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spk00: Ladies and gentlemen, good day, and welcome to the Jackson First Quarter 2023 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.
spk03: Thank you, Operator. Please note the discussion today will contain four looking statements. relating to the company's future performance and are intended to qualify for the safe harbor of liability as established by the U.S. Private Security Litigation 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 could affect Yat-sen'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 the reconciliation of GAAP with non-GAAP financial results. Joining us today on the call from Yasmin's senior management team are Mr. Junfeng 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 the 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. Jinzong Huang. Please go ahead, David.
spk05: Thank you, Irene, and thank you, everyone, for participating in Yasen's first quarter 2023 earnings conference call today. The first quarter of 2033 showed a positive trend for the beauty industry. Total beauty retail sales achieved year-over-year growth of 5.9% in a quarter, according to the adjusted data published by the China National Bureau of Statistics. An improvement in market sentiment and the gradual recovery of offline consumption following the lifting of pandemic restrictions were major drivers of this outward trend. While we are pleased to see signs of recovery in the retail environment, we expected a rebound in our revenue to take time as consumers gradually engage in travel, social activities, and general consumption in the post-COVID era. Our sites remain focused on long-term sustainable growth as we continue to refine our business model. For the first quarter of 2023, our total net revenue declined by 41% year-over-year to RMB 765.4 million, beating the guidance we provided previously. Net revenues from skincare brands increased by 34.2%, year-over-year to RMB 245.1 million. Our clinical and premium brands, including Dr. Wu, Galantique, and Yves Long, recorded a solid growth of 58.6% year-over-year for the first quarter of 2023. In terms of revenue contribution, Our skincare brands accounted for 32% of total net revenues in the first quarter, up from 20.5% for the previous year period. Net revenues from our color cosmetic brands declined by 29.1% year-over-year to RMB 508 million. In terms of profitability, we achieved ongoing improvement in our growth margin and the net margin. Growth margin increased significantly by 5.3 percentage points to 7.3% for the first quarter of 2023 from 69% for the prior year period. Reflecting our persistent efforts to fine-tune our product mix, implement disciplined pricing and discount policies, and optimize production cost. Most importantly, we recorded a net income margin of 6.6% for the first quarter of 2023, as compared with the net loss margin of 32.7% for the prior year period. In addition to our efforts in cost optimization, The net income we recognized for the first quarter of 2023 was primarily to a reversal of recognized share-based compensation expenses of RMB 109.4 million and a decrease of RMB 42.2 million in recognition of share-based compensation expenses using the graded vesting method over the vesting term of the company's awards. Non-GAAP net loose margin narrowed to 3.4% for the first quarter of 2023 from 7.2% for the same period last year. Moving on from our financial highlights, we made progress in our product development and brand awareness improvement initiatives. Inflon launched its Radiance Faith Oil, featuring 10 precious plant extracts that provide a spa-level skin nourishment combined with five major reparative ingredients to firm and plump the skin. We also hosted a major brand event for Galenique in France to explore the legendary benefits of the brand's Platinum Snow Algae series with international fashion and beauty QLs. During the quarter, our color cosmetic brands also introduced Valentine's Day themed gift sets with campaigns to celebrate the vibrant colors and the passionate emotions associated with the holiday. In terms of channel optimization, we completed most of our adjustments in our offline footprint in 2022. As offline consumption recovered due to the lockdown policies, performance at our offline stores improved in terms of possibility during the first quarter of 2023. However, the market situation is still evolving, and the consumption activity has not fully returned to normal. Going forward, we will closely monitor market dynamics focus on identifying the appropriate product mix and a growth strategy to drive sales into offline business and adjust our approach to optimizing our offline channels as needed. Next, I would like to share some of our recent R&D endeavors and accomplishments. Our R&D expenses as a percentage of total net revenue were 3.2%. demonstrating our continuous commitment to scientific advancement and product development. Furthermore, to promote applied research and clinical innovation in treating acne, we officially launched the Dr. Wu Acne Research Fund and established the Dr. Wu Asper Committee. Together, these organizations will integrate expert resources across multiple medical fields and regions to conduct cutting-edge exploration and applied research with the goal of discovering solutions for the refined and comprehensive management of acne prone skin. Before I conclude, I want to share an update on our environmental, social, and governance performance. which continues to be a great source of inspiration for Yasen. In January, we participated in the 2023 World Economy Forum Annual Meeting in Davos, Switzerland, where we highlighted Yasen's implementation of sustainability practices through Perfect Diaries, Little Steelers , and other Yasen products at events, sustainability In summary, the first quarter of 2023 was a promising start to gradual recovery of China's beauty market in the post-pandemic era. We are cautiously optimistic about the outlook for the remainder of 2023, yet aware that uncertainties remain. We will continue to focus on brand building and product development as we work to draw upon our skincare brand's strong growth momentum and prepare to launch new color cosmetic products in the second half of 2023. With that, I call over to our CFO, Dong Hao, to discuss our financial performance. Thank you, everyone.
