Yatsen (YSG) Q3 2024 Earnings Call Transcript

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Yatsen (NYSE: YSG)
Q3 2024 Earnings Call
Nov 20, 2024, 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 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 -- Vice President, Head of Strategic Investments and Capital Markets

Thank you, operator. Please note that 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.

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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 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 will 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 2024 earnings conference call today. I will start with the macro overview and our key financial metrics, followed by insights into our strategy and updates on our brands and products. China's beauty industry faced significant challenges in the third quarter, with beauty sales significantly lagging the overall retail market. According to the adjusted data from China's National Bureau of Statistics, total retail sales of consumer goods grew by 2.7% year over year for the third quarter, while beauty retail sales declined sharply by 5.5%.

Notably, September marked the fourth consecutive month of year-over-year declines in beauty retail sales since June. Online beauty sales were also sluggish in the third quarter. Tmall reported year-over-year drop in both color cosmetics and skin care sales, while Douyin sustained modest double-digit growth. Despite a challenging market, we delivered results in line with our guidance.

Total net revenues decreased by 5.7% year over year. However, net revenues from skin care brands rose by 3.6% year over year, driven by a 10.5% year-over-year increase in our clinical and premium skin care brands, including Galenic, DR.WU, and Eve Lom. Conversely, net revenues from our color cosmetics brands fell by 10% year over year, largely due to decreased sales from the Perfect Diary brand, which is undergoing a strategic transformation to revamp its product line and optimize its channel mix. On the profitability front, our overall gross margin improved to 75.9% in the third quarter, up from 71.4% in the prior-year period, driven by a higher contribution from high-margin products.

We also reduced our net loss margin by 9.7 percentage points to 17.9% from 27.6% in the prior year through strategic marketing spending and optimized general and administrative expenses. Next, I would like to provide more color on the progress of our strategic transformation which we advanced during the third quarter to drive sustainable growth. One key initiative is optimizing our revenue mix by prioritizing higher-margin products. This involves expanding our skin care brands and introducing new color cosmetics products with higher gross margins, supported by our growing R&D capabilities.

We are also refining our cost structure to boost profitability. Operationally, we have streamlined our organizational structure to reduce general and administrative expenses, setting the stage for operating leverage once net revenues return to growth. These efforts provide a solid foundation for sustainable long-term growth and will enhance our ability to improve profitability as revenue recovers. As part of our strategic transformation initiatives, we made substantial investments in R&D with our third quarter research and development expenses totaling RMB 25.3 million, representing 3.7% of net revenues.

This consistent investment has significantly improved our R&D capability, enabling us to develop new high-quality products. In the third quarter, Perfect Diary launched the second-generation Biolip Essence lipstick that leveraged the upgraded biotech technology. Launched in late September, the product became the top seller in the lipstick category in terms of retail sales value on Douyin during the first week of October. Galenic also launched several new products.

The Couture Secret d'Excellence UV multiprotection, featuring our innovative Active Anchor technology, provides high-level full-spectrum sun protection. The No. 2 vitamin A serum offers a highly efficacious and clinically proven skin care solution to improve skin texture and reduce wrinkles. For the 11.11 Shopping Festival, we are pleased to report positive results across our brands, driven by the products we mentioned before, as well as other offerings launched throughout the year, including the Galenic Vivifiant micro-mask and our existing hero products.

At the end of October, Perfect Diary has reentered the top 20 color cosmetic brands in terms of combined sales on Tmall and Douyin. In addition, Galenic performed strongly during the festival, ranking No. 1 among premium whitening products within Austin Li's livestreaming room and No. 3 among imported anti-wrinkle serum products on Tmall.

Furthermore, Galenic participated in the 33rd European Academy of Dermatology and Venereology Congress in Amsterdam in September, where we presented groundbreaking clinical research on our Galenic No. 1 vitamin C serum, in conjunction with yellow light therapy for effectively treating melasma. This collaboration with leading international experts underscores our dedication to dermatological science. Meanwhile, Eve Lom hosted a global summit on emotional skin care at the University of Oxford, highlighting the stress-relieving benefits of Eve Lom's daily rejuvenating cream and showcasing our latest innovations in emotional skin care.

