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Yatsen Holding Limited misses on earnings expectations. Reported EPS is $-0.17 EPS, expectations were $-0.16. YSG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good day, and welcome to the Yatsen Fourth Quarter and Full Year 2023 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Vice President, Head of Strategic Investment and Capital Markets. Please go ahead.

Irene Lyu: Thank you, operator. Please note the discussion today will contain forward-looking statements relating to the company’s future performance and are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and this discussion. A general discussion of the risk factors 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. 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 the Q&A session. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on Yatsen’s Investor Relations website at ir.yatsenglobal.com.

I’ll now turn the call over to Mr. Jinfeng Huang. Please go ahead, sir.

Jinfeng Huang: Thank you, Irene, and thank you, everyone, for participating in Yatsen’s Fourth Quarter and Full Year 2023 Earnings Conference Call today. I would like to begin with the macro overview before diving into the details of our strategy and progress across our segments and the brands. China’s beauty market experienced a modest recovery in 2023. According to the trusted data published by the National Bureau of Statistics of China, total retail sales of consumer goods grew by 8.3% year-over-year for the fourth quarter and 7.2% for the full year. Against this backdrop, total beauty retail sales were up 1% year-over-year for the fourth quarter and 5.1% for the full year. Online beauty sales, patents were mixed in 2023.

Sales on Tmall decreased while sales on Douyin increased year-over-year for both the fourth quarter and the full year. We made solid progress this quarter amid a still soft retail environment, returning to a growth statutory capital as we executed our strategy transformation plan. Perfect Diary’s brand repositioning is also proceeding as intended. To pave the way for future growth, we remain focused on building strong brand equity through superior products and consumer satisfaction while continued investments in brand building and R&D. Our total net revenue for the fourth — for the quarter beat our guidance, up 6.7% year-over-year. Net revenues from our Skincare brands for the fourth quarter grew by 17.6% year-over-year. Our Clinical and Premium Skincare brands, including Galénic, DR.WU and Eve Lom delivered another solid performance, recording a 23.4% year-over-year growth in combined net revenues and further elevating their contribution to total net revenues.

Net revenues from Color Cosmetics brands declined slightly by 1.8% year-over-year for the fourth quarter. In terms of channel optimization, we continued to strategically close underperforming offline stores. As of the end of 2023, we operated 110 offline experience stores for the Perfect Diary brand as compared with 158 stores a year ago. Our 2 other Color Cosmetic brands, Little Ondine and Pink Bear, continued to resonate with their customers and recorded year-over-year revenue growth. Our fourth quarter gross margin improved to 73.7% from 71.1% for the prior year period,, benefiting from higher gross margin products and a more disciplined pricing and discount qualities. Our net loss margin expanded to 46.1% for the fourth quarter, primarily attributable to an impairment of goodwill as well as increased investment in our brands.

The goodwill impairment recorded in the fourth quarter represents the amount by which the carrying value of the Eve Lom reporting unit exceeded its fair value based on quantitative goodwill impairment test due to weaker operating results than expected at the time of acquisition. Despite challenges in the market environment and ongoing competition, we still see potential in the brand. For the full year 2023, our net loss margin was 22% as compared with 22.2% in 2022. Our non-GAAP net loss margin narrowed to 8.7% from 12.2% for the prior year period, a significant improvement that underscores our skills in balancing cost structure optimization with the need to grab market opportunities as we drive sustainable growth. Moving on to the brands and products.

For our Skincare brands, we maintained our focus on brand building and introduced efficient product to foster deeper connections with each brand’s audience. Galénic recorded solid performance during the Double 11 Shopping Festival, ranking #1 in the premium brightening serum category in terms of retail sales value on both Tmall and Douyin with [indiscernible]. The brand is also making progress on its cultural line, winning the Essence of the Year Award at the [Bazaar] Beauty Awards 2023 for its [indiscernible] excellent active serum. DR.WU’s Acne Research Fund announced its first batch of pioneering research projects at the 2023 National Congress of Cosmetic Dermatology in Shanghai. DR.WU continue to push boundaries in clinical acne research and the application of mandated acids, propelling the fields of long-term development.

Also, Eve Lom opened its first offline store in Southern China in January this year, bringing the brand’s tactile experience to a broader customer base. While — with respect to Color Cosmetics, Perfect Diary’s brand repositioning continues to gain traction among its target customers. Biolip Essence Lipstick, the new hero product we launched in September 2023, has been gaining market share in the lipstick category on both Tmall and Douyin. During [indiscernible], the newly launched lipstick made Perfect Diary the #1 lipstick brand in terms of retail sales value on Douyin. Given this product line’s potential, we expanded the series to include Biolip Essence Lipstain in 2023 and Biolip Essence Matt Lipstick in February 2024, enriching offering for customers to experience its advanced formulation.

