Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yatsen Fourth Quarter and Full Year 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.

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 Yasin's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this full booking 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, non-GAAP financial results. Joining us today on the call from Yasin's senior management are Mr. Xinzong 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. Jinfeng Huang, who's co-host here.

Thank you, Irene, and thank you, everyone, for participating in Yasen's fourth quarter and a full year 2023 earnings conference call today. I would like to begin with a macro overview before delving into the details of our strategy and progress across our segments and brands. China's beauty market experienced a modest recovery in 2023. According to the adjusted data published by the National Bureau of Statistics of China. Total retail sales of consumer goods grew by 8.3% year-over-year for the fourth quarter and 7.2% for the full year. Against this backdrop, total beauty retail sales were up 1% year-over-year for the fourth quarter and 5.1% for the full year. Online beauty sales patterns were mixed in 2023. Sales on Timor decreased while sales on Douyin increased year over year for both the fourth quarter and the full year. We made solid progress this quarter amid a still-stopped retail environment, returning to a growth trajectory as we executed our strategy transformation plans. Perfect Diaries brand repositioning is also proceeding as intended. To pave the way for future growth, we remain focused on building strong brand equity through superior products and consumer satisfaction, while continuing investments in brand building and R&D. Our total net revenue for the quarter beat our guidance. up 6.7% year-over-year. Net revenues from our skincare brands for the fourth quarter grew by 17.6% year-over-year. Our clinical and premium skincare brands, including Delinec, Dr. Wu, and Yves Long, delivered another solid performance, recording a 23.4% year-over-year growth in combined net revenues, and further elevating their contribution to total net revenues. Net revenues from color cosmetic brands declined slightly by 1.8% year-over-year for the fourth quarter. In terms of channel optimization, we continued to strategically close underperforming offline stores. As of the end of 2023, we operated 110 offline experience stores for the Perfect Diary brand, as compared with 158 stores a year ago. Our two other color cosmetic brands, Little Ondine and Pin Bear, continued to resonate with their customers and recorded year-over-year revenue growth. Our fourth quarter growth margin improved to 73.7% from 71.1% for the prior year period. benefiting from higher growth margin products and a more disciplined pricing and discount policies. Our net loose margin expanded to 46.1% for the fourth quarter, primarily attributable to an impairment of goodwill, as well as increased investment in our brands. The goodwill impairment recorded in the fourth quarter represents the amount by which the carrying value of the EAP loan reporting unit exceeded its fair value based on quantitative goodwill impairment test due to weaker operating results than expected at the time of acquisition. Despite challenges in the market environment and ongoing competition, we still see potential in the brand. For the full year 2023, our net loss margin was 22% as compared with 22.2% in 2022, Our non-GAAP net loss margin narrowed to 8.7% from 12.2% for the prior year period, a significant improvement that underscores our skills in balancing cost structure optimization with the need to grab market opportunities as we drive sustainable growth. Moving on to the brands and products, for our skincare brands, we maintained our focus on brand building and introduced efficient products to foster deeper connections with each brand's audience. Galanick recorded solid performance during the Double 11 Shopping Festival, ranking number one in the premium brightening serum category in terms of retail sales value on both Timor and Douyin with his Hero VC serum. The brand is also making progress on its Couture line, winning the Essence of the Year award at the Bazaar Beauty Awards 2023 for its CO2 Secret excellent active serum. Dr. Wu's acne research fund announced its first batch of pioneering research projects at the 2023 National Congress of Cosmetic Dermatology in Shanghai. Dr. Wu continues to push boundaries in clinical acne research and the application of mandelic acid. propelling the fields of long-term development. Also, Yiflong opened its first offline store in southern China in January this year, bringing the brand's tactile experience to a broader customer base. With respect to color cosmetics, Perfect Diary's brand repositioning continues to gain traction among its target customers. Biolip Essence Lipstick the new hero product we launched in September 2023 has been gaining market share in the lipstick category on both Tmall and Douyin. During 2012, the newly launched lipstick made ProfitDiary the number one lipstick brand in terms of retail sales value on Douyin. Given this product line's potential, we expanded the series to include BioLip Essence Lip Stain in 2023, and a biolip essence matte lipstick in February 2024, enriching offering for customers to experience its advanced formulation. CleverDiary also recently launched its multi-peptide essence tone-up cream, the brand's very first product, integrating the wrinkle-reducing cream with the makeup primer and the natural foundation. Both Little Ondine and Pin Bear introduced new products during the quarter, Little Ondine's Little White Eyeline Pen won the Eye Color Award in the Color Cosmetic category at the Vogue Beauty Awards 2023. Wild King Bear's Fairy Dream Eyeshadow brought home the Sea Beauty Awards Color Development Award. Moving now to the R&D, R&D expenses as a percentage of revenues were 3.4% for the fourth quarter and a 3.3% for the full year, 2023. Over the past year, we have significantly enhanced our R&D capabilities under the leadership of our chief scientific officers, establishing a comprehensive R&D framework and a clear strategy direction. The R&D team has developed iconic products, including Perfect Iris Lipstick Essence, BioLip Essence Lipstick, and Galanix ViviFant We also strengthened our R&D infrastructure by setting up our Shanghai R&D Center. Along with these efforts, we promoted innovation through industry-academia collaboration, including leading initiatives such as Dr. Wu's Acne Research Fund and the Galenic Dermatology Research Fund. Going forward, we remain committed to R&D investment. to drive innovation and growth. So before I conclude, a brief update on our 2023 ESG performance. Yasen's dedication to environmental and social responsibility and employee welfare is integral to our brand and future development. We published our second ESG report in 2023, highlighting our alignment with prevailing green development initiatives. Furthermore, we were honored to be recognized at China's 2023 DEI Employer Awards for our deep commitment to inclusion and employee welfare. To summarize, we are pleased with our return to growth in the fourth quarter and will remain focused on pursuing sustainable growth with