Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yat-Sen first quarter 2022 earnings conference call. Today's conference call 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 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 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 Yasen'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 GAAP to non-GAAP financial results, please see the earnings release issued earlier today. Joining us today on the call from Yasin's senior management team are Mr. Xinfeng Huang, our founder, chairman, and CEO, and also Mr. Donghao Yang, our director and CFO. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference call is being recorded, and a webcast replay will be available on Yasin's investor relations website at ir.yasinglobal.com. I'll now turn the call over to Mr. Xinfeng Huang. Please go ahead, David.

Thank you, Irene, and I thank everyone for participating in Yasen's conference for the first quarter of 2022. The first quarter of 2022 was a challenging one for Yasen and the entire beauty industry. According to the China National Bureau of Statistics, Beauty retail spending grew by 1.8% in the first quarter, one of its lowest growth rates since the pandemic recovery from the second quarter of 2020, due to weak consumer spending and economy uncertainties in China. The resurgence of COVID-19 in March led to widespread restrictions in major Chinese cities, such as Shanghai, and with the restrictions continuing well into the second quarter, it is clear that we are facing one of the toughest business environments in recent years. Against this market backdrop, our potential net revenues in the first quarter declined by 38.3% year-over-year to RMB $891 million, in line with our previous guidance. Market turbulence Notwithstanding, we remain committed to our strategy evolution plan, a process that began in 2021. Fundamentally, we believe strong brands are highly resilient across market cycles. Strong brands also deliver higher margins, which in turn can be reinvested into branding and R&D, perpetuating a virtual cycle. Therefore, our evolution strategy is simple, offering a portfolio of strong brands with highly differentiated, effective products to drive sustainable growth. We are allocating the talent and the resources needed to achieve these goals, and our team executed with passion, tenacity, and resilience during the first quarter. Since the team's efforts, we are already seeing some signs of progress. One such sign is the improvement in our growth margin, which reached 59% in the first quarter, an increase of 0 points and 4 percentage points respectively on a year-over-year and a quarter-over-quarter basis. We achieved this growth margin gain by relentlessly focusing on building brand equities and reducing unprofitable discounts and promotions. Incidentally, our Perfect Diary loose powder won WWD's Maker of the Year Award and was included on the National Business Daily's 2022 China Generation Z Brand List. These awards not only underscore the ongoing appeal of Perfect Diaries brand and product, but also our powerful validation of our brand building approach. We have expanded our brand and launched a new product for the new year. Starting with skincare in March, Dr. Wu released his new Triple Action Repair Serum along with a campaign highlighting the product's efficacy in repairing acne scars and enhancing enhancing Dr. Wu's dermatologist brand credentials. In April, Yip Long launched a new branding campaign with breathtaking visuals centered around a mystical British botanical garden, awakening customers' sense of sight, smell, and touch, while re-interpretating a vision of radiant skin beauty for a new generation. Not to be outdone, in May, Dylannix introduced its new secret effluent powder series, an anti-aging serum featuring snow algae as the core ingredient. Combining the breathtaking scenery of the French Alps with an insistence on French precision and science to reinforce Dylannix reputation for elegant yet effective skincare products. The energy and excitement of these campaigns are matched by robust financial results from our skincare brands, with net revenues growing by 58.5% year-over-year to RMB 183 million in the first quarter, representing 20.5% of total net revenues, up from 7.5% in the prior year period. While our transformation is rooted in brand building, we are laser focused on doing it in the right way. Under the current economy conditions, marketing efficiency is key. For our color cosmetic brands, the tough market environment and our relentless efforts to optimize marketing ROI led to a large decline in revenues in the first quarter. However, our color cosmetic brands are now operating with a much improved profitability profile for online business compared with the last year. Specifically, we significantly improved Ito Onbin's profitability profile by streamlining operations and concentrating on its hero product category, namely the eyeliner, where it enjoys strong brand recognition among a core group of loyal customers. For PinBear, on the other hand, we developed a strategy combining this good bang for the buck product with a breakthrough reason to buy and IP crossovers appealing to school-age target customers to attract new customers and keep performance marketing expense at a reasonable level. We are also exploring several operating levels for both legal auditing and the team there. From increasing third-party online and offline distribution to tailoring ROI-maximizing strategies on Tmall and Douyin as we seek incremental uplift opportunities for revenue and profitability amid this difficult market environment. These marketing efficiency enhancements across the brand portfolio helped us significantly reduce our selling and marketing expenses in