Ladies and gentlemen, good day, and welcome to the Yatsen Fourth Quarter and Full Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Head of 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 our intent is to qualify for the safe harbor from liability as established by the US Private Securities Litigation Reform Act.

Such statements are not guarantees of the 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. For a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. 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 Web site at ir.yatsenglobal.com. I will now turn the call over to Mr. Jinfeng Huang. Please go ahead..

Okay. Thank you, Irene. And thank you, everyone, for participating in Yatsen inaugural earnings conference call today. So 2020 was an exciting year for Yatsen as we made great strides across our business and achieved numerous milestones.

So one of the most significant highlight for the year was our successful listing on the New York Stock Exchange on November 19th last year. So marking the start of our new journey as a public company.

So on behalf of Yatsen's employees and myself, I would like to extend our sincere gratitude and appreciation to all of long time and the new shareholders who continue to support us.

Today, for the first time as a public company, we are pleased to present you with our solid operating and financial performance for the fourth quarter and the full year of 2020. So throughout the year, we leveraged our past successes to further fortify our leading position in color cosmetics for Gen Z and millennial customers.

So Yatsen's firm commitment to product innovation, development, enhancing brand portfolio and the product offerings and strengthening ties with customers through both online and offline channels, position us as a unique and competitive player in China's fast growing beauty industry.

So as a result, for the full year, we grew our total net revenues by 72.6% year-over-year to RMB5.2 billion and increased our gross sales by 72.4% from RMB3.5 billion in 2019 to RMB6.1 billion in 2020.

In an extension of the robust momentum we saw throughout the year, fourth quarter total net revenue increased 71.7% year-over-year to RMB2 billion, and gross sales climbed 73.3% year-over-year to RMB2.3 billion.

So our quarter results are a testament to our ability to quickly grow our business as evidenced by the accelerated expansion of our flagship brand Perfect Diary, and the rapid growth witnessed by our other brands, including Little Ondine and Abby's Choice soon after being introduced to our portfolio.

So the strength across our brand portfolio demonstrated our ability to incubate and scale brands, and assures us that we are on the right track as we continue to press forward.

These numbers also display the effectiveness of our disruptive B2C model, which enabled us to consistently deliver innovative products and personalized services that deepen customer engagement.

So the growing popularity of homegrown Chinese beauty brands is creating a great opportunity for us as our brand targets Gen Z and millennials, the golden cohort of China's beauty industry. So our evolving product line is steadily gaining traction among young consumers and seeing substantial growth.

So in the fourth quarter, the number of B2C customers reached another record high of 14.4 million, and this number came in at 32.3 million for the full year. So this represents impressive year over year gains of 31% and 38% respectively. So color cosmetics are the foundation of our business and a dominant contributor to revenue.

So having said that, we further widened our product variety and offerings during the fourth quarter with more emphasis on quality, innovation and uniqueness.

So we deepened our reach in the skin care segment with the acquisition of Galénic, an iconic premium French skincare brand from Pierre Fabre and the Chinese skincare brand, which is a leading medical skincare brand known for its highly effective products, targeting various sensitivities in Asian skin.

We also entered a strategic partnership with Sensient Technologies, a partnership that is enhancing our R&D capabilities for innovative colors and the new materials for color cosmetics. So boosting quality control for raw materials and amplifying the use of technology to solve recurring challenges in the color cosmetics industry.

So leveraging our disruptive B2C model and core platform capabilities, we are working towards building the multibrand portfolio that drives a broader product selection and adjusted the needs of more customers. With this vision in mind, I would like to review some of our recent activities and unpack upcoming initiatives for 2021 and beyond.

So on the back of the success of our existing brands, we plan on introducing some more brands through self incubation and acquisitions in target market segments where we see considerable room for growth.

Our ideal portfolio will consist of diversified brands with varying market positioning from mass market to high end as we seek to attract a wide expression of consumers. We are also proactively pursuing strategic investments, acquisitions and collaborations, both domestically and overseas.

