Yatsen Holding Limited (YSG) Q3 2023 Earnings Call

Yatsen Holding Limited (NYSE:YSG) Q3 2023 Earnings Conference Call November 21, 2023 7:30 AM ET

Company Participants

Irene Lyu - Vice President, Head, Strategic Investments and Capital Markets

Jinfeng Huang - Founder, Chairman and Chief Executive Officer

Donghao Yang - Chief Financial Officer

Conference Call Participants

Maggie Wan - CICC

Operator

Ladies and gentlemen, good day and welcome to the Yatsen Third Quarter 2023 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 Investments and Capital Markets. Please go ahead.

Irene Lyu

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 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 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. 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 team 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 the Q&A session. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will also 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, sir.

Jinfeng Huang

Thank you, Irene, and thank you, everyone, for participating in Yatsen’s third quarter 2023 earnings conference call today. In the third quarter of 2023, China’s beauty industry remained in the mild recovery phase that began as the country emerged from the pandemic earlier this year. According to the National Bureau of Statistics of China, total retail sales of consumer goods grew by 4.2% year-over-year and the total beauty retail sales increased by 2.6% year-over-year, both representing a deceleration in year-over-year growth rate from the second quarter. Online beauty sales showed a similar pattern in the third quarter. For both Color Cosmetics and Skincare, combined total sales on Tmall and Douyin, recorded a slower growth rate than in the second quarter of 2023.

Amid uncertainties in consumer demand, Yatsen remained committed to its strategic transformation plan. We continuously strive to build strong brand equity based on superior product performance and consumer satisfaction. For the third quarter of 2023, we recorded total net revenue of RMB718.1 million, in line with our previous guidance.

Net revenue from our Skincare Brands declined by 4.1% year-over-year, mainly attributable to our strategy decisions to phase out Abby’s Choice brand. Our clinical and premium skincare brands, including Galénic, DR.WU and Eve Lom delivered another solid performance, recording 7.4% year-over-year growth in combined net revenues and further increasing their contribution to total net revenues as compared with the prior year period. Net revenues from Color Cosmetics brands decreased by 21.5% year-over-year, primarily due to the decline in Perfect Diary sales as a result of the timing of new product launches near the end of the third quarter and the closure of underperforming offline stores. The number of Perfect Diary’s offline stores totaled 123 as of the end of the third quarter compared with 198 a year ago.

Net revenues from Little Ondine and Pink Bear continued to grow as both brands raised their brand awareness among targeted consumers. Yatsen’s gross margin improved to 71.4% in the third quarter from 58.9% in the prior year period. Due to the rising contribution from higher gross margin in Skincare Brands and ongoing cost optimization across our brand portfolio, net loss and the non-GAAP net loss margin expanded to 27.6% and 18.1% respectively as we increased investments in the Perfect Diary brand upgrades and preparations for the Double 11 Shopping Festival.

Turning now to our brands and products. During the third quarter of 2023, we repositioned the Perfect Diary brand, carrying out a series of campaigns with refreshed visual identities and new product launches. The brand’s new Hero product, Biolip Essence Lipstick, leverages our exclusive Biolip technology, which creates a bionic sebum film upon application to protect the lip fragile skin barrier. Biolip’s strong efficacy in lip line reduction was validated by the prestigious Ruijin Hospital and SGS testing agency. Our two other Color Cosmetics brands, Little Ondine and Pink Bear, both formed co-branding partnerships with popular IPs that deeply resonated with young consumers.

For our Skincare Brands, we continue to engage deeply in brand building, further cultivating each brand’s distinctive audience. Galénic marked its 45 anniversary with the Gala celebration, the hosted and aerate of celebrities, media and scholars in Paris. The brand also officially announced its scientific research cooperation with Hospital St. Louis, a well-known dermatology hospital in Paris and established Galénic Dermatology Research Foundation. In addition, DR.WU celebrated its 20th anniversary. Its reputation as a high-quality clinical brand and a pioneer in the use of mandelic acid continued to strengthen as the brand was honored as Asia’s leading mandelic-based Skincare brand by Euromonitor, the world’s top independent provider of market research and industry analysis. Furthermore, Eve Lom introduced renounced singer and actor Xiao Zhan as its brand ambassador to increase brand awareness and establish a broader customer base.

