Q2 2022 Yatsen Holding Ltd Earnings Call
Ladies and gentlemen, good day and welcome to the Hudson Second quarter 2022 earnings Conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to I Remember you had a strategic investment and capital markets. Please go ahead.
Okay.
Thank you operator.
I used to know the discussion say welcome for affordable sustainable 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.
At the same time for lockouts yourself future performance and are subject to certain risks and uncertainties assumptions and other factors.
Some of these risks are beyond the company's control adequate cause actual results to differ materially from those mentioned in today's press release and Vista.
Gotcha.
General discussion of the risk factors that could affect <unk> business and financial results is included in certain filings of the company with the Securities Exchange Commission the.
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 Yahoo, Senior management team are searching for a while our founder chairman and CEO and Mr. Don Young our CFO and director Nash.
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 Yasser Investor Relations website.
The U S and global Hawk.
I'll now turn the call over to Mr. Jim Walsh. Please go ahead David.
Okay.
Well, thank you Gary and thank you everyone for participating in reference second quarter 'twenty to 'twenty two earnings conference call today.
At the start of the year, we embark our next part you're depend up on the journey with a single focus on building strong brands and World class R&D capability.
While she needs a pinnacle gross.
In the second quarter, we entered into a tough stretch updates Brittany.
Where a confluence of tonnages has put all the strategies and execution to the test.
The main tonnage was widespread Kobe 19 recurrences.
We shut down our numerous cities in China between April and June .
According to the latest data from the China National Bureau of Statistics.
Retail spending was down by 22, 3% and <unk>.
11% in April and May respectively.
Before slightly recovery in June .
The propulsion propulsion that you've.
You've had it offline retail spending national wide.
Including our offline stores.
In the online arena competition intensified our competitors engaged in aggressive promotions to drive sales.
Sluggish market demand for color cosmetics.
The premium skincare category.
And proved to be highly resilient and in fact grew during the second quarter.
Against this backdrop, our total net revenue decreased by 47, 6% year over year to RMB.
I'm doing 51 8 million.
Meeting the high end of our revenue guidance.
The year over year decline in revenues was mainly due to soft performance of our color cosmetics Brian .
Particularly offset.
Partially offsets by Santa rose across our skincare brands.
Our non-GAAP net margin reached 28% in the second quarter.
An increase of nine percentage points compared with the prior year period.
Attributable to the higher operating cost ratios of all our offline stores due to weak offline store sales.
As well as inventory loose and the completions for store closures.
Encouragingly, our quarterly net cash generated from operating activities for the positive for the first time since.
Since IPO at RMB 111 9 million.
Care to an outflow of RMB 17, 9 million for the prior year period.
Due to our disciplined working capital management practices.
While our overall strategy goals remain unchanged this resolves demonstrated.
Our ability to accelerate the optimization of our revenue base and cut costs in response to the evolving market environment in the second quarter.
Okay all revenue.
Greater detail.
Net revenues for all of our gift brands grew by 49, 2% year over year.
Presenting.
But he is three 4% of total net revenue for the second quarter.
Compared with 14% for the prior year period.
Total net revenues from telco, you blow and economic <unk>.
Secondly achieved year over year growth of 100, and it's held per se.
Supported by growing groundwork condition.
<unk> and the successful ramp up across multiple e-commerce channels.
Our skin care brands also keep it superior gross margin and the net profitability levels compared to our color cosmetic brands and approved highly resilient during periods of economy uncertainty in China.
Yeah.
Notably both of which became the largest and most profitable skincare brand in our portfolio.
Driven by standout performance of the classic mentally axes.
Yeah.
Which popped it.
N P acne Sterling chart on Tmall during the June 18th shopping Festival.
But the more notable sales do you lack Jamie grew by more than eight times compared to the prior year period.
And the new chip bold action with parents Cherilyn became the top Sally skin repair service on bogey during the June 18th shop eat basketball.
If long ranked number one on T mall during the 18th shopping festival in the premium may call removal category.
On the branding side Paulino well received brand we launched media campaign.
Late April .
