Yatsen Q1 2023 Earnings Call Transcript

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May 16, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, good day, and welcome to the Yexton First Quarter 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Mailloux, Vice President, Head of Strategic Investment and Capital Markets. Please go ahead.

Speaker 1

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 for 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.

Speaker 1

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 Yatin's business and financial results is included in certain filings with 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 the reconciliation of GAAP to non GAAP financial results.

Speaker 1

Joining us today on the call from Yatson's senior management team are Mr. Zifong Huang, our Founder, Chairman and CEO and Mr. Zonghua Yang, our CFO and Director. Management will begin with prepared remarks As a reminder, this conference is being recorded. In addition, A webcast replay of this conference call will be available on Yaxin's Investor Relations website at ir.

Speaker 1

Yaxanglobal I'll now turn the call over to Mr. Zhenzong Huang. Please go ahead, David.

Speaker 2

Thank you, Irene, and thank you, everyone, for participating in Yaxuan's Q1 2023 earnings conference call today. The Q1 of 2023 showed a positive chance for the beauty industry. Total beauty retail sales Achieved year over year growth of 5.9% in the quarter according to the adjusted data published by the China National Bureau of Statistics and our involvement in market sentiment And the gradual recovery of offline consumption following the lifting of pandemic restrictions were major drivers of this upward trend. While we are pleased to see signs of recovery in the retail environment, We expected a rebound in our revenue to take time as consumers gradually reengage in travel, social activities and the general consumptions in the post COVID year. Our sites remain focused on long term sustainable growth as we continue to refine our business model.

Speaker 2

For the Q1 of 2023, our total net revenue declined by 41% year over year to RMB765,400,000 Abiding the guidance we provided previously, net revenues from skincare brands increased by 34.2% Year over year to RMB245.1 million. Our clinical and premium brands, including Doctor. Wu, Delanique and Yves Long recorded a solid growth of 58.6 percent year over year for the Q1 of 2023. In terms of revenue contribution, our skincare brands accounted for 32% of total net revenues in the Q1, Up from 20.5% for the period year period, net revenues from our color cosmetics brands In terms of profitability, we achieved ongoing improvement In our gross margin and the net margin, gross margin increased significantly by 5.3 percentage points to 7.3% for the Q1 of 2023 from 69 for the prior year period, reflecting our persistent efforts to fine tune our potamix, Implement disciplined pricing and discount policies and optimize production cost. Most importantly, we recorded a net income margin of 6.6% for the Q1 of 2023 as compared with the net loss margin of 32.7% for the prior year period.

Speaker 2

In addition to our efforts in cost optimization, the net income we recognized for the Q1 of 2023 was primarily attributable of recognized share based compensation expenses RMB109.4 million and a decrease of RMB42 point 2,000,000 in recognition of share based compensation expenses using the graded vesting method over the vesting term of the company's awards. Non GAAP net loss margin narrowed to 3.4% for the Q1 of 2023 from 7.2% for the same period last year. Moving on from our financial highlights, We made progress in our product development and brand awareness improvement initiatives. Yiflon launched It's Radian's face oil featuring 10 pressures plant extracts that provide a spa level skin Nourishment combined with 5 major reparative ingredients to firm and plump the skin. We also hosted a major brand event for Galenic Influencers to explore the legendary benefit of the brand's platinum snow LG series with international fashion and beauty KOLs.

Speaker 2

During the quarter, our color cosmetic brand also introduced Valentine's Day themed gift sets This campaign to celebrate the vibrant colors and the passionate emotions associated with the holiday. In terms of channel optimization, we completed most of our adjustments in our offline footprint in 2022. As offline consumption recovered due to the lockdown policies, performance at our offline stores improved In terms of profitability during the Q1 of 2023, however, The market situation is still evolving and the consumption activity has not fully returned to normal. Going forward, we will closely monitor market dynamics, focus on identifying the appropriate product mix And a growth strategy to drive sales in the offline business and adjust our approach to optimizing our offline channels As needed. Next, I would like to share some of our recent R and D endeavors and accomplishments.

