Q3 2022 Yatsen Holding Ltd Earnings Call
Ladies and gentlemen, good day and welcome to the Yadkin third quarter 'twenty to 'twenty two earnings conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over there I lean you head of Investor strategic investment and capital markets. Please go ahead.
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.
Effects of certain with certain key assumptions and other factors.
Some of these risks are beyond the company's control.
<unk> actual results to differ materially from those mentioned in today's press release and this discussion.
A general discussion of the risk factor that could affect yeah. So there's no financial results is included in certain findings of the company with the Securities Exchange Commission.
Yes.
The company does not undertake any obligation to update the falloff of information except as required by law.
During today's call management will also discuss certain non-GAAP financial measures for comparison purpose only.
Please see the earnings release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP and non-GAAP financial results.
Joining us today on the call from JASO Senior management are Mr. King phone calls, our founder Chairman and CEO and Mr. Joe Hall, Young our CFO and director.
Management will begin with prepared remarks, and the call will conclude with a Q&A session.
A reminder, this conference is being recorded.
In addition, a webcast replay of this conference call will be available on <unk> Investor Relations website at IR of thoughts Yeah. So global thought call I'll now turn the call virtual misheard since Oswald. Please go ahead Sir.
Thank you Gary and thank you everyone.
Participating Justin so quarter two earnings conference call today.
We started the year by launching a five year strategy.
All lines, all plans to evolve our business and drive the long term and sustainable growth.
With this strategy pocket, it's all roadmap.
The management team continued to fine tune our business model.
Although negatively impacted.
Upturn beauty market and a resurgence of COVID-19.
Our skincare brands recorded solid growth in the third quarter of 10 to 22.
We have also seen improvements in gross margin net loss and non-GAAP net loss or kind of our cost optimization plan.
Overall, our sales in the third quarter of 2022 continued to experience slowdowns as a result of challenging market headwinds and the lower levels of consumer spending.
Which have been exacerbated by resurgence of COVID-19.
You'll see retail sales in the third quarter of 10 to 22 went down by three 2% year over year. According to the adjusted the data published by China's National Bureau of Statistics.
Sales of both color cosmetics, and skincare product on T mall fell by double digits year over year in the third quarter of 2022 extending that down.
Trend in the second quarter up 10 to temperature.
Our total net revenues for the third quarter of 2022 declined by 31% year over year to RMB $857 9 million.
Meeting the high end of our revenue guidance.
Let's look at our revenue mix in detail.
Net revenue was still skincare brands increased by 33% year over year to RMB $259 4 million.
That's a highlight total net revenues.
Our fast growing clinic, and a premium brands deductible, if long and clinique delivered solid growth.
59% year over year this quarter.
In terms of revenue contribution our skincare brands contributed 31, 4% of total net revenues for the third quarter often at the end of Q1.
Which has exceeded 50% of total net revenues for two consecutive quarters.
Compared with 15, one Corp.
Our total net revenues for the third quarter of send it into one.
Our color cosmetic brands on the other hand, Thor 48, 8% decline year over year in total net revenues to RMB 500, and assisting $9 3 million.
Reflecting the continued softness in market demand for our color cosmetics as well as intensified industry come petition from both domestic and international brands.
Gross margin for the third quarter, often has a need to increase by 1% point to 50.
58, 9% from 57, 9% for the third quarter. After this one.
The increased sales of higher gross margin product for all of our brands.
Cost optimization.
Streets are pricing and discounting policies across all of our brand portfolios.
Our net loss margin was 24, 6% in the third quarter up 10 to 72, representing an improvement of 3.2 percentage points from the second quarter of 2022 or two four percentage points from the previous.
If you've ever year period.
Our non-GAAP net loss margin was 14, 7% in the third quarter of tons ended two representing an improvement of seven one percentage points from the second quarter of 292 or one four percentage points from the prior year period.
The improvement is attributable to our continued cost optimization.
Now I will share some of the quarter's major initiatives to enter development.
In the third quarter of 272 hour business teams were active in developing and strengthening our portfolio of high performing brands tailored.
Tailored to Chinese consumers' evolving needs and the space.
Yeah.
And the other will read them to be launched the new products infused with Chipote extra we pair technology, which lets pull that.
That's curses on the iconic repair surgeon.
We celebrated the brands Nike anniversary with these loyal customers across China.
Naturally those with sensitive or pole scheme, who secret if he shows products designed to put their skin types.
If raw achieved a robust growth despite the challenging industry environment.