As announced earlier this month, we recently acquired the prestigious skincare brand, Eve Lom from Manzanita Capital. So with the brand multi award winning product range our exceptional e-commerce capabilities and the demonstrated cost of innovation, we are confident that we will further accelerate Eve Lom's growth in the global market.

So to close, before I hand it over to Donghao, China's beauty market has enormous potential to be unleashed. So our customer centric value proposition, disruptive B2C business model and a strong capabilities uniquely positioning Yatsen to play a leading role in the country’s evolving beauty industry.

So looking ahead, we remain committed to redefining the landscape of Chinese beauty, even as we engage and grow with the next generation of consumers, provide them with a new journey of beauty discovery. So thank you, everyone. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance..

Thank you, David, and hello, everyone. We finished the fourth quarter of 2020 with a set of solid financial results.

Our healthy top line growth reflects the strong performance we achieved across our brand portfolio and demonstrates the deep market appeal of our products, success of our growth strategy and our ability to skillfully execute our operational plans.

In an effort to scale our brands and expand our portfolios, profitability was impacted during the quarter as a result of increased selling and marketing expenses as well as general and administrative expenses. While our gross margin rose to 66.3% in the quarter compared with 62.7% in the same period last year.

2020 was a pivotal year for Yatsen and the beauty industry as a whole, and our efforts in product innovation and development are paying off.

As we move deeper into 2021, we remain committed to our strategy of further growing our product offerings customer base and revenue, which we firmly believe will lay a solid foundation for profitability in the long run. Now moving on to our quarterly financial highlights.

Before I get started, I would like to clarify that all financial numbers presented today are in RMB amounts and all percentage changes refer to year over year changes, unless otherwise noted.

Total net revenues for the fourth quarter of 2020 increased by 71.7% to RMB2 billion from RMB1.1 billion for the fourth quarter of 2019, primarily attributable to the growth in sales volume of our beauty products, driven by increases in the number of customers during the same period.

Gross profit for the fourth quarter of 2020 increased by 81.6% to RMB1.3 billion from RMB716.3 million for the fourth quarter of 2019. Total operating expenses for the fourth quarter of 2020 were RMB2.8 billion compared to RMB644.8 million for the fourth quarter of 2019.

As a percentage of total net revenues, total operating expenses increased to 144.5% from 56.5% in the prior year period. Fulfillment expenses for the fourth quarter of 2020 were RMB144.7 million compared to RMB113.2 million for the fourth quarter of 2019.

The increase was primarily due to; one, an increase in warehousing, shipping and handling expenses, driven by the growth in sales volumes of our beauty product during the same period; and two, share based compensation expenses recognized upon occurrence of IPO according to US GAAP.

As a percentage of total net revenues, fulfillment expenses decreased to 7.4% from 9.9% in the prior year period. Selling and marketing expenses for the fourth quarter of 2020 were RMB1.4 billion compared to RMB446.3 million for the fourth quarter of 2019.

The increase was primarily due to; one, an increase in advertising, marketing and brand promotion costs; two, an increase in expenses incurred during the development of stores; and three, share based compensation expenses recognized upon occurrence of IPO according to US GAAP.

As a percentage of total net revenues, selling and marketing expenses were 70.3% compared to 39.1% in the prior year period. General and administrative expenses for the fourth quarter of 2020 were RMB1.3 billion compared to RMB71.9 million for the fourth quarter of 2019.

The increase was primarily due to; one, an increase in personnel costs; and two, recognized expenses upon the occurrence of IPO according to US GAAP. As a percentage of total net revenues, general and administrative expenses were 65.6% compared to 6.3% in the prior year period.

Research and development expenses for the fourth quarter of 2020 were RMB25.6 million compared to RMB13.4 million for the fourth quarter of 2019. The increase was primarily due to; one, personnel costs; and two, recognized share based compensation expenses upon the occurrence of IPO according to US GAAP.