Speaker 2

Our R and D expenses as a percentage of total net revenue were 3.2%, Demonstrating our continuous commitment to scientific advancement and product development. Furthermore, to promote applied research and clinical indication in treating acne, We officially launched Doctor. Wu Acne Research Fund and established Doctor. Wu ASPR Committee. Together, these organizations will integrate expert resources across multiple medical fields and Regions to conduct cutting edge exploration and applied research with the goal of discovering solutions for the refined and the comprehensive management of Acne Pong scheme.

Speaker 2

Before I conclude, I want to share an update on our environmental, social and governance performance, which continues to be great source of inspiration for Yatson. In January, we participated in the 2023 World Economy Forum Annual Meetings in Davos, Switzerland, where we highlighted Yaxon's implementation Our sustainability practice through Perfidari's lipo sealer, so lipsticks and other Yaxim products at the event sustainability, symporation. In summary, the Q1 of 2023 was a promising start to gradual recovery of China's beauty market In the post pandemic era, we are cautiously optimistic about the outlook for the remainder of 2023 We are aware that uncertainties remain. We will continue to focus on brand building and product development As we walk to draw upon our skincare brand's strong growth momentum and we prepare to launch new color cosmetic products the second half of twenty twenty three. With that, I will turn the call over to our CFO, Dong Hao, to discuss our financial performance.

Speaker 2

Thank you, everyone.

Speaker 3

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 revenues for the Q1 of 2023 decreased by 14.1 percent to RMB700 at RMB65.4 million from RMB891 million for the prior year period. The decrease was primarily attributable to a 29.1% year over year decrease in net revenues from color cosmetics brands, partially offset by a 34.2% year over year increase in net revenues from Skin Care Brands. Gross profit for the Q1 of 2023 decreased by 7.5% to RMB568.7 million from RMB614.5 million for the prior year period.

Speaker 3

Gross margin for the Q1 of 2023 increased to 74.3% from 69% for the prior year period. The increase was driven by 1st, Increasing sales of higher gross margin products from skincare brands and secondly, more disciplined Pricing and discount policies and certainly cost optimization across all of the company's brand portfolios. Total operating expenses for the Q1 of 2023 decreased by 37.6 percent to RMB575.9 million from RMB922.5 million for the prior year period. As a percentage of total net revenues, total operating expenses for the Q1 of 2023 were 75.2% as compared with 103.5% for the prior year period. Fulfillment expenses for the Q1 of 2023 were RMB51.9 million as compared with RMB73.9 million for the prior year period.

Speaker 3

As a percentage of total net revenues, fulfillment expenses for the Q1 of 2023 decreased to 6.8% from 8.3% for the prior year period. The decrease was primarily attributable to a decrease in warehouse and logistics costs due to the outsourcing of Most of the company's warehousing and handling operations, selling and marketing expenses for the Q1 of 2023 were RMB469 1,000,000 as compared with RMB604.7 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the Q1 of 2023 decreased to 60% from 67.9% for the prior year period. The decrease was primarily attributable to the closure of underperforming offline stores and a reduction in share based compensation related to the decrease in selling and marketing headcount. General and administrative expenses for the Q1 of 2023 were RMB40.7 million as compared with $208,100,000 for the prior year period.

Speaker 3

As a percentage of total net revenues, general and administrative expenses The Q1 of 2023 decreased to 5.3% from 23 point 4% for the prior year period. The decrease was primarily attributable to a reversal of recognized Share based compensation expenses of $109,400,000 due to the forfeiture of Uninvested awards granted to our former Chief Technology Officer upon these resignations And a decrease of RMB42.2 million in recognition of share based compensation expenses using the greatest vesting method over the vesting term of the company's awards. Research and development expenses The Q1 of 2023 were RMB24.2 million as compared with RMB35 point $8,000,000 for the prior year period. As a percentage of total net revenues, research and development expenses The Q1 of 2023 decreased to 3.2% from 4% for the prior year period. The decrease was primarily attributable to the company's efforts to maintain research and development expenses at a reasonable level relative to total net revenues.