Why are the brand remained strong in premium cleans the category.
Expanding to a certain category by launching our radios repair, which you know whatever it.
At September <unk>.
If lam countered with acoustics heroes he rules in Shanghai to cultivate a locally at the luxury experience for the celebrity Bret.
Clinique also recorded very strong online growth in the third quarter of <unk> 72.
We have gained more market share if state number one for two consecutive quarters in the premium dairy category on the E.
Okay.
<unk> maintained its leading position the cyclic.
So there's an active certain also experienced steady growth in the third quarter I'll tell you the truth.
The launch of the secret to due diligence and see if there isn't in the third quarter of two was attended by industry experts and thought leaders and the raised awareness of the brand.
<unk> leadership in the premium dermatology co skincare sphere.
While I'll call it compromises.
Spears, our year over year decline of 48, 8%, we saw improved gross margin in aggregate.
Brendan went through channel optimization, and the promotion control to develop sustainable business model.
Oh, I'm, sorry sales, although ive achieved strong year over year growth of 19, 7% and it ranked number two among all color cosmetics brands.
Another improvement from number three ranking it achieved last year.
We have also closed underperforming offline stores throughout 2022.
As a result, that's all September 30th two we operated a total of 198 experience stores.
Perfect diary, Brett representing a net reduction of 88 stores since the beginning of the year.
In the fourth quarter. This offline store optimization program will continue and we are constantly monitoring the market situation.
Off the offline retail space to basketball brand strategies moving forward.
In addition to channel optimization, we are also adjusting their.
The category mix.
To increase our market share in facial makeup and the conversion part.
Oh, the diary translucent blurring Lewis Potter and upgrade that anti dullness efficacy. In addition to the original my lock technology.
We gained more market share in the loose powder category on T more compared to last quarter.
We also applied this patented technology to the newly launched clear covers three colored concealer palette as an attempt to.
Band It two other facial categories.
Our robust new product launch and a healthy pipeline backed by continuous investments in R&D.
R&D expenses increased to three 9% from two 7% of net revenues in the year in the prior year period.
They bought it at the International Federation of the scientists.
Cosmetics chemistry Congress with schuh cutting edge technologies that September .
We will continue our efforts to build our strong R&D capability as a core strategy for future growth.
We are also constantly reminded of the importance of our commitment to our environmental social and governance program.
In the third quarter of 2022.
Donated computers and are purchasing equipment to the government October 10 town located in Guangdong province to help improve the townships and information technology infrastructure.
We are actively involved in it.
Elevating the quality of life of those even more challenging circumstances, and we'll continue to take the initiative to us.
Sort of corporate social responsibility and to contribute our support in the future.
While we expect the retail environment to remain challenging for the wrap up 10% to end up for the first half was 10 December three we.
We have sufficient resources to meet our strategic objectives.
During the double 11 shopping festival. This year, we saw outstanding performance in our skincare brands Clinique achieved high triple digits year over year over year sales growth.
And the bulk of who got the first place in premium class a category and Acme control category with their payroll product cleans or in a matter of lead Gen. Toby new vocera, respectively on people.
In summary, we have already made significant progress in our strategy evolutionary journey.
With higher contribution for our skin care brand in <unk>.
Moving to gross margin and significantly narrowed and that loose in the third quarter Alternatively too.
With the cash restricted cash and if something investment balance of RMB two six.
6 billion at the end of this quarter, we have sufficient resources and the flexibility in pursuit of our long term strategy goes.
With that I will now turn the call over to our CFO , Don how young to discuss our financial performance.
Thank you everyone.
Okay.
Thank you, David and Hello, everyone.
Oh I get started I would like to clarify that all financial numbers presented today are in and then Vietnam and all percentages.
All percentage changes referred to year over year changes unless otherwise noted.
Total net revenues for the third quarter of 2022.
He used by 36, 1%.
$857 9 million RMB.
134 billion in the prior year period. The decrease was primarily attributable to a 48.8 per cent decrease in.
Net revenues from our color cosmetics, right, partially offset by a 30.
33% increase in net revenues from our skin care brand.
Gross profit for the third quarter of 2022 decreased by 35.2 per se.
$591 3 million RMB.
911, 8 million in the prior year period.
Gross margin for the third quarter of 2022 increased to 68, 9%.
67, 9% in the prior year period the.
The increase was primarily driven by increased sales of higher gross margin products from our skin care brand.
Optimization, and stricter pricing and discount policies across the hall.
