Yatsen Holding Limited

Ladies and gentlemen, good day, and welcome to the Yat-Sen Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Eileen Yu, Head of Strategic Investment and Capital Markets. Please go ahead.

Thank you, Operator. Please note that discussion today will contain four 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 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 Yasen'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 forelooking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. Please see the earnings release issued earlier today. for a definition of non-GAAP financial measures and a reconciliation of GAAP's non-GAAP financial results. Joining us today on the call from Yasin's senior management are Mr. Jinfeng 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'll now turn the call over to Mr. Xinzong Huang. Please go ahead, sir.

Thank you, Irene, and thank you, everyone, for participating in Yasen's third quarter 2022 earnings conference call today. We started the year by launching a five-year strategy. outlining our plans to evolve our business and drive the long-term and sustainable growth. With this strategy target as our roadmap, the management team continued to fine-tune our business model. Although negatively impacted by the softened beauty market and the resurgence of COVID-19, our skincare brands recorded solid growth in the third quarter of 2022, We have also seen improvements in gross margin net loss and long gap net loss on account of our cost optimization plan. Overall, our sales in the third quarter of 2022 continued to experience slowdowns as a result of challenging market headwinds and the lower levels of consumer spending, which have been exacerbated by resurgence of COVID-19, Beauty retail sales in the third quarter of 2022 went down by 3.2% year-over-year, according to the adjusted data published by China National Bureau of Statistics. Sales of both color cosmetics and skincare products on Tmall fell by double digits year-over-year in the third quarter of 2022, extending the downward trend in the second quarter of 2022. Our total net revenues for the third quarter of 2022 declined by 36.1% year-over-year to RMB $857.9 million, meeting the high end of our revenue guidance. Let's look at our revenue mix in detail. Net revenues for skincare brands increased by 33% year-over-year to RMB $269.4 million, As a highlight, total net revenues of our fast-growing clinic and premium brands, Dr. Wu, Yves Long, and Galantique, delivered solid growth of 69% year-over-year this quarter. In terms of revenue contribution, our skincare brands contributed 31.4% of total net revenues for the third quarter of 2022, which has exceeded 30% of total net revenues for two consecutive quarters. Compared with 15.1% of total net revenues for the third quarter of 2021, our color cosmetic brands, on the other hand, saw a 48.8% decline year-over-year in total net revenues to RMB 569.3 million. reflecting the continued softness in market demand for our color cosmetics, as well as intensified industry competition from both domestic and international brands. Growth margin for the third quarter of 2022 increased by 1% to 67.9% for the third quarter of 2021 due to increased sales of higher growth margin products from our skincare brands. cost optimization, and stricter pricing and discount policies across all our brand portfolios. Our net loss margin was 24.6% in the third quarter of 2022, representing an improvement of 3.2 percentage points from the second quarter of 2022 or 2.4 percentage points from the previous year period. Our non-GAAP net loss margin was 14.7% in the third quarter of 2022, representing an improvement of 7.1 percentage points from the second quarter of 2022, or 1.4 percentage points from the prior year period. The improvement is acceptable to our continued cost optimization. Now I will share some of the quarter's major initiatives and developments. In the third quarter of 2022, our business teams were active in developing and strengthening our portfolio of high-performing brands tailored to Chinese consumers' evolving needs and tastes. Dr. Wu recently launched new products infused with triple-action repair technology, which was proven efficacious on the iconic repair serum. We celebrated the brand's 19th anniversary with its loyal customers across China, especially those with sensitive or ex-pro skin who seek efficient products designed for their skin types. Yiflong