Yatsen (YSG) Q1 2023 Earnings Call Transcript

Yatsen (YSG 8.28%)
Q1 2023 Earnings Call
May 16, 2023, 7:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day and welcome to the Yatsen first-quarter 2023 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 -- Head of Strategic Investments 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 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 could affect Yatsen's business and financial results as 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 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, David.

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Thank you, Irene, and thank you, everyone, for participating in Yatsen's first-quarter 2023 earnings conference call today. The first quarter of 2023 showed a positive change for the beauty industry. Total beauty retail sales achieved year-over-year growth of 5.9% in the quarter according to the adjusted data published by the China National Bureau of Statistics. [Inaudible] in market sentiment and the gradual recovery of offline consumption, following the lifting of pandemic restrictions, were major drivers of this trend.

While we are pleased to see signs of recovery in the retail environment, we expected a rebound in our revenue to take time as consumers gradually reengage in travel, social activities, and general consumption in the post-COVID era. Our sites remain focused on long-term, sustainable growth as we continue to refine our business model. For the first quarter of 2023, our total net revenue declined by 41% year over year to RMB 765.4 million, beating the guidance we provided previously. Net revenues from skincare brands increased by 34.2% year over year to RMB 245.1 million.

Our clinical and premium brands, including DR.WU, Galénic, and Eve Lom, recorded a solid growth of 58.6% year over year for the first quarter of 2023. In terms of revenue contribution, our skincare brands accounted for 32% of total net revenues in the first quarter, up from 20.5% for the previous year period. Net revenues from our color cosmetic brands declined by 29.1% year over year to RMB 508 million. In terms of profitability, we achieved ongoing improvement in our gross margin and the net margin.

Gross margin increased significantly by 5.3 percentage points to 74.3% for the first quarter of 2023, from 69% for the prior-year period, reflecting our persistent efforts to fine-tune our policies, implement disciplined pricing and discounting -- discount policies, and optimize production cost. Most importantly, we recorded a net income margin of 6.6% for the first quarter of 2023, as compared with the net loss margin of 32.7% for the prior-year period. In addition to our efforts in cost optimization, the net income we recognized for the first quarter of 2023 was primarily due to a reversal of recognized share-based compensation expenses of RMB 109.4 million and a decrease of RMB 42.2 million in recognition of share-based compensation expenses using the graded-vesting method over the vesting term of the company's awards. Non-GAAP net loss margin narrowed to 3.4% for the first quarter of 2023 from 17.2% for the same period last year.

Moving on to our financial highlights. We made progress in our product development and brand awareness improvement initiatives. Eve Lom launched its Radiance Face Oil featuring 10 precious plant extracts that provide spa-level skin nourishment, combined with five major reparative ingredients to firm and plump the skin. We also hosted a major brand event for Galénic in France to explore the legendary benefits of the brand's Platinum Snow Algae series with international fashion and beauty KOLs.

During the quarter, our color cosmetic brands also introduced Valentine's Day themed gift sets with campaigns to celebrate the vibrant colors and the passionate emotions associated with the holiday. In terms of channel optimization, we completed most of our adjustments in our offline footprint in 2022. As offline consumption recovered due to the lockdown policies, performance at our offline stores improved in terms of profitability during the first quarter of 2023. However, the market situation is still evolving, and the consumption activity has not fully returned to normal.

Going forward, we will closely monitor market dynamics, focus on identifying the appropriate product mix and growth strategy to drive sales in the offline business and adjust our approach to optimizing our offline channels as needed. Next, I would like to share some of our recent R&D endeavors and accomplishments. Our R&D expenses as a percentage of total net revenue were 3.2%, demonstrating our continuous commitment to scientific advancement and product development. Furthermore, to promote applied research and innovation in treating acne, we have -- we officially launched DR.

WU acne research fund and established the DR. WU expert committee. Together, these organizations will integrate expert resources across multiple medical fields and regions to conduct cutting-edge exploration and applied research with the goal of discovering solutions for the refined and comprehensive management of acne-prone skin. Before I conclude, I want to share an update on our environmental, social, and governance performance, which continues to be a great source of inspiration for Yatsen.

In January, we participated in the 2023 World Economic Forum annual meetings in Davos, Switzerland, where we highlighted Yatsen's implementation of sustainability practice through Perfect Diary's line of Stiletto lipsticks and other Yatsen products at the event's sustainability symposium. In summary, the first quarter of 2023 was a promising start to gradual recovery of China's beauty market in the post-pandemic era. We are cautiously optimistic about the outlook for the remainder of 2023, yet aware that uncertainties remain. We will continue to focus on brand-building and product development as we work to draw upon our skincare brand's strong growth momentum and prepare to launch new color cosmetic products in the second half of 2023.

With that, I'll turn the call over to our CFO, Donghao, to discuss our financial performance. Thank you, everyone.

Donghao Yang -- Director and Chief Financial Officer

Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in renminbi amounts, and all percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the first quarter of 2023 decreased by 14.1% to RMB 765.4 million from RMB 891 million for the prior-year period. The decrease was primarily attributable to a 29.1% year-over-year decrease in net revenues from color cosmetic brands, partially offset by a 34.2 % year-over-year increase in net revenues from skincare brand.

Gross profit for the first quarter of 2023 decreased by 7.5% to RMB 568.7 million from RMB 614.5 million for the prior-year period. Gross margin for the first quarter of 2023 increased to 74.3% from 69% for the prior-year period. The increase was driven by, first, increasing sales of higher gross margin products from skincare brands, and secondly, more disciplined pricing and discount policies, and certainly, cost optimization across all of the company's brand portfolios. Total operating expenses for the first quarter of 2023 decreased by 37.6% to RMB 575.9 million from RMB 922.5 million for the prior-year period.

As a percentage of total net revenues, total operating expenses for the first quarter of 2023 were 75.2%, as compared with 103.5% for the prior-year period. Fulfillment expenses for the first quarter of 2023 were RMB 51.9 million, as compared with RMB 73.9 million for the prior-year period. As a percentage of total net revenues, fulfillment expenses for the first quarter of 2023 decreased to 6.8% from 8.3% 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 the company's warehousing and handling operations.

Selling and marketing expenses for the first quarter of 2023 were RMB 459 million, as compared with RMB 604.7 million for the prior-year period. As a percentage of total net revenues, selling and marketing expenses for the first quarter of 2023 decreased to 60% from 67.9% for the prior-year period. 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. General and administrative expenses for the first quarter of 2023 were RMB 40.7 million, as compared with RMB 208.1 million for the prior-year period.

As a percentage of total net revenues, general and administrative expenses for the first quarter of 2023 decreased to 5.3% from 23.4% for the prior-year period. The decrease was primarily attributable to a reversal of recognized share-based compensation expenses of $109.4 million due to the forfeiture of unvested awards granted to our former chief technology officer upon his resignation, and a decrease of RMB 42.2 million in recognition of share-based compensation expenses using the graded-vesting method over the vesting term of the company's awards. Research and development expenses for the first quarter of 2023 were RMB 24.2 million, as compared with RMB 35.8 million for the prior-year period. As a percentage of total net revenues, research and development expenses for the first quarter of 2023 decreased to 3.2% from 4% for the prior-year period.

The decrease was primarily attributable to the company's efforts to maintain research and development expenses at a reasonable level relative to total net revenues. Loss from operations for the first quarter of 2023 decreased by 97.7% to RMB 7.2 million from RMB 308 million for the prior-year period. Operating loss margin was 0.9%, as compared with 34.6% for the prior-year period. Non-GAAP loss from operations for the first quarter of 2023 decreased by 63.3% to 62.4 million from 170.1 million for the prior-year period.

Non-GAAP operating loss margin was 8.1%, as compared with 19.1% for the prior-year period. Net income for the first quarter of 2023 was RMB 50.7 million, as compared with net loss of RMB 291.4 million for the prior-year period. Net income margin was 6.6%, as compared with net loss margin of 32.7% for the prior-year period. Net income attributable to Yatsen's ordinary shareholders for diluted ADS for the first quarter of 2023 was RMB 0.08, as compared with net loss attributable to Yatsen's ordinary shareholders for diluted ADS of RMB 0.46 for the prior-year period.

Non-GAAP net loss for the first quarter of 2023 decreased by 83.2% to RMB 25.8 million from RMB 153.6 million for the prior-year period. Non-GAAP net loss margin was 3.4%, as compared with 17.2% for the prior-year period. Non-GAAP net loss attributable to Yatsen's ordinary shareholders for diluted ADS for the first quarter of 2023 was RMB 0.05, as compared with RMB 0.24 for the prior-year period. As of March 31st, 2023, the company had cash, restricted cash, and short-term investments of RMB 2.54 billion, as compared with RMB 2.63 billion as of December 31st, 2022.

Net cash used in operating activities for the first quarter of 2023 decreased by 80.6% to 20.2 million from 104.1 million for the prior-year period. Looking at our business outlook for the second quarter of 2023, we expect our total net revenues to be between RMB 700 million and RMB 61.4 million and RMB 856.6 million, representing a year-over-year decline of approximately 10% to 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?

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today's first question comes from Dustin Wei with Morgan Stanley. Please go ahead.

Dustin Wei -- Morgan Stanley -- Analyst

Thanks for taking my questions. My first question related to the first-quarter sales beat versus the prior guidance. So, may I know what's changed for the last beat of the first quarter? Is that because some of the better execution, for instance, like, the skincare products or just the industry environment that becoming better by the end of the first quarter? And the second question is related to the -- the guidance for the next quarter, the second quarter. So, is there any assumption behind it, for instance, the -- the assumption for the June 18 sales results, and also, what's the sales trend so far in the second quarter?

Donghao Yang -- Director and Chief Financial Officer

Well, thank you very much, Dustin, for the question. Well, we beat by a pretty big margin our Q1 guidance because of the things that you've just mentioned. First of all, the macro environment has improved quite significantly, especially in the -- in the offline business. And we've benefited -- benefited from that trend.

And of course, secondly, we -- I think we've done a great job executing our business strategy in Q1, which is, obviously, you know, putting more focus on our skincare brands and, at the meantime, you know, trying to execute a, you know, strategic transformation for color cosmetics line. And regarding our second question, we are -- as we've mentioned in our remarks, we are currently cautiously optimistic about the future growth of our business. It's -- I think that is reflected -- has been reflected in our Q2 guidance, which is substantially better than our Q1 and Q4 last year guidance. Basically, you know, we're now more confident about the future growth of our skincare brand and also the success of our strategic transformation of our, you know, Perfect Diary brand.

Of course, you know, the success in the upcoming June 18th campaign is one of the factors that we've considered, you know, in putting out our -- our quarter -- guidance.

Dustin Wei -- Morgan Stanley -- Analyst

Thanks a lot, Donghao. So, for the second quarter, are we a little bit counting on the good results for that June 18th to perform -- you know, sort of keep up to achieve the guidance number? Or we should say, you know, this guide number is roughly what we are seeing, like, from April moving to May?

Donghao Yang -- Director and Chief Financial Officer

Well, June 18th is obviously a major event for the second quarter like every year, and this year is no different. So, the success of the June 18th campaign, obviously, will play a critical role in achieving the -- the guidance. And also, you know -- you know, we're putting more effort in our so-called daily sales, meaning, you know, the campaigns are, you know, important, but the daily sales are also very critical. So, back to your question, April, May, and June is -- is an important month.

It doesn't mean that April and May, you know, we -- we -- we can afford to do nothing, which is not the case. You know, we're -- we're going to make real efforts in every opportunity that we can have to drive our sales growth.

Dustin Wei -- Morgan Stanley -- Analyst

Got it. That's helpful. And may I follow up on, in terms of the cautiously optimistic, how are we seeing in terms of the industry promotion and the competition? Like, year to date, are we seeing gradually less competition, the price discount, especially online and like in livestreaming channel? Or we are seeing generally similar level of the competition versus, like, last year?

Donghao Yang -- Director and Chief Financial Officer

Well, from our perspective, I think the competition is intensifying. You know, as far as we know, most of the international major brands are actually offering greater than ever discounts in order to drive their sales. So, as I mentioned in our call script, you know, the macro environment is improving, meaning you know, the total consumption, the demand, you know, is going up. But in the meantime, the competition is still intensifying -- is -- is intensifying.

So, that's why, you know, we say all right, we're only cautiously optimistic about the -- our business growth in the next couple of quarters.

Dustin Wei -- Morgan Stanley -- Analyst

Got it, got it. And just lastly, in terms of Yatsen's home, sort of the journey to achieve the full-year profitability. I know that each quarter will have its own dynamics. You know, full year sort of being profitable.

Does it mean that every quarter the company will achieve the profitability? But just can we have a look, colors like are we betting on a little more, for instance, like the major event quarter, such as the second quarter and fourth quarter, to have better profit. or a lighter quarter, such as the third quarter, we'll see better profitability?