All of our brand portfolio.
Total operating expenses for the third quarter of 2022 decreased by 33.1% to.
857 million RMB from one point to $8 billion in the prior year period as a percentage of total net revenue.
Total operating expenses for the third quarter of 2022 were 99, 9% as compared with 95, 4% in the prior year period.
Fulfillment expenses for the third quarter of 2022 or 63.
<unk> 3.8 million RMB as compared with 102 million in the prior year period as.
As a percentage of total net revenues fulfillment expenses for the third quarter of 2022 decreased to seven 4% from seven 5% in the prior year period. The decrease was primarily attributable to a decrease in warehouse and logistics costs due to optimized.
Jason our fulfillment capacity.
Selling and marketing expenses in the third.
Third quarter of 2022 were $564 8 million RMB as compared with 911 3 million in the prior year period.
As a percentage of total net revenues selling and marketing expenses for the third quarter of 2022 decreased to 65, 8% from 67.9% in the prior year period. The decrease was primarily attributable to the <unk>.
Efficiency of online marketing activities, partially offset by store closure related expenses and provision.
General and administrative expenses for the third quarter of 2022 were 194.5 million.
As compared with $233 9 million in the prior year period.
As a percentage of total net revenue general and administrative expenses for the third quarter of 2022 increased to 22, 7%.
17.4% in the prior year period, the increase was primarily attributable to the lower total net revenues in the third quarter of 2022, creating a little bit low base effect.
Research and development expenses for the third quarter of 2022, or $33 9 million as compared with 35.8 million in the prior year period.
Total net revenues.
Research and development expenses for the third.
Third quarter of 2022 increased to three 9% from two 7% in the prior year period. The increase was primarily attributable to the lower total net revenues in the fourth quarter of 2022.
Hitting the low base effect.
Loss from operations for the third quarter of 2022 decreased by 28, 1%.
Two $265 7 million RMB from three point $69 3 million in the prior year period operating loss margin was 31%.
Paired with 27.5% in the prior year period.
non-GAAP loss from operations for the third quarter of 2022 decreased by 26, 6% to 150.
62, 6 million from $221 7 million in the prior year period.
non-GAAP operating loss margin was 19% as compared with 16.5% in the prior year period.
Net loss for the third quarter of 2022.
Leased by 41.7% here 210.7 million from $361 8 million in the prior year period.
<unk> margin was 24.6% as compared with 26, 9% in the prior year period.
Net loss attributable to Yelp and Fortinet is shareholders per diluted EPS for the third quarter of 2022 was 0.37, RMB as compared with 0.57 and RMB in the prior year period.
Yeah.
non-GAAP net loss for the third quarter of 2022 decreased by 41.5% tier one.
Hundreds and $26 5 million RMB.
$216 3 million in the prior year period.
non-GAAP net loss margin was 14, 7% as compared with 16, 1%.
In the prior year period, non-GAAP net loss attributable to yeltsin's wouldn't their shareholders per diluted ads.
For the third quarter of 2022 was 0.2 to RMB as compared with 0.34 RMB in the prior year period.
Yeah.
As of September 30th.
2022, the company had cash restricted cash and short term investments.
2.6 million RMB as compared with 3.14 billion as of December 31st 2021.
Net cash generated from operating activities for the third quarter of 2022 with.
21.8 million RMB compared with net cash.
Using operating activities.
200, and plenty of five point premium yeah.
In the prior year period.
Looking at our business outlook for the fourth quarter of 2022, we expect our total net revenues to be between $916 7 million RMB and 1.07 billion RMB, representing a year over year decline of approximately 30%.
The 40 people.
This forecast reflects our current and the preliminary views of the market and operational conditions.
Are subject to change.
With that I would now like to open the call up to Q&A.
Yes. Thank you.
This time, we will begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
For the benefit of all participants on today's call. If you wish to ask your question to management in Chinese. Please immediately repeat your question in English.
So with these instructions in mind, we will pause momentarily to assemble the roster.
Yeah.
And today's first question comes from Dustin Wei with Morgan Stanley .
Yes.
Thanks for taking my question first question as it related to the double 11 performance I Wonder if management can comment.
Terms of the performance by brand or by you know skincare brands into call. It Brent.
And Oh do we expect that the GP margin in fourth quarter to be sequentially lower by since third quarter because of that promotion for double 11.
And the second question related to the performance or the skincare brands, Inc. Third quarter. It sounds like it's QD Abbas choice. The other three major skincare brands performed pretty strongly.
