Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yatsen Second Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Liu, Head of Strategic Investment and Capital Markets. Please go ahead.

Thank you, Operator. Please know the discussion today will contain four looking standards. relating to the company's future performance and are intended to qualify for the safe harbor from liability as established by the U.S. Cabot Securities Mitigation 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 Yasin'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 definition of non-GAAP financial measures, A Reconciliation of Gap to Non-Gap Financial Results, we see the earnings issues earlier today. Joining us today on the call from Yasin Senior Management are Mr. Zifeng Huang, our founder, chairman, and CEO, and Mr. Zhonghao 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 Yasin's investor relations website at ir.yasinglobal.com. I'll now turn the call over to Mr. Junfeng Huang. Please go ahead.

Thank you, Irene, and thank you, everyone, for participating in Yasin's second quarter 2021 earnings conference call today. So our total net revenues grew 53.5% year-over-year in the second quarter, in line with our guidance. So due to steady contribution from our flagship Perfect Diary brand and better than expected performance of our newly launched and acquired brands. So the number of DTC customers increased by 13.3% year-over-year to 10.2% median. And the average net revenue per DTC customer went up by 17.6% to 117 RMB from 99 RMB during the second quarter of 2020. So this solid result came despite intensifying competition and rising customer acquisition costs. Even as China's beauty market grew at about 20% overall during the second quarter, growth in the premium segment and in skincare was notably stronger than other market segments. We believe this market development validates a set of strategy growth initiatives we launched in May to sharpen our growth model. Specifically, we are optimizing internal resources and organization structures to enhance the power of our brands to facilitate positive innovation, capitalize on new growth channels, and optimize cost structures and efficiencies. This ongoing transformation transformative process will continue into mid-September, even though we have already seen some early signs of success in the latest quarter. So with our proven ability to disrupt the traditional beauty industry using the digitalized latest DDC model, we are now building a portfolio of durable, iconic brands supported by consumers' insights and innovation. So we believe these strategic initiatives are essential tools to position us on the path of a high-quality, sustainable growth, particularly as we prepare for a busy season in the lead-up to single-stay in the fourth quarter. So during the second quarter, we launched several new products under our ,, such as Lucent Blurring Loose Powder with Smart Lock technology and the Ultralight Purifying Cleansing Oil. So all of these new products featured preparatory technology and received very encouraging user feedback. Despite deep competition from both international and domestic peers during the June 18th Shopping Festival, Perfect Diary was one of the top two best-selling domestic Chinese color cosmetic brands, selling more than 400,000 Remy lip glosses, among other heel products. The launch of our higher-priced Slim Heel Lipstick Cherry Boss was also a success during the May 20th Chinese Valentine's Day campaign with sales of more than 100,000 units. This also introduced the Perfect Diary brand to male customers who are buying for their significant others. Heading into the second half of the year, we plan to make a strong push into the base makeup category and to premiumize the Perfect Diary brand among our new and existing users. So speaking of brand building, we continue to be recognized by the industry for our achievements. So this quarter, the 2021 T-Mobile Beauty Awards, known as the Oscar of the beauty industry, named Perfect Diary the most sought-after brand of the year and Yasen the fastest-growing beauty group in 2021. World Brand Lab recognized Perfect Diary as one of China's 500 most valuable brands of 2021, in which we are the only color cosmetic brand and the youngest beauty brand on the list. Now, turning to other brands in our portfolio, we continue to optimize return on investment for Little Ondine and AB's Choice during the second quarter. The newly launched color cosmetic brand, Pink Bear, has seen fast growth since its debut in March 2001. This sensational lip brand sold over more than 500,000 lip glosses during its first June 18th campaign, gathering the award as the fastest-growing new cosmetic brand on Timor in 2021. And as we head into the second half of the year, we will continue to expand PinBear into the eye and face makeup categories. We are also excited about our progress in skincare, which has grown to represent more than 20% of our growth cells in the second quarter. our new innovative skincare products strongly resonated with our consumers. Galanix Pure Brightening Vitamin C Powder quickly sold out following its initial launch on Mainland China this April. So after a relatively short period of integration into our platform, Dr. Wu's Mainland China sales grew dramatically during the second quarter to become the number one in this category on Tmall. During the June 18th Shopping Festival, Dr. Wu's sales increased around 700% from the same period last year. Meanwhile, Yves Long was the number one premium cleanser brand on Tmall during the second quarter, and the sales of its classic cleansing cream products grew by 53% year-over-year during the June 18th Shopping Festival on Tmall. The rapid progress we have made so far clearly shows that there is great growth potential for these brands in the future. We continue to focus on improving ROI on our sales and marketing expenses across the firm. Throughout the June 18th Shopping Festival, we were able to maintain discipline on pricing and discounts, as well as allocate resources on brands and channels with higher ROI. The end result was a decline in our sales and marketing expenses to 61% of the total net revenues based on long gap measures compared to 71% last quarter and the 6.7% in the fourth quarter of 2020. So we have also set up our investment in R&D, which increased to 2.3% of total net revenues this quarter from 1.4% a year ago. Our increased investment in R&D has already borne fruit as demonstrated by the smart lock technology that we developed in-house and used in the new translucent blurring loose powder line. So besides launching this innovative product, we also recently announced the establishment of a joint research laboratory with the National Engineering Research Center for Nanomedicine, which was formed under the Guazhong University of Science Technology to further enhance our R&D capabilities in advanced skincare, particularly the nano-based and thermal delivery system for active ingredients. So looking ahead, the lower year-over-year growth rate in Q3 as reflected in our guidance is largely due to the unusual quarterly seasonality pattern caused by the COVID-19 pandemic last year. So in a typical year, the China online beauty market is characterized by higher sales in Q2 than Q3. as a result of the June 2018 promotions across all sales channels. This pattern was disrupted in 2020 due to social distancing and quarantine policies during the COVID-19 pandemic in Q2, followed by relatively stronger sales in Q3 as the market recovered, helped by the pent-up demand from the previous months. So this creates a low base in Q2 and a high base in Q3 for year-on-year comparisons this year. However, if you compare our combined sales in Q2 and Q3 this year, which represent 53.5% and 5 to 10 based on our guidance, year-over-year growth rates, respectively, the year-over-year growth is projected to be 26% to 29%. We believe this is a more accurate picture of our growth trend, taking last year's unusual seasonality into account. We expect to have a normal basis of comparison in Q4, and our year-over-year will resume its normal trajectory. We are confident that successful execution of our strategy growth initiatives, our expanding talent pool, and the ample financial results on our balance sheet position us well to continue playing a leading role in China's evolving beauty market. So thank you, everyone. I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance.