Keep long hosted a number of live events in London, colon guarded and in New York Soho District.
But why and immersive offline experiential touch point for our customers.
He made his long launch the new forming cream cleans or which improves upon traditional clean so we used to and Anthony infused sulfate active formulary.
Representing our latest effort to expand you've long into mainstream and skincare categories.
Young its route you make how removal.
Last but not least.
Can that continue to demonstrate robust growth on the strength of these core by time, you see certain states.
During the second quarter got a neat launched the secrete after lunch.
Oh Gee anti aging ceragon.
In the summer.
Limited edition gifts that but by the time you see seriously.
Accompanied by branding campaign, featuring the Chinese woman's cohort of Shakopee speed skating gold.
She joined us.
Our award winning female sliver, Monica pool, and a female free diving camping be cut.
As you can see our skin care business is growing from strength to strength.
Testament to our ability to translate our accumulated experience and the know how from color cosmetics.
Sadly in the field of luxury and premium skincare.
We are closer to a truly global team to ogonek organically develop and grow our skincare brands.
How old town lapsed system and all of our R&D teams are also building the capability to develop a strong pipeline of new products to support the growth of our clinical and skincare brands.
Notable R&D breakthroughs during the quarter included the successful launch of the Triple action, Sir and well thought of <unk> and the anti aging no algae sterling, but can I make.
Which is featured active ingredients and formulations developers with significant contribution from our R&D lab.
The Triple action seven for example, with developers in partnership with the University of Science and technology.
And the both our nano targeting technology and enabling the sites we leased up.
Active ingredient is directed to an acne inflammation sports deep under the skin layers.
For an increase in efficacy compared with higher productivity.
The anti aging snow algae certain features all work with technicals.
Combining a high concentration of exclusive.
Oh Gee originating from Swedish.
For my first regions with yachts and length of the peptide to achieve higher efficacy in anti wrinkle in the anti aging applications.
The successful launch and the commercialization of this product.
Note that our R&D teams can develop a new product.
The suit the needs of our growing brand portfolio Union expenditures and aesthetic Matt.
Our color cosmetic brands on the other hand full of 55% decline in total net revenues.
<unk> is a slowdown in our pocket diary and little on the brands.
So did I read launched several new products in the second quarter.
Such as the road gemstone eyeshadow.
Lipstick and last Thursday.
As well as the new read my lips crush collection and beloved compression lipstick you've set.
Collection for the May 20 years, Chinese Valentine's Day campaign.
This new product launch.
In pets by the clinical downturn in consumer.
Color cosmetic spending as well as intense market competition among the mass segment.
The resurgence of COVID-19, also edwards to be impacts of polka diary offline stores sales and profitability.
Murphy pitching and acceleration of our store optimization plans.
As of June 30th 2022 we operated a total of 228 perfect diary stores.
A net reduction of 58 stores since the beginning of this year.
Given the worsening.
We tell you by China.
We plan to close additional.
Under performing stores in the second half of 2032.
We will continue to monitor the offline retail environment.
And ongoing basis to determine if further store closures I need it.
We are also exploring other ways to serve our offline stores customers profitability.
Both of them, there and the lethal all day.
Both expanded their distribution with Teekay group to more than 300, you're taking a V and the colors.
Across the nation.
Quarter.
Which generated additional incremental revenue and profits for the two brands.
Paul where we will look to replicate this success and further expand collaboration with other distribution partners.
Due largely to the 11th to levels of promotions during the June 18th to it.
Particularly for the color cosmetics, our overall gross margin declined to 52, 9%.
A decrease of two nine percentage points compared with the prior year period.
Our gross margin was also impacted by an inventory loss of RMB $43 9 million.
Presenting for 6% of total net revenue.
Now, let's have a look at all cost.
Yeah.
By far the largest piece of our operating expenses with our selling and marketing expenses.
Totally RMB.
Have you had the $2 5 million.
For the second quarter on a non.
non-GAAP basis.
Which decreased by.
34 35.
Five 7% year over year.
The same rate that's all revenue reduction.