But could you sort of elaborate a little more in types of Oh, maybe provide a range of their performance or you know some of the different strategy and their progress.
And just you know from management's perspective are the key skincare brands performance is kind of a little ahead of the expectation or there is something more to do.
Thank you.
First question for the double 11, our results.
So skincare brands right now because I know you've long until to achieved robust sales.
Sales gross even W. Devon.
With G M B, a higher than where I'm sure you know RMB for each of the brands.
So some of the heroes.
Each of the brands are performing quite well.
I think that at least has a high single digit sales growth and also chiefess yeah. A couple of the new brands, which puts you more double elevens and.
And.
The Vcs are in historical high single digits year on year or South schools, and we also launched a new partner the secret gasoline seven and that becomes the imported essence a couple thousand.
Uh huh.
Lance do continue to ER to ER to taking the number one.
Premium clean seen cleans the category.
And also for those who are riding out the renewable seven it's already a pretty strong in the Acme control category.
Some of the new products with both of them a couple of things, we do well, especially the triple active eligible actually repair surgeon is ranking as a top four personally I don't see more.
So looking forward I think the.
The sum of the Hugo Clutters up the team kept brands.
Wow.
It's helped to contribute.
The growth of the brands and in aggregate.
The percentage of the revenue I'm puzzled.
Total revenue.
The future.
What kind of cosmetic well I think right now or hotter brands are still facing a pretty big tonnage and also put the diary has been a nickel and a ton of wrong. So we prioritize profitability and we applied a very strict.
You don't just come policies across all those kind of brands in order to to impulse to operate the gross margin and also the hooked up profitability as far as protecting the brand image.
So looking forward for Q4 I'm a I think we are on the right churn to continue optimizing the gross margin and also the bottom line.
Well Oh, you have a second question gross margin well gross margin has a lot to do with Oh.
The product category mix, and our inventory provision a lot of things.
And we're not in position to make a comment on the gross margin in Q4, but what I can tell you is over the long term.
Take care of business grows stronger and take a higher percentage in the total of product mix.
And we believe in the long term you know our gross margin.
We'll see a upward trend.
Got it. Thank you can't ask one more question related to sort of the expenses and the restructuring. So understanding that company has been focused on like you know store closure organization optimization et cetera. So sort of can we have a update on the status now like do we expect that those exercisable.
<unk> pretty much done in the fourth quarter this year.
Or you know some of those will continue into the 2023, depending on the macro environment.
And is there some number that you can share in terms of the sort of one off costs like for the full year. This year. What you have today, you know, including the human resource light you know severance costs or one off store closure costs, you know kind of one off expenses that that that that we likely won't see in 2020.
Three.
Okay.
Alright, so yeah.
We have been.
Pretty aggressive in closing the nonperforming stores are due to mostly the challenges in our macro.
Economic situations, especially caused by COVID-19.
This year, we have.
You know more than close to 300 store.
But according to our current plan by the end of this year you know we're gonna have.
No.
A little over 400, a bad 100 store, including self operated stores and the franchise stores.
Well in terms of the expenses.
That we've incurred in the ER or in the process well.
It has been quite substantial we can provide you with that.
Now if you want and after this call.
But going into next year.
I don't think we're going to incur.
A substantial loss war.
Central expenses.
Due to store closure related.
Division expenses, because now I think we have reduced the total number of stores.
Two a very manageable level.
Got it thanks, a lot for answering my questions.
Sure. Thank you.
Thank you and the next question comes from Kuan Yew Lin with TICC.
Hi, Thanks for taking my questions I've got two questions.
The first one regarding color cosmetics.
Thanks.
I'll call it <unk>.
Keep the crazy each quarter. However, we still maintain the company's competitive add in color cosmetics.
As well as the brand at that.
P D. So on at what time or what.
What's the outside management, that's the color cosmetics, where we tend to grow the business.
The first question and my second question is related to guidance for the fourth quarter. So the total net revenue is expected to decline by 30% to 40% in the fourth quarter could you elaborate more about the channel.
I understand the skincare.
And.
And I guess it went down by like category.
Thanks.
Yeah.
Okay.
Yeah sure so for a perfect salary actually you can see for the past three corner the word.
Calling for flattish and in total the year over year class a similar similar scale. So we're not actually changing it's more of a stable Ah Ah trial right now and then in terms of what we're doing for perfect salary right now is that Seagull S. Four.