Thank you, David, and hello, everyone. 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, at least otherwise noted. Total net revenue for the second quarter of 2021 is grew by 53.5% to 1.53 billion RMB from 993.2 million RMB in the prior year period. The growth was primarily attributable to increased contribution from diversified sales channels and newly launched and acquired brands. Gross profit for the second quarter of 2021 increased by 65.1% to approximately 1 billion RMBs from 607 million RMB in the prior year period. Gross margin improved by 4.6 percentage points to 65.7% in the second quarter 2021 as compared with 61.1% in the prior year period. On the back of increased sales generated from higher margin brands and products. We have also seen the continuation of the premiumization trend for the Perfect Diary brand in the quarter, enabling us to achieve higher average order value and better margins. Total operating expenses for the second quarter of 2021 increased by 51% to 1.41 billion RMB from 935.3 million RMB in the prior year period. As a percentage of total net revenues, total operating expenses decreased to 92.6% from 94.2 percent in the prior year period. Fulfillment expenses for the second quarter of 2021 were 118 million RMB as compared with 81.7 million RMB in the prior year period. As a percentage of net revenue, fulfillment expenses decreased to 7.7 percent from 8.2 percent in the prior year period. which was primarily attributable to the high base effect of the prior year period, during which logistics costs were high as a result of the COVID-19 pandemic last year. Selling and marketing expenses for the second quarter of 2021 were $972.5 million RMB, as compared with $622.5 million RMB in the prior year period. As a percentage of total net revenues, selling and marketing expenses were 63.8% as compared with 62.7% in the prior year period. However, on a non-GAAP basis, which includes expenses related to share-based compensation and amortization of intangible assets, selling and marketing expenses were 61.4% of total net revenues as compared with 71% in the prior quarter and 62.7% in the same period last year. Such a decrease in the selling and marketing expenses as a percentage of total net revenues was a result of our focus on improving the ROI on our selling and marketing expenses. General and administrative expenses for the second quarter of 2021 were 286.4 million RMB as compared with 216.8 million RMB in the prior year period. As a percentage of total net revenues, general and administrative expenses for the second quarter of 2021 decreased to 18.8% from 21.8% in the prior year period. The decrease in percentage was primarily due to lower HPC expenses compared to the same period last year. Research and development expenses for the second quarter of 2021 were 35.2 million RMB as compared with 14.3 million RMB in the prior year period. As a percentage of total net revenues, research and development expenses for the second quarter of 2021 increased to 2.3% from 1.4% in the prior year period. The increase was primarily due to higher personnel costs and share-based compensation expenses as a reflection of our commitment to enhance our R&D capabilities. Lost from operations for the second quarter of 2021 increased by 24.9% to 409.9 million RMB from 328.3 million RMB in the prior year period. Operating loss margin was 26.9% as compared with 33.1% in the prior year period. Non-GAAP loss from operations for the second quarter of 2021 increased by 17.7% to 211.4 million RMB from 179.6 million RMBs in the prior period. Non-GAAP operating loss margin was 13.9% as compared with 18.1% in the prior period. Net loss for the second quarter of 2021 increased by 21.6% to 391.2 million RMBs from 321.7 million RMBs in the prior period. Net loss margin was 25.7%, as compared with 32.4% in the prior year period. Non-GAAP net loss from the second quarter of 2021 increased by 12.6%, to RMB 194.9 million from 173.1 million. Non-GAAP net loss margin was 12.8%, as compared with 17.4% in the prior year period. Net loss attributable to Yasmin's ordinary shareholders per diluted ADS for the second quarter of 2021 decreased to 0.62 RMB from 5.68 RMB in the prior year period. Non-GAAP net loss attributable to Yasmin's ordinary shareholders for diluted ABS for the second quarter of 2021 decreased to 0.31 RMB from 1.28 RMB in the prior year period. As of June 30th, 2021, the company had cash and cash equivalent and restricted cash of 4.11 billion RMB as compared with 5.73 billion RMB as of December 31, 2020. Looking at our business outlook for this third quarter of 2021, we expect our total net revenue to be between 1.33 billion RMB and 1.39 billion RMB, representing a year-over-year growth rate of approximately 5% to 10%. 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 open the call to Q&A. Operator?

