Yatsen Holding Ltd Q2 FY2024 Earnings Call

Ladies and gentlemen, good day, and welcome to the Yatsen 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 Lyu, Vice President, 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 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, 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 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. 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 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'll now turn the call over to Mr. Jinfeng Huang. Please go ahead.

Thank you, Irene. And thank you, everyone, for participating in Yatsen's second quarter 2024 earnings conference call today. I will start with an overview of the macro environment and our key financial metrics before moving on to the strategy, brand, and quarter update. China's beauty industry has a subdued second quarter, with the 618 Shopping Festival falling short of expectations. According to the adjusted data published by China's National Bureau of Statistics, retail sales rebounded in May, likely due to the early start of the 618 Festival and the cancellation of customer promotions, followed by a significant year-over-year decline in June. For the full second quarter, total retail sales decreased by 1.2% year-over-year, lagging the overall market. Our total retail sales of consumer goods grew by 2.7% year-over-year. In addition, online beauty sales remained muted. While Tmall and Douyin 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 profit performance of China's beauty market impacted our revenue, leading Yatsen to revise our revenue guidance in July. Total net revenues for the second quarter were RMB794.5 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 Galénic, DR. WU, and Eve Lom grew by 5% year-over-year. Color Cosmetics brand net revenues increased by 11.4% year-over-year, primarily due to the ongoing strategy transformation of the Perfect Diary brand. The flagship product line, the Biolip Essence, is performing well as the brand continues to build its new product lineup. On the profitability side, our overall gross margin increased to 76.7% from 74.7% for the prior year period, thanks to an increased contribution from high gross margin products. Our net loss margin also narrowed by 1.9 percentage points to 10.8% from 12.6% for the prior year period. Our non-GAAP net loss margin, however, increased to 9.4% from 5.4% in the prior year period. The year-over-year increase in our non-GAAP net loss margin was mainly due to higher channel trapping 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 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 to pursue a sustainable growth path. Our Skincare brand delivered another steady performance during the second quarter, supporting our new products, but also benefiting from increasingly diverse offerings this quarter. Our renewable shipment oil gained significant visibility on the Douyin platform after being featured in a popular live streaming room, successfully boosting the product revenue contribution. Galénic also experienced growing sales from its reviewed product, the recuperating micro mask. Our Color Cosmetics brands continued to develop and launch standout products in the second quarter, focusing on introducing household products, including the translucent wearing long wear cushion foundation, while Little Ondine brought the glitter pen and color-correcting compact powder market. Additionally, Perfect Diary's Biolip Essence lipstick category won the Gold Award in the Beauty and Personal Care Category at the iColor Awards, showcasing our effective brand repositioning and a key hero product. The second quarter also included a host of brand-building opportunities across our brand portfolio. Yatsen participated in the 2024 China Conference of Cosmetics Science and Technology, as well as the related 15th Academic Symposium. During the event, the press released a scientific research report empowered in collaboration with the China Association of Fragrance, Labor and Cosmetic Industries, and the affiliated hospitals of Shanghai Jiaotong University School of Medicine. Regarding the Skincare brand, Galénic held a major brand event in Bali in collaboration with GQ, featuring several actors and key opinion leaders. Galénic also announced swimming world champion, Ms. Zhang Yifei, as its new brand ambassador during the quarter. Furthermore, DR. WU participated in the 13th Asia Dermatological 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 advancements in anti-aging shipments and demonstrated new retinal anti-wrinkle firming serum efficacy. Before I wrap up and provide an update on R&D, I'm proud to share that on May 28, the Yatsen Global Innovation R&D Center was officially inaugurated in Shanghai, marking the first global R&D hub for a national beauty brand. With nearly 4,000 square meters of R&D space, the successful completion and operational launch will provide robust support for Yatsen's product development and technological advancement. In conclusion, the second quarter was challenging from a macro perspective. We will remain focused on the factors we can control, driving continued improvement in our loss margin through cost and efficiency optimization, while improving 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, 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 revenue for the second quarter of 2024 decreased by 7.5% to RMB794.5 million from RMB868.6 million for the prior year period. The decrease was primarily due to an 11.4% year-over-year decrease to net revenues from the Color Cosmetics segment. Gross profit for the second quarter of 2024 decreased by 5% to RMB609.4 million from RMB641.6 million for the prior year period. Gross margin for the second quarter of 2024 increased to 76.7% from 74.7% for the prior year period. This increase was 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 RMB744.6 million from RMB776.7 million for the prior year period. As a percentage of total net revenue, total operating expenses for the second quarter of 2024 were 93.7% compared with 90.5% for the prior year period. Fulfillment expenses for the second quarter of 2024 were RMB51.2 million compared with RMB68.3 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 the overall average selling price of our products, as well as further improvement in logistics efficiency. Selling and marketing expenses for the second quarter of 2024 were RMB544.7 million compared with RMB542.8 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the second quarter of 2024 increased to 68.6% from 53.2% for the prior year period. The increase is primarily due to increased investments in the Douyin platform, in line with the growing revenue contribution from Douyin and our investments in new product launches and building brand equities across our portfolio. General and administrative expenses for the second quarter of 2024 were RMB119.1 million compared with RMB149.7 million for the prior year period. As a percentage of total net revenue, 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 service conversations as a result of the reversal of recognized share-based compensation expenses due to the forfeiture of unvested awards granted to certain former employees. Research and development expenses for the second quarter of 2024 were RMB29.7 million compared with RMB25.9 million for the prior year period. As a percentage of total net revenue, the research and development expenses for the second quarter of 2024 increased to 3.7% from 3% for the prior year period. The increase was primarily attributable to the commencement of operations of our global innovation R&D center in Shanghai on May 28, 2024. Loss from operating for the second quarter of 2024 was RMB135.2 million compared with RMB135.1 million for the prior year period. Operating loss margin was 17% compared with 16.7% for the prior year period. Non-GAAP loss from operations for the second quarter of 2024 was RMB111.9 million compared with RMB74.6 million for the prior year period. Non-GAAP operating loss margin was 14.1% compared with 8.7% for the prior year period. Net loss for the second quarter of 2024 decreased by 21.2% to RMB85.5 million from RMB108.5 million for the prior year period. Net loss margin was 10.8% compared with 12.6% for the prior year period. Net loss attributable to Yatsen's ordinary shareholders for diluted ADS for the second quarter of 2024 was RMB0.77 compared with RMB0.99 for the prior period. Non-GAAP net loss for the second quarter of 2024 was RMB74.9 million compared with RMB46.3 million for the prior year period. Non-GAAP net loss margin was 9.4% compared with 5.4% for the prior year period. Non-GAAP loss attributable to Yatsen's ordinary shareholders, the diluted ADS for the second quarter of 2024 was RMB0.67 compared with RMB0.41 for the prior year period. As of June 30, 2024, we had cash, restricted cash, and portfolio investments of RMB1.58 billion compared with RMB2.08 billion as of December 31, 2023. Net cash used in operating activities for the second quarter of 2024 was RMB148.2 million compared to RMB14.4 million for the prior year period. Looking at our business outlook for the third quarter of 2024, we expect our total net revenue to be between RMB646.3 million and RMB718.1 million, representing a year-over-year decrease of approximately 0% to 10%. These forecasts reflect our firm and preliminary views on the market and operational conditions, with subject to sustainable factors. With that, I would now like to open the call to Q&A. Operator?