As a percentage of total net revenues, research and development expenses were 1.3% compared to 1.2% in the prior year period. Loss from operations for the fourth quarter of 2020 were RMB1.5 billion compared to income from operations of RMB71.5 million for the fourth quarter of 2019.

Non-GAAP loss from operations for the fourth quarter of 2020 was RMB290.1 million compared to non-GAAP income from operations of RMB90 million for the fourth quarter of 2019. Net loss for the fourth quarter 2020 was RMB1.5 billion compared to net income of RMB46.2 million for the fourth quarter of 2019.

Non-GAAP net loss for the fourth quarter 2020 was RMB287.4 million compared to non-GAAP net income of RMB64.8 million for the fourth quarter of 2019.

Net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the fourth quarter of 2020 was RMB4.04 compared to net income attributable to Yatsen’s ordinary shareholders per diluted ADS of RMB0.1 for the fourth quarter of 2019.

Non-GAAP net loss attributable to and ordinary shareholders per diluted ADS for the fourth quarter of 2020 was RMB0.73 compared to non-GAAP net income attributable to Yatsen’s ordinary shareholders per diluted ADS of RMB0.16 for the fourth quarter of 2019.

As of December 31, 2020, the company had cash and cash equivalents and restricted cash of RMB5.7 billion compared to RMB676.6 million as of December 31, 2019. For the quarter ended December 31, 2020, net cash used in operating activities was RMB362.1 million.

Looking at our business outlook for the first quarter of 2021, we expect our total net revenues to be between RMB1.37 billion and RMB1.42 billion, representing a year-over-year growth rate of approximately 35% to 40%. This forecast reflects our current and preliminary view on the market and operational conditions, which is subject to change.

With that, I would now like to turn the call to Q&A..

[Operator Instructions] And the first question comes from Christine Cho with Goldman Sachs..

David and Donghao, congratulations on your first earnings call. I have two quick questions. One, could you give kind of your key assumptions behind your guidance for the next quarter? And secondly, I would love to get an update on the Perfect Diary skincare extension plans.

And also with all the acquisitions of Galénic, Eve Lom and some of the skin care brands, how do you see the skin care mix evolving in the long run? Thank you..

Christine, I didn't quite get your first question.

So you want to provide some color behind the Q1 guidance or what?.

Yes..

What do you mean by color? I mean, the guidance is the guidance is 35% to 40%, I didn't….

So some market conditions that you're looking at what kind of growth you're looking at for the category as a whole. The FX rates you mentioned is 6.52. But what are some of the things -- let me phrase it this way, what are some of the key factors that could be very important to looking into first quarter..

Well, again, I think we still continue to execute our strategies in terms of, one, our existing brands, Little Ondine, ABC, we continue to grow those brands and two, we have acquired a number of new brands. And we're currently focusing on the integration of those new brands into our existing business and operations.

But in Q1, the contributions in terms of revenue from those newly acquired brands is still very limited. But going into Q2 and Q3, Q4, the later part of this year, we do expect increasing contributions from those new brands. We still have the second question to answer. David, go ahead..

So for the Perfect Diary skin care expansion, I think because right now, we are rolling out the skin care products in our offline stores and also, we have the main the product line coming in the middle of the year. So we see our in expanding the skin care, especially we leverage the Perfect Diary and select brand equity.

So we believe long term wise the skin care will contribute a portion of the Perfect Diary’s growth there. And just to build for the Q1, like the guidance expectation and also, if you look at for our existing brands and most of the new product launches usually in Q1.

And so there will be more new products and even new brands coming out to launch after the Q1..

And the next question comes from Dustin Wei with Morgan Stanley..

So I think the first question is still related to the guidance of the 35% to 40% year-on-year. I kind of think of that first quarter '20 even for the online business was slightly or meaningfully impacted by COVID. So there's sort of a little low base effect there, and yet we have this guidance.

So not sure if we can talk about the breakdown by brand or some of dynamics for online, offline, like, for example, if we think like 35% to 40% sales growth for the whole company then what's the growth that we should look for the Perfect Dairy, for example, or what's the growth for online? Just try to get a sense about that, management is a little bit too conservative this is a reasonable guidance.

And then if we are kind of looking for slightly slower growth, is that some of the strategic change here that management think for the existing brands, company will need to focus more on the profitability or sort of lower loss ratio and then focus more on the newer brands.

So that's sort of related to, I guess, the first quarter guidance and some of the potential strategy change.

I guess the second question is that when we think about the more premium brand like Galénic or Eve Lom, are they the brands that are going to be generating the profitable growth, or the company will use the similar sort of methodology to really drive the very strong sales growth, but this brand yet in the short term will be loss making? Third question is related to our, I guess, the balance sheet and cash.

So I think for 2021, if we assume company will still have some loss and the working capital needed for expanding the business and the potential M&A. So what kind of the cash consumption or cash burn that we should look for the end of 2021? Thank you very much..

Well, thank you for the question. Let me first try to take a shot at your question. So first of all, last year, actually Q1 was not a low base, especially in our business. Maybe in some of the other businesses, they saw the impact of the COVID-19 a bit earlier. But for us Q1 last year, we saw 120% year-over-year growth.

So it was a very strong quarter in our mind. So the impact from COVID-19 started to hit us actually from Q2 and even until maybe in some part of the China today.

Because, as you know, in the last few months, in some parts of the country, especially in the northern part of the country, COVID-19 came back and in some of the cities, offline stores were closed, again, and some of our stores were or impacted, too. So we're not trying to be conservative in providing the guidance.

But again, as we mentioned earlier, in Q1 some of the new products for existing brands like Perfect Diary, Little Ondine will not be launched until Q2. And the contribution to our revenue from the newly acquired brands will not present themselves or will not show themselves in our financials starting from Q2.

Currently, we're busy trying to integrate Galénic and the other Chinese brands into our operations, and we haven't even actually closed. We find the [FPAs] for Eve Lom that's why we had to disclose the deal, but it will take us another couple of weeks to actually close the deal.

And the consolidation of Eve Lom numbers into our financials will start only from the beginning of Q2. So we believe that the growth rate of our overall business will start to come back or pick up starting from Q2 compared to Q1. So it's not like, all right, just Q1 growth rate year-over-year is representative of the growth rate for the full year.

So your second question….

And I think for your second question, I think it's relating to the strategy for new brand and existing brands. So actually, when we are determining a brand strategy, the company will actually look at the brand development agent cycle instead of whether the brand is new or existing.

So for example, even for our first brand Perfect Diary, if we identify good growth opportunities in the new category or new offering, we will not hesitate to implement a growth strategy by investing, continue to invest in sales and marketing to further view the brand equity and with customer awareness.

So basically, when we look at our brand portfolio, in the long term, we are going to launch more brands through a combination of self incubation and also M&A. But even for M&A, it's not only a pure aggregating all revenues together to increase the overall group level sales, but rather we're very good at growing the brand that we acquire.

Basically growing the top line, increase the market share. So basically, in the long term, we are still very -- right now, we're still very focusing on top line growth regardless of whether it's new, existing, but rather looking at the brand stage and also growth healthier..

Your third question is actually regarding on cash burn this year. I can only talk about our operating cash flow because you can never plan ahead of time your next acquisition activity. So this year, as we've explained to our investors. It's going to be another loss making year because our current focus is on top line growth.

So it's going to be a negative operating cash flow year for us. But hopefully, next year, we're going to be able to break even in our bottom line and so our cash flow situation..

[Operator Instructions] And the next question comes from Luzi Li with Bank of America Securities..

So my first question is, since we gave the first quarter guidance. So for the full year, can we use -- so we are expecting accelerating growth from Q2 to the end of the year, right? So how should we look at the full year growth rates? And if it's going to accelerate from the second quarter.

So what is the key growth driver behind that? It should be like our flagship brand Perfect Diary or newly developed, self-developed brands like Little Ondine and Abby's Choice, or the key growth, or the key contribution from the growth should come from the newly acquired brands? So this is my first question.