Moving on to R&D. R&D expenses as a percentage of revenues were 3.4%. In September, Yatsen and the Galénic brand attended the IFSCC conference in Barcelona, Spain and presented a scientific paper on the brand’s patent, snow algae peptide. At the conference, Galénic also announced that it has entered into strategic cooperation with the global peptide leader, Lubrizol, to jointly research new ingredients, collaborate on anti-aging product research and expand Yatsen’s open-lab research and development boundaries.

Before handing the call over to Donghao, I would like to provide an update on our share repurchase program. As announced earlier today, our Board of Directors has approved and authorized a change to the size and term of our share repurchase program, increasing the aggregate value of shares that may be repurchased under the share repurchase program from $150 million to $200 million and expanding the effective term of the share repurchase program through November 19, 2025. This further demonstrated our confidence in Yatsen projects.

To summarize, China’s beauty market is still in the process of a modest recovery this year. Looking forward, we will continue to adapt flexibility and are confident in our resources and ability to advance our strategic transformation plan.

With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.

Donghao Yang

Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all 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 third quarter of 2023 decreased by 16.3% to RMB718.1 million from RMB857.9 million for the prior year period. The decrease was primarily attributable to a 21.5% year-over-year decrease in net revenues from Color Cosmetics brands combined with a 4.1% year-over-year decrease in net revenues from Skincare brands. Gross profit for the third quarter of 2023 decreased by 13.3% to RMB512.8 million from RMB591.3 million for the prior year period. Gross margin in the third quarter of 2023 increased to 71.4% from 68.9% for the prior year period. The increase was first, increasing sales of higher gross margin products from Skincare brands. And secondly, more disciplined pricing and discount policies and thirdly, cost optimization across all of our brand portfolios.

Total operating expenses for the third quarter of 2023 decreased by 13.1% to RMB744.3 million from RMB857 million for the prior year period. As a percentage of total net revenue, total operating expenses for the third quarter of 2023 were 103.6% as compared with 99.9% for the prior year period. Fulfillment expenses for the third quarter of 2023 were RMB56 million as compared with RMB63.8 million for the prior year period. As a percentage of total net revenue, fulfillment expenses for the third quarter of 2023 increased to 7.8% from 7.4% for the prior year period. The increase was primarily attributable to the deleveraging effect of lower net revenues in the third quarter of 2023. Selling and marketing expenses for the third quarter of 2023 were RMB511.7 million as compared with RMB564.8 million for the prior year period.

As a percentage of total net revenues, selling and marketing expenses for the third quarter of 2023 increased to 71.3% from 65.8% for the prior year period. The increase was primarily attributable to increased investments in the Perfect Diary brand upgrades and preparation for the Double 11 Shopping Festival.

General and administrative expenses for the third quarter of 2023 were RMB151.8 million as compared with RMB194.5 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the third quarter of 2023 decreased to 21.1% from 22.7% for the prior year period. The decrease was primarily attributable to a reduction in compensation corresponding to a decrease in general and administrative headcount.

Research and development expenses for the third quarter of 2023 were RMB24.7 million as compared with RMB33.9 million for the prior year period. As a percentage of total net revenues, research and development expenses for the third quarter of 2023 decreased 3.4% from 3.9% for the prior year period. The decrease was primarily attributable to our efforts to maintain research and development expenses at a reasonable level relative to total net revenue.

Loss from operations for the third quarter of 2023 decreased by 12.9% to RMB231.5 million from RMB265.7 million for the prior year period. Operating loss margin was 32.2% as compared with 31% for the prior year period. Non-GAAP loss from operations for the third quarter of 2023 increased by 1.2% to RMB164.6 million from RMB162.6 million for the prior year period. Non-GAAP operating loss margin was 22.9% as compared with 19% for the prior year period.