Our first question comes from Maggie Huang with CICC. Please go ahead.

I have two questions. The first question is, what is our plan for product development and channel expansion for Color Cosmetics and Skincare brands, respectively? And my second question is, 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 on plan for development and channel strategy. 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. We continue to have a number of new products, for example, for Galénic and DR. WU, which will have new active and functional skincare products launched in the latter half of this year. Additionally, on the Color side, we have a list of new pipelines, including new listings and foundation products. In terms of channels, we have been discussing expanding into more TV channels, on top of the currently very high online channel presence. By increasing the concentration or the weighting of the TV channel, we'll have more room for growth and also a better profitability mix in the future.

For your second question, regarding the promotion strategy for the second half of the year, I don't think there will be substantial changes in terms of promotion strategies. We have several events planned until the end of the year, so we will primarily focus on optimizing our channel mix and product mix as Irene just mentioned. In terms of prioritizing revenue profitability, in the second half of the year, we will be focusing more on recovering losses and achieving profitability. In terms of revenue, we're going to be more aggressive in terms of new product development and adjusting our channel mix so that we can grow our revenue as quickly as possible. However, we will ensure that we maintain a focus on profitable revenue growth.

That’s helpful. Thank you very much, and I have no more questions.

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 Yatsen directly or through Piacente 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.