Yatsen - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, good day, and welcome to the Yatsen Q2 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 (VP, Head of Strategic Investment and Capital Markets)

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 liabilities, 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 a 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'll now turn the call over to Mr. Jinfeng Huang. Please go ahead.

Jinfeng Huang (Founder, Chairman and CEO)

Thank you, Irene, and thank you everyone for participating in Yatsen's Q2 2024 earnings conference call today. I will start with an overview of the macro environment and our key financial metrics before moving on to the strategy, brand, and quarter update. China's beauty industry had a sluggish Q2, with the 6.18 shopping festival falling short of expectations. According to the adjusted data published by China's National Bureau of Statistics, beauty retail sales rebounded in May, largely due to the early start of the 6.18 festival and the cancellation of presales, followed by a significant year-over-year decline in June. For the full Q2, 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 Tmall 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, prompting us to revise our revenue guidance in July. Total net revenues for the Q2 were CNY 794.5 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 Galénic, Dr. Wu, and Eve Lom grew by 5% year over year. Color cosmetics brands net revenues increased by 11.4% year over year, primarily due to the ongoing strategy transformation of the Perfect Diary brand.

The soft flagship product line, the Bio-Lip Essence is performing well as the brand continues to build its new product lineup. 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 percentage points 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 investment in marketing events to strengthen brand equity in the Q2.

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. Meanwhile, we will maintain our investments in brand building and R&D and ensure sustainable growth path. Our skincare brand delivered another steady performance during the Q2, driven not only by our hero product, but also by an increasingly diverse and expansive product portfolio. Eve Lom's Renewal Treatment Oil gained significant visibility on the Douyin platform after being featured in the renowned KOL live streaming room, successfully boosting the product's revenue contribution. Galénic also experienced growing sales from its Vivifying Micro-Capsule Mask. Our color cosmetic brands also continued to develop and launch standout products in the Q2.

So we introduced multiple power products, including a translucent blurring long-wear cushion foundation, while Little Ondine brought the Born Wild dual-ended brow gel pen and the dual compact powder to market. Also, Bio-Lip lipstick recently won the Gold Award in the beauty and personal care category at the Big Beauty Role Awards, showcasing our effective brand repositioning and appealing hero product. The Q2 also included a host of brand building opportunities across our brand portfolio. In May, Yatsen participated in the twenty twenty-four China Conference of Cosmetic Science and Technology, as well as the related fifteenth Academic Symposium. During the event, DR.WU released its latest scientific research report, compiled in collaboration with the China Association of Fragrance, Flavor, and Cosmetic Industry, and the Ruijin Hospital of Shanghai Jiao Tong University School of Medicine.

On the skincare front, Galénic held a major brand event in Bali in collaboration with GQ, featuring several experts and KOLs. Galénic also announced swimming world champion, Zhang Yufei, as its new brand ambassador during the quarter. Furthermore, Dr. Wu participated in the thirteenth Asia Dermatological Congress, the most widely attended and representative event in the field of dermatology in Asia, focusing on Asian skin's unique anti-aging needs. Dr. Wu collaborated with top industry experts to present the latest advancement in anti-aging treatment, and to demonstrate its new retinol anti-wrinkle firming serum's efficacy. So before I wrap up, an update on R&D. I'm proud to share that on May the twenty-eighth, the Yatsen Global Innovation R&D Center was officially inaugurated in Shanghai, marking China's first global R&D hub for a national beauty brand.

With nearly 4,000 square meters of R&D space, the center's successful completion and operational launch will provide robust support for Yatsen's product development and technological advancement. 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 enhancing our channel mix and advancing product development. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.

Donghao Yang (CFO and Director)

Thank you, David, and hello, everyone. Before I get started, I would like to clarify that our financial numbers presented today are in RMB, 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 RMB 794.5 million, from RMB 858.6 million for the prior year period. The decrease was primarily due to an 11.4% year-over-year decrease in net revenues from color cosmetics brands. Gross profit for the Q2 of 2024 decreased by 5% to RMB 609.4 million from RMB 641.6 million for the prior year period.

Gross margin for the Q2 of 2024 decreased 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 RMB 744.6 million, from RMB 776.7 million for the prior year period. As a percentage of total net revenues, total operating expenses for the Q2 of 2024 were 93.7%, as compared with 90.5% for the prior year period. Fulfillment expenses for the Q2 of 2024 were RMB 61.2 million, as compared with RMB 68.3 million for the prior year period.

