Yatsen Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 22, 2023

Key Takeaways

  • Total Q2 net revenues fell by 9.8% year-over-year to RMB 858.6 million, driven by a 16.6% drop in color cosmetics and only partially offset by a 2.3% increase in skincare sales.
  • Gross margin expanded to 74.7% (up from 62.9%) and non-GAAP operating loss margin improved to 8.7%, reflecting disciplined pricing, cost optimization, and a higher-margin skincare mix.
  • Offline footprint was optimized, with underperforming stores cut from 228 to 136, boosting operational efficiency and supporting margin gains.
  • Formed a strategic R&D partnership with Shanghai Ruijin Hospital, launching the Yatson-Regine Medical Skincare Joint Laboratory to advance skin disease research and product development.
  • Q3 guidance forecasts a further 10%–20% revenue decline, highlighting ongoing uncertainty in China’s post-pandemic beauty market recovery.
AI Generated. May Contain Errors.
Earnings Conference Call
Yatsen Q2 2023
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

Ladies and gentlemen, good day, and welcome to the Yatsen 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 Lyu, Vice President, Head of Strategic Investment and Capital Markets. Please go ahead.

Irene Lyu
Irene Lyu
VP and Head of Strategic Investment and Capital Markets at Yatsen

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 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.

Irene Lyu
Irene Lyu
VP and Head of Strategic Investment and Capital Markets at Yatsen

Please see the earnings release issued earlier today for a definition of non-GAAP financial measure 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, David.

Jinfeng Huang
Jinfeng Huang
Founder, Chairman, and CEO at Yatsen

Thank you, Irene, and thank you everyone for participating in Yatsen's second quarter 2023 earnings call, conference call today. The beauty industry experienced a modest post-COVID recovery during the second quarter 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 second 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.

Jinfeng Huang
Jinfeng Huang
Founder, Chairman, and CEO at Yatsen

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 618 Shopping Festival. Against the industry backdrop, we continued to focus on rebalancing our category mix, expanding growth margins, and improving net margins through enhanced operational efficiency. Our business transformation remained largely on track, evidenced by our second quarter revenue beating the guidance we provided previously. Net revenues from our skincare brands increased by 2.3% year-over-year to RMB 325.2 million. Within skincare, our clinical and premium brands delivered another solid performance, with Galénic, DR.WU, and Eve Lom recording 13.3% year-over-year growth in combined net revenues.

Jinfeng Huang
Jinfeng Huang
Founder, Chairman, and CEO at Yatsen

With respect to revenue contribution, our skincare brands accounted for 37.9% of total net revenues in the second quarter, up from 33.4% in the prior year period. Revenues from color cosmetics declined in the second quarter as Perfect Diary continued to undergo a brand transformation. Furthermore, the number of Perfect Diary'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 growth margin, which has demonstrated a clear upward trend over the past four quarters. We also improved our net margin year-over-year, reflecting our effective cost reduction and channel optimization strategies.

Jinfeng Huang
Jinfeng Huang
Founder, Chairman, and CEO at Yatsen

Turning to our product. Beyond our investments in the existing hero products, we also introduced new skincare products during the quarter. One highlight was Galénic's Secret d'Excellence The Cream, a new anti-aging product enhanced with our patent snow algae peptide to promote collagen production. Additionally, several of our existing hero products received recognition this quarter, with Galénic's Antioxidant No. 1 VC Serum, ranking No. 1 in both Tmall, offering these livestream premium brightening serum category and Douyin's premium serum category during the 618 Shopping Festival. Eve Lom also turned in a solid performance during 618, with the Eve Lom Cleanser coming in 1st 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.

Jinfeng Huang
Jinfeng Huang
Founder, Chairman, and CEO at Yatsen

During the second quarter, Perfect Diary launched its stunning holiday collection, tailored for summer wear as well as Translucent Blurring Longwear Foundation, which delivers a long-lasting, flawless finish. We also rolled out new and upgraded products for Little Ondine and Pink Bear, driving growth in both brands. Little Ondine made the Tmall June 18th top 100 best-selling list, with its brand new 3D Shadow & Highlighter Eyeliners. Pink Bear launched its new Jelly Lipstick. Brand building remains a critical component of Yatsen's long-term strategy. In July, two of our skincare brands, Galénic and DR.WU, participated in the World Congress of Dermatology in Singapore, raising its brand awareness among an internationally renowned group of clinicians, scientists, and industry professionals. DR.WU also celebrated his 20 years anniversary this summer, a testament to his products' enduring popularity and the strength of his brand equity. Moving on to our recent R&D achievements.