innovation across our brands. With that, I will now turn the call over to our CFO, Dong Haoyang, 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 renminbi amounts, and all percentage changes refer to year-over-year changes, unless otherwise noted. Total net revenues for the fourth quarter of 2023 increased by 6.7 percent to 1.07 billion RMB from $1.01 billion for the prior year period. The increase was primarily attributable to a 17.6% year-over-year increase in net revenues from skincare brands, partially offset by a 1.8% year-over-year decrease in net revenues from color cosmetics brands. Gross profits for the fourth quarter of 2023 increased by 10.6% to $790 from $714.6 million for the prior year period. Gross margin for the fourth quarter of 2023 increased to 73.7% from 71.1% for the prior year period. The increase was driven by increasing sales of higher gross margin products and more disciplined pricing and discount policies across all of our brand portfolios. Total operating expenses for the fourth quarter of 2023 increased by 67.7% to 1.33 billion RMB from 792.9 million for the prior year period. As a percentage of total net revenues, total operating expenses for the fourth quarter 2023 were 124% as compared with 78.9% for the prior year period. Fulfillment expenses for the fourth quarter of 2023 were 62.7 million RMB as compared with 62.5 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the fourth quarter of 2023 decreased to 5.8% from 6.2% for the prior year period. The decrease was primarily attributable to further improvements in logistics efficiency. Selling and marketing expenses for the fourth quarter of 2023 were $717.4 million as compared with $535.2 million for the prior year period. As a percentage of total net revenue, selling and marketing expenses for the fourth quarter of 2023 increased to 66.9% from 53.2% for the prior year period. The increase was primarily due to the Perfect Diary brand upgrade, as well as our investments in new product launches across our brand. General and administrative expenses for the fourth quarter of 2023 were $158.7 million as compared with $169.9 million for the prior year period. As a percentage of total net revenue, general and administrative expenses for the fourth quarter of 2023 decreased to 14.8% from 16.9% for the prior year period. The decrease was primarily attributable to a reduction in share-based compensation Research and development expenses for the fourth quarter of 2023 were $36.9 million as compared with $25.1 million for the prior year period. As a percentage of total net revenues, research and development expenses for the fourth quarter of 2023 increased to 3.4% from 2.5% for the prior year period. The increase was primarily attributable to an increase in personnel costs, reflecting our commitment to enhancing our research and development capabilities. Impairment of goodwill for the fourth quarter of 2023 was 354 million RMB as compared with nil in the prior year period. Impairment reported in this quarter represents the amount by which the carrying value of the Yves Long reporting unit exceeded its fair value. based on quantitative goodwill impairment tests, primarily due to weaker operating results than expected at the time of acquisition. Loss from operations to the fourth quarter of 2023 was 539.6 million RMB as compared with 78.2 million for the prior year period. Operating loss margin was 50.3% as compared with 7.8% for the prior year period. Non-GAAP loss from operations for the fourth quarter of 2023 was $125.9 million as compared with non-GAAP income from operations of $11.5 million for the prior year period. Non-GAAP operating loss margin was 11.7% as compared with non-GAAP operating income margin of 1.1% for the prior year period. Met loss for the fourth quarter of 2023 was 494.5 million RMB as compared with 55 million for the prior year period. Net loss margin was 46.1% as compared with 5.5% for the prior year period. Net loss attributable to just an ordinary shareholders for diluted EDS for the fourth quarter of 2023 was as compared with 0.09 for the prior year period. Non-GAAP net loss for the fourth quarter of 2023 was 93.7 million RMB as compared with non-GAAP net income of 34.7 million for the prior year period. Non-GAAP net loss margin was 8.7% as compared with non-GAAP net income margin of 3.4%. for the prior year period. Non-GAAP net loss attributable to Yesen's ordinary shareholders for diluted ADS for the fourth quarter of 2023 was 0.17 RMB as compared with non-GAAP net income attributable to Yesen's ordinary shareholders for diluted ADS of 0.06 RMB for the prior year period. Now, I'd like to briefly walk you through the highlights of our full year results. Total net revenues for the full year of 2023 decreased by 7.9% to 3.41 billion RMB from 3.71 billion for the prior year period, primarily attributable to the decline in net revenues from color cosmetic brands, partially offset by the increase in net revenues from skincare brands. Growth profit for the full year of 2023 decreased by 0.2% to 2.51 billion RMB from 2.52 billion for the prior year period. Growth margin for the full year of 2023 was 73.6% as compared with 68% for the prior year period. The increase was primarily attributable to First, increasing sales of higher gross margin products from skincare brands. And second, more disciplined pricing and discount policies. And third, cost optimization across all of our brand portfolios. Last from operations for the full year of 2023 was $913.4 million as compared with $928.9 million for the prior year period. Non-GAAP loss from operations for the full year of 2023 was $427.5 million as compared with $539.3 million for the prior year period. Net loss for the full year of 2023 was $750.2 million as compared with $821.3 million for the prior year period. Net loss attributable to GAAP and ordinary shareholders for diluted ADS for the full year of 2023 was 1.36 RMB as compared with 1.37 for the prior year period. Non-GAAP net loss for the full year of 2023 was 296.1 million as compared with 462.9 million for the prior year period. Non-GAAP net loss attributable to Yassin's one of their shareholders for diluted ADS for the full year of 2023 was 0.53 RMB as compared with 0.76 RMB for the prior year period. As of December 31st, 2023, the company had cash, restricted cash, and short-term investments of 2.08 billion RMB as compared with 2.63 billion RMB as of December 31st, Net cash generated from operating activities for the fourth quarter of 2023 was 90.5 million as compared with net cash generated from operating activities of 106.6 million RMB for the prior year period. Net cash used in operating activities for the full year of 2023 was and $7.4 million RMB as compared with net cash generated from operating activities of $136.2 million for the prior year period. Looking at our business outlook for the first quarter of 2024, we expect our total net revenues to be between $765.4 million and $800.8 million. 3.7 million RMB, representing a year-over-year increase of approximately 0% to 5%. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change. With that, I would 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 touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. The first question today comes from Maggie Huang with CICC. Please go ahead.

