Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yat-sen fourth quarter and full year 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Liu, Vice President, Head of Strategic Investment and Capital Markets. Please go ahead.

Please note the discussion 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 Security Mitigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and alternatives, 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 Yassen'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 form of 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 to non-GAAP financial results. Joining us today on the call from Yasin's senior management, Mr. Qi Donghuang, our founder, chairman, CEO, and Mr. Zou Haoyang, our CFO and director. Management will begin with prepared remarks, and the call will conclude with a QA session. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on Yasin's investor relations website at ir.yasinglobal.com. I'll now turn the call over to Mr. Jinfeng Huang. Please go ahead, Jinfeng.

Thank you, Irene, and thank you, everyone, for participating in Yasen's fourth quarter end of the year 2022 earnings conference call today. 2022 was a year of transformation for Yasen. Early in the year, we launched our new five-year strategy plan with an eye towards long-term sustainable growth and began refining our product category needs, channel mix, and business model accordingly. This roadmap guided our steps amid the myriad challenges in 2022, including the recurrent COVID-19 outbreak and related lockdowns. China's beauty industry continued to struggle with this macro-heaven, and consumer sentiment remained weak overall. Nevertheless, our skincare brand remained a bright spot for 2022, recording solid growth in sales. We also achieved significant profitability improvements, both increasing growth margin and narrowing net loss margins, and turned profitable under non-GAAP measures for the fourth quarter of 2022. According to the adjusted data published by the China National Bureau of Statistics, China's total beauty retail sales in the fourth quarter of 2022 recorded a negative growth of 3.1% year-over-year. While for the full year 2022, China's beauty retail sales declined by 3.2% year-over-year. On Timor, color cosmetic sales fell by double digits, and the sales of skincare products experienced a single-digit decline year-over-year in 2022. However, we have seen a light at the end of the tunnel With the resumption of offline activities and the adjustment of COVID restrictions, the consumer market is well on its way to a recovery in 2023. Against this backdrop, our overall sales slowed down throughout the year. Total net revenues declined by 34.2% year-over-year in the fourth quarter to RMB 1.01 billion. But we need to look at our revenue mix in detail to see the full picture. Net revenues for our skincare brands increased by 42.4% year-over-year to RMB 471.6 million, highlighted by outstanding performance among our fast-growing clinical and premium brands. including Dr. Wu, Galanick, and Yvlon, which recorded a robust growth of 73% year-over-year and a 99.3% year-over-year in combined net revenues for the fourth quarter and the full year of 2022, respectively. In terms of revenue contribution, our skincare brand accounted for 46.9% of total net revenues in the fourth quarter and the 33.5% for the full year of 2022, more than doubling compared with the prior year period in both cases. Our color cosmetic brands, on the other hand, saw a decline of 66.9% year-over-year in sales to RMB 513. and 13.4 million, reflecting the continued softness in the market demand for color cosmetics products, as well as intensified industry competition from both domestic and international brands. As we move into 2023, we will continue to build on our skincare portfolio's success while addressing the challenges in the color cosmetics landscape. Turning now to profitability. Since the higher contribution for our skincare brand, more distinct pricing and discount policies, and continued cost optimization across all our brands, our growth margin increased by 6.1 percentage points to 71.1% for the fourth quarter from 55% a year ago. Net loose margin for the fourth quarter narrowed to 5.5% from 31.1% for the prior year period. Most importantly, we recorded a non-GAAP net income margin for 3.4% for the fourth quarter as compared with a non-GAAP net loose margin of 14.7% for the third quarter and the non-GAAP net loss margin of 21.9% for the prior year period. We have been striving to achieve non-GAAP profitability by elevating operational efficiency and closing underperforming offline stores, among other cost optimization measures. Next, let me share some of our operational highlights from the fourth quarter and the full year 2022. Throughout the year, we created and delivered products tailored to Chinese consumers' preferences. Glanit