However.
Percentage of total net revenue.
non-GAAP selling and marketing expenses remain elevated at.
With tier three 3% for the second quarter compared with 51, 4% for the prior year period.
Attributable to higher operating costs, the ratios of all offline stores.
In store closure related expenses and the pollution of RMB 20.
$28 7 million for further store closures in the second half of 30 to 32.
This store closure provision represent it represents 3% of.
Our total net revenues.
Oh, you elaborated all related expenses offset the fat from the reduction of our performance.
As the marketing expenses, which declined substantially as a percentage percentage of total net revenue in the second quarter.
Our non-GAAP general and administrative expenses recorded a net reduction of RMB.
$18 7 million.
Compared with the prior year period.
Though as a percentage of total net revenue net revenues.
Increased three five percentage points to 12, 6%.
Due to the deleveraging effect from the reduction in our revenues.
In addition to optimizing our fixed expenses were further.
Our total head count in the second quarter.
Our fulfillment expenses remain flat as a percentage of total net revenues.
Right.
Operating operational disruptions stemming from COVID-19.
Overall, our non-GAAP net lose margin.
Oh.
21, 8%.
The exceptionally challenging external environment in the second quarter.
Well as the numerous initiatives, we took to adjust our business with inventory loose and full closer position.
Totally seven points that 6% of total net revenues.
As we look back at our second quarter, we see it as an utmost chapter in our five year development.
The crucible from reach a stronger and more resilient, yes, I'm really emerge.
We generated a net cash inflow from operations of RMB 111, 90 there.
First positive quarterly net cash flow.
Call it since our IPO.
<unk> ended the second quarter with RMB Shreveport.
6 billion of cash and short term investments.
While we expect the eternal environment to remain challenging in the near term we.
We have ample financial flexibility to meet the hour.
Teaching objectives and continue our journey of evolution.
With that I will now turn the call over to our CFO , Don how young she will discuss our financial performance. Thank you everyone.
Thank you, David and Hello, everyone before I get started I would like to clarify that all financial numbers presented today are in and then Vietnam and all percentage changes refer to year over year changes unless otherwise noted.
Total net revenues for the second quarter of 2022 decreased by 37, 6%.
$951 8 million RMB from 1.53 million RMB in the prior year period.
Increase was primarily attributable.
To your point Bob.
That decline in net revenues from our color cosmetic brands, partially offset by a 49, 2% increase in net revenue from our skin care brand.
Gross profit for the second quarter of 2022.
Creased by 40 points reinforce that.
$598 3 million.
1 billion in the prior year period gross margin for the second quarter of 2022 decreased to 62, 9% from 65, 7% in the prior year period. The decrease was primarily attributable.
Elevated levels of promotion.
The June 18th shopping festival and in inventory.
<unk> of 43.9 million RMB.
Total operating expenses for the fourth.
Quarter of 2022 decreased by 38%.
875.3 million from one point.
41 billion in the prior year period.
As a percentage of total net revenue total operating expenses for the second.
Quarter of 2022 or 92%.
Compared with 92 point.
In the prior year period.
Film and expenses for the second quarter of 2022.
$69 7 million.
Pulp with well hunger and $18 1 million in the prior year period.
As a percentage of total net revenue pro forma in expenses.
Second quarter of 2022.
273%.
Seven 7% in the prior year period.
The decrease was primarily attributable to a reduction in share based compensation corresponding to a decrease in fulfillment head count.
Selling and marketing expenses for the second quarter of 2022 or $625 7 million.
As compared with 972.5 million in the prior year period.
As a percentage of total net revenues.
And marketing expenses for the SEC.
Second quarter of 2022.
So 65.7%.
53, 8% in the prior year period, the increase was primarily attributable to higher operating cost issue.
I'll fight for it.
Turning to our to.
All client for itself as well as store closure related expenses and the provision of <unk> 20.
$28 7 million RMB for further.
Closure in the second half of.
2022, partially offset by a reduction of our performance based.
And Brian marketing spend it.
