Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yatsen fourth quarter and full year 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 in Capital Markets. Please go ahead.

Thank you, Operator. Please note that the discussion today will contain four 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 Security 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 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, and a reconciliation of gap to non-gap financial results. Please see the earnings release issued earlier today. Joining us today on the call from Yasen's senior management are Mr. Jinfeng Huang, our founder, chairman, and CEO, and Mr. Donghao Yang, our director and CFO. Management will begin with prepared remarks, and the call will continue with a Q&A session. As a reminder, this conference call is being recorded. and the webcast replay will be available on Yasin's investor relations website at ir.yasinglobal.com. I'll now turn the call over to Mr. Linfeng Huang. Please go ahead.

Thank you, Irene, and thank you, everyone, for participating in Yasin's conference call for the fourth quarter and the full year of 2021. Last year, we celebrated our first year as a public company, as well as our fifth anniversary since our establishment. In all aspects, 2021 was an important year of change, marked by challenges in the market and the start of our evolution to the next stage of strategic focus. In order to provide everyone with a clear picture of our overall strategy and direction, let me take a moment to talk about our development history. For most of our first five years of development, the Chinese color cosmetic market, especially the online portion, experienced rapid growth. As a result, we focused on increasing market share, achieving high revenue growth, and establishing Purpose Diary as the leading upstart color cosmetic brand in China in this first phase of our development. We have largely achieved this goal by late 2020. More importantly, in the process, we have built a highly capable team with full spectrum of capabilities necessary to run a highly digitalized business model, covering R&D, supply chain, brand management, technology, and online-offline operations. However, as the color cosmetics market started to decelerate in 2020 and then experienced low growth in the second half of 2021, Competition also intensified among our domestic and global players. Given such market developments, we evolved our business focus to take a more balanced and holistic approach to sustainable growth. This new phase of our development, which began last year, includes building a diversified brand portfolio covering different price tiers within color cosmetics and skincare categories. upgrading our R&D capabilities, and promoting iconic, durable brands with reduced discounts and promotions. While we believe this is the right approach for Yasen, the positive impact from our strategy evolution will take several quarters to take effect. Our financial results may not show improvements in a linear fashion from quarter to quarter. With this context in mind, let me go over our financial highlights for 2021. Total net revenues for full year 2021 grew by 11.6% to RMB 5.8 billion. While we began on a strong note in the first half of 2021, we experienced a significant deceleration in the second half, particularly during the fourth quarter when total net revenues declined by 72.1% year-over-year. Our total net revenue from color cosmetic brands, including Proprietary, Little Owning, and Pin Bear, declined by 33.9% year-over-year in the fourth quarter. Although on a full-year basis, they were down by only 2.3% compared with the prior year. Black-ish consumer demand, the high prior year base for comparison, and our conscious decision to limit discounts and promotions contributed to this performance. One of 2021's bright spots was the robust performance of our skincare brands, which in aggregate quadrupled in size compared to 2020. Exhibiting particularly strong growth during the fourth quarter, full-year total net revenues for our skincare brands surged by 327.7% on a year-over-year basis, representing 21.3% of total net revenue, compared with 4% in the prior year period. We believe the outperformance of skincare relative to color cosmetics validates our strategy of acquiring a number of solid skincare brands since 2020. Despite the competitive dynamics, we did not give ground on growth margins. Our full year growth margins increased by 2.5 percentage points to 56.8%, compared with 54.3% in the prior year. In the fourth quarter, we achieved growth margin of 55%, compared with 56% in the prior year period. due to RMB 47.7 million of inventory provision booked at the year-end. Without inventory provision, we would have achieved a growth margin of 68.1% and 68.3% for the fourth quarter and the full year, 2021, respectively. 4.8 and 3.6 percentage points higher than prior year periods on a comparable basis. We ended the year with a cash balance of approximately RMB 3.1 billion, giving us ample flexibility to pursue our strategy goals. As we look forward to implementing our strategy evolution during the rest of 2022, we will focus on the following execution areas. First, on brand building. For our color cosmetic brand, we plan to build brand equity with compelling high-impact marketing, while limiting discounts and promotions. Our successful 2021 China Girl campaign for Puppet Diary is a great example of our focused brand building approach. We partnered with Cosmo Magazine to create content showcasing the dreams and aspirations of a diverse group of women across different locations and demographics, reinforcing our product's broad appeal while establishing our company as the face and future of modern Chinese feminine beauty. On the other hand, our skincare brands will build on last year's momentum, capitalizing on their brand strength and pre-existing hero products. In 2021, we