Yatsen Holding Limited (NYSE:YSG) Q3 2022 Earnings Call Transcript November 22, 2022
Yatsen Holding Limited beats earnings expectations. Reported EPS is $-0.22, expectations were $-0.28.
Operator: Ladies and gentlemen, good day, and welcome to the Yatsen’s Third Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Head of Strategic Investment and Capital Markets. Please go ahead.
Irene Lyu: Thank you, Operator. Please note that 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 team 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 Web site at ir.yatsenglobal.com.
I will 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 third quarter 2022 earnings conference call today. We started the year by launching a five-year strategy outlining our plans to evolve our business and drive the long-term and sustainable growth. With this strategy target as our roadmap, the management team continued to fine-tune our business model. Although negatively impacted by the softening beauty market and the resurgence of COVID-19, our Skincare Brands recorded solid growth in the third quarter of 2022. We have also seen improvements in gross margin, net loss, and non-GAAP net loss on account of our cost optimization plan. Overall, our sales in the third quarter of 2022 continued to experience slowdowns as a result of challenging macro headwinds and the lower levels of consumer spending, which have been exasperated by resurgence of COVID-19.
Beauty retail sales in the third quarter of 2022 went down by 3.2% year-over-year according to the data published by China National Bureau of Statistics. Sales of both color cosmetics and skincare products on Tmall fell by double digits year-over-year in the third quarter of 2022 extending the downward trend in the second quarter of 2022. Our total net revenues for the third quarter of 2022 declined by 36.1% year-over-year to RMB857.9 million, meeting the high end of our revenue guidance. Let’s look at our revenue mix in detail. Net revenues from Skincare Brands increased by 33% year-over-year to RMB 269.4 million, as a highlight, total net revenues of our fast-growing clinic and the premium brands, DR.WU, Eve Lom, and GalÃnic delivered solid growth of year-over-year this quarter.
In terms of revenue contribution, our Skincare Brands contributed 31.4% of total net revenues for the third quarter of 2022, which has exceeded 30% of total net revenues for two consecutive quarters, compared with of total net revenues for the third quarter of 2021. Our Color Cosmetics Brands, on the other hand, saw a 48.8% decline year-over-year in total net revenues to , reflecting the continued softness in market demand for our color cosmetics as well as intensified industry competition from both domestic and the international brands. Gross margin for the third quarter of 2022 increased by one percentage point to 58.9% from 57.9% for the third quarter of 2021, due to increased sales of higher growth margin products from our Skincare Brands, cost optimization, and stricter pricing and discount policies across all of our brand portfolios.
Our net loss margin was 24.6% in the third quarter of 2022, representing an improvement of 3.2 percentage points from the second quarter of 2022, or 2.4 percentage points from the prior year period. Our non-GAAP net loss margin was 14.7% in the third quarter of 2022, representing an improvement of 7.1 percentage points from the second quarter of 2022 or 1.4 percentage points from the prior-year period. The improvement is attributable to our continued cost optimizations. Now, I will share some of the quarter’s major initiatives and the developments. In the third quarter of 2022, our business teams were active in developing and strengthening our portfolio of high-performing brands tailored to Chinese consumers’ evolving needs and . And DR. WU recently launched new products infused with triple-action repair technology which with proven efficacies on the iconic , we celebrated the brand’s 19 anniversary with its loyal customers across China, especially those with sensitive or skin who seek efficient products designed for their skin types.
Eve Lom achieved the robust growth despite the challenging industry environments. While the brand remained strong in premium cleanser category, we expanded to serum category by launching a Radiance Repair Retinol Serum. In September, Eve Lom partnered with the , in Shanghai, to cultivate a world-leading and a luxurious experience for the brand. GalÃnic also recorded very strong online growth in the third quarter of 2022. We have gained more market share and stayed number one for two consecutive quarters in the premium serum category, Ondine. While our maintained its leading position, the Secret D’Excellence active serum also experienced steady growth in the third quarter of 2022. The launch of the Secret D’Excellence active serum in the third quarter of 2022 was attended by industry experts and the thought leaders, and raised awareness of the brand, amplifying its leadership in the premium dermatological skincare sphere.
While our Color Cosmetics business experienced a year-over-year decline of 48.8%, we saw improved growth margin in aggregate. Our Color Brands went through channel optimization and promotion control to develop sustainable business model. Perfect Diary sales Ondine achieved strong year-over-year growth of 97%, and ranked number two among all Color Cosmetics Brands, another improvement from number three ranking it achieved last year. We have also closed underperforming offline stores throughout 2022 as a result. As of September 30, 2022, we operated a total of 193 experience stores of the Perfect Diary brand, representing a net reduction of 88 stores since the beginning of the year. In the fourth quarter, these offline store optimization program will continue, and we are constantly monitoring the market situation of the offline retail space to better support our brand strategies moving forward.