Jinfeng Huang
Jinfeng Huang
Founder, Chairman, and CEO at Yatsen

Our R&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 Ruijin Hospital, an affiliate of the Shanghai Jiao Tong University School of Medicine, to the next level with the official unveiling of the Yatsen Ruijin Medical Skincare Joint Laboratory in Shanghai. We formed this alliance with Ruijin Hospital to jointly conduct research on skin disease, mechanisms, and developed efficient skin products, skincare products. Leveraging Yatsen's deep experience and strong capabilities, as well as Ruijin 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. Operations of the Guangzhou manufacturing hub we established with Cosmax, officially commenced on August 11, enabling further optimization of our supply chain.

Jinfeng Huang
Jinfeng Huang
Founder, Chairman, and CEO at Yatsen

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 second 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, and we understand that the recovery pattern of consumer demand remains uncertain.

Jinfeng Huang
Jinfeng Huang
Founder, Chairman, and CEO at Yatsen

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 board, 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.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

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 referred to year-over-year changes, unless otherwise noted. Total net revenues for the second quarter of 2023 decreased by 9.8% to RMB 858.6 million, from RMB 951.8 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 second quarter of 2023 increased by 7.2% to RMB 641.6 million, from RMB 598.3 million for the prior year period.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Gross margin for the second quarter of 2023 increased to 74.7%, from 62.9% for the prior year period. The increase was driven by, first, increasing sales of higher gross margin products from skincare brands. Second, more disciplined pricing and discount policy. Third, cost optimization across all of our brand portfolios. Total operating expenses for the second quarter of 2023 decreased by 11.3% to RMB 776.7 million, from RMB 875.3 million for the prior year period. As a percentage of total net revenues, total operating expenses for the second quarter of 2023 were 90.5%, as compared with 92.0% for the prior year period.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Fulfillment expenses for the second quarter of 2023 were RMB 58.3 million, as compared with RMB 69.7 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the second quarter 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 second quarter of 2023 were RMB 542.8 million, as compared with RMB 625.7 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the second quarter of 2023 decreased to 63.2% from 65.7% for the prior year period.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

The decrease was primarily attributable to the closure of underperforming offline stores and a reduction in share-based compensation related to the decrease in selling and marketing headcount, partially offset by an increase in online advertising expenses. General and admin- administrative expenses for the second quarter of 2023 were RMB 149.7 million, as compared with RMB 147.8 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the second quarter of 2023 increased to 17.4% from 15.5% for the prior year period. The increase was primarily attributable from increase in share-based compensation, compar-- combined with the deleveraging effect of lower total net revenues in the second quarter of 2023.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Research and development expenses for the second quarter of 2023 were RMB 25.9 million, as compared with RMB 32 million for the prior year period. As a percentage of total net revenues, research and development expenses for the second quarter of 2023 decreased to 3% from 3.4% 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 second quarter of 2023 decreased by 51.2% to RMB 135.1 million from RMB 277 million for the prior year period. Operating loss margin was 15.7%, as compared with 29.1% for the prior year period.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Non-GAAP loss from operations for the second quarter of 2023 decreased by 65.8% to RMB 74.6 million from RMB 218.2 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 second quarter of 2023 decreased by 59% to RMB 108.5 million, from RMB 264.3 million 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 Yatsen's ordinary shareholders per diluted ADS for the second quarter of 2023 was 0.2 RMB, as compared with 0.43 RMB for the prior year period.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Non-GAAP net loss for the second quarter of 2023 decreased by 77.7% to RMB 46.3 million from RMB 207.5 million 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 Yatsen's ordinary shareholders per diluted ADS for the second quarter of 2023 was RMB 0.08, as compared with RMB 0.34 for the prior year period. As of June 30th, 2023, we had cash, restricted cash, and short-term investments of RMB 2.57 billion, as compared with RMB 2.63 billion as of December 31st, 2022.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Net cash used in operating activities for the second quarter of 2023 was RMB 14.4 million, compared with net cash generated from operating cash, operating activities of RMB 111.9 million for the prior year period. Looking at our business outlook for the third quarter of 2023, we expect our total net revenues to be between RMB 686.3 million and RMB 772.1 million, representing a year-over-year decline of approximately 10%-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 to Q&A.

