Jintong Huang. Please go ahead.

Okay. Thank you, Irene. And thank you, everyone, for participating in Yasen's inaugural earnings conference call today. So 2020 was an exciting year for YesSend as we made great strides across our business and achieved numerous milestones. So one of the most significant highlights for the year was our successful listing on the New York Stock Exchange on November 19th last year. So marking the start of our new journey as a public company. So on behalf of Yasun's employees and myself, I would like to extend our sincerest gratitude and appreciation to all of your long-time and new shareholders who continue to support us. Today, for the first time as a public company, we are pleased to present you with our solid operating and financial performance for the fourth quarter and the full year of 2020. So throughout the year, we leveraged our past successes to further fortify our leading position in color cosmetics for Gen Z and millennial customers. So Yasheng's firm commitment to product innovation and development, enhancing brand portfolio and product offerings, and strengthening ties with customers through both online and offline channels, position us as a unique and competitive player in China's fast-growing beauty industry. So as a result, for the full year, we grew our total net revenues by 72.6% year-over-year to RMB 5.2 billion and increased our growth sales by 72.4% from RMB 3.5 billion in 2019 to RMB 6.1 billion in 2020. In an extension of the robust momentum we saw throughout the year, fourth quarter revenues total net revenue increased 71.7% year-over-year to RMB 2 billion, and growth sales climbed 73.3% year-over-year to RMB 2.3 billion. So our solid results are testament to our ability to quickly grow our business, as evidenced by the accelerated expansion of our flagship brand, Puppet Diary, and the rapid growth witnessed by our other brands, including Little Ondi and AB's Choice, soon after being introduced to our portfolio. The strength across our brand portfolio demonstrated our ability to incubate and scale brands and assured us that we are on the right track as we continue to press forward. These numbers also display the effectiveness of our disruptive D2C model, which enabled us to consistently deliver innovative products and personalized services that deepen customer engagement. So the growing popularity of homegrown Chinese beauty brands is creating a great opportunity for us as our brand targets Gen Z and millennials, the golden cohort of China's beauty industry. So our evolving product line is steadily gaining traction among young people consumers, and seen substantial growth. So in the fourth quarter, the number of B2C customers reached another record high of 14.4 million. And this number came in at 32.3 million for the full year. So this represents impressive year-over-year gains of 31% and 38%, respectively. So color cosmetics are the foundation of our business. and a prominent contributor to revenue. So having said that, we further widened our product variety and offerings during the fourth quarter with more emphasis on quality, innovation, and uniqueness. So we deepened our reach in the skincare segment with the acquisition of Galenic, an iconic premium French skincare brand from Pierre Fabre, and a massive Chinese skincare brand which is the leading medical skincare brand known for its highly effective products targeting various sensitivities in Asian skin. We also entered a strategic partnership with Sensant Technologies, a partnership that is enhancing our R&D capabilities for innovative colors and new materials for color cosmetics. So boosting quality control for raw materials, and amplifying the use of technology to solve recurring challenges in the color cosmetics industry. So leveraging our disruptive D2C model and core platform capabilities, we are working toward building a multi-brand portfolio that drives a broader product selection and addresses the needs of more customers. With this vision in mind, I would like to review some of our recent activities. and unpack upcoming initiatives for 2021 and beyond. So on the back of the success of our existing brands, we plan on introducing some more brands through self-incubation and acquisitions in target market segments where we see considerable room for growth. Our ideal portfolio will consist of diversified brands with varying market positioning, from mass market to high end, as we seek to attract a wide spectrum of consumers. We are also proactively pursuing strategic investments, acquisitions, and collaborations, both domestically and overseas. As announced earlier this month, we recently acquired the prestigious skincare brand Yves Long from Madonita Capital, So with the brand's multi-award-winning product range, our exceptional e-commerce capabilities, and a demonstrated track record of innovation, we are confident that we will further accelerate Yiblong's growth in the global market. So to close, before I hand it over to Dong Hao, China's beauty market has enormous potential waiting to be unleashed. So our customer-centric value proposition disruptive D2C business model, and strong R&D capabilities, uniquely positioning Yasen to play a leading role in the country's evolving beauty industry. So looking ahead, we remain committed to redefining the landscape of Chinese beauty, even as we engage and grow with the next generation of consumers to provide them with a new journey of beauty discovery. So thank you, everyone. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance.