General and administrative expenses for the second quarter of 2022, or $147 8 million RMB as compared with $286 4 million in the prior year period.
As a percentage of total net revenue.
<unk> and administrative expenses for the second quarter of 2022 decreased to 15.5% from 18.8% in the prior year period.
Decrease was primarily attributable to a reduction in share based compensation.
Profiling to a decrease in general and a little bit.
Okay.
Research and development expenses for the second quarter of 2022 were 32 million.
Paired with 35.2 million in the prior year period as a percentage of total net revenues research and development expenses.
The second quarter of 2022 increased to 3.4% from 2.2% in the prior year period. The increase was primarily attributable to the deleveraging effect of lower total net revenue.
Loss from operations for the second quarter of 2022 decreased by 32 point corporate tax.
Wondering if 77 million RMB.
409, 9 million in the prior year period.
Operating loss margin was 29, 1% as compared with 26, 9% in the prior year period.
non-GAAP loss from operations for the second quarter of 2022 increased by three two.
Perfect.
218 points to a million RMB from $211 4 million in the prior year period.
Yeah operating loss margin was 22, 9%.
Compared with 14.9% in the prior year period.
Loss for the second quarter of 2022 decreased by 32, 4% to 200.
And $64 3 million RMB.
391.2 million in the prior year period net loss margin was 27, 8%.
With 25.7% in the prior year period net loss.
Pivotal volcker wasn't very thoroughly for diluted it yet, but the second quarter of 2022.
Your point 43, RMB as compared with four point 62 RMB.
Prior year period.
non-GAAP net loss for the second quarter of 2022 increased by six 5%.
$107 5 million RMB 194.9 million in the prior year period.
non-GAAP net loss margin was 21, 8%.
As compared to 12.8% in the prior year period, non-GAAP net loss attributable to ordinary shareholders for that.
Yes, but the second quarter of 2022 was zero point 44, RMB as compared with <unk> 31, RMB in the prior year period.
[noise] as of June 30th.
1022, the company had cash with 50 cats in the short term investment.
2.06 billion RMB as compared with.
A few points.
One 4 billion RMB as of December 31, 2021, net cash generated from operating activities for the second quarter of 2022 increased by 241, 6%.
111.9 million RMB from net cash used in operating activities.
79 million in the prior year period.
But the third quarter of 2022, the company expects its total net revenues to be between.
$738 4 million RMB, and 872 7 million.
Presenting a year over year decline of approximately 35% to 45% primarily due to the continued softness in market demand for our color cosmetics.
These forecasts reflect.
The company's current and preliminary views on the market and operational conditions.
It's all subject to change with that I'd now like to open the call for 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'll usually speaking so we asked for other handset before pressing the keys.
Your question. Please press Star then two.
And for the benefit of all participants on today's call. If you wish to ask a question to management in Chinese. Please immediately repeat your question in English.
Today's first question comes from Dustin Wei with Morgan Stanley . Please go ahead.
Thanks, a lot for taking my question. The first question I want to start with the guidance on the third quarter guidance in terms of the revenue that declined magnitude, it's quite similar to the second quarter, but considering I think the Kobe situations. Probably is you know worst is over and our I think the base will be also.
Lower into the second half in the third quarter. So you know I understand that Oh don't how talk about the softness in color cosmetics, but just wondering if there is you know more information behind this guidance.
And maybe you know management could share some of the near term trends third quarter today.
Maybe by channel or by by product by category, you know what kind of softness it won't you know that we are talking about and the second question regarding the GP margin. So I think this is probably the second quarter that we have this inventory loss or the inventory provision. So I'm not sure you would have.
This number to share regarding the inventory age structure like you know how much sort of a little bit aging.
Inventory that we still see that can potentially still be written off in the coming quarters and also regarding the GP margin.
I think it's encouraging to see the revenue contribution from them from the skincare.
Skincare is increasing and so I think it's probably on the other direction to reach to almost like half of the business is coming from skincare. So how should we you know longer term or maybe next year or so think about the GP margin for the company. Thank you.
Alright, thanks for.
For the question.
First time guidance.
