Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yattson Second Quarter 2022 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 note that discussion today will contain forward-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. Please see the earnings release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. Joining us today on the call from Yasin's senior management team are Mr. Xinfeng 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 Yasen's investor relations website at ir.yasenglobal.com. I'll now turn the call over to Mr. Jinfeng Huang. Please go ahead, David.

Thank you, Irene, and thank you, everyone, for participating in Yasen's second quarter 2022 earnings conference call today. At the start of the year, we embark our next five-year development journey with a simple focus on building strong brands and world-class R&D capabilities while achieving sustainable growth. In the second quarter, we entered into a turbulent stretch of this journey where a confluence of challenges has put our strategies and execution to the test. The main challenge was widespread COVID-19 recurrences, which shut down our numerous cities in China between April and June. According to the latest data from the China National Bureau of Statistics, beauty retail spending was down by 22.3% and 11% in April and May, respectively, before slightly recovering in June. This disproportionately impacted offline retail spending nationwide, including our offline stores. In the online arena, competition intensified as our competitors engaged in aggressive promotions to charge sales amidst sluggish market demand for color cosmetics. The premium skincare category, on the other hand, proved to be highly resilient and, in fact, grew during the second quarter. Against this backdrop, our total net revenue decreased by 37.6% year-over-year to RMB 951.8 million, meeting the high end of our revenue guidance. The year-over-year decline in revenues was mainly due to soft performance of our color cosmetics brands, particularly offset are partially offset by seller growth across our skincare brands. Our non-GAAP net loose margin reached 20.8% in the second quarter, an increase of 9 percentage points compared with the prior year period. Attributable to the higher operating cost ratios of our offline stores due to weak offline store sales, as well as inventory loose and provisions for store closures. Encouragingly, our quarterly net cash generated from operating activities turned positive for the first time since Yasen's IPO at RMB 111.9 million, compared to an outflow of RMB 79 million for the prior year period. Due to our disciplined working capital management practices, While our overall strategy goals remain unchanged, these results demonstrated our ability to accelerate the optimization of our revenue mix and the cut cost in response to the evolving market environment in the second quarter. Let's look at our revenue mix in greater detail. Net revenues from our skincare brands grew by 49.2% year-over-year representing 33.4% of total net revenues for the second quarter, compared with 14% for the prior year period. Total net revenues from Dr. Wu, Yvlon, and Glenit collectively achieved year-over-year growth of 112%, supported by growing brand recognition, strong hero products, and a successful ramp up across multiple e-commerce channels. Our skincare brands also exhibited superior growth margin and net profitability levels compared to our color cosmetic brands and proved highly resilient during this period of economy uncertainty in China. Notably, Dr. Wu became the largest and the most profitable skincare brand in our portfolio. driven by stellar performance of the classic Mandelic Axis series, which topped the anti-acne serum chart on Tmall during the June 18th shopping festival. Furthermore, Dr. Wu's sales through Douyin live streaming grew by more than eight times compared to the prior year period, and the new triple action repair serum became the top-selling skin repair salon on Douyin during the June 18th Shopping Festival. Yiflong ranked number one on Timor during the June 18th Shopping Festival in the premium makeup removal category. On the branding side, following a well-received brand-relaunched media campaign in late April, Yves Long hosted a number of live events in London's Covent Garden and in New York's Soho District to provide an immersive offline experiential touchpoint for our customers. In May, Yves Long launched a new foaming cream cleanser, which improves upon traditional cleansers with an asthmatic-infused surface active formula. representing our latest efforts to expand Yves Long into mainstream skincare categories, beyond its roots in makeup removal. Last but not least, Galanit continued to demonstrate robust growth on the strength of its core vitamin C serum synthesis. During the second quarter, Galanit launched the Secret Excellence Snow Algae Anti-Aging Serum, and a summer