Yes.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. 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. Once again, that was star then 1 to ask a question, and at this time, we will pause momentarily to assemble our roster. And our first question will come from Dustin Wei of Morgan Stanley. Please go ahead.

Hello, management. Thanks for taking my question. So first question is really regarding the third quarter guidance. So it sounds like it's because the base kind of issue in the third quarter last year that make company sort of provide the very conservative or low guidance. It sounds like it's not because the current COVID outbreak So that's a little, to me, it's a little confusing. So just appreciate you can clarify that point. And if we are looking for 5% to 10% sales growth, you know, I think by brand, are we going to assume the perfect diary could be declining in third quarter? Or, you know, could you provide some of the colors like by brand or by channel? So that's the first question regarding the guidance. And the second question is, consequently, we think about the margin of profit for third quarter. If we're assuming like 5% to 10% sales growth, does that mean company will also control the variable cost? So we are still continue to see sort of rationalization, ROI, and reduction on net loss ratio. Or because of certain operating delaverage, in fact, in the third quarter, we were temporarily in the quarter seeing like bigger loss or bigger loss ratio. And the third point is back to David's prepared remark, talk about the transformation plan. Appreciate your management can provide some of the details about the goal of that transformation, the operational target or financial target, and how long that we would expect that change will be done and when we are going to see some of the better financial results. That's my three questions. Thank you very much.

