Yatsen Holding Ltd

NYSE:YSG

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Yatsen First 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.

[Irene Lyu, executive]

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 that 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 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 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, executive]

Thank you, Irene, and thank you, everyone, for participating in Yatsen's First Quarter 2024 Earnings Conference Call today. I will start by providing a macro overview before reviewing our strategy and the progress we have made across our segments and the brands. China's beauty industry continues to grow moderately in the first quarter of 2024. According to the adjusted data published by the National Bureau of Statistics of China, total retail sales of consumer group grew by 4.7% year-over-year in the first quarter of 2024, while total beauty retail sales increased by 3.3% year-over-year.

Online sales trends remain mixed, beauty sales on Douyin recorded another quarter of double-digit year-over-year growth, while sales on Tmall remains largely flat year-over-year in the first quarter. While the first quarter is transitionally a low season in the beauty industry, we still managed to maintain the growth category that started last quarter. As our 5-year strategy transformation plan focuses, we plan to strengthen our market position through superior products and strong brand equity across our brands while rapidly optimizing our long-term cost structure.

For the first quarter, total net revenues were RMB 773.4 million, growing 1% year-over-year, in line with guidance. Net revenues from our Color Cosmetics brands increased 3.2% year-over-year, indicating progress in Perfect Diary's brand positioning as well as continued growth of Little Ondine and Pink Bear. Pink Bear Brand's revenues increased by 0.1% year-over-year. Combined revenues from our clinical and premium skin care brands, Galénic, DR.WU and Eve Lom rose 6.4% year-over-year. Gross margin improved to 77.7% from 74.3% for the prior year period.

Hence, we had increased contribution from higher gross margin products. Our net loss margin was 15.1% compared with the net income margin of 6.6% for the prior year period, primarily due to the exceptionally high base resulting from the reversal of recognized share-based compensation expenses of RMB 109.4 million related to the forfeiture of unvested awards granted to former executive officers.

Our non-GAAP net loss margin was 10.8% compared with 3.4% for the prior year period, attributable to increased investment in marketing activities and a shift in our channel mix with the growing contribution from Douyin.

Next, a brand and product update. For our skincare segment, our first quarter initiatives include brand building events and product launches in preparation for the June 18 shopping festival in the second quarter. Galénic and Eve Lom presented their latest R&D results and the products at the fourth China International Consumer Products Expo in April, where Galénic launched its Couture Secret d'Excellence. The essence and the Eve Lom launched its daily rejuvenating cream.

Furthermore, DR.WU launched several new products, including its tri-retinoid anti-wrinkle firming serum and the Suncare UV-protect whitening lotion. In the Color Cosmetics segment, Perfect Diary continues to realize its Biolip Essence collections potential. The brand ranked #2 in the lipstick category among the listed brands in terms of retail sales value on Tmall and Douyin combined for the first quarter of 2024. This Biolip Essence Matte lipstick launched earlier this year also delivered a good performance during the March 8 shopping festival.

Our 2 other major Color Cosmetics brands, Little Ondine and Pink Bear, remains on a solid ground trend. Pink Bear launched its Sugar Glossy Lipstick during the quarter and was honored at the BeautyInc Awards as the newcomer of the year. Looking ahead, both Little Ondine and Pink Bear, we will continue to explore new color change and [indiscernible] to pursue sustainable growth pattern.

Next R&D. Our R&D expenses as a percentage of revenue increased to 3.6% from 3.2% for the prior year period. We continue to push the boundaries afar, recently hosting the first Galénic Dermatology Research Fund's annual research summit in France. Renowned dermatologists and experts from around the global gathered to discuss the latest research in Skincare and present project for final review. Also, DR.WU officially announced the launch of the second DR.WU Acne Research Fund project in March, and we'll begin soliciting new acne research topics in the first half of 2024.

In conclusion, we were pleased to maintain our growth trend this quarter, and we'll stay focused on sustainable growth and brand building as we move ahead. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.

[Donghao Yang, executive]

Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in RMB amounts and all percentage changes refers to year-over-year changes unless otherwise noted. Total net revenues for the first quarter of 2024 increased by 1% to RMB 773.4 million, from RMB 765.4 million for the prior year period. The increase was primarily attributable to a 3.2% year-over-year increase in net revenues from color cosmetics plant combined with a 0.1% year-over-year increase in net revenues from skincare brands.

Gross profit for the first quarter of 2024 increased by 5.7% to RMB 600.9 million from RMB 568.7 million for the prior year period. Gross margin for the first quarter of 2024 increased to 77.7% from 74.3% 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 first quarter of 2024 increased by 31.7% to RMB 758.7 million from RMB 575.9 million for the prior year period.

As a percentage of total net revenues, total operating expenses for the first quarter of 2024 were 98.1% as compared with 75.2% for the prior year period. Fulfillment expenses for the first quarter of 2024 were RMB 51.4 million as compared with RMB 61.9 million for the prior year period. As a percentage of total net revenue, fulfillment expenses for the fourth quarter of 2024 decreased to 6.7% from 6.8% for the prior year period.