Thank you, David, and hello, everyone. We finished the fourth quarter of 2020 with a set of solid financial results. Our healthy and top-line growth reflects the strong performance we achieved across our brand portfolio and demonstrates the deep market appeal of our products. success of our growth strategy, and our ability to skillfully execute our operational plan. In an effort to scale our brand and expand our portfolio, profitability was impacted during the quarter as a result of increased selling and marketing expenses, as well as general and administrative expenses. While our gross margin rose to 66.3% in the quarter, compared with 62.7% in the same period last year. 2020 was a pivotal year for Yatan and the beauty industry as a whole, and our efforts in product innovation and development are paying off. As we move deeper into 2021, we remain committed to our strategy of further growing our product offerings, customer base and revenue, which we firmly believe will lay a solid foundation for profitability in the long run. Now, moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers presented today are in RMB a month, and all percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the fourth quarter of 2021 increased by 71.7% to 2 billion RMB from 1.1 billion RMB for the fourth quarter of 2019, primarily attributable to the growth in sales volume of our beauty products driven by increases in the number of customers during the same period. Growth profit for the fourth quarter of 2020 increased by 81.6% to 1.3 billion RMB from 716.3 million RMB for the fourth quarter of 2019. Total operating expenses for the fourth quarter of 2020 were 2.8 billion RMB, compared to 644.8 million RMB for the fourth quarter of 2019. As a percentage of total net revenues, total operating expenses increased to 144.5%. from 56.5% in the prior year period. Fulfillment expenses for the fourth quarter of 2020 were 144.7 million RMB, compared to 113.2 million RMB for the fourth quarter of 2019. The increase was primarily due to, one, an increase in warehousing, shipping, and handling expenses driven by the growth in sales volume of our beauty products during the same period. And two, share-based compensation expenses recognized upon occurrence of IPOs according to U.S. GAAP. As a percentage of total net revenues, fulfillment expenses decreased to 7.4% from 9.9% in the prior year period. Selling and marketing expenses for the fourth quarter of 2020 were 1.4 billion RMB, compared to 446.3 million RMB for the fourth quarter of 2019. The increase was primarily due to, one, an increase in advertising, marketing, and brand promotion costs. Two, an increase in expenses incurred during the development of experience stores. And three, share-based compensation expenses recognized upon occurrence of ICOs according to U.S. Japanese. As a percentage of total net revenues, selling and marketing expenses were 70.3% compared to 39.1% in the prior year period. General and administrative expenses for the fourth quarter of 2020 were 1.3 billion RMB compared to 71.9 million RMB for the fourth quarter of 2019. The increase was primarily due to, one, an increase in personnel costs, and two, recognized expenses upon the occurrence of IPOs, according to US GAAP. As a percentage of total net revenues, general and administrative expenses were at 65.6%, compared to 6.3% in the prior year period. Research and development expenses for the fourth quarter of 2020 were 25.6 million RMB, compared to 13.4 million RMB for the fourth quarter of 2019. The increase was primarily due to, one, an increase in personnel costs, and two, recognized share-based compensation expenses upon occurrence of IPO according to U.S. GAAP. As a percentage of total net revenues, research and development expenses were 1.3%, compared to 1.2% in the prior year period. Loss from operations for the fourth quarter of 2020 was 1.5 billion RMB, compared to income from operations of 71.5 million RMB for the fourth quarter of 2019. Non-GAAP loss from operations for the fourth quarter of 2020 was 290.1 million RMB, compared to non-GAAP income from operations of 90 million RMB for the fourth quarter of 2019. Net loss for the fourth quarter of 2020 was 1.5 billion RMB compared to net income of 46.2 million RMB for the fourth quarter of 2019. Non-GAAP net loss for the fourth quarter of 2020 was 287.4 million RMB compared to non-GAAP net income of 64.8 million RMB for the fourth quarter of 2019. Net loss attributable to Jackson's ordinary shareholders per diluted ADS for the fourth quarter of 2020 was 4.04 RMB compared to net income attributable to Jackson's ordinary shareholders per diluted EDS of 0.1 RMB for the fourth quarter of 2019. Non-GAAP net loss attributable to Yasmin's ordinary shareholders per diluted EDS for the fourth quarter of 2020 was 0.73 RMB, compared to non-GAAP net income attributable to Yasmin's ordinary shareholders per diluted EDS of 0.16 RMB for the fourth quarter of 2019. As of December 31, 2020, the company had cash and cash equivalents and restricted cash of 5.7 billion RMBs compared to 676.6 million RMBs as of December 31, 2019. As the quarter ended December 31, 2020, net cash used in operating activity was 362.1 million RMBs. Looking at our business outlook for the first quarter of 2021, we expect our total net revenues to be between 1.37 billion RMD and 1.42 billion RMD, representing a year-over-year growth rate of approximately 35% to 40%. This forecast reflects our current and preliminary view on the market and operational conditions. which is subject to change. With that, I would now like to turn the call to Q&A.