achieved robust growth despite the challenging industry environment. While the brand remained strong in premium cleanser category, we expanded to serum category by launching Radiance prepare Huichino Seren. In September, Yiflong partnered with the Equisite Herald Tea Rooms in Shanghai to cultivate a worldly and luxurious experience for the celebrated brand. Galenique also recorded very strong online growth in the third quarter of 2022. We have gained more market share and stayed number one for two consecutive quarters in the premium Seren category on Douyin, While our hero VC Theron maintained its leading position, the Secret D'Excellence Active Theron also experienced steady growth in the third quarter of 2022. The launch of the Secret D'Excellence Active Theron in the third quarter of 2022 was attended by industry experts and thought leaders and raised awareness of the brand. amplifying its leadership in the premium dermatological skincare sphere. While our color cosmetics business experienced a year-over-year decline of 48.8%, we saw improved growth margin in aggregate. Our color brands went through channel optimization and promotion control to develop sustainable business models. Perfect Diary sales on Douyin achieved strong year-over-year growth of 97% and ranked number two among all color cosmetics brands. Another improvement from number three ranking is achieved last year. We have also closed underperforming offline stores throughout 2022. As a result, as of September 30, 2022, we operated a total of 198 experienced stores of the Perfect Diary brand, representing a net reduction of 88 stores since the beginning of the year. In the fourth quarter, this offline store optimization program will continue and we are constantly monitoring the market situation of the offline retail space to best support our brand strategies moving forward. In addition to channel optimization, we are also adjusting the category Meats to increase our market share in facial makeup and the complexion products. Perfect Iris translucent blurring loose powder and upgrades that add anti-doubleness efficacy in addition to the original smart lock technology gained more market share in the loose powder category on T-more compared to last quarter. We also applied this patent technology to the newly launched ClearCover three-color concealer palette as an attempt to expand it to other facial categories. Our robust new product launch and healthy pipeline are backed by continuous investments in R&D. R&D expenses increased to 3.9% from 2.7% of net revenues in the prior year period. We debated at the International Federation of Societies of Cosmetics Chemistry Congress with two cutting-edge technologies in September. We will continue our efforts to build a strong R&D capability as our core strategy for future growth. We are also constantly reminded of the importance of our commitment to our environmental, social, and governance programs. In the third quarter of 2022, Yasen donated computers and the projection equipment to the government of Zhouchentang, located in Guangdong province, to help improve the township's information technology infrastructure. We are actively involved in elevating the quality of life of those in more challenging circumstances and will continue to take the initiative to assume corporate social responsibility and contribute our support in the future. While we expect the retail environment to remain challenging for the rest of 2022 and for the first half of 2023, we have sufficient resources to meet our strategy objectives. During the Double 11 Shopping Festival this year, we saw outstanding performance in our skincare brands. Glanik achieved high triple digits year-on-year sales growth, Yves Long and Dr. Wu got the first place in premium cleanser category and acne control category with their Hero Products Cleanser and the Madelique Gentle Renewal Serum, respectively, on T-Morph. In summary, we have already made significant progress in our strategy evolutionary journey. With higher contribution from our skincare brands, improved growth margin, and significantly narrowed net loss in the third quarter of 2022. With the cash, restricted cash, and short-term investment balance of RMB 2.6 billion at the end of this quarter, we have sufficient resources and flexibility in pursuit of our long-term strategy goals. With that, I will now turn the call over to our CFO, Donghao Yang. to discuss our financial performance. Thank you, everyone.