Perfect Diary also recently launched its multiyear peptide Essence tone-up cream, the brand’s very first product integrating a wrinkle reducing cream with the makeup primers and natural foundation. Both Little Ondine and Pink Bear introduced new products during the quarter. Little Ondine’s little wide-eyeline pen won the iColor Award in the Color Cosmetics category at the Vogue Beauty Awards 2023. While Pink Bear’s fairy dream eyeshadow brought home the CBeauty Award’s Color Development Award. Moving now to the R&D. R&D expenses as a percentage of revenues were 3.4% for the fourth quarter and 3.3% for the full year 2023. Over the past year, we have significantly enhanced our R&D capabilities under the leadership of our Chief Scientific Officer, establishing a comprehensive R&D framework and a clear strategy direction.

The R&D team has developed its iconic products, including Perfect Diary’s Lipstick Essence, Biolip Essence Lipstick and Galénic’s [indiscernible] invigorating micro-mask. We also strengthened our R&D infrastructure by setting up our Shanghai R&D center. Along with these efforts, we promoted innovation through industry-academia collaboration, including leading initiatives, such — initiatives such as DR.WU’s Acne Research Fund and the, Galénic Dermatology Research Fund. Going forward, we remain committed to R&D investments to drive innovation and growth. So before I conclude, a brief update on our 2023 ESG performance. Yatsen’s dedication to environmental and social responsibility and employee welfare is integral to our brand and future development.

We published our second ESG report in 2023, highlighting our alignment with prevailing green development initiatives. Furthermore, we were honored to be recognized at the China’s 2023 DEI Employer Awards for our deep commitment to inclusion and employee welfare. To summarize, we are pleased with our return to growth in the fourth quarter, and we will remain focused on pursuing sustainable growth with innovation across our brands. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.

Donghao Yang: 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 fourth quarter of 2023 increased by 6.7% to RMB 1.07 billion from RMB 1.01 billion for the prior year period. The increase was primarily attributable to a 17.6% year-over-year increase in net revenues from Skincare brands, partially offset by a 1.8% year-over-year decrease in net revenues from Color Cosmetics brands. Gross profit for the fourth quarter of 2023 increased by 10.6% to RMB 790.1 million from RMB 714.6 million for the prior year period. Gross margin for the fourth quarter of 2023 increased to 73.7% from 71.1% for the prior year period.

The increase was driven by increasing sales of higher gross margin products and more disciplined pricing and discount policies across all of our brand portfolios. Total operating expenses for the fourth quarter of 2023 increased by 67.7% to RMB 1.33 billion from RMB 792.9 million for the prior year period. As a percentage of total net revenues, total operating expenses for the fourth quarter of 2023 were 124% as compared with 78.9% for the prior year period. Fulfillment expenses for the fourth quarter of 2023 were RMB 62.7 million as compared with RMB 62.5 million for the prior period. As a percentage of total net revenues, fulfillment expenses for the fourth quarter of 2023 decreased to 5.8% from 6.2% for the prior year period. The decrease was primarily attributable to further improvements in logistics efficiency.

Selling and marketing standards for the fourth quarter of 2023 were RMB 717.4 million as compared with RMB 535.2 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the fourth quarter of 2023 increased to 66.9% from 53.2% for the prior year period. The increase was primarily due to the Perfect Diary brand upgrade as well as our investments in new product launches across our brands. General and administrative expenses for the fourth quarter of 2023 were RMB 158.7 million as compared with RMB 169.9 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the fourth quarter of 2023 decreased to 14.8% from 16.9% for the prior year period.

The decrease was primarily attributable to a reduction in share-based compensation. Research and development expenses for the fourth quarter of 2023 was RMB 36.9 million as compared with RMB 25.1 million for the prior year period. As a percentage of total net revenues, research and development expenses for the fourth quarter of 2023 increased to 3.4% from 2.5% for the prior year period. The increase was primarily attributable to an increase in personnel costs, reflecting our commitment to enhancing our research and development capabilities. Impairment of goodwill for the fourth quarter of 2023 was RMB 354 million as compared with nil in the prior year period. Impairments recorded in this quarter represents the amount by which the carrying value of the Eve Lom reporting unit exceeded its fair value based on quantitative goodwill impairment test, primarily due to weaker operating results than expected at the time of acquisition.