In addition to channel optimization, we are also addressing the category mix to increase our market share in facial makeup and product. Perfect Diary’s Translucent Blurring Loose Powder, an upgrade that adds anti-dullness in efficacy in addition to the original SmartLOCK technology, and gained more market share in the loose product category on Tmall compared to last quarter. We also applied this patented technology to the newly launched Clear Cover 3-color Concealer Palette as an attempt to expand it to other facial categories. Our robust new product launch and a healthy pipeline are backed by continuous investments in R&D. R&D expenses increased to 3.9% from 2.7% of net revenues in the prior-year period. We debuted at the International Federations of Societies of Cosmetics Chemistry Congress with two cutting-edge technologies, in September.
We will continue our efforts to build a strong R&D capability as our core strategy for future growth. We are also constantly reminded of the importance of our commitment to our environmental, social, and governance program. In the third quarter of 2022, Yatsen donated computers and the projection equipment to the government of located in Guangdong province to help improve the township’s information technology infrastructure. We are actively involved in elevating the quality of life of those in more challenging circumstances, and will continue to take the initiative to assume corporate social responsibility and to contribute our support in the future. While we expect the retail environment to remain challenging for the rest of 2022 and for the first half of 2023, we have sufficient resources to meet our strategy objectives.
During the W11 Shopping Festival this year, we saw outstanding performance in our skincare brands. GalÃ©nic achieved high triple digit year-on-year sales growth. Eve Lom and DR. WU got the first place in premium cleaner category and acne control category serum respectively on Tmall. In summary, we have already made significant progress in our strategy evolutionary journey. With higher contribution from our skincare brand, improved gross margin, and significantly narrowed in the third quarter of 2022. With the cash, restricted cash and short-term investment balance of RMB2.6 billion at the end of this quarter, we have sufficient resources and flexibility in pursuit of our long-term strategy goals. With that, I will now turn the call over to our CFO, Donghao Yang to discuss our financial performance.
Thank you, everyone.
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Donghao Yang: Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in Renminbi amount, and all percentages — all percentage changes referred to year-over-year changes unless otherwise noted. Total net revenues for the third quarter of 2022 decreased by 36.1% to RMB857.9 million from RMB1.34 billion in the prior year period. The decrease was primarily attributable to a 48.8% decrease in net revenues from our color cosmetics brands, partially offset by a 33% increase in net revenues from our skincare brand. Gross profit for the third quarter of 2022 decreased by 35.2% to RMB591.3 million from RMB911.8 million in the prior year period. Gross margin for the third quarter of 2022 increased to 68.9% from 67.9% in the prior year period.
The increase was primarily driven by increased sales of higher gross margin products from our skincare brand, cost optimization, and stricter pricing and discount policies across all of our brand portfolios. Total operating expenses for the third quarter of 2022 decreased by 33.1% to RMB857 million from RMB1.28 billion in the prior year period. As a percentage of total net revenue, total operating expenses for the third quarter of 2022 were 99.9% as compared with 95.4% in the prior year period. Fulfillment expenses for the third quarter of 2022 were RMB63.8 million as compared with RMB102 million in the prior year period. As a percentage of total net revenues, fulfillment expenses for the third quarter of 2022 decreased to 7.4% from 7.5% in the prior year period.
The decrease was primarily attributable to a decrease in warehouse and the logistics cost due to optimization of our procurement capacity. Selling and marketing expenses for the third quarter of 2022 were RMB564.8 million as compared with RMB911.3 million in the prior year period. As a percentage of total net revenues, selling and marketing expenses for the third quarter of 2022 decreased to 65.8% from 67.9% in the prior year period. The decrease was primarily attributable to the higher efficiency of online marketing activities partially offset by store closer related expenses and provision. General and administrative expenses for the third quarter of 2022 were RMB194.5 million as compared with RMB233.9 million in the prior year period. As a percentage of total net revenue, general and administrative expenses for the third quarter of 2022 increased to 22.7% from 17.4% in the prior year period.
The increase was primarily attributable to the lower total net revenue in the third quarter of 2022, creating a low base effect. Research and development expenses for the third of 2022 was RMB33.9 million as compared with RMB35.8 million in the prior year period. As a percentage of total net revenue, research and development expenses for the third quarter of 2022 increased to 3.9% from 2.7% in the prior year period. The increase was primarily attributable to the lower total net revenues in the third quarter of 2022 creating a low bases effect. Loss from operations for the third quarter of 2022 decreased by 28.1% to RMB265.7 million from RMB369.3 million in the prior year period. Operating loss margin was 31% as compared with 27.5% in the prior year period.
