Yatsen Q2 2023 Earnings Call Transcript

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August 22, 2023

There are 5 speakers on the call.

Operator

Ladies and gentlemen, good day and welcome to the Yatson Second Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Irene Lu, 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 from liability as established by 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 that could affect Yatin'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 its forward looking information, except as required by law. During today's call, management will also discuss certain non GAAP financial measures for comparison 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 Yatin's senior management are Mr.

Speaker 1

Jingbo 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 and A session. As a reminder, This conference is being recorded. In addition, a webcast replay of this conference call will be available on Yatra's Investor Relations website at ir.

Speaker 1

Yasenglobal.com. I'll now turn the call over to Mr. Jingfeng Huong, please go ahead, David.

Speaker 2

Thank you, Irene, Thank you everyone for participating in YASM's Q2 2023 earnings conference call today. The beauty industry experienced a modest post COVID recovery during the Q2 of 2023. According to the National Bureau of Statistics of China, total retail sales of consumer goods grew by 10.7% year over year, while declining by 2% quarter over quarter. More specifically, beauty retail sales rose by 11.5% year over year and 0.8% quarter over quarter in the 2nd quarter. The year over year growth was particularly was partially affected by the prior year period's low base, while quarter over quarter growth indicated a mild recovery pattern during the quarter.

Speaker 2

Online beauty sales also rebounded Demonstrated by the beauty sales growth on Tmall and Douyin on both a yearly and quarterly basis, mainly driven by promotion activities during the June 18 Shopping Festival. Against the industry backdrop, We continued to focus on rebalancing our category mix, expanding gross margins and improving net margins through enhanced operational efficiency. Our business transformation remained largely on track, Evidenced by our 2nd quarter revenue beating the guidance we provided previously. Net revenues from our skincare brands increased by 2.3% year over year to RMB $325,200,000 Within skincare, our clinical and premium brands delivered another solid performance with Galenic, Dotawu and Yiflom recording 13.3% year over year growth in combined net revenues. With respect to revenue contribution, Our skincare brands accounted for 37.9% of total net revenues in the 2nd quarter, up from 33.4% in the prior year period.

Speaker 2

Revenues from Color Cosmetics Declined in the Q2 as Perfect Diary continued to undergo a brand transformation. Furthermore, the number of Public Dyer's offline stores totaled 136 As of the end of the second quarter compared with 228 a year ago, As a result of targeted closures of underperforming offline stores, Our product mix optimization as well as our disciplined approach to discounts and promotions Continued to drive improvements in our overall gross margin, which has demonstrated A clear upward trend over the past 4 quarters. We also improved Our net margin year over year, reflecting our effective cost reduction and channel optimization strategies. Turning to our products. Beyond our investments in the existing hero products, we also introduced New skincare products during the quarter.

Speaker 2

One highlight was Galanique's Secret D'Agilent Active Cream, a new anti aging product enhanced with our patent Snow Algae Peptide to promote collagen reduction. Additionally, Several of our existing hero products received recognition this quarter with Galanix Antioxidant number 1, VC Serum ranking number 1 in both Tmall, Austin Lee's live stream Premium Brightening Styrene category and Douyin's premium Styrene category during the June 18th shopping festival. Yiflon also turned in a solid performance during June 2018, With the Iflon cleanser coming in first among premium cleanser products on Tmall. For our color cosmetics brands, we continued to advance product development, Releasing high quality products with strengthened functional features. During the Q2, PuffyDiary launched its stunning holiday collection tailored for summerwear as well as translucent blurring longwear foundation, which delivers a long lasting flawless finish.

Speaker 2

We also rolled out new and upgraded products for Little Awning and Pin Bear, Driving growth in both brands. Little on Game made the Tmall June 18th Top 100 best selling list with its brand new 3 d shadow and highlighter eyeliners, While Pin Bear launched its new jelly lipstick, brand building remains a critical component Participated in the World Congress of Dermatology in Singapore, raising this brand awareness among an internationally renowned group of clinicians, scientists and industry professionals. Doctor. Wu also celebrated its 20th anniversary this summer, a testament to its products enduring popularity and the strength of its brand equity. Moving on to our recent R and D achievements.

Speaker 2

Our R and D expenses reached 3% As a percentage of total net revenues, reflecting our continuous efforts in scientific advancement and product development. We are pleased to report that in June, we took our partnership with Regine Hospital, An affiliate of the Shanghai Jiaotong University School of Medicine to the next level with the official unveiling of the Yatin Regine Medical Skincare Joint Laboratory in Shanghai. We formed this alliance with Regine Hospital to jointly conduct research on skin disease Mechanisms and development, efficiency, skin care products. Leveraging Yesen's deep experience and strong capabilities as well as Ruijin's remarkable achievements in resource integration across the beauty industry, educational and research institutions and hospitals. We look forward to advancing the future of skincare together.