In terms of our efforts to optimize our cost structure, we also made significant progress in the third quarter. Our general and administrative expenses for the quarter were RMB 85 million, representing 12.6% of net revenues, a substantial improvement from RMB 151.8 million or 21.1% of net revenues for the prior-year period. By reducing our fixed cost levels, we are moving closer to our goal of sustainable growth. Lastly, I would like to provide an update on our ESG initiatives.

We recently released our 2023 Environmental, Social, and Governance Report, marking our third consecutive year of deepening commitment to transparency and sustainability. We are proud to maintain our MSCI ESG rating of A, reflecting our strong performance in several key areas, including product packaging and waste management, product carbon footprint, and chemical safety. Our dedication to excellence in green and low-carbon initiatives continues to enhance our position as a responsible leader in the beauty industry. In conclusion, while the beauty industry continues to face challenges, we remain optimistic about our ability to adapt and thrive.

With our focus on innovation, brand-building, and sustainable practices, we are confident that we are well-positioned to achieve year-over-year revenue growth in the fourth quarter. Additionally, our commitment in quality and consumer engagement will enhance brand loyalty given our long-term progress. 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 renminbi amounts and all percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the third quarter of 2024 decreased by 5.7% to 677 million RMB from 718.1 million for the prior-year period. The decrease was primarily due to a 10% year-over-year decrease in net revenues from color cosmetics brands, partially offset by a 3.6% year-over-year increase in net revenues from skin care brands.

Gross profit for the third quarter of 2024 increased by 0.2% to 513.8 million RMB from 512.8 million for the prior-year period. Gross margin for the third quarter of 2024 increased to 75.9% from 71.4% 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 third quarter of 2024 decreased by 12% to 655.2 million from 744.3 million for the prior-year period.

As a percentage of total net revenues, total operating expenses for the third quarter of 2024 were 96.8%, as compared with 103.6% for the prior-year period. Fulfillment expenses for the third quarter of 2024 were 50.4 million, as compared with 56 million for the prior-year period. As a percentage of total net revenues, fulfillment expenses for the third quarter of 2024 decreased to 7.4% from 7.8% for the prior-year period. The decrease was primarily due to an increase in the overall average selling price of our products, as well as further improvements in logistics efficiency.

Selling and marketing expenses for the third quarter of 2024 were 494.4 million, as compared with 511.7 million for the prior-year period. As a percentage of total net revenues, selling and marketing expenses for the third quarter of 2024 increased to 73% from 71.3% 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, partially offset by lower marketing expenses as a result of our more strategic marketing spending. General and administrative expenses for the third quarter of 2024 were 85 million, as compared with 151.8 million for the prior-year period.

As a percentage of total net revenues, general and administrative expenses for the third quarter of 2024 decreased to 12.6% from 21.1% for the prior-year period. The decrease was primarily attributable to lower payroll expenses resulting from a reduction in general and administrative headcount and lower share-based compensation expenses. Research and development expenses for the third quarter of 2024 were 25.3 million, as compared with 24.7 million for the prior-year period. As a percentage of total net revenues, research and development expenses for the third quarter of 2024 increased to 3.7% from 3.4% for the prior-year period.

The increase was primarily attributable to the deleveraging effect of lower total net revenues in the third quarter of 2024. Loss from operations for the third quarter of 2024 was 141.3 million, as compared with 231.5 million for the prior-year period. Operating loss margin was 20.9%, as compared with 32.2% for the prior-year period. Non-GAAP loss from operations for the third quarter of 2024 was 98.5 million, as compared with 164.6 million for the prior-year period.

Non-GAAP operating loss margin was 14.5%, as compared with 22.9% for the prior-year period. Net loss for the third quarter of 2024 was 121.1 million, as compared with 197.9 million for the prior-year period. Net loss margin was 17.9%, as compared with 27.6% for the prior-year period. Net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the third quarter of 2024 was 1.22 RMB, as compared with 1.81 RMB for the prior-year period.

Non-GAAP net loss for the third quarter of 2024 was 76.6 million, as compared with 130.2 million for the prior-year period. Non-GAAP net loss margin was 11.3%, as compared with 18.1% for the prior-year period. Non-GAAP net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the third quarter of 2024 was 0.77 RMB, as compared with 1.19 RMB for the prior-year period. As of September 30, 2024 we had cash, restricted cash, and short-term investments of 1.31 billion RMB, as compared with 2.08 billion RMB as of December 31, 2023.