Net loss for the third quarter of 2023 decreased by 6.1% to RMB197.9 million from RMB210.7 million for the prior year period. Net loss margin was 27.6% as compared with 24.6% for the prior year period. Net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the third quarter of 2023 was RMB0.36 as compared with RMB0.37 for the prior year period. Non-GAAP net loss for the third quarter of 2023 increased by 3% to RMB130.2 million from RMB126.5 million for the prior year period. Non-GAAP net loss margin was 18.1% as compared with 14.7% for the prior year period. Non-GAAP net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the third quarter of 2023 was RMB0.24 as compared with RMB0.22 for the prior year period.

As of September 30, 2023, we had cash, restricted cash and short-term investments of RMB2.24 billion as compared with RMB2.63 billion as of December 31, 2022. Net cash used in operating activities for the third quarter of 2023 was RMB163.4 million compared with net cash generated from operating activities of RMB21.8 million for the prior year period.

Looking at our business outlook for the fourth quarter of 2023, we expect our total net revenues to be between RMB1.01 billion and RMB1.06 billion, representing a 0% to 5% increase year-over-year. 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.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Maggie Wan with CICC.

Maggie Wan

Thanks for taking my questions. This is Maggie Wan from CICC. I have two questions. The first one is regarding the new products of Perfect Diary. We have seen the launch of bio [ph] essence lipstick and also foundations in Q3. So, is there any feedback from the customers? And how should we expect on your performance in next year? This is for the first question. And my second question is about our guidance. We have guided a positive revenue growth for Q4, which is an encouraging signal. So, behind this guidance, could management give us more color on your expectation for both skincare and color cosmetics sectors in Q4? And like what are the key drivers for us to achieve that goal? That’s my questions. Thank you.

Irene Lyu

So, yes, thank you for the question. Let me take the first one. Well, Perfect Diary’s new lipstick launch, which is the bio essence lipstick, after its launch in the end of September, we have received very positive feedback from our users as they enjoy very strong efficacy from the lipstick. Basically, our philosophy is to have a very perfect makeup look combined with in-level efficacy benefit from the lipstick, so that’s number one. And then secondly, the user profile also started to shift after our brand upgrade and also the new launch. Historically, our consumers are most like – mostly unique [ph] and also young consumers from the lower-tier cities. But then after we launched this new product and the brand operates given that our price points start to increase and with new bolt-on benefits, we started to see more high-value consumers coming to buy our lipstick including, for example, the sophisticated young man and also the upper middle class. And also since the launch, we have seen a very positive ranking performance on both consumer and volumes. So, the launch of this lipstick was only at the end of September, so it haven’t really contributed much of the Q3 performance. But in Q4 and 11.11, we continue to see this product to gain market share.

Donghao Yang

Yes. And your second question, I think Irene has already covered part of the answer for your question. We launched our new product Perfect Diary towards the end of – mid to end of September, Q3. And the sales contribution from those new products, we started to show on our P&L starting in Q4. So, that’s one reason. One other reason is Q4 has traditionally been a strong season for our skin care products. And if you look at our skin care products and the main – three main skin care brands have been growing really fast in the past many quarters, and we are expecting strong growth from those skin care brands. So all-in-all, with the slowdown of the decline, sales decline of Perfect Diary brand and strong growth from those other skin care brands, that’s why we are expecting a strong quarter in Q4. And therefore, we gave the guidance of 0% to 5% year-over-year growth. As you know, in the past almost 2 years, the sales of the company have been declining. And hopefully, that decline has bottomed out, and we do expect our sales to start to gain traction in the foreseeable future.

Maggie Wan

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

Operator

[Operator Instructions] Alright. This concludes the question-and-answer session. I would like to turn the call over to Irene Lyu for any closing comments.

Irene Lyu

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

Operator

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