Thank you so much for the question, Justin. So first thing, let's discuss a little bit about the guidance. So as I mentioned before, we need to take the Q2 and Q3 combined to look at the growth rate. One of the key reasons is because of the unusual seasonality of last year because of the COVID. So if you look at the Q3 guidance, we cannot provide the accurate breakdown of the by-brand, but we still see a very healthy growth trend of proprietary main brand. Because of the ROI adjustment, now we have more brands in skincare category, and for A.B. Choice and Lidl Ondine, we continue to sharpen the ROI. And then, so for that two brands, we are allocating the resources into the skincare growths. So that's what we see about the Q3 guidance. And then you talk about the COVID impact on Q3. We see some moderate impact on our offline stores because right now it's less than one-third of the offline store were impacted by the COVID. So we continue to already... keeping the consideration of the impact of the COVID in our exhibition of the offline cells. So for the transformation plant, we think we take some initiative to really sharpen our growth model. So that means a few things. First, we continue to improve our ROI. So this will be reflecting on the sales and marketing percentage of the total revenue and also improvement on the bottom line. Second is that right now we are, so in the past quarter, we actually allocated internal resources into skincare brands, which means we moved some of the best performers from cosmetic to skincare up in you. So that is under the assumption that we think our growth in the color cosmetic category will continue. However, we see a higher, more intense competition in color cosmetics. So right now we are focusing on the growth on proprietary and also because we already take some very good initiative to grow the skincare brand. We see the momentum on Dr. Wu, Delaney, Yife Long, and Avis Choice is moving pretty well. We will continue to invest in the skincares like a growth.

Thank you, David. If I can just follow up on sort of the from margin where the profit aspect of the questions for third quarter that, you know, should we take the third quarter's margin a little bit abnormal because this low growth or you think, you know, the ROI and the margin kind of improvement will continue despite the sort of a little bit low growth for the third quarter itself?

I think, so if we think about the Q3 and Q4 growth, so normally the Q4's growth comes from the investment on the Q3, because we need to take the repeat purchase rate into consideration. So normally the new user we acquired in Q3 will come back during the single-state promotion. So for Q3, the investments on our flagship brands like Perfect Diary and also the skincare brands will still be high. But somehow we see the trend because of the optimized ROI and lower sales and marketing percentage of revenue. So the bottom line improvement will continue.

Okay. Thank you very much, David. Thank you.

Thank you so much, Dustin.

The next question comes from Christine Cho of Goldman Sachs. Please go ahead.

Thank you so much, David. So I have a quick three questions. So just to follow up on the guidance, I think in understanding the seasonality, if I just simply add the second quarter actual revenue plus kind of your third quarter guidance, it kind of seems to imply around 25 to 30 percent growth on a YY basis. Is this around the level of normalized growth that we should look for going forward beyond fourth quarter and beyond? That's the first question. Second question is, would you have any update on the offline store expansion? I recall that you had around 100 new opening target for this year, but seems like due to the COVID situation and other kind of factors, so far the store opening has been slower than the target. And lastly, I just wanted to hear some thoughts on kind of the weaker July numbers across the industry. Do you have any thoughts here? Do you think this is more of a pull forward of demand towards June 18th? Or is this something, any other factors that we should think about in terms of interpreting July and August numbers? Thank you.

Thank you so much. to answer your first question about the looking forward, the guidance on Q4 and also other quarters next year. We think the, so I probably would take the Q1 into consideration as well. So the average growth rate of the Q1 to Q3 will be something that we believe will be a more accurate reflection of our growth looking forward. And going back to your second question about the offline source. So in Q2 this year, we nearly opened around. Irene, can you help to adjust the second question of the offline store opening?

Yes, so far we have at the end of the second quarter, we have 273 stores open compared to at the end of the year, 241. So that's a net increase of... 32 stores, we expect to continue to open more stores. But given the repeated COVID situations, the number of stores that we're planning to open may drop a little bit compared to the number that we gave earlier.

So your third question about the overall growth of cosmetic industry in July. We did see a slower growth versus the previous months, and also it's lower than our expectation. So I believe one of the key reasons behind is what really drives the growth of previous months. So if you look at the... since June or last year. So in the past 12 months, beginning last June to this June. So the whole skincare or the whole cosmetic industry growth was mainly driven by skincare and also premium brands growth. So we see that growth trend right now is getting a little bit like slowing down. And also, so that's why the whole market grows. We think it's a weaker. But looking forward, so if we look at the August data, so we still have the confidence on the color cosmetic growth. As we see, there's some new emerging channels are booming. For example, the live broadcasting, live streaming generally is growing really fast. So now the company's focus is we need to capture the new growth of the new category engines and also newly emerging channels like Douyin.

Thank you. That is super clear. Thank you. Thank you.

The next question comes from Louise Lee of Bank of America Securities. Please go ahead.