Well you know it is the overall cosmetics market in China has experienced.
Very sharp a decline starting from.
At the beginning of this year.
Well some of that actually is related to the macro economy.
Global situation and some of that also was due to the COVID-19 situation, especially.
And so high in areas around Shanghai, even today.
You May also know that in.
A lot of the areas regions in China, and the COVID-19 situation is still very serious for example.
I think you know and some of the northwest and southwest provinces in China.
People are still restricted from from traveling to.
You know with surgery.
The COVID-19 pandemic.
And Dennis.
So that's oh.
About the overall market softness.
We experienced a pause here and if you compare our Q3 guidance versus <unk>.
Q2, and you mentioned you know our Q3 guidance is very similar to.
The level of Q2 actually two.
We viewed that as a very positive signal that means you know the business has stabilized.
From the trend of a sharp decline in southern France.
You know at the beginning of this year.
So that's one thing you know our overall business is stabilizing and also you know.
The softness that's on color cosmetics business.
You know is to.
To some extent offset by our strong growth in skincare.
Oh, why you know, we're giving this a guidance level similar to that of Q2.
And you've talked about a GP margin and an aging of the inventory you know, we're not providing that kind of detail for our inventory, but we can tell you. What we can tell me is you know we.
Made up of vision provision of 44 million RMB.
Our obsolete inventory.
In Q2, which is quite substantial number.
And you know we do have a provision policy as part of our overall accounting policy.
Policy and going forward you know, we'll continue to make provisions.
As required by our policy.
David I read and do you have anything else off.
Yeah sure. So yeah all of that guidance basically I think it's a way of providing this based on our estimation on both the external and internal factors and then we have to look at it by their friends are product category right. For example on the color cosmetic side. So Hal had mentioned you know et cetera.
Environment, we see a resurgence of COVID-19, which comfortable to impact customer confidence and also the funding rate among the young generation you say, it's also impacted by the Covid situation in which those people are our core customers. So that continues to impact the color cosmetic market, which were cut off.
They'll see that July due to your overall, China retail spending.
The only negative growth year over year, that's on the external side for color and internally as we're still going through our strategic evolution that we're still really focusing on high quality revenue for the color cosmetic friend, So right now because of this.
Refining all of our business model.
They'll see you know a decline in the color cosmetic segment of our business and all the skin care side, we had a very strong sales in Q2 and for skincare, because it's highly seasonal Rand normally Q2, and the Q4 are the major seasons for for.
Skincare, because customers tend to stock up during a large promotion so for Q3 with them would come to you will see growth.
But given you know, it's a kind of a quiet period.
For for a certain e-commerce.
<unk> sales. That's why we are also providing guidance that's kind of just some.
Sure.
Yeah, one other thing to add yeah you.
You just asked about you know the impact of our <unk>.
Growth of our skin care business on the gross margin trend and obviously in our business.
Has much higher gross margin level than on color cosmetics, the difference could be as big as like 10 percentage points.
So as we continue to grow.
Grow our skin care business as the skin care business continues to take more share in our total product mix.
We believe that you know the Oh, we will continue to see improvement on our gross margin.
Yes.
Alright.
Got it thanks, Thanks a lot.
Thank you and ladies and gentlemen, our next question comes from formulary win we'll see our Susi. Please go ahead.
Oh, Thanks for taking my questions I have two questions. The first one.
Regarding selling and the marketing campaign.
Hum as industry competition intensified.
Some international brands Awesome, Atlanta dance right.
Pat mentioned that don't match.
So I can't imagine that gave some color on your plans for marketing and promotion in the second half off tiny tiny chance and how do you see the channel that's selling and marketing expenses as a percentage of total revenue in the second half of the.
And the second question regarding organization and those don't change ASUR Gras wind portfolio could you give some color on how how are you allocating resources and talents amounted fans fans.
Well thank.
Thank you very much for your question, our first time to selling and marketing.
You know, we we compete are of course with her.
With other you know with your friends and as long as our domestic the domestic brands not only on the selling and marketing.
But also you know we are making very.