spk02: Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in RMB amount and all percentage changes referred to year-over-year changes as is otherwise noted. Total net revenues for the first quarter of 2023 decreased by 14.1% to 765.4 million RMB from 891 million for the prior year period. The decrease was primarily attributable to a 29.1% year-over-year decrease in net revenues from color cosmetics brands, partially offset by a 34.2% year-over-year increase in net revenues from skin care brands. Growth profits for the first quarter of 2023 decreased by 7.5% to 568.7 million RMB from $614.5 million for the prior year period. Gross margin for the first quarter of 2023 increased to 74.3% from 69% for the prior year period. The increase was driven by, first, increasing sales of higher gross margin products from skincare brands, and secondly, more disciplined pricing and discount policies and certainly cost optimization across all of the companies' brand portfolios. Total operating expenses for the first quarter of 2023 decreased by 37.6% to 575.9 million RMB from 922.5 million for the prior year period. As a percentage of total net revenues, Total operating expenses for the first quarter of 2023 were 75.2%, as compared with 103.5% for the prior year period. Fulfillment expenses for the first quarter of 2023 were 51.9 million RMB, as compared with 73.9 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the first quarter of 2023 decreased to 6.8% from 8.3% 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 the company's warehousing and handling operations. Selling and marketing expenses for the first quarter of 2023 were 469 million RMB, as compared with $604.7 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the first quarter of 2023 decreased to 60% from 67.9% for the prior year period. The decrease was primarily attributable to the closure of underperforming offline stores and a reduction in share-based compensation related to the decrease in selling and marketing headcount. General and administrative expenses for the first quarter of 2023 were 40.7 million RMB as compared with 208.1 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the first quarter of 2023 decreased to 5.3% from 23.4% for the prior year period. The decrease was primarily attributable to a reversal of recognized share-based compensation expenses of $109.4 million due to the forfeiture of uninvested awards granted to our former chief technology officer upon his resignation. and a decrease of 42.2 million RMB in recognition of share-based compensation expenses using the graded vesting method over the vesting term of the company's awards. Research and development expenses for the first quarter of 2023 were 24.2 million RMB, as compared with 35.8 million for the prior year period. As a percentage of total net revenues, Research and development expenses for the first quarter of 2023 decreased to 3.2% from 4% for the prior year period. The decrease was primarily attributable to the company's efforts to maintain research and its development expenses at a reasonable level relative to total net revenues. Loss from operations for the first quarter of 2023 decreased by 97.7 percent to 7.2 million RMB from 308 million for the prior year period. Operating loss margin was 0.9 percent as compared with 34.6 percent for the prior year period. Non-GAAP loss from operations for the first quarter of 2023 decreased by 63.3 percent to 62.4 million from 170.1 million for the prior year period. Non-GAAP operating loss margin was 8.1% as compared with 19.1% for the prior year period. Net income for the first quarter of 2023 was 50.7 million RMD as compared with net loss of 291.4 million for the prior year period. Net income margin was 6.6% as compared with net loss margin of 32.7% for the prior year period. Net income attributable to Yasen's ordinary shareholders for diluted ADS for the first quarter of 2023 was 0.08 RMB as compared with net loss attributable to Yasen's ordinary shareholders for diluted ADS of 0.46 RMB for the prior year period. Non-GAAP net loss for the first quarter of 2023 decreased by 83.2% to 25.8 million RMB from 153.6 million for the prior year period. Non-GAAP net loss margin was 3.4% as compared with 17.2%. for the prior year period. Non-GAAP net loss attributable to Justine's ordinary shareholders for diluted ADS for the first quarter of 2023 was 0.05 RMB as compared with 0.24 RMB for the prior year period. As of March 31st, 2023, the company has cast restricted cast and short-term investments of 2.54 billion RMB as compared with 2.63 billion as of December 31st, 2022. Net cash used in operating activities for the first quarter of 2023 decreased by 80.6% to 20.2 million from 104.1 million for the prior year period. Looking at our business outlook for the second quarter of 2023, we expect our total net revenues to be between 761.4 million RMB and 866.6 million RMB, representing an over-year decline of approximately 10% to 20%. 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. Operator?
