Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yattson Second Quarter 2024 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 motion 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 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 factor that could affect Yassin'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. Here today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. We see the earnings relief issues 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. Jinfeng 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 Yasson's semester relations website at ir.yassonglobal.com. I'll now turn the call over to Mr. Jinfeng Huang.

Thank you, Irene, and thank you, everyone, for participating in Yasson's second quarter 2024 earnings conference quarter day. I will start with an overview of the macro environment and our key financial metrics before moving on to the strategy, brand and the quarter update. China's beauty industry has subdued the second quarter with the 2018 shopping festival falling short of expectations. According to the adjusted data published by China's National Bureau of Statistics, duty retail sales rebounded in May, likely due to the early start of the 6-18 festival and the cancellation of pre-sales, followed by a significant year-over-year decline in June. For the full second quarter, duty retail sales decreased by 1.2% year-over-year, lacking the overall market. where total retail sales of consumer goods grew by 2.7% year-over-year. In addition, online beauty sales remained muted. While Tmall and Douyin's combined beauty sales recorded year-over-year growth in the second quarter, the growth rate was significantly lower than in the prior year period. The dropped performance of China's beauty market impacted our revenue, to revise our revenue guidance in July. Total net revenues for the second quarter were RMB 794.5 million, reflecting a 7.5% year-over-year decline, in line with our revised expectations. Net revenues from our skincare brands were basically flat year-over-year, while combined revenues from Galanique, Dr. Wu, and Yves Long grew by 5% year-over-year. Polar Cosmetics brand's net revenues decreased by 11.4% year-over-year, primarily due to the ongoing strategy transformation of the Pervidari brand. Its full flagship product line, the BioLip Essence 2, is performing well as the brand continues to build its new product line-up. On the profitability side, our overall growth margin increased to 17.6%. from 17.47% for the prior year period, thanks to an increased contribution from high growth margin products. Our net loss margin also narrowed by 1.9% points to 10.8% from 12.6% for the prior year period. Our long gap net loss margin, however, increased to 9.4% from 5.1% for the prior year period. The year-over-year increase in our non-GAAP net loss margin was mainly due to higher channel traffic expenses as a result of Douyin's growing contribution to sales and our investments in marketing events to strengthen brand equity in the second quarter. Given the challenges in the industry and where we are in our strategy transformation plan, we will remain focused on improving our channel mix and optimizing our cost structure to reduce losses for the remainder of the year. Meanwhile, we will maintain our investments in brand building and R&D as we pursue a sustainable growth path. Our skincare brand delivered another steady performance during the second quarter, given not only by our hero product, but also by an increasingly diverse and extensive product portfolio. This launch renewal treatment oil gained significant disability on the Douyin platform after being featured in the remote edges of YouTube's live streaming room, successfully boosting the product's revenue contribution. DelaNIC also experienced growing sales from its viewing services, integrating Michael Mask. Our telecosmetic brands also continued to develop and launch standout products in the second quarter, Profit Diary introduced multiple power products, including a translucent layering long-wear cushion foundation, while Little Ondine brought the Born Wild dual-ended gel gel pen and a gold compact powder to market. Also, Profit Diary's Biolink Essence Lipstick recently won the gold award in the beauty and personal care category at the Big Tiger Roll Awards. showcasing our effective brand repositioning and appealing hero products. The second quarter also included a host of brand building opportunities across our brand portfolio. In May, Yasem participated in the 2024 China Conference of Cosmetic Science and Technology, as well as the related 15th Academic Symposium. During the event, Perfect Diary released latest scientific research report compiled in collaboration with the China Association of Pregants, Labor and Cosmetic Industries, and the Rijin Hospital of Shanghai Jiao Tong University School of Medicine. On the skincare front, Galanick held a major brand event in Bali in collaboration with GQ, featuring several experts and KOLs. Glenick also announced swimming world champion Ms. Zhang Yufei as its new brand ambassador during the quarter. Furthermore, Dr. Wu participated in the 13th Asia Dermatology Congress, the most widely attended and representative event in the field of dermatology in Asia, focusing on Asian skin's unique anti-aging needs. Dr. Wu collaborated with top industry experts to present the latest advancement in anti-aging treatments and to demonstrate its new to retinal anti-wrinkle firming serums efficacy. So before I wrap up, an update on R&D. I'm proud to share that on May the 28th, the Yangtze Global Innovation R&D Center was officially inaugurated in Shanghai, marking China's first global R&D hub for a national beauty brand. With nearly 4,000 square meters of R&D space, the sector's successful completion and operational launch will provide robust support for Yasen's product development and technological advancement. In conclusion, the second quarter was challenging from a macro perspective. We will remain focused on the sectors we can control. Designing continued improvement in our loss margin through cost and efficiency optimizations, while impacting our channel mix and advancing product development. 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. Hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in the amount, and all percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the second quarter of 2024 decreased by 7.5% to $794.5 million from $858.6 million for the prior year period. This decrease was primarily due to an 11.4% year-over-year decrease in net revenues from color cosmetic brands. Growth profits for the second quarter of 2024 decreased by 5% to $609.4 million from $641.6 million for the prior year period. Growth margins for the second quarter of 2024 increased to 76.7% from 74.7% for the prior year period. The increase is primarily driven by an increase in sales of higher gross margin products. Total operating expenses for the second quarter of 2024 decreased by 4.1% to $744.6 million from $776.7 million for the prior year period. As a percentage of total net revenues, total operating expenses for the second quarter of 2024 were 93.7% as compared with 90.5% for the prior year period. Fulfillment expenses for the second quarter of 2024 were $51.2 million as compared with $68.3 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the second quarter of 2024 decreased to 6.4% from 6.8% for the prior year period. The decrease was primarily due to an increase in overall average selling price of our products, as well as further improvements in logistics efficiency. Selling and marketing expenses for the second quarter of 2024 were $544.7 million, as compared with As a percentage of total net revenues, selling and marketing expenses for the second quarter of 2024 increased to 68.6% from 63.2% for the prior year period. The increase was primarily due to increased investment in the Go-In platform in line with the growing revenue contribution from Bayou, as well as our investment in new product launches and building brand equity across our portfolio. General and administrative expenses for the second quarter of 2024 were $119.1 million as compared with $149.7 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the second quarter of 2024 decreased to 15% from 17.4% for the prior year period. The decrease was primarily attributable to a reduction in share-based compensation as a result of the reversal of recognized share-based compensation expenses due to the forfeiture of uninvested awards granted to certain former employees. Research and development expenses for the second quarter of 2024 were $29.7 million, as compared with $25.9 million for the prior year period. As a percentage of total net revenues, research and development expenses for the second quarter of 2024 increased to $3.3 million. from 3% for the prior year. The increase was primarily attributable to the commencement of operations of our Global Innovation R&D Center in Shanghai on May 28, 2024. Lost from operations for the second quarter of 2024 was $135.2 million as compared with $145.1 million for the prior year period. Operating loss margin was 17% as compared with 16.7% for the prior year period. Non-GAAP loss from operations for the second quarter of 2024 was $111.9 million as compared with $74.6 million for the prior year period. None guessed operating loss margin was 14.1% as compared with 8.7% for the prior year period. Net loss for the second quarter of 2024 decreased by 21.2% to $85.5 million from $108.5 million for the prior year period. Net loss margin was 10.8%. as compared with 12.6% for the prior year period. Net loss attributable to guests and ordinary shareholders for diluted EBOs for the second quarter of 2024 was 0.77 RMBs as compared with 0.99 RMBs for the prior year period. Non-guest net loss for the second quarter of 2024 was 74.6%. as compared with 46.3 million for the prior year period. Non-GAAP net loss margin was 9.4%, as compared with 5.4% for the prior year period. Non-GAAP net loss attributable to Yeltsin's ordinary shareholder for diluted ABS for the second quarter of 2024 was 0.67 RMB, as compared with 0.41 RMB for the prior year period. As of June 30th, 2024, we had cash, descriptive cash, and short-term investments of 1.58 billion as compared with 2.08 billion as of December 31st, 2023. Net cash used in operating activity for the second quarter of 2024 was $148.2 million as compared with $14.4 million for the prior year period. Looking at our business outlook for the third quarter of 2024, we expect our total net revenues to be between $646.3 million and $718.1 million, representing a year-over-year decrease of approximately from 0% to 10%. 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?

