Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yatzen First Quarter 2024 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Lu, Vice President, Head of Strategic Investment and Capital Markets. Please go ahead.

Thank you, Operator. Please know the discussion today will contain four moving 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 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 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 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 Yasuo Senior Management are Mr. Junfeng Huang, our founder, chairman, and CEO, and Mr. Donghao Yang, our CFOM director. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is still recorded. In addition, a webcast replay of this conference call will be available on Yassin's investor relations website at ir.yassinglobal.com. I will now turn the call over to Mr. Deng Zengfang, fiscal expert.

Thank you, Irene, and thank you, everyone, for participating in Yassin's first quarter 2024 earnings conference call today. I will start by providing a macro overview before reviewing our strategy and the progress we have made across our segments and brands. China's beauty industry continued to grow moderately in the first quarter of 2024. According to the adjusted data published by the National Bureau of Statistics of China, total retail sales of consumer goods grew by 4.7%, year-over-year in the first quarter of 2024, while total beauty retail sales increased by 3.3% year-over-year. Online sales trends remained mixed. Beauty sales on Douyin recorded another quarter of double-digit year-over-year growth, while sales on Timor remained largely flat year-over-year in the first quarter. While the first quarter is traditionally a low season in the beauty industry, we still managed to maintain the growth trajectory that started last quarter. As our five-year strategy transformation plan progresses, we plan to strengthen our market position through superior products and strong brand equity across our brands while gradually optimizing our long-term cost structure. For the first quarter, total net revenues were RMB 773.4 million, growing 1% year-over-year, in line with guidance. Net revenues from our color cosmetics brands increased 3.2% year-over-year, indicating progress in Perfect Diaries brand repositioning, as well as continuous growth of Little Onding and the fingers. Skincare brand revenues increased by 0.1% year-over-year. Combined revenues from our clinical and premium skincare brands that are named Dr. Wu and Yiflong rose 6.4% year-over-year. Growth margin improved to 77.7% from 74.3% for the prior year period. Thanks to an increased contribution from higher growth margin products, our net loss margin was 15.1%, compared with the net income margin of 6.6% for the prior year period. Primarily due to the exceptionally high base resulting from the reversal of recognized share-based compensation expenses of RMB $100,000, and $9.4 million related to the forfeit of unvested awards granted to a former executive officer. Our non-GAAP net loss margin was 10.8%, compared with 3.4% for the prior year period, attributable to increased investment in marketing activities and a shift in our channel mix with the growing contribution from Douyin. Next, a brand and product update. For our skincare segment, our first quarter initiative includes brand building events and product launches, in preparation for the June 18 Shopping Festival in the second quarter. Galenique and Yves L'Homme presented their latest R&D results and products at the 4th China International Consumer Product Expo in April, where Galenique launched its Couture Secret Death Legend. The Essence and the Yves Long launch its Daily Rejuvenating Cream. Furthermore, Dr. Wu launched several new products, including his Cherise Kino Anti-Winkle Firming Serum and the Suncare UV Protect Whitening Lotion. In the color cosmetic segment, SurveyDiary continues to realize its Biolead Essence collection's potential. The brand ranked number two in the lipstick category among domestic brands in terms of retail sales value on Tmall and Douyin, combined for the first quarter of 2024. If Biolead Essence Matte Lipstick, launched earlier this year, also delivered a good performance during the March 8 shopping festival, Our two other major color cosmetic brands, Little Andy and Pink Bear, remained on a solid ground trend. Pink Bear launched its sugar glossy lipstick during the quarter and was honored at the Beauty Inc. Awards as the Newcomer of the Year. Looking ahead, both Little Andy and Pink Bear will continue to explore new color trends and hit IT to pursue a sustainable growth path. Next, R&D. Our R&D expenses as a percentage of revenues increased to 3.6% from 3.2% for the prior year period. We continued to push the boundaries of funds, recently hosting the first Atlantic Dermatology Research Fund Annual Research Summit in France. Renewed dermatologists and experts from around the globe gathered to discuss the latest research in skincare, and present the project for panel review. Also, Dr. Wu officially announced the launch of the second Dr. Wu Acne Research Fund project in March and will begin soliciting new acne research topics in the first half of 2024. In conclusion, we were pleased to maintain our growth trend this quarter and will stay focused on sustainable growth and brand building as we move ahead. 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 a month, and all percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the first quarter of 2024 increased by 1% to 773.4 million RMB from 765.4 million RMB for the prior year period. The increase was primarily attributable to a 3.2% year-over-year increase in net revenues from color cosmetics plants combined with a 0.1% year-over-year increase in net revenues from skincare brands. Growth profit for the first quarter of 2024 increased by 5.7% to 600.9 million RMB from 568.7 million for the prior year period. Growth margin for the first quarter of 2024 increased to 77.7%. from 74.3% for the prior year period. The increase was primarily driven by an increase in sales of higher gross margin products. Total operating expenses for the first quarter of 2024 increased by 31.7% to 758.7 million RMBs from 508.2% and 75.9 million RMB for the prior year period. As a percentage of total net revenues, total operating expenses for the first quarter of 2024 were 98.1% as compared with 75.2% for the prior year period. Fulfillment expenses for the first quarter of 2024 were 51.4 million RMB as compared with $61.9 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the first quarter of 2024 decreased to 6.7% from 6.8% for the prior year period. Selling and marketing expenses for the first quarter of 2024 were $539.2 million RMB as compared with 459 million RMB for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the first quarter of 2024 increased to 69.7% from 60% for the prior year period. The increase was primarily due to increased investment in the Douyin platform in line with the growing revenue contribution from Douyin, as well as our investment in new product launches and building brand equity across our portfolio. General and administrative census for the first quarter of 2024 were 140.1 million RMB as compared with 40.7 million for the prior year period. As a percentage of total net revenues, general and administrative census for the first quarter of 2024 increased to 18.1% from 5.3% for the prior year period. The increase was primarily attributable to the exceptionally low general and administrative census reported in the prior year period as a result of the reversal of recognized share-based compensation expenses of 109.4 million RMB due to the forfeiture of uninvested awards granted to our former chief technology officer upon his resignation. Research and development expenses for the first quarter of 2024 were 27.9 million RMB as compared with As a percentage of total net revenues, research and development expenses for the first quarter of 2024 increased to 3.6% from 3.2% for the prior year period. The increase was primarily attributable to higher personnel costs, reflecting our commitment to enhancing our research and development capabilities. Loss from operations for the first quarter of 2024 was 157.7 million RMB as compared with 7.2 million for the prior year period. Operating loss margin was 20.4% as compared with 0.9% for the prior year period. Non-GAAP loss from operations for the first quarter of 2024 was 107 million RMB as compared with 62.4 million for the prior year period. Non-GAAP operating loss margin was 13.8% as compared with 8.1% for the prior year period. Net loss for the first quarter of 2024 was 124.9 million RMB as compared with net income of 50.7 million RMB for the prior year period. Net loss margin was 16.1% as compared with net income margin of 6.6% for the prior year period. Net loss attributable to Yesen's ordinary shareholders for diluted ABS for the first quarter of 2024 was 1.16 RMB as compared with net income attributable to Yesen's ordinary shareholders for diluted 0.42 RMB for the prior year period. Non-GAAP net loss for the first quarter of 2024 was 83.8 million RMB as compared with 25.8 million RMB for the prior year period. Non-GAAP net loss margins was 10.8% as compared with 3.4% for the prior year period. non-GAAP net loss attributable to GAAP's ordinary shareholders per diluted EDS for the first quarter of 2024 was 0.78 RMB as compared with 0.24 RMB for the prior year period. As of March 31st, 2024, we had cash, restricted cash, and short-term investments of 1.89 billion RMB as compared with 2.08 billion RMB as of December 31, 2023. Net cash used in operating activities for the first quarter of 2024 was 121.8 million RMB as compared with 20.2 million for the prior year period. Looking at our business outlook for the second quarter of 2024, we expect our total net revenues to be between 858.6 million RMB and 901.5 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 now like to open the call to Q&A. Operator?

