Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yassin Second Quarter 2023 Earnings Conference Call. Today's conference call 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.

Thank you, Operator. Please note the discussion today will contain four local statements relating to the company's future performance. and are intended to qualify for the safe harbor from liability as established by U.S. Private Security 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 Yasmin'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. Please see the earnings relief 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 are Mr. Jingbo Huang, our founder, chairman, and CEO, and Mr. Donghao Yang, our CFO and director. Management will begin with detailed 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 Yasin's investor relations website at ir.yasinglobal.com. I'll now turn the call over to Mr. Jinfeng Huang. Please go ahead, David.

Thank you, Irene. And thank you, everyone, for participating in Yasen's second quarter 2023 earnings conference call today. The beauty industry experienced a modest post-COVID recovery during the second quarter of 2023. According to the National Bureau of Statistics of China, total retail sales of consumer goods grew by 10.7%, year-over-year, while declining by 2% quarter-over-quarter. More specifically, beauty retail sales rose by 11.5% year-over-year and 0.8% quarter-over-quarter in the second quarter. The year-over-year growth was partially affected by the prior year period's low base while quarter-over-quarter growth indicated a mild recovery pattern during the quarter. Online beauty sales also rebounded, demonstrated by the beauty sales growth on Timor and Douyin on both a yearly and a quarterly basis, mainly driven by promotion activities during the June 18th shopping festival. Against the industry backdrop, we continued to focus on rebalancing our category mix, expanding growth margins, and improving net margins through enhanced operational efficiency. Our business transformation remained largely on track, evidenced by our second quarter revenue beating the guidance we provided previously. Net revenues from our skincare brands increased by 2.3% year-over-year to RMB 325.2 million. Within skincare, our clinical and premium brands delivered another solid performance, with Galanick, Dr. Wu, and Yife Long recording 13.3% year-over-year growth in combined net revenues. With respect to revenue contribution, our skincare brands accounted for 37.9% of total net revenues in the second quarter, up from 33.4% in the prior year period. Revenues from color cosmetics declined in the second quarter as Perfect Diary continued to undergo a brand transformation. Furthermore, the number of Perfect Diaries offline stores totaled 136 as of the end of the second quarter compared with 228 a year ago as a result of targeted closures of underperforming offline stores. Our product mix optimization as well as our disciplined approach to discounts and promotions continued to drive improvements in our overall growth margin, which has demonstrated a clear upward trend over the past four quarters. We also improved our net margin year over year, reflecting our effective cost reduction and channel optimization strategies. Turning to our product. Beyond our investments in the existing Hero products, we also introduced new skin care products during the quarter. One highlight was Galanix Secret Diatilin Active Cream, a new anti-aging product enhanced with our patent Snow Algae peptide to promote collagen reproduction. Additionally, several of our existing hero products received recognition this quarter. With Galactic's Anti-Occident No. 1 VC Serum ranking No. 1 in both Timor, Austin Lee's Livestream Premium Brightening Serum category and Douyin's Premium Serum category during the June 18th Shopping Festival. Yiflong also turned in a solid performance during June 18, with the Iflon cleanser coming in first among premium cleanser products on Tmall. For our color cosmetics brands, we continued to advance product development, releasing high-quality products with strengthened functional features. During the second quarter, Perfect Diary launched its standing holiday collection, tailored for summer wear, as well as translucent blurring longwear foundation, which delivers a long-lasting, flawless finish. We also rolled out new and upgraded products for Little Onding and Pin Bear, driving growth in both brands. Little Onding made the Timor June 18th top 100 best-selling list with its brand-new 3D shadow and highlighter eyeliners, while Pin Bear launched its new jelly lipstick. Brand building remains a critical component of Yasen's long-term strategy. In July, two of our skincare brands, Galanique and Dotawoo, participated in the World Congress of Dermatology in Singapore, raising this brand's awareness among an internationally renowned group of clinicians, scientists, and industry professionals. Dr. Wu also celebrated his 20th anniversary this summer, a testament to his product's enduring popularity and the strength of his brand equity. Moving on to our recent R&D achievements, our R&D expenses reached 3% as a percentage of total net revenues, reflecting our continuous efforts in scientific advancement and product development. We are pleased to report that in June, we took our partnership with Regene Hospital, an affiliate of the Shanghai Jiao Tong University School of Medicine to the next level with the official unveiling of the Yasen Regine Medical Skincare Joint Laboratory in Shanghai. We formed this alliance with Regine Hospital to jointly conduct research on skin disease mechanisms and developed efficient skin products, skincare products. Leveraging Yasheng's deep experience and strong capabilities, as well as Ruijin's remarkable achievements in resource integration across the beauty industry. Educational and research institutions and hospitals, we look forward to advancing the future of skincare together. Furthermore, operations of the Guangzhou Manufacturing Hub we established with Cosmos officially commenced on August 11th, enabling further optimization of our supply chain. Powered