Net cash used in operating activities for the third quarter of 2024 was 175.9 million, as compared with 163.4 million for the prior-year period. Looking at our business outlook for the fourth quarter of 2024, we expect our total net revenues to be between 1.07 billion RMB and 1.18 billion RMB, representing a year-over-year increase of approximately 0% to 10%. 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

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

Maggie Wan -- CICC -- Analyst

Well, thanks for taking my question. This is Maggie Wan from CICC. I have two questions. The first one is about our performance during 11.11 festival and is that in line with our expectations? And the second question is about our plan for product development and channel expansion for the next year.

That's my two questions. Thank you.

Donghao Yang -- Chief Financial Officer and Director

All right. Maggie, thank you very much for your question. Let me take your first question. I think we have done pretty well during the 11.11 festival, pretty much in line with our expectations.

Most of our brands have performed in line with our expectations. For example, our Galenic brand. You know, we sold pretty well through -- you know, a lot of -- some very well-known KOLs, in line with our expectations. And our Perfect Diary also performed pretty well.

And your second question, what is the plan to -- for product development and channel expansion next? Well, next year, I think we're -- we have made very good plans for our new product development for all of our brands. So, we're now trying to put together a new product development plan for next year as part of our annual budgeting process. Channel expansion, I think we'll continue to work very hard to drive growth through our top channels like Tmall and Douyin. And also, we're going to try to develop more new channels.

For example, for Galenic, we're going to open some new offline stores to explore the feasibility of our business opportunities in the offline channels.

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

Yeah, to -- to build on --

Maggie Wan -- CICC -- Analyst

OK.

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

Sorry. OK. So, to build on what Donghao shared before, I think my overall evaluation about our performance in the 11.11 promotion is in line with our objective; and in some areas, we're exceeding our expectations. So, first of all, I think 11.11 is a very important sales event, as we all know.

But if we go deeper to our strategic goals for leveraging the 11.11 to improve our sales for our strategic brands and also to catch up with the momentum for new product launch, if we are judging based on the criteria before, I think we have made quite significant progress. Here are some examples. So, during this year, in often these livestreaming rooms, we have four brands that joined the promotion event. And then the Perfect Diary has gained a pretty good momentum to have -- to achieve the sales target for the Biolip lipstick and also our loose powder.

As we all know, loose powder is a very important category to provide an opportunity for Perfect Diary to expand our category from lip category to face makeup category. And then for our Galenic brand, so during the 11.11 promotion, I think the brand has a pretty balanced sales on Tmall and also Douyin. So -- and also, Galenic launched a new product, the vitamin A serum, which helps the brand for future growth to expand the benefits space from purely whitening category into anti-aging category, which is much bigger than the whitening category in -- from the market size perspective. There's -- another thing I want to highlight is the -- optimizing the ROI on investments.

I think, in next quarter, we are going to release the gross margin for our Q4. But during this promotion, we are very disciplined in controlling the price -- selling price for our hero products. For our lipstick, we are selling in Austin Li's livestreaming with 130 RMB for one and also a 240 RMB for two lipstick. This provides us with a very good scenario to maintain the sales momentum while keeping a balance on the gross margin improvement.

I think -- from the strategic transformation perspective, I think the 11.11 is in line with our expectations. Your second question talked about the new product offerings. Again, going back to the transformation guidelines. So, I think one of the key important -- key areas that we have been investing is R&D.

And then based on the robust R&D performance, we are launching some new products based on the efforts we have been committed to devote in the past few years. And we are very thrilled to see some early indicators on the products we launched in the market. And then based on those indicators, we are happy to see the progress we are making. As I mentioned before, the lipstick -- the Biolip lipstick for Perfect Diary helps the brand to regain the growth momentum and also the -- and also improve the brand's profitability -- gross margin.

And then for our other clinical and skin care brands, and we launched some new products, and then we are also very happy to see the early results for those products, which will provide us some foundations in the future for sustainable growth. So, that's the -- some of the points I want to add on Donghao's answer.

Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to Irene for any closing remarks.

Irene Lyu -- Vice President, 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 the Piacente Financial Communications. 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

[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

Maggie Wan -- CICC -- Analyst

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