Thank you. 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, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And if you do wish to ask, 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. And once again, that's star then one if you have a question. Our first question comes from Maggie Huang with CICC. Please go ahead.

This is Maggie Huang from JICC. I have two questions. The first question is that what is our plan for product development and channel expansion for color cosmetic and skincare brands respectively? And my second question is that what is our promotion strategy in the second half of the year and how to balance our revenue growth and profitability? That's my question. Thank you.

Thank you, Maggie, for the question. So for the first question, I'll plan for a product development channel strategy. So currently, our strategy is to fine-tune our product mix and also channel mix. On the product side, we have a very robust new product pipeline for the second half of the year for both our color and skincare side. So we continue to have a number of new products, for example, for Galenic. And Dr. Wu, they will have new, very active and functional skincare products launched in later half this year. And also on the color side, we have a list of new pipelines, including new lipsticks and foundation products, you know, for Perfect Diary and Little Orangey. And then in terms of channels, We have been talking about expanding into more 2B channels on top of currently very high concentration of 2C channels. So by increasing the concentration or the weighting of the 2B channels, we'll have more room for growth and also a better profitability mix in future.

Okay. The second question, the promotion, for the second half of the year. I don't think there will be substantial changes in terms of promotion strategies. You know, we're going to have W11 and a few other events from now until the end of the year. So we will primarily focus on optimizing our channel mix and product mix, as Irene has just mentioned. And in terms of revenue profitability, And I think at the second half of the year, we're going to be focusing more on cutting loss and achieving profitability as soon as possible. In terms of revenue, we're going to be more aggressive in terms of new product development and channel mix. so that we can grow our revenue as fast as possible. But in the meantime, we're going to be focusing on achieving a profitable revenue growth and be profitable as soon as possible.

You've done it. That's very helpful. Thank you very much. And I have no more questions.

Thank you.

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to management for 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 PSL Financial Communications. 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.

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.