by this development and our enhanced capabilities, we are confident about the prospect to successfully explore and launch more hero products in the future. Before I conclude, I would like to mention that we recently released our 2022 Environmental, Social, and Governance, or ESG report, marking our second consecutive year of ESG reporting. We are proud to provide a comprehensive review of our ESG initiatives and developments, including corporate governance, research and development, employees' rights protection, human capital development, environmental sustainability, and social responsibility, among others. We are grateful for the opportunity to demonstrate our commitment to creating a better society by fulfilling our corporate social responsibilities. To summarize, China's beauty market is still finding its footing in the post-pandemic era. and we understand that the recovery pattern of consumer demand remains uncertain. However, our strategy transformation is proceeding as planned, and our portfolio of strong, distinctive brands, as well as our sufficient financial resources, will empower us to adapt with flexibility. We will continue to build our brands across the board, elevating our skincare brand's growth while positioning our color cosmetic brands for success in the future. With that, I will now turn the call over to our CFO, Donghao 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 in RMB amounts and all percentage changes referred to year-over-year changes unless otherwise noted. Total net revenues for the second quarter of 2023 decreased by 9.8% to $858.6 million from $951.8 million for the prior year period. The decrease was primarily attributable to a 16.6% percent year-over-year decrease in net revenues from color cosmetics brands, partially offset by a 2.3 percent year-over-year increase in net revenues from skincare brands. Gross profit for the second quarter of 2023 increased by 7.2 percent to $641.6 million from $598.3 million for the prior year period. Growth margin for the second quarter of 2023 increased to 74.7% from 62.9% for the prior year period. The increase was driven by, first, increasing sales of higher gross margin products from skincare brands. Second, more disciplined pricing and discount policy, and third, cost optimization across all of our brand portfolios. Total operating expenses for the second quarter of 2023 decreased by 11.3 percent to $776.7 million from $875.3 million for the prior year period. As a percentage of total net revenues, total operating expenses for the second quarter of 2023 were 90.5 percent as compared with 92.0 percent for the prior year period. Fulfillment expenses for the second quarter of 2023 were 58.3 million as compared with 69.7 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the second quarter of 2023 decreased to 6.8% from 7.3% 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 our warehousing and handling operations. Selling and marketing expenses for the second quarter of 2023 were $542.8 million as compared with $625.7 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the second quarter of 2023 decreased to 63.2% from 65.7% 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, partially offset by an increase in online advertising expenses. General and administrative expenses for the second quarter of 2023 were 149 points as compared with $147.8 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the second quarter of 2023 increased to 17.4% from 15.5% for the prior year period. The increase was primarily attributable to an increase in share-based compensation combined with the deleveraging effect of lower total net revenues in the second quarter of 2023. Research and development expenses for the second quarter of 2023 were $25.9 million as compared with $32 million for the prior period. As a percentage of total net revenues, research and development expenses for the second quarter of 2023 decreased to 3 percent from 3.4 percent for the prior year period. The decrease was primarily attributable to our efforts to maintain research and development expenses at a reasonable level relative to total net revenues. Loss from operations for the second quarter of 2023 decreased by 51.2 percent to 135.1 million from $277 million for the prior year period. Operating loss margin was 15.7% as compared with 29.1% for the prior year period. Non-GAAP loss from operations for the second quarter of 2023 decreased by 65.8% to $74.6 million from $218.2 million for the prior year period. Non-GAAP operating loss margin was 8.7% as compared with 22.9% for the prior year period. Net loss for the second quarter of 2023 decreased by 59% to $108.5 million from $264.2 million for the prior year period. Net loss margin was 12.6% as compared with 27.8% for the prior year period. Net loss attributable to Yasmin's ordinary shareholders for diluted ADS for the second quarter of 2023 was 0.2 RMB as compared with 0.43 RMB for the prior year period. Non-GAAP net loss for the second quarter of 2023 decreased by 77.7 percent to 46.3 million from 207.5 million for the prior year period. Non-GAAP net loss margin was 5.4 percent as compared with 21.8 percent for the prior year period. Non-GAAP net loss attributable to just an ordinary shareholder for diluted ADS for the second quarter of 2023 was 0.08 RMB as compared with 0.34 RMB for the prior year period. As of June 30, 2023, we had cash, restricted cash, and short-term investments of $2.57 billion as compared with $2.63 billion as of December 31, Net cash used in operating activities for the second quarter of 2023 was $14.4 million compared with net cash generated from operating activities of $111.9 million for the prior year period. Looking at our business outlook for the third quarter of 2023, we expect our total net revenues to be between $686.3 million and $772.1 million, representing a year-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.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing keys. To withdraw from the question 2, 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 our roster. The first question today comes from Chyna Lin with CICC. Please go ahead.