Hi, David. Hi, Dong Hao. Thank you for taking my question. My first question is about the second quarter. So you mentioned about the key driver of the quarterly sales growth is from the channel diversification on the new products. So could you give us some color on the channel diversification? So versus the last quarter, so do we see further expansion from the sales contribution from outside of Taobao and Tmall? particularly Douyin. So what is the rough contribution from Douyin now? And I remember that you mentioned that Douyin, the ROI of Douyin in Q1 is still at the trial period. So do we see any improvement from the ROI from this channel? So this is my first question. My second question is also about the guidance. it seems like the Q3 guidance is a little bit lower. But if we look at it, you just mentioned that normally we see higher cells from Q2 versus Q3. But if we look at the past two years, it's not the case. So in this case, how should we look at Q4 when the base becomes even tougher? So is it the 25% to 30% is a normalized growth? My third question is, based on what we are doing for the transformation, so things like we are prioritizing our net loss control versus the sales growth, if that's the case. Thank you.

Thank you, Louise, for the question. So first one about the channel mix. Yes, we are seeing a higher growth rate outside of Timor in terms of a channel miss. And then so we especially we see a very fast growth of the GMV in Douyin because of the live streaming. So in Q1, yes, we are on a testing period. So the ROI is not that high. In Q2, we significantly improved the ROI. So right now the growth of Douyin is on a right check. And I believe this will be reflecting on a sustainable growth on revenue and also optimized of our sales and marketing percentage of total revenue. So about the guidance on the Q3, I think I discussed that for Christine's question. If you're taking the Q2 and Q3 growth combined, and then if you're taking Q1 to Q3 combined, we believe the Q1 to Q3 combined will be something that we believe will be more accurate reflection of our growth expectation for quarters moving forward. And then so having said that, we believe our performance on Douyin on the live streaming, there are still some opportunities for us to optimize So we will continue to devote more efforts to service our competitors in Douyin China.

How about my last question? So looking forward, are we prioritizing the net loss control versus sales growth? Or how do we strike a balance here? Thank you.

I think, so right now we are taking a more sustainable growth strategy. So the key focus is still on growth. But if you look at what that means for Yasen, is that we think that the value of the growth coming from the skincare brands and coming from our premium skincare brands is more valuable for the whole group. So that's why we will continue to devote more resources to grow the skincare brands. And then also for our flagship brand for the diary, as I mentioned before, previously we did move too fast to reallocate our talent into the skincare BU. And now we think because of the intensifying competition, we need to refocus and also to demo more resources to continue the growth trend of our main brand. So growth will be the key priority of the company. But the reason we see the optimized bottom line is because we have a very high display in the resource allocation to maintain a higher ROI level because the higher ROI level is reflecting the whole group, which means for all our brands, we are taking the same bar. So that actually means we need to optimize the A-BIS choice and also little on this growth model.

Louis, a bit more on your second question. I believe you were looking at Q2 versus Q3 back in 2019, and then Q2 and Q3 in 2020 in our business. And you're right. Even back in 2019, our Q3 revenue was actually higher than Q2 by about 11%. And the reason behind that was because back then we were enjoying really, you know, high growth speed. So that's why, you know, the growth speed, our high growth speed actually outweighs, you know, the seasonality back in 2019. So that's why in 2019 Q3 was 11%. Our revenue was 11% higher than Q2. But if you look at our 2020 last year's number, our Q3 revenue was actually 27%. higher than Q2. And that was a reflection of the disruption in the seasonality pattern that we were talking about. So, you know, as David has mentioned several times just now, you know, in Q2 last year, you know, we had that social distancing and quarantine policies in almost all of the country, which actually depressed consumer demand ourselves back in Q2. But in Q3, you know, the 10 top demand from the previous Q1 and Q2 were actually released. So that's why we saw a much higher Q3 revenue number last year. And that was the seasonality pattern change that, you know, we were talking about. I hope that answers your question.

Got it. Thank you very much. Very clear. Sure.

The next question comes from Ingrid Zhang of UBS. Please go ahead.

