Yatsen Q2 2024 Earnings Call Transcript

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August 20, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, good day and welcome to the Yat sen 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 Mayhew, 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 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 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 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.

Speaker 1

Joining us today on the call from Yatra's senior management are Mr. Junfeng Wang, 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.

Speaker 1

In addition, a webcast replay of this conference call will be available on Yateng's Investor Relations website at ir. Yatenglobal.com. I'll now turn the call over to Mr. Junfeng Wang. Please go ahead.

Speaker 2

Thank you, Irene, and thank you everyone for participating in Yaxon's Q2 2024 Earnings Conference Quarterly. I will start with an overview of the macro environment and our key financial metrics before moving on to the strategy, trends and the quarter update. China's Beauty Industry had a tough period in the Q2. With the 20 18 shopping festival falling short of expectations. According to the adjusted data published by China's National Bureau of Statistics, Disney Retail sales rebounded in May, largely due to the early start of the 6/18 festival and the cancellation of Christmas, followed by a significant year over year decline in June.

Speaker 2

For the full second quarter, beauty retail sales decreased by 1.2% year over year, lagging the overall market. Where total retail sales of consumer goods grew by 2.7% year over year. In addition, online beauty sales remained muted. While C More and Douyin's combined beauty sales recorded year over year growth in the Q2, the growth rate was significantly lower than in the prior year period. The softer performance of China's beauty market impacted our revenue, helping us to revise our revenue guidance in July.

Speaker 2

Total net revenues for the Q2 were RMB794.5 million, reflecting a 7.5% year over year decline, in line with our revised expectations. Net revenues from our skincare brand were basically flat year over year, while combined revenues from Galanique, Doctor. Wu and Yiflon grew by 5% year over year. Paula Cosmetics brand's net revenues decreased by 11.4% year over year, primarily due to the ongoing strategy transformation of the proprietary brand. The full flagship product line, the Bio Leaf Essence is performing well as the brand continues to build its new product lineup.

Speaker 2

On the profitability side, our overall gross margin increased to 17.7% from 17.47% for the prior year period, thanks to an increased contribution from high gross margin products. Our net loss margin also narrowed by 1.9% 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% for the prior year period. The year over year increase in our non GAAP net loss margin was mainly due to higher channel traffic 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 improving our channel mix and optimizing our cost structure to reduce losses for the remainder of the year.

Speaker 2

Meanwhile, we will maintain our investments in brand building and R and D as to secure sustainable growth path. Our skincare brands delivered another steady performance during the Q2, driven not only by our hero product, but also by an increasing driven not only by our hero products, but also by an increasing diverse and extensive product portfolio. Gitlong's renewal shipment oil gained significant visibility on the Douyin platform after being featured in the remote access in the film's live streaming room, successfully boosting the product's revenue contribution. Galamic also experienced growing sales from its Vivienne TV series in vibrating Michael Musk. Our Tata Cosmetic brands also continued to develop and launch standout products in the Q2.

Speaker 2

Hermes introduced multiple Tata products, including the translucent, earring longwear cushion foundation, violet onding brought the form wire dual ended glow gel pen and the dual compact powder to market. Also, product direct Byelier Essence Lipstick recently won the Gold Award in the Beauty and Personal Care category and the 5th Tiger Roll Awards, showcasing our effective brand repositioning and appealing hero products. The 2nd quarter also included a host of brand building opportunities across our brand portfolio. In May, Yat sen participated

Speaker 3

in the

Speaker 2

2024 China Conference of Cosmetic Science and Technology, as well as the related 15th academic symposium. During the event, Survey Diary released its latest scientific research report compiled in collaboration with the China Association of Fragrance, Labor and Cosmetic Industry and the Regine Hospital of Shanghai Jiaozhong University School of Medicine. On the skincare front, Gallantica held a major brand event in Bali in collaboration with GQ featuring several experts and KOLs. Skylinex also announced swimming world champion, Ms. Zhang Yufei, as its new brand ambassador during the quarter.

Speaker 2

Furthermore, Doctor. Wu participated in the 13th Asia Dermatology Congress. The most widely attended and a representative event in the field of dermatology in Asia, focusing on Asian Skin's unique anti aging needs. Doctor. Wu collaborated with top industry experts to present the latest advancement in anti aging treatments and demonstrate its new to retinal anti wrinkle firming serine's efficacy.

Speaker 2

So before I wrap up, an update on R and D. I'm proud to share that on May 28, the Yafen Global Innovation R and D Center was officially inaugurated in Shanghai, marking China's 1st global R and D hub for national beauty brand. With nearly 4,000 square meters of R and D space, the center's successful completion and operational launch will provide robust support for Yaxan's product development and technological advancements. In conclusion, the Q2 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 optimizations, while impacting our channel mix and advancing product development.

Speaker 2

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 are renminbi amounts and all percentage changes refer to year over year changes unless otherwise noted. Total net revenues for the Q2 of 2024 decreased by 7.5% to $794,500,000 from $868,600,000 for the prior year period. The decrease was primarily due to an 11.4% year over year decrease to net revenues from Color Cosmetics brand. Gross profit for the Q2 of 2024 decreased by 5% to $609,400,000 from 600 and $41,600,000 for the prior year period.