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.

Thanks for taking my question. This is Maggie Huang from CICC. I have two questions. My first question is about our strategy for the coming June 18th Shopping Festival and also do we have a target growth rate respectively for our skincare and also color cosmetic brands? That's my first question. And my second question is regarding our selling and marketing expenses ratio. The management have mentioned that we increased our investment in brand equity building in Q1. So what is our plan to allocate our expenses between such kind of branding and online traffic acquisition? And how should we expect the change of this expense ratio for the whole year? That's my two questions. Thank you.

Thank you for your questions. Let me try to answer your first one. Well, in the last one or two years, the major online shopping festivals in China, their influence has gradually come down. Brand owners or manufacturers like us are relying less and less on those shopping festivals in terms of our sales growth. But that said, we're still making our efforts to try to sell more of a product during those festivals. And this year, the 2018 festival actually is a bit different from the previous years. So this year, the festival started May the 20th. but it's going to last a lot longer than the previous years. So it's so hard for us to tell, you know, what the performance ourselves on that festival this year will be. It's going to take us some more time to be able to tell that. And you also asked about our growth rate forecast for skin care and color cosmetics. Unfortunately, we're not providing that kind of growth forecast, except for our guidance for the sales for the second quarter. And your second question, are selling marketing expenses the split between branding and traffic? Well, it really depends on how our actually new product launch performs. So we're currently trying to control or make better use of our selling and marketing expenses. And as you can see in Q1, our selling and marketing expenses were a bit higher compared to the previous quarter. And we are actually taking measures to try to take it down and to make sure that we become profitable in the near to mid-term.

Okay, I got it. 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 Yasmin directly or at TFC or contact information for IR equals China and the U.S. and the county today's press release. Thank you. Have a great day.

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