spk00: 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, we ask that you 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. Today's first question comes from Dustin Wei with Morgan Stanley.
spk06: Please go ahead. Thanks for taking my questions. My first question related to the first quarter sales speed versus the prior guidance. So sort of may I know what's changed, you know, for the last speed of the first quarter? Is that because some of the better execution, for instance, like the skincare products, or just the industry environment that becoming better by end of the first quarter? And the second question is related to the guidance for the next quarter, the second quarter. So is there any assumption behind it? For instance, the assumption for the June 18 sales results, and also what's the sales trend so far in second quarter?
spk02: Well, thank you very much, Justin, for the question. Well, we beat by a pretty big margin our Q1 guidance because of the things that you've just mentioned. First of all, the macro environment has improved quite significantly, especially in the offline business, and we've benefited from that trend. And, of course, secondly, I think we've done a good job executing our, you know, business strategy in Q1, which is obviously, you know, putting more focus on our skincare brand, and in the meantime, you know, trying to execute a, you know, strategic transformation for our color cosmetics brand. And regarding our second question, we are, as we've mentioned in our call script, we are currently possibly optimistic about the future growth of our business. I think that has been reflected in our Q2 guidance, which is substantially better than our Q1 and Q4 last year guidance. Basically, we're now more confident about the future growth of our skincare brand and also the success of our strategic transformation of our Perfect Diary brand. Of course, the success in the upcoming June 18th campaign is one of the factors that we've considered in putting out our guidance. Thanks a lot, Donghao.
spk06: Sort of for the second quarter, are we a little bit counting on the good results for that June 18 to perform, you know, sort of keep up to achieve the guided number? Or we should say, you know, this guided number is roughly what we are seeing, like from April moving to May.
spk02: Well, June 18 is obviously a major event. for the second quarter, like every year. This year is no different. So, you know, the success of the June 18th campaign obviously will play a critical role in achieving the guidance. And also, you know, we're putting more effort in our so-called daily sales meaning the campaigns are important, but the daily sales are also very critical. So back to your question, April, May, June is an important month. It doesn't mean that April and May we can't afford to do nothing, which is not the case. We're going to make real efforts in every opportunity that we can have to drive our sales growth.
spk06: Got it, that's helpful. And may I follow up on, in terms of the cautiously optimistic, how are we seeing in terms of the industry promotion and the competition? Like here today, are we seeing, you know, gradually, you know, last competition, the price discount, especially online and the live streaming channel, or we are seeing generally similar level of the competition versus like last year?
spk02: Well, From our perspective, I think the competition is intensifying. As far as we know, most of the international major brands are actually offering greater-than-ever discounts in order to drive their sales. As we mentioned in our call script, the macro environment is improving. meaning the total consumption, the demand is going up. But in the meantime, the competition is still intensifying. So that's why we say we're only cautiously optimistic about our business growth in the next couple of quarters.