Speaker 3

Gross margin for the Q2 of 2024 increased to 76.7% from 74.7% for the prior year period. The increase was primarily driven by an increase in sales of higher gross margin products. Total operating expenses for the Q2 of 2024 decreased by 4.1% to $744,600,000 from $776,700,000 for the prior year period. As a percentage of total net revenues, total operating expenses for the Q2 of 20.74 were 93.7% as compared with 90.5% for the prior year period. Fulfillment expenses for the Q2 of 2024 were $51,200,000 as compared with $58,300,000 for the prior year period.

Speaker 3

As a percentage of total net revenues, fulfillment expenses for the Q2 of 2024 decreased to 6.4% from 6.8% for the prior year period. The decrease was primarily due to an increase in overall average selling price of our products as well as further improvement in logistics efficiency. Selling and marketing expenses for the Q2 of 2024 were $544,700,000 as compared with $542,800,000 for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the Q2 of 2024 increased to 68 0.6% from 63.2% for the prior year period. The increase was primarily due to increased investments in the Celine platform in line with the growing revenue contribution from ZOE IN as well as our investments in new product launches and building brand equity across our portfolio.

Speaker 3

General and administrative expenses for the Q2 of 2024 were $119,100,000 as compared with $149,700,000 for the prior year period. As a percentage of total net revenues, general and administrative expenses for the Q2 of 2024 decreased to 15% from 17.4% for the prior year period. The decrease was primarily attributable to a reduction in share based compensation as a result of the reversal of recognized service compensation expenses due to the focus of uninvested awards granted to certain former employees. Research and development expenses for the Q2 of 2024 were $29,700,000 as compared with $25,900,000 for the prior year period. As a percentage of total net revenue, the 3rd time development expenses for the Q2 of 2024 increased to 3.7% from 3% for the prior year period.

Speaker 3

The increase was primarily attributable to the commencement of operations of our Global Innovation R and D Center in Shanghai on May 28, 2024. Loss from operations for the Q2 of 2024 was $135,200,000 as compared with $135,100,000 dollars for the prior year period. Operating loss margin was 17% as compared with 16.7% for the prior year period. Non GAAP loss from operations for the Q2 of 2024 was $111,900,000 as compared with $74,600,000 for the prior year period. Non GAAP operating loss margin was 14 point 1% as compared with 8.7% for the prior year period.

Speaker 3

Net loss for the Q2 of 2024 decreased by 21.2% to 85,500,000 dollars from $108,500,000 for the prior year period. Net loss margin was 10.8% as compared with 12.6% for the prior year period. Net loss attributable to Yatin's ordinary shareholders per diluted CDOs for the Q2 of 2024 was RMB0.77 as compared with RMB0. 9 9 for the prior year period. Non GAAP net loss for the Q2 of 2024 was 74,900,000 as compared with 46,300,000 for the prior year period.

Speaker 3

Non GAAP net loss margin was 9.4% as compared with 5.4% for the prior year period. Non GAAP net loss attributable to Yatin's ordinary shareholder for diluted ADS for the Q2 of 2024 was RMB0.67 as compared with RMB0.41 for the prior year period. As of June 30, 2024, we had cash, restricted cash and short term investments of RMB 1,580,000,000 dollars as compared with $2,080,000,000 as of December 31, 2023. Net cash used in operating activities for the Q2 of 2024 was 148 $200,000 as compared with $14,400,000 for the prior year period. Looking at our business outlook for the Q3 of 2024, we expect our total net revenues to be between $646,300,000 $718,100,000 representing a year over year decrease of approximately 0% to 10%.

Speaker 3

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

Speaker 4

Thank you for taking my question. This is Maggie Huang from CICC. I have two questions. The first question is that what is our plan for product development and channel expansion for Kyla Cosmetics and skincare brands respectively? And my second question is that, what is our promotion strategy in the second half of the year and how to balance our revenue growth and profitability?

Speaker 4

That's my question. Thank you.

Speaker 1

Thank you, Maggie, for the question. So for the first question on plan for cloud development channel strategy. So currently our strategy is to fine tune 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 skin care side. So we continue to have a number of new products, for example, for Galenic and Doctor.

Speaker 1

Wu Zhi will have new very active and functional skin care products launched in later half this year. And also on the color side, we have a list of new pipelines including new lipstick and foundation products for perfect diary and lipo allergy. And then in terms of channels, we have been talking about expanding into more 2 d channels on top of currently very high concentration of 2 d channels. So by increasing the concentration or the weighting of the 2D channels, we will have more room for growth and also a better profitability mix in future.

Speaker 3

Okay. For your second question, the promotion strategy for the second half of the year, I don't think there will be substantive changes in terms of promotion strategy. We're going to have February 11 and a few other events until the end of the from now until the end of the year. So we will primarily focus on optimizing our channel mix and product mix as Irene has just mentioned. And in terms of revenue profitability, balance, I think at the second half of the year, we're going to be focusing more on cutting loss and achieving profitability as soon as possible.

Speaker 3

In terms of revenue, we're going to be more aggressive in terms of new product development and channel mix, so that we can grow our revenue as fast as possible. But in the meantime, we're going to be focusing on achieving a profitable revenue growth and be profitable as soon as possible.

Speaker 4

Okay. Got it. That's very helpful. Thank you very much. And I have no more questions.

Speaker 3

Thank you.

Operator

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to management for 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 Yatin directly or PSL's Financial Communications. Our contact 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

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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Earnings Conference Call
Yatsen Q2 2024
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