Yatsen Holding Ltd Q4 FY2020 Earnings Call

Ladies and gentlemen, good day, and welcome to the Yatsen Fourth Quarter and Full Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Head of Strategic Investment and Capital Markets. Please go ahead.

Thank you, operator. Please note the discussion today will contain forward-looking statements relating to the company's future performance and our intent is to qualify for the safe harbor from liability as established by the US 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 Yatsen'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. For a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. Joining us today on the call from Yatsen'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 Yatsen's Investor Relations website at ir.yatsenglobal.com. I will now turn the call over to Mr. Jinfeng Huang. Please go ahead.

Okay. Thank you, Irene. And thank you, everyone, for participating in Yatsen's inaugural earnings conference call today. So 2020 was an exciting year for Yatsen as we made great strides across our business and achieved numerous milestones. One of the most significant highlights for the year was our successful listing on the New York Stock Exchange on November 19th last year, marking the start of our new journey as a public company. On behalf of Yatsen's employees and myself, I would like to extend our sincere gratitude and appreciation to all of our long-time and new shareholders who continue to support us. Today, for the first time as a public company, we are pleased to present you with our solid operating and financial performance for the fourth quarter and the full year of 2020. Throughout the year, we leveraged our past successes to further fortify our leading position in color cosmetics for Gen Z and millennial customers. Yatsen's firm commitment to product innovation, development, enhancing brand portfolio and product offerings, and strengthening ties with customers through both online and offline channels positions us as a unique and competitive player in China's fast-growing beauty industry. As a result, for the full year, we grew our total net revenues by 72.6% year-over-year to RMB5.2 billion and increased our gross sales by 72.4% from RMB3.5 billion in 2019 to RMB6.1 billion in 2020. In an extension of the robust momentum we saw throughout the year, fourth quarter total net revenue increased 71.7% year-over-year to RMB2 billion, and gross sales climbed 73.3% year-over-year to RMB2.3 billion. Our quarter results are a testament to our ability to quickly grow our business as evidenced by the accelerated expansion of our flagship brand Perfect Diary and the rapid growth witnessed by our other brands, including Little Ondine and Abby's Choice, soon after being introduced to our portfolio. The strength across our brand portfolio demonstrated our ability to incubate and scale brands and assures us that we are on the right track as we continue to press forward. These numbers also display the effectiveness of our disruptive B2C model, which enabled us to consistently deliver innovative products and personalized services that deepen customer engagement. The growing popularity of homegrown Chinese beauty brands is creating a great opportunity for us as our brand targets Gen Z and millennials, the golden cohort of China's beauty industry. Our evolving product line is steadily gaining traction among young consumers and seeing substantial growth. In the fourth quarter, the number of B2C customers reached another record high of 14.4 million, and this number came in at 32.3 million for the full year, representing impressive year-over-year gains of 31% and 38% respectively. Color cosmetics are the foundation of our business and a dominant contributor to revenue. Having said that, we further widened our product variety and offerings during the fourth quarter with more emphasis on quality, innovation, and uniqueness. We deepened our reach in the skincare segment with the acquisition of Galénic, an iconic premium French skincare brand from Pierre Fabre, and a leading Chinese medical skincare brand known for its highly effective products targeting various sensitivities in Asian skin. We also entered a strategic partnership with Sensient Technologies, a partnership that is enhancing our R&D capabilities for innovative colors and new materials for color cosmetics, boosting quality control for raw materials and amplifying the use of technology to solve recurring challenges in the color cosmetics industry. Leveraging our disruptive B2C model and core platform capabilities, we are working towards building the multibrand portfolio that drives a broader product selection and addresses the needs of more customers. With this vision in mind, I would like to review some of our recent activities and unpack upcoming initiatives for 2021 and beyond. On the back of the success of our existing brands, we plan on introducing more brands through self-incubation and acquisitions in target market segments where we see considerable room for growth. Our ideal portfolio will consist of diversified brands with varying market positioning from mass market to high-end as we seek to attract a wide expression of consumers. We are also proactively pursuing strategic investments, acquisitions, and collaborations, both domestically and overseas. As announced earlier this month, we recently acquired the prestigious skincare brand, Eve Lom from Manzanita Capital. With the brand's multi-award-winning product range, our exceptional e-commerce capabilities, and the demonstrated cost of innovation, we are confident that we will further accelerate Eve Lom's growth in the global market. To close, before I hand it over to Donghao, China's beauty market has enormous potential to be unleashed. Our customer-centric value proposition, disruptive B2C business model, and strong capabilities uniquely position Yatsen to play a leading role in the country’s evolving beauty industry. Looking ahead, we remain committed to redefining the landscape of Chinese beauty, even as we engage and grow with the next generation of consumers, providing them with a new journey of beauty discovery. Thank you, everyone. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance.