Yes, 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. 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. At this time, we will pause momentarily to assemble the roster. And the first question comes from Christine Cho with Goldman Sachs.

Christine Cho David and Donghao, congratulations on your first earnings call. I have two quick questions. One, could you give us some kind of your key assumptions behind your guidance for the next quarter? And secondly, I would love to get an update on the Perfect Diary skincare expansion plans. And also with all the acquisitions of Skitilinic and Eplom and some of the skincare brands, how do you see the skincare mix evolving in the long run? Thank you.

Christine, sorry, I didn't quite get your first question. So you want to provide some color behind the Q1 guidance or what?

Yes, yes.

So I'm sorry, what do you mean by color? I mean, the guidance is a guidance. I'm sorry.

Yeah, so some market conditions that you're looking at, what kind of growth you're looking at for the category. as a whole, you know, the ethics rates you mentioned is 6.52, but what are some of the things, let me phrase it this way, what are some of the key factors that could be very important to looking into first quarter?

Well, again, you know, I think we still continue to execute our, you know, strategies in terms of You know, one, you know, our existing brand, you know, Perfect Diary, Elizabeth Andian, and ABC, you know, we continue to grow those brands. And two, you know, we have, you know, acquired, you know, a number of new brands. And, you know, we're currently focusing on the integration of those new brands into our existing, you know, business and operations. But, you know, in Q1, you know, the contributions, you know, in terms of revenue from those newly acquired brands is still very limited. But going into, you know, Q2 and Q3, Q4, the later part of this year, you know, we do expect, you know, increasing contributions, you know, from those new brands.

Thank you.

Thank you. Oh, wait. We still have the second question to answer. I'll bring it. Go ahead.

David, go ahead. So for the Pervitare skincare expansion, I think because right now we are rolling out the skincare products in our offline stores. And also we have the men's product line coming in the middle of the year. So... So I believe we see our consistent commitment in expanding the skin care, especially we leverage the perfidiarist-like brand equity. So we believe long-term-wise the skin care will contribute a portion of the perfidiarist growth. And just to build on the Q1 site, the guidance presentation, and also if you look at for our existing brands, And most of the new product launch is usually now in Q1. And so there will be more new products and even new brands coming out to launch after Q1. Yes, that's it.

Thank you.

Thank you. And the next question comes from Dustin Wei with Morgan Stanley.

Thanks, management, for the question opportunity. So I think the first question is still related to the guidance of the 35% to 40% year-on-year. I kind of think of that first quarter 20, even for the online business, was slightly or meaningfully impacted by COVID. So there's sort of a little low base effect there, and yet we have this guidance. So not sure if we can talk about the breakdown by brand or some of the dynamics for online-offline, like For example, if we think like 35 to 40% sales growth for the full company, then what's the growth that we should look for for the perfect diary, for example, or what's the growth for online? Just try to get a sense about that management is a little bit too conservative or this is reasonable guidance. And then if we are kind of looking for slightly slower growth, Is that some of the strategic change here that management think for the existing brands? Company will need to focus more on the profitability or sort of lower loss ratio and then focus more on the newer brands. So that's sort of related to, I guess, the first quarter guidance and some of potential strategy change. I guess the second question is that when we think about the more premium brand like Glanik, or EFLOM, are they the brands that are going to be generating the profitable growth, or the company will use the similar sort of methodology to really drive the very strong sales growth, but this brand yet in the short term will be loss making? The third question is related to our, I guess, the balance sheet and the cash. So I think for 2021, if we assume the company will still have some loss and the working capital needed for expanding the business and the potential M&A, so what kind of the cash consumption or cash burn that we should look for for the end of 2021? Thank you very much.