Speaker 2

Furthermore, Operations of the Guangzhou Manufacturing Hub we established with Cosmis officially commenced on August 11, Enabling further optimization of our supply chain, powered by these developments and our enhanced capabilities, we are confident about the prospect to successfully explore and launch more hero products in the future. Before I conclude, I would like to mention that we recently released Our 2022 Environmental, Social and Governance or ESG report marking our 2nd consecutive year of ESG reporting. We are proud to provide A comprehensive review of our ESG initiatives and developments, including corporate governance, Research and development, employees' rights protection, human capital development, environmental sustainability and social responsibility among others. We are grateful for the opportunity to demonstrate our commitment To creating a better society by fulfilling our corporate social responsibilities. To summarize, China's beauty market is still finding its footing in the post pandemic era.

Speaker 2

And we understand that the recovery pattern of consumer demand remains uncertain. However, our strategy transformation is proceeding as planned and our portfolio of strong distinctive brands as well as our sufficient financial resources will empower us to adapt with flexibility. We will continue to build our brands across the broad, elevating our skincare brands growth, while positioning our color cosmetic brands for success in the future. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. 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 Our renminbi amounts and all percentage changes refer to year over year changes unless otherwise noted. Total net revenues for the Q2 of 2023 decreased by 9.8% to RMB 858,600,000 from RMB951.8 million for the prior year period. The decrease was primarily attributable to a 16.6% year over year decrease in net revenues from color cosmetics brands, partially offset by a 2.3% year over year increase in net revenues from skincare brands. Gross profit for the Q2 of 2023 increased by 7.2% to RMB641,600,000 from RMB598,300,000 for the prior year period.

Speaker 3

Gross margin for the Q2 of 2023 increased to 74.7% from 62.9% for the prior year period. The increase was driven by: 1st, increasing sales of higher gross margin products from skincare brands 2nd, More disciplined pricing and discount policy and third, cost optimization across all of our brand portfolios. Total operating expenses for the Q2 of 2023 decreased by 11.3% to RMB776.7 million from RMB875.3 million for the prior year period. As a percentage of total net revenues, total operating expenses for the Q2 of 2023 were 90 point 5% as compared with 92.0% for the prior year period. Fulfillment expenses for the Q2 of 2023 were RMB58,300,000 as compared with RMB69.7 million for the prior year period.

Speaker 3

As a percentage of total net revenues, fulfillment expenses For the Q2 of 2023 decreased to 6.8% from 7.3% 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 our warehousing and handling operations, selling and marketing expenses for the Q2 of 2023 were RMB 542.8 million as compared with RMB625,700,000 for the prior year period. As a percentage of total net revenues, Selling and marketing expenses for the Q2 of 2023 decreased to 63 related to the decrease in selling and marketing headcount, partially offset by an increase in online advertising expenses. General and administrative expenses for the Q2 of 2023 were $149,700,000 as compared with $147,800,000 for the prior year period. As a percentage of total net revenues, general and administrative expenses for the Q2 of 2023 increased to 17.4% from 15.5% for the prior year period.

Speaker 3

The increase was primarily attributable to an increase in share based compensation combined with The deleveraging effect of lower total net revenues in the Q2 of 2023, Research and development expenses for the Q2 of 2023 were 25 point RMB9 1,000,000 as compared with RMB32 1,000,000 for the prior year period. As a percentage of total net revenues, Research and development expenses for the Q2 of 2023 decreased to 3% from 3 point 4% 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 revenues. Loss from operations for the Q2 of 2023 decreased by 51.2 percent to 135,100,000 from RMB277 1,000,000 for the prior year period. Operating loss margin was 15.7% as compared with 29.1% for the prior year period.

Speaker 3

Non GAAP loss from operations The Q2 of 2023 decreased by 65.8 percent to RMB74.6 million from CNY218.2 million for the prior year period. Non GAAP operating loss margin was 8.7% as compared with 22.9% for the prior year period. Net loss for the Q2 of 2023 decreased by 59% to $108,500,000 from 200 and CAD64,300,000 for the prior year period. Net loss margin was 12.6% as compared with 27.8% for the prior year period. Net loss attributable to Yat sen's ordinary shareholders per diluted ADS for the Q2 of 2023 was RMB0.2 as compared with RMB0.43 for the prior year period.

Speaker 3

Non GAAP net loss for the Q2 of 2023 decreased by 77.7 percent to $46,300,000 from $207,500,000 for the prior year period. Non GAAP net loss margin was 5.4% as compared with 21.8% for the prior year period. Non GAAP net loss attributable to Jetson's ordinary shareholders per diluted ADS The Q2 of 2023 was RMB0.08 as compared with RMB0.34 for the prior year period. As of June 30, 2023, we had cash, restricted cash and short term investments of RMB2.57 billion as compared with RMB2.6 RMB3 1,000,000,000 as of December 31, 2022. Net cash used in operating activities For the Q2 of 2023 was RMB14.4 million compared with net cash generated from operating cash operating activities of RMB111.9 million for the prior year period.

Speaker 3

Looking at our business outlook for the Q3 of 2023, we expect our total net revenues to be between $686,300,000 $772,700,000 RMB1 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 for Q and A.

Operator

Thank you. We will now begin the question and answer session. For the benefit of all participants on today's call, if you wish to ask your questions First question today comes from China Lin with CICC. Please go ahead.

Speaker 4

Thanks for taking my questions. This is Tianyi from CICC and I've got two questions. The first question is regarding profitability. So are we still on track with the full year profit? Looking ahead, what are the key drivers that will boost our profitability in the second half of the year?

Speaker 4

And this is for the first question. And about the second question, it's regarding growth of Color cosmetics, are we seeing the launch of Perfect Diary's new foundation product? And how has the sales performance been so far? Could you provide insight into the upcoming strategies for color cosmetics in the second half of the year? And is there any chance that Atala Cosmetics return to growth in the second half of the year?

Speaker 4

That's my question. Thank you.

Speaker 3

Well, thank you very much for your questions. For your first question on profitability, I think we're still on the right track To improve continually improve our profitability over time, if you compare This quarter with the same quarter last year, the improvement on profitability has been very significant. And your second question, PD-five, well, we've just launched the foundation product for Proprietary, it's still too early for us to tell You know how the new product will perform, but for the Second half of the year, especially towards the end of Q3 and beginning of Q4, we're going to launch a major Brian, upgrade campaign and new product launch for Perfect Diary. We are making Preparation for that major campaign, but it's still too early to tell how the campaign will turn out. And there, Of course, there will be some uncertainty around the success of that campaign, but we are very confident that We can we will try our best and hopefully we can make it a huge success.

Speaker 4

Got it. Thank you very much. I have no more questions.

Speaker 3

Yes. Thank

Operator

The next question comes from Vivi Heng with Morgan Stanley. Please go ahead.

Speaker 4

This is Vivi for Morgan Stanley, so I have two questions. Firstly, it's on the industry part. So could management give us some color on what is the industry Competition like as we enter into the Q3, like how is it like in terms of the competition, especially on online and live streaming channels? And I know that this might be a little bit far, but how should we expect on like the Double 11 Festival this year? Do you see like if there is any possibility that a promotional level would like to intensify on a year on year basis or maybe just compare to 6/18 festival this year?

Speaker 4

Secondly, I would like to ask on our offline store strategy. Do we expect further store

Speaker 1

Yes. Thanks, Lily, for the question. So on the first question in terms of the industry outlook and the competition landscape, So what we see is we saw a modest recovery pattern during the Q2, even though the year over year growth rate was good, but it was a low base last Given the lockdown of Shanghai and other cities in Q2 last year, if you look at the quarter over quarter growth pattern, It's actually largely flat, so which implies a recovery, but a relatively mild recovery. And within the beauty market, Different segments are all growing. Even within current economic condition, the premium segment is still growing, but at a slightly lower rate.

Speaker 1

So we do expect that the China beauty market still have headroom to grow, given the per capita beauty spending is still relatively low compared to other Mature markets. And then looking at competition, over time, we see we have seen that competition has been intensifying and there are actually divergent performance among different categories and different brands. And one of the very obvious trend is brands with strong product efficiencies and brand equities are actually outperforming compared to others. And also consumer behavior has shifted a little bit From previous impulsive buying habits towards more rational behavior, which also kind of demonstrates that Followers very strong efficacy and functional value actually probably attract more consumer attention and buying. So those are some of the key trends that we have witnessed in the industry.

Speaker 3

Yes. And your second question, in the past 2 years, we've closed around 150 stores of our offline stores and most of which were obviously under And going forward, I think we will continue to Optimize some of our stores, but I don't think that we're going to close A substantial number of stores down the road, but optimization will It will always be our strategy. Thank you.

Speaker 4

Got it. That is very helpful. Thank you so much.

Speaker 3

Thank

Operator

you. And that concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Speaker 1

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Yat sen directly We are beyond Investor Relations. Our content information for IR in both China and the U. S. Can be found in today's press release.

Speaker 1

Thank you, and have a great day.

Operator

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

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Earnings Conference Call
Yatsen Q2 2023
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