<unk> achieved profitability. So how we're going to do that we think there are two major plaza. We're undergoing right now one is in terms of channel optimization and the second one is on the product.
Category optimized finish it and I'll, let Chad I'll, let Chantal why we have alluded earlier is that.
Offline right now because of the challenging macro environment. So we're closing down the number of stores that will you know.
Contributing to the sales decline or with things that will likely to stabilize find at the end of this year and then secondly in terms of channel mix.
You can see all the online channel.
That is our also thoughtful set forth, though in so we're also a swing heavily investing heavily on dorian to promote the growth and attract new customers. So far this quarter are telling you have experienced a year over year, our inquiries are 97%.
SAP hardware.
Our comparable and hunting as you are hopefully do well on the Doe in part, but that's about the channel optimization and all the category optimizations.
There used to be very have very high market share on the on.
And also I category, but in terms of complexion official makeup that's actually a larger market that we're saying we need to that's happened and also for some market share. So as mentioned in our conference call and we are introducing a number I'll I'll make a complexion products, which are indoor fire.
Our barlach technology, we're seeing quarter over quarter increase of market.
Market share in the facial makeup so that's another flavor of phone will help.
Perfect Irene as friends are turned around and and likely try and play a more healthy trend next year.
Yeah, well regarding your second question about our guidance for Q4.
You know, where we're guiding the market that you know our total revenue is going to decline by 3% to 442%.
And they decline.
You know primarily from our color.
But it's a business.
Offset by a final close of our skin care business. So the general trend of our business and especially our category mix.
And in the future will be.
Very sound and healthy.
You know growth skin care business and in the meantime, you know we're working very hard it's hard to tell.
One of our probably cosmetics business.
Got it.
No I have no other questions.
Thank you.
Thank you and once again. Please press Star then one if you would like to ask a question.
And our next question comes from Olivia Tong with Raymond James.
Great. Thanks.
Thanks, Good morning.
I wanted to ask you about your view on the competitive environment local brands versus international brands, and how they stack up particularly well.
With 11 11, and then also your thoughts as you go into next year and then specifically for you about fiscal 'twenty three the Q4 guide would suggest that on a two year stack basis on revenue.
That the sales deceleration.
That starts to turn.
It's a greater deceleration in sales.
As you think about the go forward over the next 12 months in your view that that's sort of the steady state piece now or is there something that changes materially as you go into fiscal 'twenty three thank you.
Well I think it's the market.
The growth.
For the total PC market right now.
Yeah.
Almost zero sometimes.
So so so basically all the competition movie.
But that's a normal market.
So if we're looking at the international players.
Yeah.
That's a loss and also continue.
It's Paul.
Basically for the whole year.
And separately you Nevertheless.
So hum Dymista friends.
I think the new brands emerge and.
That's kept those talents where attendance.
Industry of the past two or three years, especially on a farcical and building muscle.
So for US I think of who you are.
The multiple Cogs all of a strategy that's helpful for a phone call.
External competition.
Right now we have a very clear strategy for growth policy and care for them from the portfolio and also she will send a wrong for autologous.
So profitability Whoopi Goldberg.
Policy and and also thank him for that.
So low so if we go forward I think we are executing the strategy.
Consistency and law and also while we will continue to.
To to move forward with a very.
<unk> strategy.
Yourself.
Yeah, and your second question about our next.
Next year's outlook.
Well.
First of all we do not provide guidance for our or any time.
Horizon beyond the next quarter, but anyway.
Yeah.
Well for 2023, I think the decline in our growth rate.
I don't think it will be and.
As deep has this year.
For a number of reasons one you know we've been working very hard to turn around our color cosmetic business and we've seen some very good positive sign.
In our effort.
Secondly, you know we've got a very strong growth in our.
Our skin care business, which we believe will continue into next.
Next well into next year.
So if you consider these two.
Trying together.
I think overall, our you know next year I think our growth rate.
Of our business as well.
Sorry to stabilize it.
If not have turned positive.
From a year over year.
At that point.
Okay.
Thank you.
Thank you and that concludes the question and answer session I would like to turn the conference back over to management for any closing comments.
Okay.
Unfortunately yesterday, if you have any further questions. Please.
Feel free to talk them off at Yahoo.
Whereas whereas indefinitely.
A couple for me so far I all in both China and the U S. Probably follow today's press release publicly say thank you.
Thank you. The conference has now concluded thank you for attending today's presentation.
Now disconnect your lines.