Mr. Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in RMB amounts, and all percentage changes refer to year-over-year changes, unless otherwise noted. Total net revenues for the third quarter of 2022 decreased by 36.1% to 857.9 million RMB from 1.34 billion in the prior year period. The decrease was primarily attributable to a 48.8% decrease in net revenues from our color cosmetics brands, partially offset by a 33% increase in net revenues from our skincare brands. Gross profit for the third quarter of 2022 decreased by 35.2% to 591.3 million RMB from 911.8 million in the prior year period. Gross margin for the third quarter of 2022 increased to 68.9% from 67.9% in the prior year period. The increase was primarily driven by increased sales of higher gross margin products from our skincare brand, cost optimization, and stricter pricing and discount policies across all of our brand portfolios. Total operating expenses for the third quarter of 2022 decreased by 33.1% to 857 million RMBs. from $1.28 billion in the prior year period. As a percentage of total net revenue, total operating expenses for the third quarter of 2022 were 99.9% as compared with 95.4% in the prior year period. Fulfillment expenses for the third quarter of 2022 worth 63.8 million RMB as compared with 102 million in the prior year period. As a percentage of total net revenues, fulfillment expenses for the third quarter of 2022 decreased to 7.4% from 7.5% in the prior year period. The decrease was primarily attributable to a decrease in warehouse and the logistics costs due to optimization of our fulfillment capacity. Selling and marketing expenses for the third quarter of 2022 were 564.8 million RMB as compared with 911.3 million in the prior year period. As a percentage of total net revenues, selling and marketing expenses for the third quarter of 2022 decreased to 65.8% from 67.9% in the prior year period. The decrease was primarily attributable to the higher efficiency of online marketing activities partially offset by store closure related expenses and provisions. General and administrative expenses for the third quarter of 2022 were 194.5 million as compared with 233.9 million in the prior year period. As a percentage of total net revenues, general and administrative expenses for the third quarter of 2022 increased to 22.7% from 17.4% in the prior year period. The increase was primarily attributable to the lower total net revenues in the third quarter of 2022, creating a low base effect. Research and development expenses for the third quarter of 2022 were 33.9 million as compared with 35.8 million in the prior year period. As a percentage of total net revenues, research and development expenses for the third quarter of 2022 increased to 3.9 percent from 2.7 percent in the prior year period the increase was primarily attributable to the lower total net revenues in the third quarter of 2022 creating a low base effect law firm operations for the third quarter of 2022 decreased by 28.1 percent to 265.7 million RMB from 3.69.3 million in the prior period. Operating loss margin was 31% as compared with 27.5% in the prior period. Non-GAAP loss from operations for the third quarter of 2022 decreased by 26.6% to 162.6 million RMB. from 221.7 million in the prior year period. Non-GAAP operating loss margin was 19% as compared with 16.5% in the prior year period. Net loss the third quarter of 2022 decreased by 41.7% to 210.7 million from 361.8 million in the prior year period. Net loss margin was 24.6% as compared with 26.9% in the prior period. Net loss attributable to Yeltsin's Wooden Ridge shareholders for diluted ADS for the third quarter of 2022 was 0.37 RMB as compared with 0.57 RMB in the prior period. Non-GAAP net loss for the third quarter of 2022 decreased by 41.5% to 126.5 million RMB from 216.3 million in the prior period. Non-GAAP net loss margin was 14.7% as compared with 16.1% in the prior period. Non-GAAP net loss attributable to Yeltsin's ordinary shareholders for diluted ABS for the third quarter of 2022 was 0.22 RMB as compared with 0.34 RMB in the prior year period. As of September 30th, 2022, the company had cash, restricted cash and short-term investments of 2.6 billion RMB as compared with 3.14 billion as of December 31st, 2021. Net cash generated from operating activities for the third quarter of 2022 was 21.8 million RMB compared with net cash used in operating activities of 225.3 million in the prior year period. Looking at our business outlook for the fourth quarter of 2022, we expect our total net revenues to be between 916.7 million RMB and 1.07 billion RMB, representing a year-over-year decline of approximately 30% to 40%. This forecast reflects our current and the preliminary views of the market and operational conditions, which are subject to change. With that, I would now like to open the call to Q&A.

Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star then one 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 two. 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. So with these instructions in mind, we will pause momentarily to assemble the roster. And today's first question comes from Dustin Wei with Morgan Stanley.

Thanks for taking my questions. First question is related to the W11 performance. I'm wondering if management can comment in terms of the performance by brand or by, you know, skin care brands and the color brands. And do we expect that the GP margin in fourth quarter could be sequentially lower versus third quarter because of the promotion for W11? And the second question related to the performance for the skincare brands in third quarter. It sounds like excluding Abbott's Choice, the other three major skincare brands perform pretty strongly. But could you sort of elaborate a little more in terms of, you know, maybe provide a range of the performance or, you know, some of the different strategy and their progress? And just, you know, from management's perspective, the key skincare brand's performance is kind of a little ahead of the expectation or there's something more to do?

Thank you. First question for the W11 results. For skincare brands, right now our Glanik, Yves Long, and Dr. Wu achieved robust sales growth in 2011, with GMV higher than 100 million RMB for each of the brands. So some of the hero products of each of the brands are performing quite well. I think Glanik has high triple-digit year-on-year sales growth. and also achieved as the top of the new brands for Timor W11s. And so for the VC turn, it's also a high triple digit year-on-year sales growth. And we also launched a new product, the secret deacetylene serum, and that becomes the imported essence top-selling for the top five. Yves Blanc still continues to take the number one premium cleanser category. And also for Dr. Wu, right now the Renew Serum is already pretty strong in the acne control category. And some of the new products of Dr. Wu are performing really well, especially the Triple Action Repair Serum. It's ranking at the top four repair serums on Timor. So looking forward, I think some of the hero products of the skincare brands will help to contribute the growth of the brands. and in aggregate, improving the percentage of our total revenue in the future. For color cosmetics, I think right now our color brands are still facing a pretty big challenge. and also has been undergoing a turnaround. So we prioritized profitability and we applied very strict pricing and discount policies across all those color brands in order to improve the growth margin and also improve the profitability as well as protecting the brand image. So looking forward for Q4, I think we are on the right hand to continue optimizing the gross margin and also the bottom line.

Well, on your second question, gross margin, well, gross margin has a lot to do with the category mix and inventory provision, a lot of things. And we're not in position to make comment on the gross margin Q4, but what I can tell you is over the long term, as our skincare business grows stronger and take a higher percentage in the total product mix, and we believe in the long term, you know, our gross margin will be an upward trend.

Got it. Thank you. Can I ask one more question related to sort of the expenses and the restructuring? So understanding that company has been focused on, like, you know, store closure, organization optimization, et cetera. So can we have an update on the status now? Like, do we expect that those exercises will be pretty much done in the fourth quarter this year? Or, you know, some of those will continue into the 2023, depending on the macro environment. And is there some number that you can share in terms of the sort of one-off costs, like for the full year this year, year today, you know, including the human resource, like, you know, severance costs or, you know, one-off store closure costs, you know, kind of one-off expenses that we likely won't see in 2023? All right.

So we have been pretty aggressive in, closing the non-performance stores due to mostly the challenges in our macroeconomic situation, especially caused by COVID-19. So at the beginning of this year, we have, you know, more than close to 300 stores. But according to our current plan, by the end of this year, you know, we're going to have, you know, a little over 100, about 100 stores, including you know, self-operated stores and the franchise stores. Well, in terms of the expenses that we've incurred during the process, well, it has been quite substantial. We can provide you with a breakdown, if you want, after this call. But going into next year, I don't think we're going to incur, you know, substantial loss or, you know, substantial expenses due to store closure related, you know, provisional expenses because now I think we have reduced the total number of stores to a very manageable level.

Got it. Thanks a lot for answering my questions.

Sure. Thank you.

Thank you. And the next question comes from Kuan Yi Lin with CICC.

Hi. Thanks for taking my questions. I've got two questions. The first one regarding color cosmetics, it seems that sales of color cosmetics keep decreasing each quarter. However, we still believe in the company's competitive edge in color cosmetics as well as the brand asset of TDs. So at what time or what sales size do management expect the color cosmetics will return to growth? So this is the first question. And my second question is related to guidance for the fourth quarter. So the total net revenue is expected to decrease by 30% to 40% in the fourth quarter. Could you elaborate more about the trend of color cosmetics and the skin care just break down by category? Thanks.