the first quarter. Our total non-GAAP selling and marketing expenses declined by 44.4% year-over-year to RMB 517 million. And as a percentage of total net revenues, our non-GAAP selling and marketing expenses reached 54%. a decrease of seven percentage points year over year. While we continue to pursue further improvements in marketing efficiency, there's also much we can do operationally to build on this progress. At the moment, we are focused on mitigating the adverse impact of pandemic-related disruptions on our offline stores. During the first quarter, Many of our offline stores were shut down due to pandemic restrictions. While those stores that remain open witnessed reduced traffic and e-store spending. We expect this situation to persist and possibly worsen in the second quarter. Accordingly, we proactively initiated a number of store optimizations in the first quarter and approved and requisite certain foreclosure-related expenses as a result. We may continue to optimize the size of our offline stores network throughout the year. We believe this plan will put our offline business on a more sustainable footing, given the dynamic retail environment in China this year. COVID-19 adverse impact also extends to our logistics and supply chains. To ensure that we are able to obtain critical orders ahead of the crucial May 20th and June 18th promotional holidays in the second quarter, our team has worked tirelessly with our logistics and supply chain partners to find creative solutions. Additionally, given the weakening consumer demand outlook for the rest of 2022, we made certain optimization adjustments to the size of our logistics footprint and reduce the scope of our supply chain expansions during the first quarter. Looking elsewhere within our cost base, we also overhauled our organization structure to align with our new sustainable growth objectives. During the first quarter, we comprehensively updated our management structure We vented our compensation structure and optimized our talent pool. As a result, our total headcount stands at approximately 3,000 as of the end of March 2022, compared with 4,200 employees a year ago. Our non-GAAP general and administrative expenses totaled RMB $113 million, approximately RMB 32 million lower than the fourth quarter of 2021. The cumulative effect of our various cost optimization initiatives is we achieved a non-GAAP net loss of RMB 156 million in the first quarter, a 38.3% reduction compared to the net loss of RMB 234.3 million in the prior year period. We expect the operating environment to become even more challenging in the second quarter of 2022 due to the effects of prolonged COVID-19 impacts on the economy. We will remain focused on both aspects of our business and the environment that we can control. Optimizing costs, upgrading our capabilities, and investing for the future. while continuing to adapt to a dynamically evolving market. As the lifeblocks of our product differentiating efforts, R&D continues to be a key area of investment. We recorded R&D 36 million in R&D expenses in the first quarter, representing 4% of total net revenues. We are working on a number of exciting initiatives to strengthening our IMD capabilities in 2022, and we look forward to sharing updates on our new partnerships and milestones as they become available. We are also working to upgrade our Dolphin live streaming operations. Building on the previous quarter's momentum, total net revenue from our Dolphin channel grew by over 150% year-over-year, in the first quarter of 2022, making it our third largest channel by revenues behind Chimo and our offline stores. After more than a year of extensive testing and optimization, we have developed and honed various tactics to maximize ROI on Douyin across our various brands. In particular, COVID diary ranked third in color cosmetic sales on Douyin during the first quarter, demonstrating the progress we have made since last year. As pleased as we are with this result, we won't be standing still. Given the fast-moving nature of the Douyin platform, we will continually adapt and innovate to stay ahead of the curve. Last but not least, integral to our sustainable success is our continued effort to adapt socially responsible corporate citizens. Yasmin is passionate about promoting women's public welfare and empowerment. On International Women's Day, Yasmin and Neil Whitley jointly launched the Women Without Limits campaign. We invited women from different industries and diverse identities to share their life experiences. encouraging more women to explore their own possibilities and pursue their dreams. In addition, our efforts to ensure the safe and efficient delivery of goods have continued in the recent COVID outbreak. With Perfect Diary cooperating with logistic companies to develop a green goods code, this code improves the transparency of the transported goods and help ensure on-time delivery to customers. For detailed information on how we are adjusting the environmental and the social impact of our business and putting in place corporate governance best practices, please refer to our inaugural ESG report, which was released on May 15th. This first annual report provides a comprehensive review of our ESG activity. In a world full of uncertainties, we believe Yasen serves a vital social mission to discover, protect, and elevate beauty, which creates happiness and inspires our minds. To that end, 2022 will be an important year for Yasen as we set off our new five-year plan. Although the current and foreseeable market conditions remain challenging, we plan to evolve narrow our operating rules, and continue to delight customers in China and around the world with our pioneering high-quality business products. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.