Yatsen (YSG) Q3 2023 Earnings Call Transcript

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Yatsen (YSG 8.28%)
Q3 2023 Earnings Call
Nov 21, 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 third 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 investments and capital markets. Please go ahead.

Irene Lyu -- Vice President, 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 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 companies 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 also 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 -- Founder, Chairman, and Chief Executive Officer

Thank you, Irene, and thank you, everyone, for participating in Yatsen's third quarter 2023 earnings conference call today. In the third quarter of 2023, China's building industries remained in the mild recovery phase that began as the country emerged from the pandemic earlier this year. According to the National Bureau of Statistics of China, total retail sales of consumer goods grew by 4.2% year over year, and the total beauty retail sales increased by 2.6% year over year, both representing a deceleration in year-over-year growth rate from the second quarter. Online beauty sales showed a similar pattern in the third quarter.

For both color cosmetics and skincare, combined total sales on Tmall and Douyin recorded a slower growth rate than in the second quarter of 2023. Amid uncertainties in consumer demand, Yatsen remained committed to its strategic transformation plan. We continuously strive to build strong brand equity based on superior product performance and consumer satisfaction. For the third quarter of 2023, we recorded total net revenue of RMB 718.1 million, in line with our previous guidance.

Net revenue for our skincare brands declined by 4.1% year over year, mainly attributable to our strategic decision to phase out the Abby's Choice brand. Our clinical and premium skincare brands, including Galenic, DR.WU, and Eve Lom, delivered another solid performance, recording 7.4% year-over-year growth in combined with net revenues and a further increasing their contribution to total net revenues as compared with the prior-year period. Net revenues from color cosmetics brands decreased by 21.5% year over year, primarily due to the decline in Perfect Diary sales as a result of the timing of new product launches near the end of the third quarter and the closure of underperforming offline stores. The number of Private Diary offline stores totaled 123 as of the end of the third quarter compared with 198 a year ago.

Net revenues from Little Ondine and Pink Bear continued to grow as both brands raise their brand awareness among targeted consumers. Yatsen's gross margin improved to 71.4% in the third quarter from 58.9% in the prior-year period due to the rising contribution from higher gross margin skincare brands and ongoing cost optimization across our brand portfolio. Net loss and the non-GAAP net loss margin expanded to 27.6% and 80.1%, respectively, as we increased investments in the Perfect Diary brand upgrades and preparations for the Double 11 Shopping Festival. Turning now to our brands and products.

During the third quarter of 2023, we repositioned the Perfect Diary brand, carrying out a series of campaigns with the refreshed visual identities and new product launches. The brand's new hero product, Biolip Essence Lipstick, leverages our exclusive Biolip technology, which creates a bionic sebum film upon application to protect the lip's fragile skin barrier. Biolip's strong efficacies in lip line reduction was validated by the prestigious Ruijin Hospital and SGS testing agency. Our two other color cosmetics brands, Little Ondine and Pink Bear, both formed co-branding partnerships with popular IPs that deeply resonated with young consumers.

For our skincare brands, we continued to engage deeply in brand building, further cultivating each brand's distinctive audience. Galenic marked its 45th anniversary with a gala celebration that hosted an array of celebrities, media, and scholars in Paris. The brand also officially announced its scientific research cooperation with Hopital Saint-Louis, a well-known dermatology hospital in Paris and established clinical dermatology research foundation. In addition, DR.WU celebrated its 20th anniversary.

Its reputation as a high-quality clinical brand and a pioneer in the use of mandelic acid continued to strengthen as the brand was honored as Asia's leading mandelic-based skincare brand by Euromonitor, the world's top independent provider of market research and industry analysis. Furthermore, Eve Lom introduced renowned singer and actor Xiao Zhan as its brand ambassador to increase brand awareness and establish a broader customer base. Moving on to R&D, R&D expenses as a percentage of revenues were 3.4%. In September, Yatsen and the Galenic brand attended the IFSCC conference in Barcelona, Spain and the -- and presented a scientific paper on the brand's patent, snow algae peptide.

At the conference, Galenic also announced that it has entered into strategic cooperation with the global peptide leader, Lubrizol, to jointly research new ingredients, collaborate on anti-aging product research, and expand Yatsen's open-lab research and development boundaries. Before handing the call over to Donghao, I would like to provide an update on our share repurchase program. As announced earlier today, our board of directors has approved and authorized a change to the size and term of our share repurchase program, increasing the aggregate value of shares that may be repurchased under the share repurchase program from $150 million to $200 million and extending the effective term of the share repurchase program through November 19, 2025. This further demonstrates our confidence in Yatsen's process.

To summarize, China's beauty market is still in the process of a modest recovery this year. Looking forward, we will continue to adapt flexibility and are confident in our resources and ability to advance our strategic transformation plan. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.

Donghao Yang -- Chief Financial Officer and Director

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 refer to year-over-year changes, unless otherwise noted. Total net revenues for the third quarter of 2023 decreased by 16.3% to 718.1 million from 857.9 million for the prior-year period.

The decrease was primarily attributable to a 21.5% year-over-year decrease in net revenues from color cosmetics brands, combined with a 4.1% year-over-year decrease in net revenues from skincare brand. Gross profit for the third quarter of 2023 decreased by 13.3% to 512.8 million from 591.3 million for the prior-year period. Gross margin in the third quarter of 2023 increased to 71.4% from 68.9% 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 thirdly, cost optimization across all of our brand portfolios.

Total operating expenses for the third quarter of 2023 decreased by 13.1% to 744.3 million from 857 million for the prior-year period. As a percentage of total net revenues, total operating expenses for the third quarter of 2023 were 103.6% as compared with 99.9% for the prior-year period. Fulfillment expenses for the third quarter of 2023 were 56 million as compared with 63.8 million for the prior-year period. As a percentage of total net revenues, fulfillment expenses for the third quarter of 2023 increased to 7.8% from 7.4% for the prior-year period.

The increase was primarily attributable to the deleveraging effect of lower net revenues in the third quarter of 2023. Selling and marketing expenses for the third quarter of 2023 were 511.7 million as compared with 564.8 million for the prior-year period. As a percentage of total net revenues, selling and marketing expenses for the third quarter of 2023 increased to 71.3% from 65.8% for the prior-year period. The increase was primarily attributable to increased investments in the Perfect Diary brand upgrade and preparations for the Double 11 Shopping Festival.

General and administrative expenses for the third quarter of 2023 were 151.8 million as compared with 194.5 million for the prior-year period. As a percentage of total net revenues, general and administrative expenses for the third quarter of 2023 decreased to 21.1% from 22.7% for the prior-year period. The decrease was primarily attributable to a reduction in compensation corresponding to a decrease in general and administrative headcount. Research and development expenses for the third quarter of 2023 were 24.7 million as compared with 33.9 million for the prior-year period.

As a percentage of total net revenues, research and development expenses for the third quarter of 2023 decreased to 3.4% from 2.9% 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 third quarter of 2023 decreased by 12.9% to 231.5 million from 265.7 million for the prior-year period. Operating loss margin was 32.2% as compared with 31% for the prior-year period.

Non-GAAP loss from operations for the third quarter of 2023 increased by 1.2% to 164.6 million from 162.6 million for the prior-year period. Non-GAAP operating loss margin was 22.9% as compared with 19% for the prior-year period. Net loss for the third quarter of 2023 decreased by 6.1% to 197.9 million from 210.7 million for the prior-year period. Net loss margin was 27.6% as compared with 24.6% for the prior-year period.

Net loss attributable to Yatsen's ordinary shareholders for diluted ADS for the third quarter of 2023 was 0.36 as compared with 0.37 for the prior-year period. Non-GAAP net loss for the third quarter of 2023 increased by 3% to 130.2 million from 126.5 million for the prior-year period. Non-GAAP net loss margin was 18.1% as compared with 14.7% for the prior-year period. Non-GAAP net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the third quarter of 2023 was 0.24 as compared with 0.22 for the prior-year period.

As of September 30, 2023, we have cash, restricted cash, and short-term investments of RMB 2.24 billion as compared with RMB 2.63 billion as of December 31, 2022. Net cash used in operating activities for the third quarter of 2023 was 163.4 million compared with net cash generated from operating activities of 21.8 million for the prior-year period. Looking at our business outlook for the fourth quarter of 2023, we expect our total net revenues to be between 1.01 billion and 1.06 billion, representing a 0% to 5% increase year over year. 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.

Questions & Answers:

Operator

[Operator instructions] And the first question comes from [Inaudible] with CICC.

Unknown speaker

Well, thanks for taking my question. This is [Inaudible] from CICC. I have two questions. The first one is regarding the new products of Perfect Diary.

We're seeing the launch of Biolip Essence Lipstick and also foundations in Q3. So, is there any feedback we've got from the customers? And how should we expect on their performance in next year? This is for the first question. And my second question is about our guidance. We've guided a positive revenue growth for Q4, which is an encouraging signal.

So, behind this guidance, could management give us more color on your expectations for both skincare and color cosmetics sectors in Q4? And, like, what are the key drivers for us to achieve that goal? That's my question. Thank you.

Irene Lyu -- Vice President, Head of Strategic Investments and Capital Markets

So, yeah, thank you for the question. Let me take the first one. For Perfect Diary's new lipstick launch, which is the Bio Essence Lipstick, after it launched in the end of September, we have received very positive feedback from our users as they enjoy very strong efficacy from the lipsticks. Basically, our philosophy is to have a very perfect makeup look, combined with skin level efficacy benefits from the lipstick.

So, that's number one. And then, secondly, the user profile also started to shift after our brand upgrade and also the new launch. Historically, our consumers are mostly Gen Z and also young consumers from the lower-tier cities. But then, after we launched this new product and the brand upgrade, given that our price point start to increase and with new growth and benefits, we start to see more high-value consumers coming to buy our lipsticks, including, for example, the sophisticated young moms and also the upper-middle class.

And also since the launch, we have seen very positive ranking performance on both Tmall and Douyin. So, the launch of this lipstick was only at the end of September, so hasn't really contributed much of the Q3 performance. But in Q4 and Double 11, we continue to see this product to gain market share.

Donghao Yang -- Chief Financial Officer and Director

Yeah. And your second question, I think Irene has already covered, you know, part of the answer for your question. You know, we launched our new product for Perfect Diary toward the end of -- mid to end of September Q3. And the sales contribution from those new products, we started to show on our P&Ls, you know, starting in Q4.

So, that's one reason. One other reason is, you know, Q4 has traditionally been a strong season for our skincare products. And if you look at our, you know, skincare products, the main three skincare brand, you know, have been growing really fast in the past many quarters, and we are expecting strong growth from those skincare brands. So, all in all, you know, with the slowdown of the decline -- sales decline of Perfect Diary brand and strong growth from those other skincare brands, that's why we are expecting a strong quarter in Q4.

And therefore, you know, we gave the guidance of 0% to 5% year-over-year growth. As you know in the past, almost two years, you know, the sales of the company have been declining. And hopefully, you know, that decline has bottomed out. And we do expect our sales to start to gain traction in the foreseeable future.

Unknown speaker

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

Operator

[Operator instructions] All right, this concludes our question-and-answer session. I would like to turn the call to Irene Lyu for any closing comments.

Irene Lyu -- Vice President, Head of Strategic Investments and Capital Markets

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

Have a great day. Thank you.

Operator

Thank you. The conference is now concluded. Thank you for attending today's presentation. [Operator signoff]

Duration: 0 minutes

Call participants:

Irene Lyu -- Vice President, Head of Strategic Investments and Capital Markets

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

Donghao Yang -- Chief Financial Officer and Director

Unknown speaker

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