Yeah, sure. So for Perfect Diary, actually, you can see for the past three quarters, the color cosmetics in total, the year-over-year decline is in a similar scale. So we're not actually changing. It's more a stable trend right now. And then in terms of what we're doing for Perfect Diary right now, the key goal is to achieve profitability. So how we're going to do that, we think there are two major plans that we're undergoing right now. One is in terms of channel optimization, and the second one is on the product category optimization. And on the channel one, we have alluded earlier is that offline right now because of the challenging macro environment. So we're closing down a number of stores that will contribute to the sales decline. But we think that will likely to stabilize by the end of this year. And then secondly, in terms of channel mix, you can see all the online channels Color Cosmetics are also dropping a set for Douyin. So we're also investing heavily on Douyin to promote the growth and attracting customers. So for this quarter, our Douyin has experienced a year-over-year increase of 97 percent so that part we're pretty comfortable and continues to hope to do well on the dough in part so that's about the channel optimization and on the product category optimization percadero used to be very have very high market share on the on the lip and also eye category but In terms of complexion and facial makeup, that's actually a larger market that we think we need to tap in and also increase our market share. So as mentioned in our conference call, we are introducing a number of complexion products which are endorsed by our Smart Lock technology. And we're seeing quarter over quarter increase of market share in the facial makeup. So that's another driver thing will help of Perfect Diaries' brand turnaround and likely turn into a more healthy trend next year.

Yeah, well, regarding the second question about our guidance for Q4, you know, we're guiding the market that, you know, our total revenue is going to decline by 30 to 40 percent. And the decline will come, you know, primarily from our color cosmetics business. offset by our fast growth of our skincare business. So the general trend of our business, and especially our category mix in the future, will be very fast and healthy growth in our skincare business. And in the meantime, we're working very hard to try to turn around our color cosmetics business.

Got it. Thanks a lot. I have no other questions.

Thank you. Thank you. And once again, please press star then one if you would like to ask a question. And our next question comes from Olivia Tong with Raymond James.

Great. Thanks. Good morning. I wanted to ask you about your view on the competitive environment, local brands versus international brands. how they stack up, particularly with 11-11, and then also your thoughts as you go into next year. And then specifically for you about fiscal 23, the Q4 guide would suggest that on a two-year stack basis on revenue that the sales deceleration starts to – it's a greater deceleration in sales. So as you think about the go forward over the next 12 months, is your view that That's sort of the steady state pace now, or is there something that changes materially as you go into fiscal 23? Thank you.

Well, I think the market, the growth for the total bidding market right now is already almost zero, or sometimes even declining. So basically the competition will be intense for us. But that I think is normal in this market. So if we're looking at the international players, they still invest a lot and also continue to give discounts basically for the whole year since February 11 last year. So for domestic brands, I think the new brands emerging As Capital Challenge, we're chatting with the music industry in the past two or three years, especially on the fast-growing Boeing platform. So for us, I think we will be more focused on our strategy instead of focused on the external competition. Right now, we have a very clear strategy to grow our skincare brands in the portfolio and also to turn around our color business. So profitability will be the priority and also skincare brands will be the priority. So when we look forward, I think we are executing the strategy well. consistency and also we will continue to move forward with that very clear strategy in the future as well.

Yeah, and your second question about our next year's outlook. Well, first of all, we do not provide guidance for any time horizon beyond the next quarter. But anyway, well, for 2023, I think the decline in our growth rate, I don't think it will be as, you know, as deep as this year for a number of reasons. One, you know, we've been working very hard to turn around our color cosmetics business, and we've seen some very good positive signs. in our effort. And secondly, you know, we've got, you know, very strong growth in our skincare business, which we believe will continue into, you know, well into next year. So if you consider these two trends together, I think overall our, you know, next year I think our growth rate of our business will start to stabilize. if not turn positive from a year-over-year standpoint.

Thank you so much.

Thank you.

Thank you. And that concludes the question and answer session. I would like to turn the conference back over to management for any closing comments.

for joining us today. If you have any further questions, please feel free to contact us at Yasen directly or through TPG Investors. Our company information for IR in both China and the U.S. can be found in today's press release. Have a good day. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation.