Yatsen Holding Limited Q3 FY2025 earnings call

• The beauty market in China showed recovery in Q3, especially in skincare. Yatsen delivered fourth consecutive quarter of revenue growth. - Skincare brands grew 83.2% y/y, reaching 49.2% of total revenue. Net loss narrowed with improved gross margin, optimized operating efficiency, etc. - Brand highlights: Galani's PO series performing well, Doctor Wu's anti-aging product launched in UK, Fabulare's progress with new products, COVID-19 ranking number one on WeChat video channel. - Participated in IFCC Congress for 4th year, 11 papers shortlisted covering various topics.

Total net revenues increased by 47.5% year over year to RMB 998.4 million. Skincare brands grew by 83.2% year over year, reaching 49.2% of total revenue. Color cosmetics brands had a 25.2% year-over-year revenue increase. Gross profit increased by 51.9% to RMB 780.5 million, with gross margin rising to 78.2%.

• Expect total net revenues between RMB 1.32 billion and RMB 1.49 billion for 2025, a year-over-year increase of approximately 15% to 30%. - Priority is to continue progressing toward profitability in disciplined and sustainable way, driven by higher skincare mix, ongoing gross margin optimization, and greater marketing efficiency.

• Discussion of forward-looking statements subject to certain risks and uncertainties beyond the company's control that could cause actual results to differ materially from those mentioned.

Q: Firstly, congratulations on beating our revenue guidance. My first question is about our performance during the Double Eleven festival. Is that in line with our expectations? And have we observed any change in the competition from foreign high-end brands? And my second question is, how do we expect the profitability of the fourth quarter and the next year?

A: Well, I think first of all, the Double Eleven performance for the whole company in general is in line with our expectations. And of course, some of the brands are exceeding our expectations. So having said that, I think we are very happy to observe some of not only the existing hero SKUs are doing well, but some of the newly launched products have gained very strong momentum during the Double Eleven Shopping Festival, which will contribute to further growth potentials in coming quarters. Those products we already mentioned in the earnings call. Going back to your question about the challenges and also competition coming from the foreign high-end brands, we did observe a very big challenge and also competition. For the past Double Eleven Shopping Festival, some of the high-end brands are struggling with very big O2O price up the hero product. We did see that with our R&D supporting some of our new product launches, those products are still gaining very strong momentum. Looking forward, I think the competition during the Double Eleven Shopping Festival will load some of the pantry for some of the foreign high-end brands, which means it will hurt their long-term growth. So having said that, I'm happy to see that our high-end brands are still keeping a very strong momentum by balancing the price promotion. And also, we are focusing on promoting some of the new SKUs. So going back to the Q4, I think we are on the right track to reach profitability. And that's our long-term goal. And then we are seeing the balance of growth and also the right track for profitability.

Q: I also have two questions. The first one is we can see that the skincare business of the company has achieved rapid growth this year. So from which efforts should we make efforts to sustain the growth maybe in the last quarter and next year? And the second question is about profitability. So in which aspects will the company make efforts to continuously improve their profitability?

A: Well, so going back to the fundamental drivers for our skincare business, I think the number one thing is about the R&D. The beauty market has always been driven by further and better innovation. So we are very happy to see that, yeah, with our R&D growth engine, we can launch a very strong pipeline this year and also for the coming years as well. The second thing we can think of is with our expansion for our skincare portfolio, including the benefit expansion and also product line expansion, we see further link sales for our product portfolios, which can help us to drive further marketing ROI. The third thing is our skincare brand. I think overall, for the three major skincare brands, we still have a pretty far potential to reach their optimized revenue level. So during this process, as we continue to drive brand awareness and also continuously drive the customer base, we still have the potential to grow our existing skincare brand. And last but not least, I think for us, we focus on launching some new products on some of the key channels. And then in the future, we will expand into other channels and also drive a better channel mix. So with that, I think that will contribute to the sustainable driver for the allocation. Going back to your questions about how can we continuously improve, I think as we said many times before, I think the product mix optimization and the channel mix optimization can help us drive the gross margin and also the further ROI on the marketing expenses. The second one is as we focus more on the customer CIM and also the product link sales, this will help us to further drive better ROI on the marketing expenses. The third thing is very important. For some of our brands, those brands are reaching what we call the optimized threshold. And in the future, as the brands like the revenue scale grow up, we will see further leverage on the true branding expenses ROI. So those are some of the things we see as very important to drive continuous improvement for profitability.

Q: Could you please introduce just give us some colors on expected expenses of the company in the future? And maybe could you please share how do you view the increasingly fierce competition in the online channel?

A: Okay. Well, if you look at our financial statements, I see we see pretty stable G&A expenses in the past quarters. But having said that, I think moving forward, as the scale of our total revenue grows, I think we will see some operational leverage on the general and administrative expenses. We will continue to invest in some of what we think short-term wise, we will categorize as expenses, but we see it more like an investment, including R&D, and also for branding dollars to really build up the brand equity. Those are some of the areas that we focus on. What sorry. What was your second question? Oh, that's how do you view the ongoing sales competition on the online channel? How do you think our company is going to face such kind of situation? I think as we said before, when we are looking at the beauty market, there are so many players, and then one of the reasons that we can continuously and also accelerate our growth is mainly driven by some of the investments we have devoted to R&D in the past few years and also our continuous commitment to brand building. So we did something right before why we are getting the growth today. So if we are looking at the competition, as long as we continue to focus on what we have done right, and then we will see more and more robust product lineup and better innovation is coming. And we will see the higher brand awareness so that we can get some more operational and also brand building optimization. And also, we will see some of the operational efficiency improving by our product mix and the channel mix optimization. And we will see some organization growth, but we focus on the cornerstones of our product innovation, customer focus, CIM, and etcetera. So as long as we focus on doing the right thing, we think in the future, we will achieve the long-term sustainable growth result.