enjoyed broad success, including with two featured products at the China International Import Expo, its Anti-Oxygen No.1 DC Serum and its newly upgraded Platinum Snow Algae Serum. The latter also ranked among the top five imported serums on Timor during the Double Eleven Shopping Festival. At the same time, Ndoza Wu's Mandelic Daily Renewal Serum put the number one position in both Timor's Agni Treatment and Douyin's Domestic Serum category. while Yves Long's iconic Cleansing Serum and Cleansing Cream ranked first among high-end cleanser products on Tmall. For our color cosmetic brand, we focused on cost optimization and given the overall softening in the color cosmetics market, as well as our own strategy goals for the fourth quarter. Going forward, with the more sustainable business model in mind, We will continue to develop our color cosmetic product portfolio to capitalize on anticipated consumption rebound in 2023. In addition to product development, branding is another key pillar of our strategy transformation. We strive continually to enhance the brand image and the positioning of our various brands among our diverse consumer cohorts. For example, Yiflong hosts its Eternal Gold-themed Global Luxury Club in four cities globally, while also sharing its offline thermal wax therapy experience with Chinese audience at Yiflong's Smart China Wellness Summit in October 2022. Furthermore, Profit Diaries' Read Me Leap Quiz Lipstick was awarded the 2022 National Consumption World of Mouth Product by People's Daily, a powerful commendation of its brand influence. In terms of channel optimization, we selectively closed offline stores and aggressively promoted our Douyin presence to diversify our online channels. As of December 31, 2022, we operated 158 offline experience stores for the Perfect Diary brand, as compared with 286 stores at the end of 2021. This strategy shift has enabled us to cut costs while still enjoying brand exposure across the country. Among our major online channels, Douyin stood out with its relatively high growth. Sales of our products on Douyin grew rapidly throughout 2022. Next, I would like to share some highlights of the progress we have made with our continuous investment in R&D, which provides vital support to new product launches and the long-term development of our brand. For the full year 2022, Our R&D expenses increased to 3.4% of total net revenues from 2.4% for the prior year period. In November, we officially signed a joint laboratory cooperation agreement with Singha Sang University for skin health research, an exciting partnership that will enable us to further explore opportunities in both color cosmetics and skin care. We are also thrilled to announce the appointment of our new Chief Scientific Officer, Ms. Jin Chen. She has over 25 years' experience in research and development in the beauty industry. Prior to joining Yasen, Ms. Chen worked at Estee Lauder for 17 years, serving in a number of senior management and research positions. including as Vice President of APEC R&D since July 2014. And from July 2001 to January 2005, she worked at Revlon, leading technical, quality control, regulatory, and manufacturing organizations. With our CSO on board, we will remain focused on strengthening our R&D capabilities as our core strategy for future growth and product differentiation. Before I wrap up, I would like to mention our environmental, social, and governance performance in 2022. In the latest ESG rating published in December 2022 by the world's largest index company, MSCI, we were upgraded to level A, leading China's cosmetic brands This upgrade clearly reflects our endeavors to improve our product eco-design and carbon footprint, our employee wellness initiative, and our corporate governance, among other ESG enhancements. We also devoted more resources to multiple social welfare programs at both the company and brand levels. Glanit, for instance, launched a new Pink October Limited Edition of its Aqua Infini Treatment Lotion in support of breast cancer research. As always, we remain deeply committed to upholding our corporate social responsibility and will continue to seek new ways to support people and communities in need. While we expect the retail environment to remain challenging for the first half of 2023, we remain confident about the prospects of China's beauty industry. We made significant progress in our strategy transformation in 2022 and have reserved sufficient resources to achieve our strategy objectives in 2023. With growing contributions from our skincare brands, improved growth margins, and streamlined operations, we are well positioned to execute with agility and capitalize on rising opportunities as the consumer market recovers. With that, I will now turn the call over to our CFO, Zhonghao Yang, to discuss our financial performance. Thank you, everyone.

Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are RMB amounts, and all percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the fourth quarter of 2022 decreased by 34.2% to 1.01 billion RMB from 1.53 billion for the prior year period. The decrease was primarily attributable to a 56.9% year-over-year decrease in net revenues from color cosmetics brands, partially offset by a 42.4% year-over-year increase in net revenues from skincare brands. Gross profits for the fourth quarter of 2022 decreased by 28% to $7.5 114.6 million RMB from 993 million for the prior year period. Gross margins for the fourth quarter of 2022 increased to 71.1% from 65% for the prior year period. The increase was driven by increasing sales of higher gross margin products from a skincare brand, and second, Strict pricing and discount policies. And third, cost optimization across all of our rent portfolios. Total operating expenses for the fourth quarter of 2022 decreased by 47% to 792.9 million RMB from 1.49 billion for the prior year period. As a percentage of total net revenues, total operating expenses for the fourth quarter of 2022 were 78.9% as compared with 97.8% for the prior year period. Affirmative expenses for the fourth quarter of 2022 were 62.5 million RMB as compared with 123.1 million for the prior year period. As a percentage of total net revenues, the affirmative expenses for the fourth quarter of 2022 decreased to 6.2% from 8.1% for the prior year period. The decrease was primarily attributable to a decrease in warehouse and logistics costs due to the outsourcing of most of our warehouse and handling operations. Selling and marketing expenses for the fourth quarter of 2022 were 535.2 million RMB as compared with 1.2 million RMB. As a percentage of total net revenues, selling and marketing expenses for the fourth quarter of 2022 decreased to 53.2% from 70.7% for the prior period. The decrease was primarily attributable to the closure of underperforming offline stores, reduction in marketing event-related expenses and higher efficiency of online marketing activities. General and administrative expenses for the fourth quarter of 2022 were 170 million RMB as compared with 248.7 million for the prior year period. As a percentage of total net revenue, general and administrative expenses for the fourth quarter of 2022 increased to 16.9% from 16.3% for the prior year period. The increase was primarily attributable to the deleveraging effect of lower total net revenues in the fourth quarter of 2022. Research and development expenses for the fourth quarter of 2022 were 25.1 million as compared with 43.3 million for the prior year period. As a percentage of total net revenues, research and development expenses for the fourth quarter of 2022 decreased to 2.5 percent from 2.8 percent for the prior year period. The decrease was primarily attributable to the planning of research development activities to maintain research and development expenses at a reasonable level relative to net revenue. Loss from operations for the fourth quarter of 2022 decreased by 84.4% to 78.2 million RMB from 501.8 million for the prior year period. Operating loss margin was 7.8% as compared with 32.8% for the prior year period. Non-GAAP income from operations for the fourth quarter of 2022 was 11.5 million RMB as compared with non-GAAP loss from operations of 360.9 million for the prior year period. Non-GAAP operating income margin was 1.1% as compared with non-GAAP operating loss margin of 23.6% for the prior year period. Net loss for the fourth quarter of 2022 decreased by 88.4% to 55 million RMB from 475.1 million for the prior year period. Net loss margin was 5.5% as compared with 31.1% for the prior year period. Net loss attributable to Yesen's ordinary shareholders for diluted EDS for the fourth quarter of 2022 was 0.09 RMB as compared with 0.75 RMB for the prior year period. Non-YES net income for the fourth quarter of 2022 was 34.7 million RMB as compared with non-GAAP net loss of 335.1 million for the prior year period. Non-GAAP net income margin was 3.4% as compared with non-GAAP net loss margin of 21.9% for the prior year period. Non-GAAP net income attributable to Yesen's ordinary shareholders for diluted EDS in the fourth quarter of 2022 was 0.06 RMB as compared with non-debt net loss attributable to Yesen's ordinary shareholders for diluted EDS of 0.53 RMB for the prior year period. Now, I'd like to briefly walk through the highlights of our full year results, total net revenues, for the full year of 2022 decreased by 36.5% to 3.71 billion RMB from 5.84 billion for the prior year period, primarily attributable to the decline in net revenues from color cosmetics brands, possibly offset by the increase in net revenues from skincare brands. Growth profits for the full year of 2022 decreased by 35.4% to 2.52 billion RMB from 3.9 billion RMB for the prior year period. Gross margin for the full year of 2022 was 68% as compared with 66.8% for the prior year period. The increase was primarily attributable to first Increasing sales of higher gross margin products from skincare brands. And second, stricter pricing and discount policies. And third, cost optimization across all of the company's brand portfolios. Loss from operations for the full year of 2022 was 928.9 million RMB as compared with loss from operations of 1.62 billion RMB for the prior year period. Non-GAAP loss from operations for the full year of 2022 was 539.3 million RMB as compared with non-GAAP loss from operations of 1.05 billion for the prior year period. Net loss for the full year of 2022 was 821.3 million RMB as compared with net loss of 1.55 billion for the prior year period. Net loss attributable to the up and ordinary shareholders for diluted EDS for the full year of 2022 was 1.37 RMB as compared with 2.44 RMB for the prior year period. Non-GAAP net loss for the full year of 2022 was $462.9 million RMB as compared with non-GAAP net loss of $980.6 million for the prior year period. Non-GAAP net loss attributable to Yesen's ordinary shareholders for diluted EDS for the full year of 2022 was 0.76 RMB as compared with 1.54 RMB for the prior year period. As of December 31st, 2022, the company had passed restricted cash and short-term investments of 2.63 billion RMB as compared with 3.14 billion as of December 31st, 2021. Net cash generated from operating activities for the fourth quarter of 2022 was 106.6 million RMB as compared with net cash used in operating activities of 250 million for the prior year period. Net cash generated from operating activities for the full year of 2022 was 136.2 million RMB as compared with net cash used in operating activities of 1.02 billion RMB for the prior year period. Looking at our business outlook for the first quarter of 2023, we expect our total net revenues to be between 623.7 million and 712.8 million RMB, representing a year-over-year decline of approximately 20% to 30%. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change. With that, I would now like to open the call to Q&A.