Selling and marketing expenses for the first quarter of 2024 were RMB 539.2 million as compared with RMB 459 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the first quarter of 2024 increased to 69.7% from 60% to the prior year period. The increase was primarily due to increased investment in the Douyin platform in line with the growing revenue contribution from Douyin as well as our investments in new product launches and building brand equity across our portfolio.

General and administrative expenses for the first quarter of 2024 were RMB 140.1 million as compared with RMB 40.7 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the first quarter of 2024 increased to 18.1% from 5.3% for the prior year period. The increase was primarily attributable with exceptionally low general and administrative expenses reported in the prior year period as a result of the reversal of recognized share-based compensation expenses of RMB 109.4 million due to the forfeiture of unvested awards granted to our former Chief Technology Officer upon his resignation.

Research and development expenses for the first quarter of 2024 were RMB 27.9 million as compared with RMB 24.2 million for the prior year period. As a percentage of total net revenues, research and development expenses for the first quarter of 2024 increased to 3.6% from 3.2% for the prior year period.

The increase was primarily attributable to higher personnel costs reflecting our commitment to enhancing our research and development capabilities. Loss from operations for the first quarter of 2024 was RMB 157.7 million as compared with RMB 7.2 million for the prior year period. Operating loss margin was 20.4% as compared with 0.9% for the prior year period. Non-GAAP loss from operations for the first quarter of 2024 was RMB 107 million as compared with RMB 62.4 million for the prior year period.

Non-GAAP operating loss margin was 13.3% as compared with 8.1% for the prior year period. Net loss for the first quarter of 2024 was RMB 124.9 million as compared with net income of RMB 50.7 million for the prior year period. Net loss margin was 16.1%, as compared with net income margin of 6.6% for the prior year period.

Net loss attributable to Yatsen's ordinary shareholders for diluted ADS for the first quarter of 2024 was RMB 1.16 as compared with net income attributable to Yatsen's ordinary shareholders to diluted ADS of RMB 0.42 for the prior year period. Non-GAAP net loss for the first quarter of 2024 was RMB 83.8 million as compared with RMB 25.8 million for the prior year period. Non-GAAP net loss margin was 10.8% as compared with 3.4% for the prior year period.

Non-GAAP net loss attributable to Yatsen's ordinary shareholders for diluted ADS for the first quarter of 2024 was RMB 0.78 as compared with RMB 0.24 for the prior year period. As of March 31, 2024, we had cash, restricted cash and full-term investments of RMB 1.89 billion as compared with RMB 2.08 billion as of December 31, 2023.

Net cash used in operating activities for the first quarter of 2024 was RMB 121.8 million as compared with RMB 20.2 million for the prior year period. Looking at our business outlook for the second quarter of 2024, we expect our total net revenue to be between RMB 858.6 million and RMB 901.5 million, representing a year-over-year increase of approximately 0% to 5%. 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. Operator?

[Operator]

[Operator Instructions] The first question today comes from Maggie Huang with CICC.

[Maggie Luyao Huang, analyst]

This is Maggie Huang from CICC. I have 2 questions. My first question is about our strategy for the coming June 18th shopping festival. And also, do we have a package growth rate, respectively, for our Skincare and also Color Cosmetics brands. That's my first question.

And my second question is regarding our selling and marketing expenses ratio. The management had mentioned that we increased our investment in brand equity building in Q1. So what is our plan to allocate our expenses between such kind of branding and online traffic acquisition. And how should we expect the change of this expense ratio for the whole year? That's my 2 questions. Thank you.

[Donghao Yang, executive]

Thank you for your questions. Let me try to answer your first one. Well, in the last 1 or 2 years, the major shopping festivals -- online shopping festivals in China, their influence has gradually come down. Brand owners or manufacturers like us are relying less and less on those shopping festivals in terms of our sales growth.

But that said, we're still making our efforts to try to sell more of a product during those festivals. And this year, the 6/18 festival actually, it's a bit different from the previous years. So this year, the festival started on May 20, but it's going to last a lot longer than the previous years. So it's so hard for us to tell what the performance ourselves on that festival this year will be.

It's going to take us some more time to be able to tell that. And you also asked about our growth rate forecast for Skincare and Color Cosmetics. Unfortunately, we're not providing the kind of growth forecast except for our guidance for the sales for the second quarter.

And your second question, our selling and marketing expenses are split between branding and traffic. Well, it really depends on how our, actually new product launch performed. So we're currently trying to control or make better use of our selling and marketing expenses. And as you can see, Q1 in our selling and marketing expenses were a bit higher compared to the previous quarters. And we are actually taking measures to try to take it down and to make sure that we would become profitable in the near to midterm.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Irene Lyu, executive]

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

[Operator]

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