Yatsen Holding Limited (NYSE:YSG) Q1 2024 Earnings Call Transcript

Yatsen Holding Limited (NYSE:YSG) Q1 2024 Earnings Call Transcript May 22, 2024

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: 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 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’ll now turn the call over to Mr. Jinfeng Huang. Please go ahead, sir.

Jinfeng Huang: 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 brands. China’s beauty industry continued to grow moderately in the first quarter of 2024. According to the [adjusted] (ph) data published by the National Bureau of Statistics of China, total retail sales of consumer goods 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 trend remains mixed. Beauty sales on Douyin recorded another quarter of double-digit year-over-year growth, while sales on Tmall remained largely flat year-over-year in the first quarter.

While the first quarter is traditionally a low season in the beauty industry, we still managed to maintain the growth trajectory that started last quarter. As our five-year strategy transformation plan progresses, we plan to strengthen our market position through superior products and strong brand equity across our brands while gradually optimizing our long-term cost structure. For the first quarter, total net revenues were RMB773.4 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 repositioning as well as continued growth of Little Ondine and Pink Bear. Skincare Brands revenues increased by 0.1% year-over-year. Combined revenues from our clinical and premium Skincare 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, thanks to an 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 RMB109.4 million related to the forfeit of unvested awards granted to a former executive officer. 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 a brand building event and the 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 products at the Fourth China International Consumer Product Expo in April, where Galénic launched its Couture Secret d’Excellence, and Eve Lom launched its Daily Rejuvenating Cream. Furthermore, DR.WU launched several new products, including its [Tri-Retinoid] (ph) Anti-Wrinkle Firming Serum and a Suncare UV Protect Whitening Lotion. In the Color Cosmetics segment, Perfect Diary continues to realize its Biolip Essence collection potential. The brand ranked #2 in the lipstick category amongst [domestic] (ph) 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 two other major Color Cosmetics Brands, Little Ondine and Pink Bear, remained on a solid ground. Pink Bear launched its sugar glossy lipstick during the quarter and was honored at the Beauty Inc Award as the newcomer of the year. Looking ahead, both Little Ondine and Pink Bear will continue to explore new color trends and [indiscernible] to pursue a sustainable growth path. Next R&D. Our R&D expenses as a percentage of revenues increased to 3.6% from 3.2% for the prior-year period. We continued to push the boundaries of funds, recently hosting the first Galénic Dermatology Research Fund’s Annual Research Summit in France. Renowned dermatologists and experts from around the globe gathered to discuss the latest research in skincare and present projects for panel review.

Also, DR.WU officially announced the launch of the second DR.WU Acne Research Fund project in March, and will begin [indiscernible] 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 buildings 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: Thank you, Jinfeng, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in renminbi amount and all percentage changes refer to year-over-year changes, unless otherwise noted. Total net revenues for the first quarter of 2024 increased by 1% to RMB773.4 million from RMB765.4 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 Brands combined with the 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 RMB600.9 million from RMB568.7 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 RMB758.7 million from RMB575.9 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 RMB51.4 million as compared with RMB51.9 million for the prior-year period. As a percentage of total net revenues, fulfillment expenses for the first 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 RMB539.2 million as compared with RMB459 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% for the prior-year period. The increase was primarily due to increased investments 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 first quarter of 2024 were RMB140.1 million as compared with RMB40.7 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 recorded in the prior-year period as a result of the reversal of recognized share-based compensation expenses of RMB109.4 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 RMB27.9 million as compared with RMB24.2 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 RMB157.7 million as compared with RMB7.2 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 RMB107 million as compared with RMB62.4 million for the prior-year period.

Non-GAAP operating loss margin was 13.8% as compared with 8.1% for the prior-year period. Net loss for the first quarter of 2024 was RMB124.9 million as compared with net income of RMB50.7 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 per diluted ADS for the first quarter of 2024 was RMB1.16 as compared with net income attributable to Yatsen’s ordinary shareholder for diluted ADS of RMB0.42 for the prior-year period. Non-GAAP net loss for the first quarter of 2024 was RMB83.8 million as compared with RMB25.8 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 per diluted ADS for the first quarter of 2024 was RMB0.78 as compared with RMB0.24 for the prior-year period. As of March 31, 2024, we had cash, restricted cash and short-term investments of RMB1.89 billion as compared with RMB2.08 billion as of December 31, 2023. Net cash used in operating activities for the first quarter of 2024 was RMB121.8 million as compared with RMB20.2 million for the prior-year period. Looking at our business outlook, for the second quarter of 2024, we expect our total net revenues to be between RMB858.6 million and RMB901.5 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?

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Maggie Huang with CICC. Please go ahead.

Maggie Huang: Thanks for taking my question. This is Maggie Huang from CICC. I have two questions. My first question is about our strategy for the coming June 18 Shopping Festival, and also do we have a target growth rate respectively for our Skincare and also Color Cosmetic 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 two questions. Thank you.

Jinfeng Huang: Thank you for your questions. Let me try to answer your first one. Well, in the last one or two 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 our products during those festivals. And this year, the 618 festival actually is 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 year. 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 that kind of growth forecast, except for our guidance for the sales for the second quarter. And your second question on selling and marketing expenses, the split between branding and traffic, well, it really depends on how our actually new product launch performs. So, we’re currently trying to control or make better use of our selling and marketing expenses. And as you can see, in Q1, 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 become profitable in the near- to mid-term.

Maggie Huang: Okay. Got it. That’s very helpful. Thank you very much. And I have no more questions.

Jinfeng Huang: Thank you.

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: 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 contact information for IR in both 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.