significantly boost the revenue from Galactic, Yvron, and Dr. Wu by employing our Yaxan Plus playbook for rapid scaling brands via e-commerce channels. In 2022, we intend to bring these brands to the next level To achieve their next growth rate, we will continue to elevate our skincare brand, develop new compelling products, and win the trust of new customers. We understand that building an enduring, category-defining, prestigious beauty brand is by no means easy nor quick, and we remain committed to growing our skincare brand while increasing growth margins and brand-level profitability throughout 2022. Second, we will continue to strengthen our R&D capabilities, while we believe we'll be a major differentiator as we upgrade our product offerings. We increased R&D spending by 136% in 2021, representing 2.4% of net revenues, compared with 1.3% in the prior year. In terms of output, we increased the number of total patents by 71%, to 118 patents, including 39 invention patents. We also developed several preparatory formulations, including SmartLock technology, a key component of our newly launched proprietary pearl loose powder system, and a nano-targeting delivery system used in Dr. Wu's new Mandelic Multiple Acid Renewal Map. as well as our patent anti-skin darkening technology in our little-own-thing long-wear foundation product. We significantly expanded our capabilities in the fundamental research, applied research, and efficacy testing by recruiting top talent from our global peers and renewed research institutions, as well as through R&D collaborations under our OpenLAC collaboration framework with leading institutions such as the Rijin Hospital, one of Shanghai's premier hospitals, and the Shenzhen University. This year, we look forward to building more partnerships to help us identify and commercialize the best innovations from both local and global universities and research institutions for the China beauty market. Our next step is to redouble our focus on sustainable growth. One aspect of this strategy is to optimize profitability across all of our channels, both offline and online. To this end, we plan to uphold high ROI requirements for traffic expenses on our traditional e-commerce channels. Moreover, after significantly increasing our Douyin live streaming revenue by more than 200% on a year-over-year basis in the fourth quarter, we plan to further enhance our operational proficiency and product mix offerings on this critical sales channel in 2022. For our offline source, we intend to take a multi-pronged approach in order to boost output and improve profitability. We plan to print certain outlets experiment with and fine-tune the different store formats, and ensure greater support for offline channels from a product and promotion standpoint. In addition, we plan to explore incremental revenue opportunities for various brands by increasing our exposure to offline and online third-party distributors. We are also looking at our operating expenses. identifying ways to improve efficiency and adjusting our variable and fixed cost space in line with our readjusted revenue scale. As I mentioned previously, we plan to optimize our sales and marketing expenses by raising the ROI requirement of our traffic expenses, as well as refine our general administrative expenses and fixed asset footprint. Given the deleveraging effects from the top-line adjustments throughout the year, the impact from this initiative may take some time to materialize. Still, we expect the cumulative effects from continued margin improvement and cost optimization to have a positive outcome on our bottom line over time. Lastly, the final aspect of our sustainable growth strategy is our commitment to ESG-backed practices and pursuing our CSR goals in line with our corporate values. We are in the early stage of a comprehensive review of our supply chain, procurement, and manufacturing process to identify areas we can upgrade with industry-leading ESG practices and have already implemented a number of eco-friendly initiatives. This year, we joined the roundtable on sustainable palm oil to promote the sourcing and use of sustainable palm oil in our supply chain and conducted a cradle-to-grave carbon footprint assessment for our core product. Slim Heel Lipstick. Furthermore, our Yves Long brand has incorporated biodegradable materials into its products and participates in the European Green Dock Packaging recycling scheme. We look forward to releasing more details about our ESG efforts in our first annual ESG report later this year. From a CSR standpoint, we have identified the empowerment of women through the promotion of Chinese feminine beauty and the protection of beauty in nature as twingles for the company. This year, Yasen partnered with the China Women's Development Foundation to launch the Shape Your Beauty public welfare training program in Sichuan Province, which helps lower-income female entrepreneurs master professional beauty skills, empowering them to create and build their own business in the beauty industry. We also offer jobs to outstanding programs, graduates, and provide financial support for potential startups. With this program, we are embracing our social responsibilities, facilitating positive social development, and proudly introducing more made-in-China beauty products to the world. In December 2021, Yasan was honored to be recognized for its ESG contributions in the 2021 Chinese Enterprise CSR ranking by E-Type. I hope by now I have presented a clear picture of the vision and strategy focus for yet another year. I cannot overstate the team's commitment to this evolutionary process and its importance to our future long-term growth. We consider ourselves fortunate to encounter these challenges at the still early stage of our development. We believe overcoming these challenges will make us stronger in the long run. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.