Non-GAAP loss from operations for the third quarter of 2022 decreased by 26.6% to RMB152.6 million from RMB221.7 million in the prior year period. Non-GAAP operating loss margin was 19% as compared with 16.5% in the prior year period. Net loss for the third quarter of 2022 decreased by 41.7% to RMB210.7 million from RMB361.8 million in the prior year period. Net loss margin was 24.6% as compared with 26.9% in the prior year period. Net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the third quarter of 2022 was RMB0.37 as compared with RMB0.57 in the prior year period. Non-GAAP net loss for the third quarter of 2022 decreased by 41.5% to RMB126.5 million from RMB216.3 million in the prior year period. Non-GAAP net loss margin was 14.7% as compared with 16.1% in the prior year period.
Non-GAAP net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the third quarter of 2022 was RMB0.22 as compared with RMB0.34 in the prior year period. As of September 30, 2022, the company had cash, restricted cash, and short-term investments of RMB2.6 billion as compared with RMB3.14 billion as of December 31, 2021. Net cash generated from operating activities for the third quarter of 2022 was RMB21.8 million compared with net cash used in operating activities of RMB225.3 million in the prior year period. Looking at our business outlook for the fourth quarter of 2022, we expect our total net revenues to be between RMB916.7 million and RMB1.07 billion representing a year-over-year decline of approximately 30% to 40%. This forecast reflects our current and preliminary views of the market and operational conditions which are subject to change.
With that, I would now like to open the call to Q&A.
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Operator: Yes, thank you. And today’s first question comes from Dustin Wei with Morgan Stanley.
Dustin Wei: Thanks for taking my questions. First question is related to the W11 performance. I’m wondering if management can comment in terms of the performance by brand or by Skincare Brands and the Color Brands. And do we expect that the GP margin in fourth quarter to be sequentially lower versus the quarter because of the promotion for W11? And the second question related to the performance for the Skincare Brands in third quarter, it sounds like, excluding Abby’s Choice, the other three major skincare brands performed pretty strongly. But could you elaborate a little more in terms of maybe provide a range of the performance or some of the different strategy and their progress? And from a management’s perspective, the key Skincare Brands performance is kind of a little ahead of the expectation or there is something more to do?
Jinfeng Huang: Thank you. First question for the W11 results, for Skincare Brands; right now, our GalÃnic, Eve Lom, and DR.WU achieved robust sales growth in W11 with for each of the brands. So, some of the hero products of each of the brand are performing quite well. I think GalÃnic has a high triple-digit year-on-year sales growth, and also achieved as the top of the new brands for Tmall W11. And so, for the VC serum, it’s also a high triple-digit year-on-year sales growth. And we also launched a new product, the Secret D’Excellence serum, and that becomes the imported essence . Eve Lom still continued to taking the number one premium cleanser category. And also, for DR.WU, right now the Renew Serum is already pretty strong in the acne control category.
And some of the new products of DR.WU are performing really well; especially the triple-action repair serum is ranking at the top four repair serum on Tmall. So, looking forward, I think the — that some of the hero products of the Skincare Brands will help to contribute the growth of the brands and, in aggregate, improving the percentage of the revenue of our total revenue in the future. For Color Cosmetics, well, I think right now our Color Brands are still facing a pretty big challenge. And also Perfect Diary has been undergoing a turnaround. So, we prioritize profitability and we applied very strict pricing and discount policies across all those Color Brands in order to improve the growth margin and also improve the profitability, as well as protecting the brand image.
So, looking forward for Q4, I think we are on the right trend to continue optimizing the gross margin, and also the bottom line.
Donghao Yang: Well, on your second question, gross margin. Well, gross margin has a lot to do with the category mix, and inventory provision, a lot of things. And we’re not in position to make comment on the gross margin in Q4. But what I can tell you is, over the long-term, as the skincare business grows stronger and take a higher percentage in the total product mix, and we believe, in the long-term, our gross margin will be an upward trend.
Dustin Wei: Got it, thank you. Can I ask one more question related to the expenses and the restructuring. So, understanding that company has been focused on like store closure, organization optimization, et cetera, so can we have an update on the status now, like do we expect that those exercise will be pretty much done in the fourth quarter this year or some of those will continue into the 2023 depending on the macro environment? And is there some number that you can share in terms of the sort of one-off costs like for the full-year this year or year-to-date, including the human resource, like, severance costs or one-off store closure costs, kind of one-off expenses that we likely won’t see in 2023?