Donghao Yang -- Director and Chief Financial Officer

Well, you know, we're confident that we're on the right track to turning profitable in the -- in the near to mid-term future. And the seasonality in our business is quite obvious. Q1, Q3 are generally the two low quarters, and Q2 and Q4 are generally the high seasons of the year. So, as you just mentioned, in Q1, the low quarter, our sales were, compared to the high season, you know, are lower, so that's why, you know, in Q1 are non-GAAP, you know, so recorded -- we recorded a net loss for non-GAAP measures, but we do expect a profitability to get better in our high seasons, Q2 and Q4.

Dustin Wei -- Morgan Stanley -- Analyst

Got it. That's all my questions. Thank you so much, Yang Donghao. Thank you.

Donghao Yang

Yes, thank you, Dustin.

Operator

Our next question comes from Casper Shi with CICC . Please go ahead.

Unknown speaker

Hi, Hello. This is Casper from CICC. And thank you very much for taking our questions. Firstly, congratulations on the financial results that beat the market expectation.

And we also see many -- multiple positive signs in the indicators. So, here we have two major questions. The first one is about our new products this year. What is our plan for releasing new products in this year? And also, is there any strategy for us to promote the new products or introduce some new products in the June 18th campaign? Thank you.

Irene Lyu -- Head of Strategic Investments and Capital Markets

Yeah, sure. Thank you for your question. In terms of our new product launch, we will share it by category. First, on the skincare category, you know, our main focus is still on the existing single product.

So, for this June 18th, we're still trying to promote the existing single products of our three main skincare brands. And we think there's still a lot of room for them to grow. At the same time, we did introduce a number of new products for skincare as well. For example, Galénic, we -- in May, we just launched a new facial cream, the Secret d'Excellence active cream featuring the finest active ingredient, snow algae, with anti-aging benefits.

And also, we mentioned in the call, Eve Lom also launched a -- Radiance Face Oil. And we think, for the second half of the year, there could be more product launch for the skincare category. And then, on color cosmetics, as we previously shared, we think the market will gradually recover. So, we have a new product pipeline mostly prepared for the second half of the year.

But then, for Q2, we still have a few new products, for example, there's the five -- two -- five parties. Like the Chinese Valentine's Day, we have a new gift box for Perfect Diary and also Little Ondine to introduce a new liner as well. So, there are more products to be to be released in the second half of the year.

Unknown speaker

OK, that's very clear. Thank you. And our second question is that could you give us some more color on the sales growth of the different skincare brands this year? And what's the performance of the major hero products in Q1 and how to expect the skincare sector's profitability to evolve this year? Thank you.

Donghao Yang -- Director and Chief Financial Officer

Yeah, well, thank you very much for your question. Well, you know what? We don't -- we currently do not provide breakdown of our sales growth and profitability for each of our brands. But in general, you know, our skincare brands are growing. You know, growth is very strong and with -- with very good profitability.

And if you compare the gross margin level of our skincare brands with the color cosmetic brands, it's like substantially higher. So, as you know, our things are -- sales of our skincare brands, you know, consists of a bigger portion of our total sales mix. You know, we do expect our overall profitability to improve over time.

Unknown speaker

OK, OK, that's very clear. These are all my questions, and thank you again for the very detailed answer. Thank you.

Donghao Yang -- Director and Chief Financial Officer

Thank you.

Operator

[Operator instructions] Our next question comes from Olivia Tong with Raymond James. Please go ahead.

Olivia Tong -- Raymond James -- Analyst

Great. Thank you. Good morning. A couple of questions here.

Some have been answered, but, you know, you talked about being cautiously optimistic about the environment. Can you talk about what you're seeing both in skin and color that support that view?

Donghao Yang -- Director and Chief Financial Officer

In color, OK, well, yeah -- well, we -- we say we're cautiously -- cautiously optimistic actually about our own business. Well, the market has recovered due to the lifting of the pandemic control policies. But again, as I said earlier, you know, the competition is intensifying. And if you look at the -- the data from Tmall and Douyin, you know, you can have quite different pictures.

So, for us, you know, we have been able to grow our skincare brands quite fast, but we have also met some challenges in our color cosmetics business. So, but in general, I think we're moving in the right direction both in terms of sales growth and -- and profitability. So, that's why we said, all right, you know, we are cautiously optimistic about our own, you know, business process.