Hi, management. Thanks for taking my question. I have three questions. The first is about the brands. I recall that in the last quarter we commented that Pink Bear is expected to deliver strong growth this year among all the color brands. Would you please update on the sales trend in the past quarter of Pink Bear? And also, for the skin care brands, we're glad to see that Dr. Wu's sales goals are already taking off in the second quarter. But would you share with us our new product launch plans in the second half? And also, when will we expect the growth of, like, if-owned galactic brands to take off, like Dr. Wu's? And second question is about the marketing cost. Would you mind to share a bit about the ROI, maybe by company level or by channels versus peers? Just want to get a feeling about where we are compared with the industry. And our last question is about the organization structure. would you please share with us maybe some color about our resource allocation among different online channels and say social marketing values in terms of personnel's marketing budgets, et cetera. Many thanks.

Thank you, Ingrid, for the question. So if I remember correctly, so the first question is about our um um investment plan on the uh on the skincare category um we so right now we we are we are spending more and more effort to grow our skincare brands so photo is growing really fast and also we see a very um also the the very fast growth of coming from pin there so the reason we launched pin bear um is that so when the profit diary is taking a criminalization chant So the price point of Perfidari is moving up. So we see the white space under the Perfidari price point. So we need PinBear to take the market share when Perfidari is moving up. So we see right now, based on the initial sales results of PinBear in the past four months, it is expecting our expectation because we think the PinBear's growth is very healthy. It's a very high ROI and a very fast growth. And also the brand positioning is very clear. So the brand is strongly resonated with the younger generation of consumers, which means the brand is trading in a lot of new users of the new engines into the color category. So I think the PinBear right now is on check. So for PinBear right now, it's really focused on the lip gloss category. But for the second half of this year, the brand will be expanding to the eyeshadow category and also some base makeup as well. So we think the fast-growing trend in there will continue, and then will help us to drive the growth of our value-share gaining in the color cosmetics. So for Dr. Wu, so right now we are really focusing on the hero product. But because Dr. Wu has a very strong product lineup architecture, So we think in the Q3 and Q4, we are going to expand into other essence items of Dr. Wu. So the R&D of Dr. Wu is very strong and the product has been proven in the past decade in the market. So the reason we just choose the first one to be very focused is that we think that one is very competitive in the market and the product performance is exceeding the consumer's expectation. So we strengthened the brand equity by making the first-year item to become the number one in this subcategory. So in Q3 and Q4, we will be expanding the essence line, expanding to the facial mask line, and also other special items as well. So we think the new product launch and expansion plan for Dr. Wu will be very strong based on the existing product line-up. And in the future, we are also devoting the resources in R&D and developing new products, new hero products for Dota 2 as well. So for the third question about the ROI, right now, because of the expansion in Douyin, because of live streaming, so the cost structure in Douyin is more CPS-based, which means we pay a fixed cost of the cells. So that is really helping us to improving the ROI. So we think as long as we continue to devote resources into growing the revenue percentage in Douyin, the optimization of the ROI will continue.

Thanks, David. My last question was about the organization structure, our resource allocation among different online channels and social marketing venues in terms of personnel, marketing budgets, et cetera. Say, how many people we have for the Douyin and Kaishou channel operation?

I cannot remember the number of the people working in Douyin and Kaishou right now. But in the past month, we were having the strategy review for our past half year, and we see a demand that we need to allocate more talent into the fast-growing channel and also fast-growing brands. So because we have a very sufficient talent pool based on our management trainee program, and also we are getting a lot of very experienced people from the industry to join us as well. So we think we have sufficient talent to manage the growth of the different channels. In terms of brand building, brand building is one of the key focus for Yasan Group. So in the past year, in the past half year, so we have hired very talented people, traditional beauty conglomerates, And then they brought in a lot of experiences in brand building. So we are strengthening the brand equity in Puppet Diary and also our other brands as well. So we think the investment in brand building will continue to take a bigger percentage of our sales and marketing expense.

Thank you.

The next question comes from Casper Shi of CICC. Please go ahead.

Hi, this is Casper from CICC, and thank you for taking my question. My first question is about the pace of introducing new product or new brand, because we noticed that recently the pace of introducing new brands is slower than before. So I wonder if the time span for the new product development is longer now. And the second question is about the skincare products of the main brand, Perfect Dairy. So could you share a bit about the recent sales performance and maybe our future plans of the new brand development, especially in the skincare category? Thank you.