Loss from operations for the fourth quarter of 2023 was RMB 539.6 million as compared with RMB 78.2 million for the prior year period. Operating loss margin was 50.3% as compared with 7.8% for the prior year period. Non-GAAP loss from operations for the fourth quarter of 2023 was RMB 125.9 million as compared with non-GAAP income from operations of RMB 11.5 million for the prior year period. Non-GAAP operating loss margin was 11.7% as compared with non-GAAP operating income margin of 1.1% for the prior year period. Net loss for the fourth quarter of 2023 was RMB 494.5 million as compared with RMB 55 million for the prior year period. Net loss margin was 46.1% as compared with 5.5% for the prior year period. Net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the fourth quarter of 2023 was RMB 0.91 as compared with RMB 0.09 for the prior year period.

Non-GAAP net loss for the fourth quarter of 2023 was RMB 93.7 million as compared with non-GAAP net income of RMB 34.7 million for the prior year period. Non-GAAP net loss margin was 8.7% as compared with non-GAAP net income margin of 3.4% for the prior year period. Non-GAAP net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the fourth quarter of 2023 was RMB 0.17 as compared with non-GAAP net income attributable to Yatsen’s ordinary shareholders per diluted ADS of RMB 0.06 for the prior year period. Now I’d like to briefly walk you through the highlights of our full year results. Total net revenues for the full year of 2023 decreased by 7.9% to RMB 3.41 billion from RMB 3.71 billion for the prior year period, primarily attributable to the decline in net revenues from Color Cosmetic brands, partially offset by the increase in net revenues from Skincare brand.

Gross profit for the full year of 2023 decreased by 0.2% to RMB 2.51 billion from RMB 2.52 billion for the prior year period. Gross margin for the full year of 2023 was 73.6% as compared with 68% for the prior year period. The increase was primarily attributable to: first, increasing sales of higher gross margin products from Skincare brands; and second, more disciplined pricing and discount policies; and third, cost optimization across all of our brand portfolios. Loss from operations for the full year of 2023 was RMB 913.4 million as compared with RMB 928.9 million for the prior year period. Non-GAAP loss from operations for the full year of 2023 was RMB 427.5 million as compared with RMB 539.3 million for the prior year period. Net loss for the full year of 2023 was RMB 750.2 million as compared with RMB 821.3 million for the prior year period.

Net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the full year of 2023 was RMB 1.36 as compared with RMB 1.37 for the prior year period. Non-GAAP net loss for the full year of 2023 was RMB 296.1 million as compared with RMB 452.9 million for the prior year period. Non-GAAP net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the full year of 2023 was RMB 0.53 as compared with RMB 0.76 for the prior year period. As of December 31, 2023, the company had cash, restricted cash and short-term investments of RMB 2.08 billion as compared with RMB 2.63 billion as of December 31, 2022. Net cash generated from operating activities for the fourth quarter of 2023 was RMB 90.5 million as compared with net cash generated from operating activities of RMB 106.6 million for the prior year period.

Net cash used in operating activities for the full year of 2023 was RMB 107.4 million as compared with net cash generated from operating activities of RMB 136.2 million for the prior year period. Looking at our business outlook for the first quarter of 2024, we expect our total net revenues to be between RMB 765.4 million and RMB 803.7 million, representing a year-over-year increase of approximately 0% to 5%. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change. With that, I would like to open the call to Q&A.

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Operator: [Operator Instructions] The first question today comes from Maggie Huang with CICC.

Maggie Huang: This is Maggie Huang from CICC. Firstly, congratulations on our revenue returning to growth and beating our guidance. And I have 2 questions. The first one is regarding Perfect Diary. We are glad to see the great performance of our new products like Essence Lipstick in Q4. So for this year, do you have a target revenue contribution from the new products? And how should we expect on the revenue growth and net margin of the brand Perfect Diary? That’s my first question. And my second question is regarding women’s day shopping festival. So how is the performance of our brands so far? And is that in line with our expectation? That’s my question.

Irene Lyu: Thank you, Maggie. For your first question on the performance on Perfect Diary. Since our launch of the Biolip Essence Lipstick, its performance has been trending up. So for example, last year December, the new lipstick is ranking #2 on both Tmall and Douyin. So it’s performing well. And in terms of new product contributions to the brand, last quarter, so fourth quarter of 2023, is a little below 40%. And we believe this year, it will turn up to above 50%. So that’s for the new card. And you also asked for margin. So basically, for this new product launch and also the Perfect Diary’s brand upgrade, we are seeing some good feedback and results so far. First of all, the gross margin is much higher for this new product compared to the old product.

And also the brand average selling clients also increased a lot to around 140 to 150 on both Tmall and Douyin. And also in terms of consumer profile, we’re also attracting more customers from higher — with higher affordability and beauty spending in general. So that’s for your question number one. And then for question number two, regarding to the women’s day’s performance so far, the women’s day shopping festival already started. And looking at overall market, the performance is relatively modest. So as a result, for our brands, we’re also seeing a relatively steady growth. So we are more — putting more resources efforts for the bigger shopping festival for example 618 and Double 11.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

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

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.