My second question is, actually, could you give us more color on the newly acquired brands, particularly the Eve Lom. So how big is it as for now? So what is our strategy to grow the newly acquired brands? I believe that most of these acquired brands are skin care.

So are we trying to capture the sales from the skin care brands from the existing customer base or we actually target to extend the customer base to the new customers because clearly we have a different brand positioning, the Eve Lom and Galénic are more premium. So what is our strategy? Thank you..

For your first question, we do not provide full year guidance for our top line growth.

But as I said earlier, starting from Q2, we may see some pickup on our growth rate, because as I pointed earlier, first Q1 last year was a very strong quarter; and one, Q1 this year, our business, especially our offline business still got hit by the COVID-19 situations in some parts of the country; and two, our newly acquired brands haven't started contributing to our top line, starting from Q2 we're going to see some of that; and three, if you look at our existing brands, we do have plans to launch new products or product categories.

For example, Perfect Diary, we're going to be launching, for example, product in Q2, Q3 this year. So those will be the drivers for our top line growth for the remaining three quarters of the year. Your second question, yes, you're absolutely right. The newly acquired brands are mostly skincare brands, like Galénic, Eve Lom and another Chinese brand.

And two of these brands at least, Eve Lom and Galénic, are actually positioned as prestige brands and it will be very difficult for us to sell them to our existing customer base of Perfect Diary, because they're just in probably different market segments.

But again, I think we have built core capabilities in terms of our supply chain, R&D capabilities and data driven product capability is also marketing through social media. So by leveraging those core operational capabilities, we believe that we will be successful in launching or relaunching those newly acquired brands..

And the next question comes from [Indiscernible] [Kevin Zhang] with [Aegis] Research..

Congratulations on very strong earning results. I have two quick questions. The first one is that since our strategy have already built a brand portfolio with different categories and price provisioning. So how do we make best use of our very large user base to cross sell, because we have very large online follower base and the membership.

So what is our multibrand operations strategy? The second question is about the newly acquired brand, Galénic and Eve Lom. So what is our strategy on the post acquisition integration? How to deal with their existing team and overseas distributor network? Thank you..

So going back to the first one, so when we're expand into the market brands and I guess, we can leverage like our existing like customer base and also our financial capabilities. So going back to the cost, I believe, so for the new brands we acquired, so the growth is coming from two parts.

One part about like we can leverage existing like the capacity or customer base to either test the product or to have the brand positioning or to launch and design new products. So that's a benefit that we can get. And also, another thing that we are good at is actually to accelerate the growth of the brand we acquired based on our B2C model.

So going back to your….

Do you mind repeating your second question?.

So since we have acquired Galénic and Eve Lom, these two overseas brands.

So what is our strategy on the post acquisition integration? For example, how to deal with their existing team, R&D resources as well as the overseas distributors?.

Well, I think that's a very important question about the acquisition, because the integration plays a very important part when we expand the brand portfolios. So right now, there a few steps we are taking. One of the most important thing is actually we are not at 100%.

It's more like a joint venture with the existing shareholders, which can help us to smoothly transfer the operation. So for our partners, they're helping us to remain and then keep the existing distribution network and helping us on the R&D and product innovation. And even keeping the key employees and the brand equity and et cetera.

So this joint venture is very important to make sure that the acquisition is like a strong effort of all parties. So that's a very important thing. Another thing is, so right now internally we are growing our organization capabilities and the M&A team.

So we have new talent coming from consulting firm in US banking and also professional services team, and that they are very good at executing the integration part of the acquisition. So we believe with the external health and also the internal teams like the commitment we are getting better and better in executing those acquisitions.

So thank you so much..

As this does conclude the question-and-answer session. I would like to turn the conference back over to management for any closing comments..

Thank you, operator. So thank you once again for joining us today. If you have any further questions, please feel free to contact us at Yatsen directly or TPG Investor Relations. Our contact information for IR in both China and the US can be found on today's press release. Have a great day. Thank you..

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