I think the first half of this year, so we spent more and more effort in developing better products for our US brands. So initially, we took a better and a fewer strategy to come up with a very innovative and long-lasting performance SKUs. For example, the loose powder we just launched, it takes longer than our traditional products to develop. But the technology and also the smart lock, the proprietary technology, Right now, it's becoming a very strong driver to helping the product to gain a share in the market. So if we look at the loose powder, and then I would believe this one will become a very important milestone of Perfect Diary. Because as we all know, the loose powder category is one of the, I would say, the strategy focus of one of our very important competitors in this market. So which means when we are gaining share in loose powder, it's actually helping us to become more competitive in the market by head-to-head comparison to our main competitor. So you're right that in the first half, we are spending more effort to developing really competitive products. It takes longer time. But for the second half of this year, we will see higher frequency of launch of new products. That is mainly because everything like last Q4 and the first two quarters this year, we have been preparing for very innovative product launch in the market. So we just launched the makeup remover oil and also we are launching some other new items as well. So for our lipstick, we are going to have a very breakthrough formula, which we are going to launch right before the single stay. And then for our eyeshadow palette, we just launched the first eyeshadow palette, which will become the blockbuster of the eyeshadow category this year. And then right before single stay, we will see a lot of new SKU launching among our existing brands, not only proprietary, but also in there and also our skincare brands. So we are confident about our new initiative pipeline in the second half of this year.

Okay. Yeah, the second question is about the skincare products of our main brand, Profit Diary. So could you give us some details about these sales performance in Q2 and maybe the guidance into Q3 and Q4?

The skincare products of Profit Diary is similar to ColorLens and also male skincare products, which will be the category expansion of Profit Diary brand. So for the skincare products, we launched in our offline stores, and now we see the percentage of the skincare products line up as the total revenue of our offline stores has been continuously growing. And based on the initial feedback from our consumers, they believe that those skincare items is actually helping to better apply the makeup So I believe the product performance has been proven and also well received by the consumers. And so after a test period, we're expanding the basic skin care product items into other channels as well. So looking forward, we will take in a higher percentage of the total revenue of that.

OK, thank you very much about the very detailed explanation. And I have no other questions. Thank you. Thank you.

The next question comes from Kevin Zhang of 86 Research. Please go ahead.

Hi, management, for taking my questions. I have two quick questions. The first one is about the data security. So how does the company evaluate the potential impact from data security-related regulation? Because based on our understanding, on the one hand, Our customer insight and product development process is really data-driven. On the other hand, the firm usually spends a lot of dollars in targeted marketing. I was just wondering if the marketing ROI will be diluted post this sort of data-based regulation. This is the first one. The second one is about the management team because our ex-CEO Vincent resigned due to health reasons. What have we done to ensure the stable operation and transition and how do we reallocate the responsibilities of COO to other members?

Thank you for your question. The first one about the data security law. So right now our legal counsel is reviewing the draft legislation on data security. So the preliminary view is that data security will not impact Yasen too much because Yasen obtains its customer data mainly through the online platforms like Tmall. So the data from Tmall are pretty well protected. So data obtained for our private domain channels are provided voluntarily by consumers. And also we have very strict data security measures in place to prevent DFU So I think overall, our assessment on the data security laws and impact on the company is something that we believe would not be very big. The second question related to our co-founders, Vincent Lee. So because of the health issue, he actually left the company around in April. So we started the transition in Q2 already. So originally he's taking a pretty big responsibility of the company's operation. And because we have the second tier management and also my co-founder, he's taking the majority power, for instance, responsibility. So in the past five months, we see the operation went quite smooth. And also we are taking the new initiative to sharpen our growth model. So I think the team's morale and also the team's operation efficiency is still in line with our expectation. Although the team has been facing very competitive environment from the industry and also a very disturbing macroeconomic environment, I believe the team right now has been quite, I would say, confident about the initiative we are taking. we believe we are heading on to the right direction. And then we are sharpening our growth model. And also we see some initial success coming from our brand expansion and also our sales growth in skincare category. So all those are some of the very important milestones we are making. So looking forward, I believe the organization has been moving to the next stage. And then we will continue to work on what we believe will be the right direction, and then we will be long-term focused, and we will continue to grow the recent brand portfolios, and then gaining more share in the cosmetic industry.

Thank you, David. That's very helpful. I have no more questions. Thank you so much.

And that concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Thanks, everyone, for joining us today. If you have any further questions, please feel free to contact us at Yasmin directly or TPG Investor Relations. Our contact information for IR in both China and the U.S. can be found on today's press release. Thanks and have a great day.

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