spk06: Got it, got it. And just lastly, in terms of YASA's own sort of the journey to achieve the full year profitability, I know that each quarter will have its own dynamics. You know, full year sort of being profitable doesn't mean that every quarter the company will achieve the profitability. But just can we have a little colors like are we betting on a little more, for instance, like a major event quarter such as the second quarter and fourth quarter to have better profits? or a lighter quarter such as the third quarter, what will see better profitability?
spk02: Well, you know, we're confident that we're on the right track to turning profitable, you know, in the near to mid-term future. And the seasonality in our business is quite obvious. Q1, Q3 are generally the two low quarters. And Q2 and Q4 are generally the high seasons of the year. So as you just mentioned, you know, in Q1, the low quarter, our sales were compared to the high season, you know, are lower. So that's why, you know, in Q1, our non-GAAP, you know, we recorded a net loss for non-GAAP measures. But we do expect a probability to get better in our high seasons, Q2 and Q4.
spk06: Got it. That's all my questions. Thank you so much, Yangzhou. Thank you.
spk02: Yes, thank you, Justin.
spk00: Our next question comes from Casper Shi with CICC. Please go ahead.
spk07: Hi, hello, this is Kasper from CSEC, and thank you very much for taking our questions. Firstly, congratulations on the financial results that beat the market expectation. We also see many multiple positive signs in the indicators. So here we have two major questions. The first one is about our new products this year. What is our plan for releasing new products in this year, and also is there any strategy for us to promote new products or introduce some new products in the June 18th campaign? Thank you.
spk03: Yeah, sure. Thank you for your question. In terms of our new product launch, we will share it by category. First on the skincare category, you know, our main focus still on the existing zero So for this June 18, we're still trying to promote the existing hero products of our three main skincare brands, and we think there's still a lot of room for them to grow. At the same time, we did introduce a number of new products for skincare as well. For example, Galanique, in May, we just launched a new facial cream, the Secret Eclos Active Cream. featuring the finest active ingredients, snow algae, with anti-aging benefits. And also, we mentioned in the call, Evolume also launched a radiant space oil. And we think for the second half of the year, there could be more products launched for the skincare category. And then on color cosmetics, as we previously shared, we think the market will gradually recover, so we have a new product pipeline mostly prepared for the second half of the year. But then for Q2, we still have a few new products. For example, there's the 520, like the Chinese Valentine's Day. We have the new gift box for Perfect Diary. And also, Little Aunt introduced a new liner as well. So there are more... products to be released in the second half of the year.
spk07: OK, that's very clear. Thank you. And our second question is that, could you give us some more color on the sales growth of the different skincare brands this year? And what's the performance of the major hero products in Q1? And how do we expect the skincare sector's profitability to evolve this year? Thank you.
spk02: Yeah, well, thank you very much for your question. Well, you know what? We currently do not provide breakdown of the sales growth and profitability for each of our brands. But in general, you know, our skincare brands are growing. You know, growth is very strong and with very good profitability. And if you compare... The gross margin level of our skincare brands with the color cosmetics brands is substantially higher. So as sales of our skincare brands consist a bigger portion of our total sales mix, we do expect our overall profitability to improve over time.
spk07: Okay, okay, that's very clear. These are all my questions, and thank you again for the very detailed answer. Thank you.
spk02: Thank you.
spk00: As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star, then 1. Our next question comes from Olivia Tong with Raymond James. Please go ahead.
spk04: Great, thank you. Good morning. A couple of questions here, some have been answered, but... You know, you talked about being cautiously optimistic about the environment. Can you talk about what you're seeing both in skin and color that supports that view?