Speaker 3

Loss from operations for the Q1 of 2023 decreased by 97.7 percent to RMB7.2 million from RMB308 $8,000,000 for the prior year period. Operating loss margin was 0.9% as compared with 34.6% for the prior year period. Non GAAP loss from operations for the Q1 of 2023 decreased by 63.3 percent to $62,400,000 from $170,100,000 for the prior year period. Non GAAP operating loss margin was 8.1% as compared with 19.1% for the prior year period. Net income for the Q1 of 2023 was RMB50.7 million as compared with net loss of $291,400,000 for the prior year period.

Speaker 3

Net income margin was 6.6% as compared with Net loss margin of 32.7 percent for the prior year period. Net income attributable to Yesen's ordinary shareholders The diluted ADS for the Q1 of 2023 was RMB0.08 as compared with Net loss attributable to Yaxon ordinary shareholders per diluted ADS of RMB0.46 for the prior year period. Non GAAP net loss for the Q1 of 2023 decreased by 83.2 percent It was RMB25.8 million from RMB153.6 million for the prior year period. Non GAAP net loss margin was 3.4% as compared with 17.2% for the prior year period. Non GAAP net loss attributable to Yaxon's ordinary shareholders for diluted ADS for the Q1 of 2023 was RMB0.05 as compared with RMB0.24 for the prior year period.

Speaker 3

As of March 31, 2023, the company had cash, restricted cash and short term investments of RMB2.54 billion as compared with RMB2.63 billion as of December 31, 2022. Net cash used in operating activities for the Q1 of 2023 decreased by 80 point 6% to $20,200,000 from $104,100,000 for the prior year period.

Speaker 4

Looking at our business outlook for

Speaker 3

the Q2 of 2023, we expect our total net revenues to be between RMB 700 RMB61.4 million and RMB866.6 million, representing a year over year decline of approximately 10% to 20%. 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 and A. Operator?

Operator

Thank you. We will now begin the question and answer session. If you wish to ask your question to management in Chinese, please immediately repeat your question in English. Today's first question comes from Dustin Wei with Morgan Stanley. Please go ahead.

Speaker 4

Thanks for taking my questions. My first question related to the first Quarter sales speed versus the prior guidance. So sort of may I know what's changed for the last speed of the 1st quarter, is that because some of the better execution, for instance, like the skincare products or just the Industry environment that becoming better by end of the Q1. And the second question is related to the guidance for the next quarter, the second quarter. So is there any assumption behind it?

Speaker 4

For instance, the assumption for the June 18 sales results

Speaker 3

Well, thank you very much, Justin, for the question. Well, we beat by a pretty big margin in our Q1 Guidance because of the things that you just mentioned. First of all, the macro environment has improved quite significantly, Especially in the offline business, and we've benefited from that trend. And secondly, I think we've done a good job executing our Business strategy in Q1, which is obviously putting more focus on our skincare brands. And in the meantime, trying to execute a strategic transformation for our color cosmetics brand.

Speaker 3

And regarding your second question, we are as we've mentioned in our call script, we are currently cautiously optimistic About the future growth of our business, I think that has reflected has been reflected in our Q2 2 guidance, which is substantially better than our Q1 and Q4 last year guidance. Basically, We're now more confident about the future growth of our skincare brand and also The success of our strategic transformation of our first product diary brand, of course, the Success in the upcoming June 18 campaign is one of the factors that we considered In putting out our guidance.

Speaker 4

Thanks a lot, Donghao. So

Speaker 5

sort of for

Speaker 4

the Q2, are we a little bit counting on the good results for that June 18 to perform sort of keep up to achieve the guided number or We should say this guided number is roughly what we are seeing like from April moving into May.

Speaker 3

Well, June 18 is obviously a major event for the Q2 like every year. This year is no Different. So the success of the June 18 campaign obviously will play a critical role In achieving the guidance and also We're putting more effort in our so called daily sales, meaning the containers are Important, but the daily sales are also very critical. So back to your question April, May, June is an important month. It doesn't mean that April May, we can't afford to do nothing, which is not the case.

Speaker 3

We're going to make real efforts In every opportunity that we can have to drive our sales growth.

Speaker 4

Got it. That's helpful. And may I follow-up on in terms of the cautiously optimistic, how are we seeing in terms of the industry promotion and the competition? Like year to date, are we seeing gradually less competition, the price discount, especially online and in live streaming channel? Well, we are seeing generally similar level of the competition versus like last year.