A big investment in our R&D capabilities.
You know we wanted to improve the efficacy.
Yeah.
Our products and to make it.
One of our biggest competitive advantages going forward so for the second half of this year.
I believe they are.
Selling and marketing expenses as a percent of revenue.
Most likely stay at a relatively stable level.
Meaning you wont be seeing a sharp increase in our selling and marketing.
<unk> expenses to drive sales growth.
Because you know we are for the long term, we do believe that product efficacy and our investment in R&D.
B are you know the most important drivers of our.
Future business growth.
And organization structure, how do we allocate our talent well it depends oh for a single brand I think you know, we will allocate or we will assign.
Assign you know our talented marketing and branding.
Most likely to both France, and R&D, you know, we're going to allocate more.
And R&D dollars are talent for you now.
Kerr brands.
For color cosmetics are maybe more operational.
And also brining is also very important so.
It really depends on the specific brands and market segments and product categories and et cetera.
Got it. Thank you very much I have no idea.
Thank you.
And ladies and gentlemen, as a reminder, please press star then one to ask a question.
Today's next question comes from Olivia Tong with Raymond James. Please go ahead.
Hi, This is Devin Weinstein on for Olivia I appreciate you taking our questions.
First just wanted to ask a little bit more about the competition that you're experiencing.
One how would you compare it to prior quarters and perhaps how are you looking at it going ahead, and then I want to specifically ask about the level of promotional activity that you are experience that you experienced during the 618 event and how you're expecting it to evolved or 11 11 and any preparation.
But youre making for that.
[noise], yes sure.
So most of the competitors you know public companies have reported their Q2 as well. So you know saw a soft season for most of the competitors, so which is kind of demonstrating our thesis on overall demand for the beauty industry in China has seen.
I said by the ongoing Covid also customer confidence issue.
The competition still quiet.
Ever since last year or actually the beginning of that whole bit weird.
We're as there's more pressure for that international players on there to meet their targets. So their sales and promotions have been straw, which is still the case going forward. We think as Covid. If you know after this year or could.
<unk> become more often well well well past that.
Such level of promotion.
E S and fewer shares.
So that's.
Number one and then secondly, nowadays no it's not.
Not only our competition based on our promotions right and and also not only on branding more as Don mentioned on efficacy of the product. We're seeing for example recently some of them International companies reported there are financial some floor last fall.
And and you can't see it because of the different type of accuracy up its product threat, especially sports floor care, if I'm the brand portfolio had Fred wish more focusing on the efficacy based products.
That tends to be stronger in the Chinese market, because when you say, it's kind of humorous and kill all the kind of more sophisticated in terms of formulation of <unk>.
So I think as we mentioned the three of the recently acquired a skincare brands right and efficacious and also premium category.
They eat along with Atlantic and Doctor what are our wells has over a 100% or for Q2, which was saying because of the position we are very interested in China.
We also see a strong growth off don't fret.
Thank you. Thank you I appreciate that and if I could just sneak in one more I just wanted to ask I realize the shut downs and the Lockdowns from Covid impacted you was there any material impact from Hainan on your business.
Oh Wow.
[laughter].
So just wanted to clarify you mean, the duty free Oh, the highlight itself right given the range, yes, that's all behind us.
Correct I was curious what what impact that is having on your business that that areas exactly.
Yeah, it's relatively small for us because you know only a freemium and watch with careful when we have large distribution. There I know, we do have a distribution I'll give lam and find that right now, but still a relatively small contribution for the overall revenue most of our vessels are still in the math on that.
Oh.
Okay very helpful. Thank you so much for your for the answers.
Thank you.
And ladies and gentlemen, I was at a final reminder, if you would like to ask a question. Please press Star then one at this time.
Everyone. This concludes our question and answer session I'd like to turn the conference back over to management for any additional or closing remarks.
Great. Thank you once again for joining US today. If you have any further questions. Please feel free to talk to us directly or TPG Investor Relations.
Information for IR in both China, and the U S can be found in today's press release. Thank you have a great day.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Okay.