Well, thanks for taking my question. This is Maggie Huang from CICC. Firstly, congratulations on our revenue returning to growth and meeting our guidance. And I have two questions. The first one is regarding Perfect Diary. We are glad to see the great performance of our new products like Essence Lipstick in Q4. So for this year, do you have a target revenue contribution from the new products? And how should we expect on the revenue growth and net margin of the brand Perfect Diary? That's my first question. And my second question is regarding Weeming State Shopping Festival. So how is the performance of our brand so far, and is that in line with our expectations? That's my question. Thank you.

Thank you, Maggie. For your first question on the performance of Perfect Diary, since our launch of the BioLift Atmos Listic, its performance has been trending up. So, for example, last year, December, the new lipstick is ranking number two on both TMO and Douyin, so it's performing well. And in terms of new product contribution to the brand, last quarter, so fourth quarter of 2023, it's a little below 40%, and we believe this year it will trend up to about 50%. So that's for the new product. And you also asked for margin. So basically, for this new product launch and also the Perfect Diaries brand upgrade, we're seeing some good feedback and results so far. First of all, the growth margin is much higher for this new product compared to the old product. And also, the brand's average selling price also increased a lot. to around 140 to 150 on both Tmall and Oyin. And also in terms of consumer profile, we also attract more customers with higher affordability and beauty standing in general. So that's for your question number one. And then for question number two, regarding to the Women's Day performance, so far the Women's Day shopping festival already started. And looking at overall market, the performance is relatively modest. So as a result, for our brands, we're also seeing a relatively steady growth. So we are putting more resources and efforts for the bigger shopping festivals, for example, 618 and W11.

That's very helpful. Thank you very much. And I have no more questions.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

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

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