Thank you, David, and hello, everyone. We finished the fourth quarter of 2020 with a set of solid financial results. Our healthy top-line growth reflects the strong performance we achieved across our brand portfolio and demonstrates the deep market appeal of our products, the success of our growth strategy, and our ability to skillfully execute our operational plans. In an effort to scale our brands and expand our portfolios, profitability was impacted during the quarter as a result of increased selling and marketing expenses as well as general and administrative expenses. While our gross margin rose to 66.3% in the quarter compared with 62.7% in the same period last year, 2020 was a pivotal year for Yatsen and the beauty industry as a whole, and our efforts in product innovation and development are paying off. As we move deeper into 2021, we remain committed to our strategy of further growing our product offerings, customer base, and revenue, which we firmly believe will lay a solid foundation for profitability in the long run. Now moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers presented today are in RMB amounts and all percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the fourth quarter of 2020 increased by 71.7% to RMB2 billion from RMB1.1 billion for the fourth quarter of 2019, primarily attributable to the growth in sales volume of our beauty products, driven by increases in the number of customers during the same period. Gross profit for the fourth quarter of 2020 increased by 81.6% to RMB1.3 billion from RMB716.3 million for the fourth quarter of 2019. Total operating expenses for the fourth quarter of 2020 were RMB2.8 billion compared to RMB644.8 million for the fourth quarter of 2019. As a percentage of total net revenues, total operating expenses increased to 144.5% from 56.5% in the prior year period. Fulfillment expenses for the fourth quarter of 2020 were RMB144.7 million compared to RMB113.2 million for the fourth quarter of 2019. The increase was primarily due to one, an increase in warehousing, shipping, and handling expenses driven by the growth in sales volumes of our beauty products during the same period; and two, share-based compensation expenses recognized upon the occurrence of our IPO according to US GAAP. As a percentage of total net revenues, fulfillment expenses decreased to 7.4% from 9.9% in the prior year period. Selling and marketing expenses for the fourth quarter of 2020 were RMB1.4 billion compared to RMB446.3 million for the fourth quarter of 2019. The increase was primarily due to one, an increase in advertising, marketing, and brand promotion costs; two, an increase in expenses incurred during the development of stores; and three, share-based compensation expenses recognized upon the occurrence of our IPO according to US GAAP. As a percentage of total net revenues, selling and marketing expenses were 70.3% compared to 39.1% in the prior year period. General and administrative expenses for the fourth quarter of 2020 were RMB1.3 billion compared to RMB71.9 million for the fourth quarter of 2019. The increase was primarily due to one, an increase in personnel costs; and two, recognized expenses upon the occurrence of our IPO according to US GAAP. As a percentage of total net revenues, general and administrative expenses were 65.6% compared to 6.3% in the prior year period. Research and development expenses for the fourth quarter of 2020 were RMB25.6 million compared to RMB13.4 million for the fourth quarter of 2019. The increase was primarily due to one, personnel costs; and two, recognized share-based compensation expenses upon the occurrence of our IPO according to US GAAP. As a percentage of total net revenues, research and development expenses were 1.3% compared to 1.2% in the prior year period. Loss from operations for the fourth quarter of 2020 was RMB1.5 billion compared to income from operations of RMB71.5 million for the fourth quarter of 2019. Non-GAAP loss from operations for the fourth quarter of 2020 was RMB290.1 million compared to non-GAAP income from operations of RMB90 million for the fourth quarter of 2019. Net loss for the fourth quarter of 2020 was RMB1.5 billion compared to net income of RMB46.2 million for the fourth quarter of 2019. Non-GAAP net loss for the fourth quarter of 2020 was RMB287.4 million compared to non-GAAP net income of RMB64.8 million for the fourth quarter of 2019. Net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the fourth quarter of 2020 was RMB4.04 compared to net income attributable to Yatsen’s ordinary shareholders per diluted ADS of RMB0.1 for the fourth quarter of 2019. Non-GAAP net loss attributable to ordinary shareholders per diluted ADS for the fourth quarter of 2020 was RMB0.73 compared to non-GAAP net income attributable to Yatsen’s ordinary shareholders per diluted ADS of RMB0.16 for the fourth quarter of 2019. As of December 31, 2020, the company had cash and cash equivalents and restricted cash of RMB5.7 billion compared to RMB676.6 million as of December 31, 2019. For the quarter ended December 31, 2020, net cash used in operating activities was RMB362.1 million. Looking at our business outlook for the first quarter of 2021, we expect our total net revenues to be between RMB1.37 billion and RMB1.42 billion, representing a year-over-year growth rate of approximately 35% to 40%. This forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change. With that, I would now like to turn the call to Q&A.

And the first question comes from Christine Cho with Goldman Sachs.

David and Donghao, congratulations on your first earnings call. I have two quick questions. One, could you provide your key assumptions behind your guidance for the next quarter? And secondly, I would love to get an update on the Perfect Diary skincare extension plans. With all the acquisitions of Galénic, Eve Lom, and some of the skincare brands, how do you see the skincare mix evolving in the long run? Thank you.

Christine, I didn't quite get your first question. So you want to provide some color behind the Q1 guidance or what?

Yes.

What do you mean by color? I mean, the guidance is 35% to 40%. I didn't…

So what are some of the key factors that could be very important for looking into first quarter?