Operator

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing keys. To withdraw from the question queue, please press star then two. 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. At this time, we will pause momentarily to assemble our roster. The first question today comes from Manqi Huang with CICC. Please go ahead.

Manqi Huang
Manqi Huang
Research analyst at CICC

Thanks for taking my questions. This is Manqi Huang from CICC, I've got two questions. The first question is regarding profitability. Are we still on track with the full year profits? Looking ahead, what are the key drivers that will boost our profitability in the second half of the year? This is for the first question. About the second question is regarding growth of color cosmetics. We've seen 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? Is there any chance that a color cosmetics return to growth in the second half of the year? That's my question. Thank you.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Well, thank you very much for, for your questions. All right. 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, you know, the improvement on profitability has been very significant. Your second question, PD Foundation. Well, we've just launched the foundation product for Perfect Diary. It's still too early for us to tell, you know, how the new product will perform. You know, for the second half of the year, especially towards the end of Q3 and beginning of Q4, we're gonna launch a major brand upgrade campaign and new product launch for Perfect Diary.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

You know, we are making preparations for that major campaign, but it's still too early and, and, to tell, you know, how the campaign will turn out. And, and there, of course, will be some uncertainty around the success of that campaign. We are very confident that, you know, you know, we can- we will try our best, and hopefully we can make it a, a huge success.

Manqi Huang
Manqi Huang
Research analyst at CICC

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

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Yep, thank you.

Operator

Again, if you have a question, please press star, then one. The next question comes from Vivi Huang with Morgan Stanley. Please go ahead.

Vivi Huang
Vivi Huang
Equity Research Associate at Morgan Stanley

Thank you for taking my question. This is Vivi Huang from Morgan Stanley. I have two questions. Firstly, is on the industry part. Could management give us a color on what is the industry competition like as we enter into the third quarter? Like, how is it like in terms of the competition, especially on online and livestreaming channels? I know that this might be a little bit far, but how should we expect on, like, 11.11 Festival this year? Do you see, like, if there is any possibility that promotional level will likely to intensify on a year-on-year basis, or maybe just compared to 618 Shopping Festival this year? Secondly, I would like to ask on our offline store strategy.

Vivi Huang
Vivi Huang
Equity Research Associate at Morgan Stanley

Do we expect further store disclosure when we enter into the second half? This is the questions that I will have. Thank you.

Irene Lyu
Irene Lyu
VP and Head of Strategic Investment and Capital Markets at Yatsen

Yes, thanks, Vivi, for the question. On the first question, in terms of the industry outlook and the competition landscape, what we see is, we saw a modest recovery pattern during the second quarter, even though the year-over-year growth rate was good, but it was a low base last year, 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. Within the beauty market, different segments are all growing. Even like, within current economic condition, the premium segment is still growing, but at a slightly lower rate. We do expect that the China beauty market still have high room to grow, given the per capita beauty spending is still relatively low compared to other mature markets.

Irene Lyu
Irene Lyu
VP and Head of Strategic Investment and Capital Markets at Yatsen

Looking at the competition, over time, we have seen that competition has been intensifying, and there are actually divergent performance among different categories and different brands. One of the very obvious trend is brands with strong product efficacies and, and brand equities are actually outperforming compared to others. Also, consumer behavior has shift a little bit, from previous impulsive buying habits towards more rational behavior, which also kind of demonstrates that product with very strong efficacy and functional value actually probably attract more consumers attention and, and buying. Those are some of the key trends that we have witnessed in the industry.

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Yeah, your second question, in the past two years, we've closed around 150 stores of our offline stores, and most of which were obviously underperforming and loss-making stores. Going forward, I think we will continue to optimize, you know, some of our stores, but I, I don't think that we're gonna close a substantial number of stores down the road. Optimization will always be our strategy. Thank you.

Vivi Huang
Vivi Huang
Equity Research Associate at Morgan Stanley

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

Donghao Yang
Donghao Yang
CFO and Director at Yatsen

Thank you.

Operator

Again, if you have a question, please press star then one. That concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Irene Lyu
Irene Lyu
VP and Head of Strategic Investment and Capital Markets at Yatsen

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Yatsen directly or P, Piacente in Investor Relations. 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

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

Executives
    • Donghao Yang
      Donghao Yang
      CFO and Director
    • Irene Lyu
      Irene Lyu
      VP and Head of Strategic Investment and Capital Markets
    • Jinfeng Huang
      Jinfeng Huang
      Founder, Chairman, and CEO
Analysts
Powered by Quartr