We will now begin the question and answer session. To ask a question, you may press star, then 1, on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like 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. At this time, we will pause momentarily to assemble our roster. The first question comes from Dustin Wei with Morgan Stanley. Please go ahead.

Thanks for taking my questions. My first question related to the balance between the sales and the profit. So I think it's pretty encouraging to see the profitability for the fourth quarter at a non-gap definition. But looking to 23, how should we think about the growth for the business, especially I think the first quarter, seems to remain a little challenging. I think partly because of the recovery is not very fast, but partly seems to be also company strategy continue to maybe lower the discount, the promotion, in order to have still very high gross margin. But the result of down like 20% to 30% for fourth quarter seems that We are still, you know, sort of want to hear from the management what's the process where, you know, where we are in terms of that balance between the growth and the profitability. And the second question is also related to the first quarter. Wondering if you could provide some of the breakdown by, for instance, like the skincare brands or color makeup brands in that 20 to 30% year-on-year decline. and standing at this point compared to maybe December last year when the reopen just happened or early this year, do you think actually that trend is, you know, beat management's expectation or a little behind expectation? And what do you observe in terms of consumer's behavior, the demand after the reopening? And the third question is sort of, it would be great if you could talk about some of the growth target or strategy for your major brands, including Perfect Diary, Pink Bear, Dr. Wu, Galactic. So what would you like them to grow or which channel? You can quantify some of the numbers. That would be very helpful. Thank you very much.

All right. Thank you very much. That's a great question. Your first question is the relationship between sales and profitability. And we would strongly encourage you to actually look at our color makeup business separately from our skin care business. So if you look at our skin care business, actually our major skin care brands are actually growing with decent profitability, you know, with a pretty high gross margin and, you know, decent operating process. But our current makeup business is actually a different story. You know, we're trying to, if you look at Perfect Diary, for example, we're trying to turn around that plan and hopefully, you know, the open up of the lockdown you know, will help us in our efforts to turn around Perfect Diary this year. At some point in time down the road, you know, the Perfect Diary brand can, you know, return to its growth trajectory. And fourth quarter, I'm sorry, you know, we're not providing that kind of detailed breakdown. But as I said earlier, you know, for our skin care product brand, you know, we will continue to try to grow this brand while at the same time maintaining a, you know, a decent profitability. So for color makeup brands, you know, we're working very hard to try to turn around our biggest brand, Perfect Diary, and hopefully, you know, we can show you guys some positive results you know, in the next two quarters.

Yes, let me just add a little bit more on the guidance behind our Q1. So we provide a guidance for first quarter top line of 20-30% year-over-year decline. Even though it's still declining, but you can see the level of decline has been sequentially narrowing down. the second quarter of 2022 as our strategic transformation plan carries out. And specifically for this Q1, we think the guidance reflects three main drivers. First is we see a stronger seasonality pattern due to the higher contribution from our skincare brand. And first quarter usually is a low season for the skincare business after the double 11, double 12 shopping festivals in Q4. So that's reason number one. And secondly, we're still continuing our cost optimization, especially for the color cosmetics business. And our major new product pipeline for the color cosmetics is expected in the second half this year. And the third reason is still last quarter, first quarter, we still have a high base of comparison, which was the result of a larger scale of offline business. So if you look at last year, year end, we still have 286 stores for Perfect Diary versus this last year, 2022 year end, of only 158 stores. So that's work items. And then I think, Dustin, you have the third question of the relevance of our brand. So we still look at them by the two categories. The first one is our skincare brand. Right now, you can see for our three major skincare brands, which is the clinical and the premium brands, the growth rate has been really high consecutively over the past three quarters. If you look at the whole year, Dr. Wu, Galanix, plus Yvonne in total grew by 99% for the full year. Even though those three brands experienced high rates, we think all of these brands do have high growth potential given their market size and also market share of their core categories feel relatively low. And currently for each brand, it only has one to two hero products. So what we are planning to do for all these three brands are two things. First, continue to increase the current existing hero product market share. um and and continue developing the brand with those tokens and then secondly a healthy new product pipeline by introducing the second or third hero products while also increasing cross sales of adjacent products so that's for skincare and for our color cosmetic business perfect direct field the largest brand um so what we are planning for perfect diary as mentioned earlier We do see a recovery of consumption and makeup business. So we think the recovery will be more prominent in the second half of this year. So for that, we have a healthy new product pipeline. And we're still adjusting the product mix and channel mix for this brand. So for product mix, we would like to increase the contribution from the facial makeup. So we do have some new products on that area in later half this year. and channel adjustments. For offline business, we think we have already done most of the adjustments. And depending on development of the offline market this year, we'll continue to do some adjustments to accommodate the new trends. And for online, we will continue to capitalize on the new channels to attract new customers.