Speaker 3

Well, from our perspective, I think the competition is intensifying. As far as we know, most of the international major brands are actually offering Greater than never discount in order to drive their sales. So As we mentioned in our call script, the macro environment is improving, meaning the total consumption, the demand is going up. But in the meantime, the competition is so intensified. So That's why we say, all right, we're only cautiously optimistic about the our business growth in the next Couple of quarters.

Speaker 4

Got it. Got it. And just lastly, in terms of Yatson's own sort of the journey to achieve the I know that each quarter will have its own dynamics, full year sort of being profitable doesn't mean that every quarter the company will achieve the But just can we have a little color like are we betting on a little more, for instance, like a major event quarter such as the second Q4 to have better profit or a lighter quarter such as the 3rd quarter, we'll see better profitability?

Speaker 3

Well, we're confident that we're on the right track to turning profitable In the near to midpoint future. And the seasonality in our business is quite obvious. Q1, Q3 are generally the 2 Low quarter and Q2 and Q4 are generally the high seasons of the year. So as you just mentioned, in Q1, the low quarter, our sales were Compared to the high season are lower, so that's why in Q1, our non GAAP, so We recorded a net loss for non GAAP measures, but we do expect our profitability Get better in our high season, like Q2 and Q4.

Speaker 4

Got it. That's all my questions. Thank you so much, Yang Zhou. Thank you.

Speaker 3

Yes. Thank you, Justin.

Operator

Our next question comes from Kasper Qiyu with CICC. Please go ahead.

Speaker 5

Hi, hello. This is Kasper from CICC. Thank you very much for taking our questions. Firstly, congratulations on the financial results that beat the market expectation. We also see many multiple So here we have 2 major questions.

Speaker 5

The first one is about our new products This year, what is our plan for releasing new products in this year? And also, is there Any strategy for us to promote the new products or introduce some new products in the June 18 campaign? Thank you.

Speaker 1

Yes, sure. Thank you for your question. In terms of our new product launch, we will share it by category. First on the skin care category, our main focus is still on the existing hero products. So for this June 18, we're still trying to promote The existing hero products of our 3 main skincare brands and we think there's still a lot of room for them to grow.

Speaker 1

At the same time, we did introduce a number of new products for skin care. So for example, Galanit, We in May, we just launched a new facial cream, the Secret Exelon's Active Cream, Featuring the finest active ingredient still algae with anti aging benefits. And also we mentioned in the call Yiflom also launched Radiant based oil. And we think for the second half of the year, there could be more product Launch for the skin care category. And then on color cosmetics, as we previously shared, We think the market will gradually recover.

Speaker 1

So we have new product pipeline mostly prepared for the 2nd half of the year, but then for Q2, we still have a few new products. For example, there is the To 5 20, like the Chinese Valentine's Day, we have the new gift box for Perfect Diary. And also, little on to introduce a new liner as well. So there are more

Speaker 5

Okay. That's very clear. Thank you. And our second question is that, could you give us some more color on the sales growth of the different Skincare Brands this year and what's the performance of the major hero products in Q1? And how do we expect the skincare sectors Profitability to evolve this year.

Speaker 5

Thank you.

Speaker 3

Yes. Well, thank you very much for your question. Well, you know what we don't We currently do not provide breakdown of the sales growth and profitability for each of our brands. But in general, Our skincare brands are growing and the growth is very strong. And with very good profitability and if you compare The gross margin level of our skincare brands with the color cosmetics brand, it's like substantially higher.

Speaker 3

So as our skin care sales of our skin care brand Consists a big portion of our total sales mix. We do expect our overall profitability to improve over time.

Speaker 5

Okay, okay. That's very clear. These are all my questions and thank you again for the very

Operator

Our next question comes from Olivia Tong with Raymond James. Please go ahead.

Speaker 6

Great. Thank you. Good morning. A couple of questions here, some have been answered. But You talked about being cautiously optimistic about the environment.

Speaker 6

Can you talk about what you're seeing both in skin and color that supports that view?