As a percentage of total net revenues? So 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 the overall average selling price of our products, as well as further improvements in logistics efficiency. Selling and marketing expenses for the Q2 of 2024 were RMB 544.7 million, as compared with RMB 542.8 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the Q2 of 2024 increased to 68.6% from 63.2% for 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 investment in new product launches and building brand equity across our portfolio. General and administrative expenses for the Q2 of 2024 were RMB 119.1 million, as compared with RMB 149.7 million for the prior year period. As a percentage of total net revenue, 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 share-based compensation expenses due to the forfeiture of unvested awards granted to certain former employees.

Research and development expenses for the Q2 of 2024 were RMB 29.7 million, as compared with RMB 25.9 million for the prior year period. As a percentage of total net revenue, research and development expenses for the Q2 of 2024 increased to 3.7% from 3% for the prior year period. The increase was primarily attributable to the commencement of operations of our Global Innovation R&D Center in Shanghai on May twenty-eighth of 2024. Loss from operations for the Q2 of 2024 was RMB 135.2 million, as compared with RMB 135.1 million 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 two thousand and twenty-four was 111.9 million, as compared with 74.6 million for the prior year period. Non-GAAP operating loss margin was 14.1%, as compared with 8.7% for the prior year period. Net loss for the Q2 of two thousand and twenty-four decreased by 21.2% to 85.5 million from 108.5 million 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 Yatsen ordinary shareholders per diluted EPS for the Q2 of two thousand and twenty-four was 0.77 RMB, as compared with 0.99 RMB for the prior year period.

Non-GAAP net loss for the Q2 of two thousand and twenty-four was CNY 74.9 million, as compared with CNY 46.3 million for the prior year period. Non-GAAP net loss margin was 9.4%, as compared with 5.4% for the prior year period. Non-GAAP net loss attributable to Yatsen ordinary shareholder for diluted EPS for the Q2 of two thousand and twenty-four was CNY 0.67, as compared with CNY 0.41 for the prior year period. As of June thirtieth, two thousand and twenty-four, we had cash, restricted cash, and short-term investments of CNY 1.58 billion, as compared with CNY 2.08 billion as of December thirty-first, two thousand and twenty-three.

Net cash used in operating activities for the Q2 of 2024 was CNY 148.2 million, as compared with CNY 14.4 million for the prior year period. Looking at our business outlook for the Q3 of 2024, we expect our total net revenues to be between CNY 646.3 million and CNY 718.1 million, representing a year-over-year decrease of approximately 0% to 10%. 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 (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And if you do wish to ask, if you, for the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. And once again, that's star then one if you have a question. Our first question comes from Maggie Huang with CICC. Please go ahead.

Manqi Huang (Analyst)

Thank you. Thank you for 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 color, cosmetic and skincare brands, respectively? And my second question is that, what is our promotion strategy in the H2 of the year, and how to balance our revenue growth and profitability? That's my question. Thank you.

Irene Lyu (VP, Head of Strategic Investment and Capital Markets)

Thank you, Maggie, for the question. For the first question, our plan for our product development channel strategy. While currently our strategy is, indeed, to fine-tune our product mix and also channel mix. On the product side, we have a very robust new product pipeline for the H2 of the year for both our color and skincare side. So we continue to have a number of new products, for example, for Galénic, and Dr. Wu. They will have new, very active and functional skincare products launched in later half this year. And also on the color side, we have a list of new pipelines, including new lipsticks and foundation products, you know, for Perfect Diary and Little Ondine.

And then in terms of channels, we have been talking about expanding into more, To-B channels on top of currently very high concentration of C channels. So by increasing the concentration or the weighting of the C channels, we'll have more, room for growth and also a better profitability, mix in future.

Donghao Yang (CFO and Director)

Okay, for the second question, the promotion strategy for the H2 of the year. I don't think there will be substantive changes in terms of promotion strategies. You know, we're gonna have Double Eleven and a few other events 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 at the H2 of the year, we're gonna be focusing more on cutting loss and you know, achieving profitability as soon as possible.

In terms of revenue, you know, we're gonna 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, you know, we're gonna be focusing on achieving a profitable revenue growth and be profitable, you know, as soon as possible.

Manqi Huang (Analyst)

Okay, got it. That's very helpful. Thank you very much, and I have no more questions.

Donghao Yang (CFO and Director)

Thank you.

Operator (participant)

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

Irene Lyu (VP, Head of Strategic Investment and Capital Markets)

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

Operator (participant)

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.