Well, again, I think we still continue to execute our strategies in terms of, one, our existing brands, Little Ondine, ABC, we continue to grow those brands. And two, we have acquired a number of new brands. We're currently focusing on the integration of those new brands into our existing business and operations. But in Q1, the contributions in terms of revenue from those newly acquired brands are still very limited. However, going into Q2, Q3, and Q4, we do expect increasing contributions from those new brands. We still have the second question to answer. David, go ahead.

So for the Perfect Diary skincare expansion, I think we are currently rolling out the skincare products in our offline stores, and we have the main product line coming in the middle of the year. We see our skincare strategy as leveraging the Perfect Diary and select brand equity. We believe long term that skincare will contribute a portion of Perfect Diary’s growth. Additionally, most of the new product launches usually happen in Q1, so there will be more new products and even new brands launching after Q1.

And the next question comes from Dustin Wei with Morgan Stanley.

So I think the first question is still related to the guidance of the 35% to 40% year-on-year. I think of the first quarter of 2020, even for the online business, was slightly or meaningfully impacted by COVID. So there's a bit of a low base effect, and yet we have this guidance. So can we talk about the breakdown by brand or dynamics for online, offline? For example, if we think of 35% to 40% sales growth for the whole company, what’s the growth we should look for Perfect Diary or online? Also, is there a strategic change here that management thinks for existing brands, prioritizing profitability over the growth rate?

Thank you for the question. Let me first try to take a shot at your question. First of all, last year, actually Q1 was not a low base, especially in our business. Maybe in some of the other businesses, they saw the impact of COVID-19 a bit earlier. But for us, Q1 last year, we saw 120% year-over-year growth, which was a very strong quarter in our mind. The impact from COVID-19 started to hit us actually from Q2. We're not trying to be conservative in providing the guidance, but in Q1 some of the new products for existing brands like Perfect Diary and Little Ondine will not launch until Q2. The contribution to our revenue from the newly acquired brands will not present itself until Q2. We believe growth will start to come back or pick up starting from Q2 compared to Q1.

I think for your second question, it relates to the strategy for new and existing brands. When we are determining brand strategy, the company looks at the brand development agent cycle instead of whether the brand is new or existing. For example, if we identify good growth opportunities in a new category or new offering, we will not hesitate to implement a growth strategy by investing, continuing to invest in sales and marketing to further build the brand equity and customer awareness. So basically, we are still very focused on top-line growth regardless of whether it's new or existing.

Your third question is actually regarding cash burn this year. I can only talk about our operating cash flow because you can never plan ahead your next acquisition activity. This year, as we've explained to our investors, it's going to be another loss-making year because our current focus is on top-line growth. So it's going to be a negative operating cash flow year for us. But hopefully, next year, we will be able to break even in our bottom line and cash flow situation.

The next question comes from Luzi Li with Bank of America Securities.

My first question is regarding the first quarter guidance. Can we expect accelerating growth from Q2 to the end of the year? What will be the key growth driver behind that? Should we expect contributions from flagship brand Perfect Diary, newly developed, self-developed brands like Little Ondine and Abby's Choice, or from newly acquired brands? My second question is, could you provide more color on the newly acquired brands, particularly Eve Lom? How big is it as for now? What is our strategy to grow these brands?

For your first question, we do not provide full-year guidance for our top-line growth. However, starting from Q2, we may see some pickup in our growth rate. Our existing brands will be launching new products or product categories in Q2 or Q3 this year. These will be the drivers for our top-line growth for the remaining three quarters of the year. Regarding your second question, yes, you're absolutely right. The newly acquired brands, Galénic, Eve Lom, and another Chinese brand, are mostly skincare brands. Two of these brands, Eve Lom and Galénic, are positioned as prestige brands and target different market segments than Perfect Diary. We believe we can leverage our supply chain, R&D capabilities, and data-driven capabilities to launch these newly acquired brands successfully.

And the next question comes from an unidentified analyst with Aegis Research.

Congratulations on very strong earning results. I have two quick questions. First, since our strategy has built a brand portfolio with different categories and price positioning, how do we utilize our large user base for cross-selling? What is our multibrand operations strategy? Second, regarding the newly acquired brands, Galénic and Eve Lom, what is our strategy for post-acquisition integration? How will we deal with their existing team and overseas distributor network?

Going back to the first question, when we expand into the market with new brands, we can leverage our existing customer base and financial capabilities. The growth comes from two parts: leveraging existing capacity or customer base to either test products or to position and design new products. We are also good at accelerating the growth of the brands we acquire using our B2C model. Regarding your second question on acquisition integration, we currently operate under a joint venture with existing shareholders. This structure helps us maintain distribution networks and supports R&D and product innovation while retaining key employees and brand equity. Moreover, we are building our organizational capabilities and M&A team for better execution in this area.

As this does conclude the question-and-answer session. I would like to turn the conference back over to management for any closing comments.

Thank you, operator. Thanks once again for joining us today. If you have any further questions, please feel free to contact us directly or TPG Investor Relations. Our contact information for IR in both China and the US can be found in today's press release. Have a great day. Thank you.

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