Well, thank you for the question. Let me first try to take a shot at your question. So, first of all, last year, actually, Q1 was not a low base, especially in our business. Maybe in some of the other businesses, you know, they saw the impact of the COVID-19 a bit earlier. But for us, you know, Q1 last year, we saw, you know, 120% year-over-year growth. So it was a very strong quarter in our mind. So, the impact from COVID-19 started to hit us, actually from Q2, and even until maybe some part of China today. Because, as you know, in the last few months, in some parts of the country, especially in the northern part of the country, you know, COVID-19 came back. And in some of the cities, you know, offline stores were closed. were closed again, and some of our stores were impacted too. So we're not trying to be conservative in providing the guidance. But again, as we mentioned earlier, in Q1, you know, some of the new products for existing brands, like Perfect Area, Little Ondi, you know, will not be launched until Q2. And the contribution to our revenue from the newly acquired products will not present themselves or will not show themselves in our financials, starting from Q2. Currently, we're busy trying to integrate Glenick and the other Chinese brands into our operations, and we haven't even closed, actually closed. We signed the SPA for Yves Long. That's why we had to disclose but it will take us another couple of weeks to actually close the deal. And the consolidation of Iran's numbers into our financials will start only from the beginning of Q2. So we believe that the growth rate of our overall business will continue. start to come back or pick up, you know, starting from Q2 compared to Q1. It's not like, all right, this Q1 growth rate year over year is representative of, you know, the growth rates the full year.

So your second question, you know, I'll... And then, yeah, and Dustin, for your second question, I think it's relating to, you know, the strategy for new brand and existing brands. So actually when we are determining a brand strategy, the company will actually look at the brand's development stage and cycle instead of whether the brand is new or existing. So for example, even for our first brand, Perfect Diary, if we identify good growth opportunities in a new category or new offering, we will not hesitate to implement a growth strategy by investing, continue to invest in sales and marketing to further view the brand equity and increase customer awareness. So basically, when we look at our brand portfolio, in the long term, we are going to launch more brands through a combination of self-incubation and also M&A. But even for M&A, it's not only a pure aggregating all revenues together to increase the overall good level sales, but rather we're very good at growing the brand that we acquire. basically growing the top line, increasing market share. So basically in the long term, we are still very, right now we're still very focusing on top line growth, regardless of whether it's new existing, but rather looking at the brand stage and also growth opportunities.

Yeah, your third question is actually regarding our cash burn this year. All right, I can only talk about our operating cash you know, flow, because you can never plan ahead of time, you know, your next acquisition activity. So this year, as we explained to, you know, our investors, you know, it's still, it's going to be another loss-making year because our current focus is on top-line growth. So it's going to be another negative operating, you know, cash flow year for us, but hopefully Next year, you know, we're going to be able to break even in our bottom line and so, you know, our cash flow situation.

Got it. Thank you very much.

Thank you. And once again, please press star then 1 if you would like to ask a question. And the next question comes from Louise Lee with Bank of America Securities.

Hi, David. Hi, Dong Hao. Thank you for taking my question. So my first question is, since we gave the first quarter guidance, so for the full year, can we use a – so we are expecting accelerating growth from Q2 to the end of the year, right? So how should we look at the full year growth rate? Uh, and, uh, if it's going to accelerate from the second quarter. So what is the people's driver behind this? Uh, is it should, uh, it should be like, uh, our flagship flagship brand, uh, presidary or, or newly developed, self-developed brands like little Alden and at a choice or, uh, the key growth. Uh, or the key contribution from the growth should come from the newly acquired brands. So this is my first question. My second question is actually, could you give us more color on the newly acquired brands, particularly the e-plomb? So how big is it as for now? So what is our strategy to grow the newly acquired brands? I believe that most of these acquired brands are skin care. So are we trying to capture the sales? from the skin care brands from the existing customer base or we actually target to extend the customer base to the new customers because clearly we have a different brand positioning. The Avalon and Glanik are more premium. So what is our strategy? Thank you. Okay.