Speaker 3

Okay. Well, yes, we feel we're cautiously optimistic actually about our own business. Well, the market has recovered due to the lifting of the pandemic control policies. But again, as I said earlier, the competition is intensified. And if you look at the data From Timo and Zohyin, we can have quite different pictures.

Speaker 3

So for us, we have been able to grow our skincare brands quite But we have also met some challenges in our color cosmetics business. So, but in general, I think we're moving in the right direction, Both in terms of sales growth and profitability. So that's why we said, all right, we are cautiously optimistic about our own This is possible.

Speaker 6

Understood. Maybe just to put that in context relative to your Expectation for Q2, you obviously saw a sequential deceleration that narrowed in Q1 by more than you expected. You're guiding for 2Q at the midpoint, which assumes a similar year over year performance in Q2. So why doesn't the sequential improvement In the year over year change continue to narrow from Q1 to Q2 if the market is now several months more established and the reopening, you feel optimistic about your performance. Just trying to understand, what you're seeing in the environment and your own business that Wouldn't drive even more improvement in Q2 as events return?

Speaker 1

Yes. So actually for our guidance, if you look at the range, right, it has been sequentially narrowing down Because last time we gave a decline of 10 to 20 and the quarter before is 20 to 30 and before that is 30 to 40. So definitely on the guidance basis, it's narrowing down. And from what we see from in the market, In Q1, as we mentioned, the whole makeup industry for the first time now show a positive Growth of 6% versus single digit decline over the past 3 quarters. Yes, but it's definitely a gradual recover rather than Very abrupt recovery.

Speaker 1

And then secondly, in terms of what's behind our Q2 guidance, We think there's still going to be a decline. There are 3 major reasons. The first one is the main flagship brand, Perfect Diary, which still contributes A majority of our revenue is still under the brand strategic transformation. And as mentioned, most of the new car launches Apply for the second half of this year. So that's why for Q2, we don't think the brand will be back to the growth stage.

Speaker 1

And then secondly, there's still going to be a high base for comparison compared to the prior year period, primarily Because of the larger scale of the offline business, if we look at last year, we still have 200 close to 230 stores For prepared diary, at the end of June 2022 and then by end of March this year, we only have around 150. The offline business because of the large number of closure of stores, there's going to be a decline. And then lastly for our food care business, definitely Have a good momentum going at a faster than market average pace, but Q1 is not a Q2 is a relatively good Season for skin care, but the size is still relatively small compared to our color business. So those are the kind of reasons behind our guidance, but again, we do see a sequential narrowing down of our guidance and the year over decline, Which suggests a healthy trend that we are expecting. Got it.

Speaker 1

Thank you. My

Speaker 6

last question is Around the positioning of your mass brands versus your more prestigious brands and How you are seeing that if you could compare and contrast the recovery of your larger mass brands versus Perhaps a little bit faster growing in some of the more prestigious brands within your portfolio. Thank you.

Speaker 1

So your question is kind of the perform just wanted to clarify the performance kind of a comparison between mass versus prestige brands For the industry or for our own brand?

Speaker 6

Honestly, both, but your view on the industry and then also your specifically your brands. Thank you.

Speaker 1

Right. Okay. Yes. Okay. Got it.

Speaker 1

So we don't actually see a very clear divergent Pattern between mass and prestige segments, but instead what we see is we see each pricing here and the category, There's the brand tends to show a more clear divergence performance. But this Q1, if you look at Qumon and Douyin, the performance really diverse. Some brands grow really fast, while some of the More established brands are going on a slower pace or even have a decline. So with the intensifying competition In this industry, we do see increasing divergence of performance, given the brand's Own equity and also their operational excellence. So in our view and also I think for all brands, the long term performance is definitely driven by more like brand building and R and D investments.

Speaker 1

So that's why for us we to support a sustainable growth, we want to build long term Success? So brand building and R and D investment is definitely the most important initiatives that we are undertaking.

Operator

Thank you. This concludes today's question and answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Speaker 1

Thank you once again for joining us today. If you have any further questions, Please feel free to contact us at Yaxim directly or TDG Investor Relations. Our contact information for IR in both China and the U. S.

Operator

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.

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Yatsen Q1 2023
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