spk02: Skin, color. Okay. Well, yeah, we say we're cautiously optimistic, actually, about our own business. Well, the market is recovered. due to the lifting of the pandemic control policies. But again, as I said earlier, the competition is intensifying. And if you look at the data from Tmall and Douyin, you can have quite different pictures. So for us, we have I've been able to grow our skincare brand quite fast, but we have also met some challenges in our color cosmetics business. But in general, I think we're moving in the right direction, both in terms of sales growth and profitability. So that's why we said, all right, we are cautiously optimistic about our own business process.
spk04: Understood. Maybe if you could put that in... Context relative to your expectation for Q2, you obviously saw a sequential deceleration that narrowed in Q1 by more than you expected. You're guiding for 2Q at the midpoint, which assumes a similar year-over-year performance in Q2. So why doesn't the sequential improvement in the year-over-year change continue to narrow from Q1 to Q2 if the market is now several months more established in the reopening? You feel cautiously optimistic about your performance. Just trying to understand what you're seeing in the environment and your own business that wouldn't drive even more improvement in Q2 as events return.
spk03: Yeah, so actually for our guidance, if you look at the range, right, it has been sequentially narrowing down. Because last time we gave a decline of 10 to 20, and the quarter before it's 20 to 30. And before that, it's 30 to 40. So definitely on the guidance basis, it's narrowing down. And from what we see in the market, in Q1, as we mentioned, the whole makeup industry, for the first time, now show a positive growth of 6% versus single-digit decline over the past three quarters. Yeah, but it's definitely a gradual recovery rather than a very abrupt recovery. And then secondly, in terms of what's behind our Q2 guidance, we think, you know, there's still going to be a decline. There are three major reasons. The first one is, you know, the main flagship brand, Perfect Diary, which still contributes to a majority of our revenue is still under the brand's strategic transformation. And as mentioned, most of the new power launches are planned for the second half of this year. So that's why for Q2, we don't think the brand will be back to the growth stage. And then secondly, there's still going to be a high base for comparison compared to the prior year period, primarily because of the larger scale of the offline business. If we look at last year, we still have close to 230 stores for Perfect Diary at the end of June 2022. And then by end of March this year, we only have around 150. So offline business, because of the large number of closure of stores, there are going to be a decline. And then lastly, for our skincare business, definitely have a good momentum going at a faster than market average pace. Q1 is not a – Q2 is a relatively good season for skin care, but the size is still relatively small compared to our color business. So those are the key kind of reasons behind our guidance. But, again, we do see a sequential narrowing down of our guidance and the year-over-decline, which suggests a healthy trend that we are expecting.
spk04: Got it. Thank you. My last question is just around the positioning of your mass brands versus your more prestigious brands and how you were seeing, if you could compare and contrast the recovery of your larger mass brands versus perhaps a little bit faster growing in some of the more prestigious brands in your portfolio. Thank you.
spk03: So your question is kind of the just wanted to clarify the performance kind of comparison between mass versus prestige brands for the industry or for our own brand?
spk04: Honestly, both, but your view on the industry and then also specifically your brand. Thank you.
spk03: Right, okay. Yes, okay, got it. So we don't actually see a very clear divergent pattern between mass and prestige segments. Instead, what we see is within each pricing tier and category, the brands tend to show more clear divergence performance. This Q1, if you look at Tmall and Douyin, the performance is really diverse. Some brands grow really fast while some of the more established brands are growing at a slower pace or even have a decline. With the intensifying competition in this industry, we do see increasing divergence of performance, even the brand's own equity and also their operational excellence. So in our view, and also we think for our brand, the long-term performance is definitely driven by more like the brand building and R&D investments. So that's why for us, we... to support this sustainable growth. We want to build long-term success. So brand building and R&D investment is definitely the most important initiative that we are undertaking.
spk04: Thank you. Best of luck.
spk00: Thank you. This concludes today's question and answer session. I'd like to turn the conference back over to the management team for any closing remarks.
spk03: Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Yasmin directly or TPG Investment Relations. Our contact information for IR in both China and the US can be found in today's press release. Thank you and have a great day.
spk00: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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