Thank you for your question. For your first question, we do not provide full-year guidance for our top-line growth. But as I said earlier, starting from Q2, we may see some pickup on our growth rate. Because as I was saying earlier, first of all, Q1 last year was a very strong quarter. And Q1 this year, you know, our business, especially our offline business, still got hit by the COVID-19 situations in some parts of the country. And two, you know, our newly acquired brands, you know, haven't started contributing to our top line. Starting from Q2, you know, we're going to see some of that. And three, you know, if you look at, you know, our existing brands, you know, we do have plans to launch new products you know, products or product categories. For example, Perfect Diary, you know, we're going to be launching, you know, for example, mail products in Q2 or Q3 this year. So those will be the drivers for our top line growth for the, you know, remaining three quarters of the year. Your second question, Yeah, you're absolutely right. You know, the newly acquired brands are mostly skin care brands like Glanix, Yvlon, and another Chinese brand. And, you know, two of these brands at least, Yvlon and Glanix, are actually positioned as, you know, prestige brands. And it will be very difficult for us to sell them to our existing customer base of Perfect Diary because they're just in totally different market segments. But again, I think we have built our core capabilities in terms of our supply chain, R&D capabilities, and data-driven product capabilities, and also marketing through social media. By leveraging those core operational capabilities, we believe that we will be successful. in launching or relaunching those newly acquired brands.

Okay, thank you. And the next question comes from Kevin Zhang with 86 Research.

Thank you for taking my questions, Huang Zong, Yang Zong, Irene. Congratulations on the very strong earning results. I have two quick questions. The first one is that since YSG have already built a brand portfolio with different categories and price positioning, so how do we make best use of our very large user base to cross-sell? Because we have very large online follower base and membership. So what is our multi-brand operation strategy? The second question is about the newly acquired brands Galenic and Yblom. So what is our strategy on the post-acquisition integration? How to deal with their existing team and overseas distributors' network? Thank you.

So thank you for the question. So going back to the first one, so when we are expanding to the multi-brands and I guess So we can leverage our existing customer base and also our organization capabilities. So going back to the link sell part, I believe for the new brands we acquired, so the growth usually comes from two parts. One part is about we can leverage existing capacity or customer base to either test the product or to test the brand positioning or to launch and design new products. So that's a benefit we can get. And also another thing that we are good at is actually to accelerate the growth of the brand we acquired based on our D2C business model. So going back to your

Do you mind repeating your second question?

Sure, no problem. So since we have acquired Galenic and Eblom, these two overseas brands, so what is our strategy on the post-acquisition integration? For example, how to deal with their existing team, R&D resources, as well as the overseas distributors?

Well, I think that's a very important question about the acquisition, because integration plays a very important part when we expand the brand portfolio. So right now, there are a few steps we are taking. One of the most important things is actually we are not 100% buyout. It's more like a joint venture with the existing shareholders, which can help us to smoothly transfer the operation. So for our partners, they're helping us to... to remain and then keep the existing distribution network and then helping us on the R&D and the product innovation and even keeping the key employees and the brand equity and et cetera. So this joint venture is very important to make sure that the acquisition is like a joint effort of both parties' strengths. So that's a very important thing. Another thing is that right now we internally we are growing our organization capabilities in the MFA team. So we have new talent coming from consulting firms, and also professional services teams, and they are very good at executing the integration part of the acquisition. So I believe with the external help and also the internal teams like the commitment, we are getting better and better in executing those acquisition deals. Thank you so much.

Thank you. And as this does conclude the question and answer session, I would like to turn the conference back over to management for any closing comments.

Thank you, operator. So thank you once again for joining us today. If you have any further questions, please feel free to contact us at YASM directly or TPG Master Relations. Our contact information for IR in both China and the U.S. can be found on today's press release. Have a great day. Thank you.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.