Thanks for taking my questions. This is Chyna from CICC, and I've got two questions. The first question is regarding profitability. So are we still on track with the four-year profits? Looking ahead, what are the key drivers that will boost our profitability in the second half of the year? And this is for the first question. And about the second question, it's regarding growth of color cosmetics. We've seen the launch of Perfect Diary's new foundation product. And how has the sales performance been so far? to do provide insight into the upcoming strategies for color cosmetics in the second half of the year? And is there any chance that color cosmetics return to growth in the second half of the year? That's my question. Thank you.

Well, thank you very much for your questions. All right. For your first question on profitability, I think we're still on the right track. to continually improve our profitability over time. If you compare this quarter with the same quarter last year, you know, the improvement on profitability has been very significant. And your second question, PD foundation, well, we've just launched the foundation product for Dairy. It's still too early for us to tell, you know, how the new product will perform. But for the second half of the year, especially towards the end of Q3 and beginning of Q4, we're going to launch a major brand upgrade campaign and new product launch for Perfect Diaries. We are making preparations for that major campaign, but it's still too early to tell how the campaign will turn out. Of course, there will be some uncertainty around the success of that campaign, but we are very confident that we will try our best, and hopefully we can make it a huge success.

Got it. Thank you very much. I have no more questions.

Yes, thank you.

Again, if you have a question, please press star, then one. The next question comes from Vivi Heng with Morgan Stanley. Please go ahead.

Thank you for taking my question. This is Vivi from Morgan Stanley. So I have two questions. Firstly, it's on the industry part. So could management give us a color on what is the industry competition like as we enter into the third quarter? Like how is it like in terms of the competition, especially on online and live streaming channels? And I know that this might be a little bit far, but how should we expect on like the Double 11 Festival this year? Do you see, like, if there is any possibility that a promotional level will likely to intensify on a year-on-year basis or maybe just compared to 6-18 festival this year? Secondly, I would like to ask on our offline SOAR strategy, do we expect further SOAR disclosure when we enter into the second half? This is the questions that I will have. Thank you.

Yes, thanks, Lily, for the question. So on the first question, in terms of the industry outlook and the competition landscape, so what we see is we saw a modest recovery pattern during the second quarter, even though the year-over-year growth rate was good, but it was low base last year, given the lockdown of Shanghai and other cities in Q2 last year. If you look at the quarter-over-quarter growth pattern, it's actually largely flat, so which implies a recovery, but a relatively mild recovery. And within the beauty market, different segments are all growing. Even within current economic conditions, the premium segment is still growing, but at a slightly lower rate. So we do expect that the China beauty market still has room to grow, given the per capita beauty spending is still relatively low compared to other mature markets. And then looking at the competition, Over time, we have seen that competition has been intensifying, and there are actually divergent performance among different categories and different brands. And one of the very obvious trends is brands with strong product efficiencies and brand equities are actually outperforming compared to others. And also, consumer behavior has shifted a little bit from previous impulsive buying habits towards more rational behavior, which also kind of demonstrates that followers' very strong efficacy and functional value actually probably attract more consumer attention and buy-in. So those are some of the key trends that we have in the industry.

And your second question, in the past two years we've closed around 150 stores. of our offline stores, most of which were obviously underperforming and loss-making stores. Going forward, I think we will continue to optimize some of our stores, but I don't think that we're going to close a substantial number of stores down the road. But optimization will always be our strategy. Thank you.

Got it. That is very helpful. Thank you so much.

Thank you.

Again, if you have a question, please press star, then 1. 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 P.R. in Western 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.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.