That's all very helpful. Thank you very much.

Again, if you have a question, please press star, then one. The next question comes from Jianye with CICC. Please go ahead.

Thanks for taking my questions. This is Tianlin from CICC, and I've got two questions. The first one regarding skin care, we have seen a continuous increase in sales contribution from our skin care brands. So what are our expectations for future sales contribution and normalized profitability in the skin care category? And the second question regarding offline channels. As of December 31st, 2022, the company operates over 150 offline stores. How well have these stores performed in terms of top-line revenue and profitability this year? And furthermore, what is the company's outlook and plans for developing our offline channels? Thank you very much.

All right. Thanks for your question. Your first question, we do expect our revenue contribution from our skincare brands to exceed at least 50%, maybe even higher in the longer term. And the profitability for our clinical and premium skincare brands, I believe, over the long term, operating margins can be in the 50%. mid-teens or even higher operating margins. Offline channel, we've downsized our offline stores significantly last year from close to 300 to about 150. Obviously, the stores we're still running are those that are with relatively better profitability. We look at the offline store performance for January and February this year. And thanks to the recovery of offline consumption due to the opening up of the lockdown policies, you know, most of our offline stores have actually come back in terms of same-store sales. And most of the stores, at least for the first two months of this year, you know, were profitable. And we do We hope that this trend will continue well into the latter part of the year and we'll continue to see profitability from our offline channel. Going forward, I think in the future, it really depends on whether we can find an appropriate growth strategy for our offline store and the appropriate product mix. in order to drive the growth of the offline business. So we will make adjustments or changes to our growth strategy for the offline channel as we see fit or as the market situation continues to evolve.

That's very helpful. Can I just add one more question? So what do you see the operating margin for the color cosmetics in the long run?

Well, for color makeup business, generally, the margin profile is lower compared to that of skincare brands. So if you look at those major international color makeup brands, typically the operating margin could be in the low to mid teens and net margin mid to high single digits as a reference point.

Okay. Thanks a lot for your insightful sharing. I have no more questions. Thanks.

Thank you.

The next question comes from Olivia Tong with Raymond James. Please go ahead.

Hi, good evening. This is Devin Weinstein on for Olivia, and I appreciate you taking our questions. I wanted to start out asking you perhaps a bit more broadly what you're seeing on the consumer front as China continues to reopen, what you're seeing across the beauty category, across the different subcategories, makeup, skin care, and perhaps how the consumer is shifting their spending behavior between channels. And second question would be your view on promotion as travel continues to recover and consumer mobility improves, and perhaps how your expectations for promotion across e-commerce and brick-and-mortar channels would vary. Thank you.

So the first question on, I know the outlook of the beauty market in China. So we're currently cautiously optimistic about the outlook in 2023 and probably more confident in long-term growth of China beauty market. So the recent lift of the quarantine travel restrictions definitely frame more social activities, which is a positive factor for both the makeup and skincare categories. However, there's still uncertainty on the path to full recovery. So as it reopens in last December, followed by an outburst of the pandemic, and the rebound of the consumption duty hasn't really been very clear in the first quarter of 2020. We do see a rebound of traffic and offline. But the consumption level and the spending is not back to the COVID situation. But we think as the reopen continues and people's disposable income continues to recover, we do expect a rebound of the beauty market probably happen in the later half of this year. That's why we plan to allocate more marketing resources also in Utah launches in the second half of this year. So regarding your second question on promotion, so we think we talked about this a couple times in the past earnings call. We still expect the international players to continue their heavy promotions, which began during the pandemic. because we think it's still one of the key drivers for their growth in China, and China growth is the key driver for their global growth. So if they don't continue with the heavy promotion, they may lose the pricing competitiveness, and as a result, losing market share. And also, as the travel retail channel is likely to accelerate, the international players may adjust their price policies to balance the travel rates on e-commerce in the China market. That's our current thoughts on the duty almost at the current competitive landscape in China.

Thank you. I appreciate your time.

Thank you.

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

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

The conference has concluded. You may disconnect your line.