Olivia Tong -- Raymond James -- Analyst

Understood. Maybe could you put that in context relative to your expectation for Q2? You obviously saw a sequential deceleration that narrowed in Q1 by more than you expected. You're guiding for 2Q at the midpoint, which assumes a similar year-over-year performance in Q2. So, why doesn't the sequential improvement in the -- in the year-over-year change continue to narrow from Q1 to Q2 if the market is now more sort of established and reopening, you feel cautiously optimistic about your performance? Just trying to understand what you're seeing in the environment and your own business that what -- that would -- wouldn't drive even more improvement in Q2 as events return?

Irene Lyu -- Head of Strategic Investments and Capital Markets

Yeah, so actually, for our guidance, we look at the range, right? It has been sequentially narrowing down because, last time, we gave decline of 10 to 20, and the quarter before, it's 20 to 30, and before that is 30 to 40. So, definitely, on a guidance basis is narrowing down and -- and from what we see from -- in the market, in Q1, you know, as we mentioned, the whole make-up community, for the first time, now show a positive growth of 6% versus single-digit decline over the past three quarters. Yeah, but it's definitely a gradual recovery rather than a very abrupt recovery. And then, secondly, in terms of what's behind our Q2 guidance, we think, you know, they're still going to be a decline there.

Three major reasons. The first one is, you know, the main flagship brand, Perfect Diary, which still contributes to a majority of our revenue, is still under the brand's strategic transformation. And as mentioned, most of the new color launches are planned for the second half of this year. So, that's why, for Q2, we don't think the brand will be back to the growth stage.

And then, secondly, there's still going to be a high base for comparison compared to the prior-year period, primarily because of the larger scale of the offline business. If you look at last year, we still have 200 -- close to 230 stores for Perfect Diary at the end of June 2022. And then, by end of March this year, we only have around 150. So, offline business, because of the large number of closure of stores, there are going to be a decline.

And then, lastly, for our skincare business, definitely have a good momentum going at a -- faster than market average pace. But Q1 is not a -- Q2 is a relatively good season for skincare, but the size is still relatively small compared to our color business. So, those are the kind of reasons behind our guidance. But again, we do see a sequential narrowing down of our guidance and the year-over-year decline, which suggests a healthy trend that we are expecting.

Olivia Tong -- Raymond James -- Analyst

Got it. Thank you. My last question is just around the positioning of your mass brands versus your -- your more prestigious brands and how you're seeing -- if you could compare and contrast the recovery, excuse me, of -- of your larger mass brands versus perhaps a little bit faster-growing and some of the more prestigious brands within your portfolio. Thank you.

Irene Lyu -- Head of Strategic Investments and Capital Markets

So, your question is kind of the performance -- just wanted to clarify the performance, kind of a comparison between mass versus prestige brands for the industry or for our own -- own brands?

Olivia Tong -- Raymond James -- Analyst

Right. Honestly, both. But -- but your view on the industry and then also your -- specifically, your brands. Thank you.

Irene Lyu -- Head of Strategic Investments and Capital Markets

Right, OK. Yeah, OK. Got it. So, we don't actually see a very clear divergent pattern between mass and prestige segments.

But instead, what we see is -- we're seeing each pricing here and the category, there's the -- the brands tend to show a more -- more clear divergent performance because this Q1, if you look at Tmall and Douyin, the performance really driven by some mass brands really fast. Some of the more established brands are growing at a slower pace or even have a decline. So, with the intensifying competition in this industry, we do see increasing divergence of performance given the brands' own equity and also their operational excellence. So, in our view, and also, we think for all brands, the long-term performance is definitely driven by more like brand-building and R&D investments.

So, that's why, for us, we -- for -- to support this sustainable growth, we want to build long-term success. So, brand-building and R&D investment, definitely the most important initiatives that we are undertaking.

Olivia Tong -- Raymond James -- Analyst

Got it. Thank you. Best of luck.

Irene Lyu -- Head of Strategic Investments and Capital Markets

OK.

Operator

Thank you. This concludes today's question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Irene Lyu -- Head of Strategic Investments 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 TPG Investor Relations. Our company 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

[Operator signoff]

Duration: 0 minutes

Call participants:

Irene Lyu -- Head of Strategic Investments and Capital Markets

Jinfeng Huang -- Founder, Chairman, and Chief Executive Officer

Donghao Yang -- Director and Chief Financial Officer

Dustin Wei -- Morgan Stanley -- Analyst

DonghaoYang

Unknown speaker

Olivia Tong -- Raymond James -- Analyst

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