limited edition gift set for the Vitamin C series. Accompanied by branding campaigns featuring the Chinese women's cohort, a short-distance speed skating gold medalist, Xu Chunyu, award-winning female surfer, Monica Guo, and a female free diving champion, Vika Li. As you can see, Our skincare business is growing from strength to strength, attachment to our ability to translate our accumulated experience and know-how from color cosmetics into success in the field of luxury and premium skincare. We have sponsored a truly global team to organically develop and grow our skincare brands. Our open lab system and our R&D teams are also building the capability to develop a strong pipeline of new products to support the growth of our clinical and skincare brands. Notable R&D breakthroughs during the quarter include the successful launch of the Triple Action Serum for Dr. Wu and the Anti-Aging Snow Algae Serum for Galanique, which featured active ingredients and formulations developed with significant contribution from our R&D lab. The Triple Action Serum, for example, was developed in partnership with the Huazhou University of Science and Technology, and both are nano-targeting technology, enabling the precise release of active ingredients directed to an acne inflammation spot deep under the skin layers for an increase in efficacy compared with fire product series. The anti-aging snow algae serum featured our work with botanicals, combining a high concentration of inclusive snow algae originating from Swedish permafrost regions with Yassin's blend of hetalpeptide to achieve higher efficacy in anti-wrinkle and anti-aging applications. The successful launch and commercialization of these products shows that our R&D teams can develop new products that suit the needs of our growing brand portfolio in an expenditures and effective manner. Our color cosmetic brands, on the other hand, saw a 50.5% decline in total net revenue. led by a slowdown in our Perfect Diary and Little Ondine brands. Perfect Diary launched several new products in the second quarter, such as the Roll Gemstone Eyeshadow, Lipstick, and Blush series, as well as the new Rimmie Lip Crush Collection and the Love Confession Lipstick Gift Set Collection for the May 20th Chinese Valentine's Day campaign. These new product launches were impacted by the clinical downturn in consumer color cosmetic spending, as well as intense market competition among the mass segment. The resurgence of COVID-19 also adversely impacted ProfitDiary's offline store sales and profitability. necessitating an acceleration of our store optimization plans. As of June 30, 2022, we operated a total of 228 proprietary stores, a net reduction of 58 stores since the beginning of this year. Given the worsening retail environment in China, we plan to close additional underperforming stores in the second half of 2022. We will continue to monitor the offline retail environment on an ongoing basis to determine if further store closures are needed. We are also exploring other ways to serve our offline stores' customers profitably. Both TeamBear and LittleOndine, for example, expanded their distribution with KK Group to more than 300 TKV and colorist stores across the nation in the second quarter, which generated additional incremental revenue and profits for the two brands. Going forward, we will look to replicate this success and further expand collaboration with other distribution partners. Due largely to the elevated levels of promotions during the June 18th period, particularly for the color cosmetics, our overall gross margin declined to 62.9%, a decrease of 2.9 percentage points compared with the prior year period. Our gross margin was also impacted by an inventory loss of RMB 43.9 million, representing 4.6%, of total net revenue. Now let's have a look at our cost. By far, the largest piece of our operating expenses was our selling and marketing expenses, totaling RMB $602.5 million for the second quarter on a non-GAAP basis, which decreased by 34% 5.7% year-over-year, the same rate as our revenue reduction. However, as a percentage of total net revenue, our non-GAAP selling and marketing expenses remain elevated at 53.3% for the second quarter, compared with 61.4% for the prior year period. attributable to higher operating cost ratios of our offline stores, certain store closure related expenses, and the provision of RMD $28.7 million for further store closures in the second half of 2022. This store closure provision represents 3% of our total net revenues. Our elevated Score-related expenses offset the effect from the reduction of our performance-based marketing expenses, which declined substantially as a percentage of total net revenue in the second quarter. Our non-GAAP general and administrative expenses recorded a net reduction of RMB 18.7 million compared with the prior year period. Though as a percentage of total net revenues, they increased by 3.5 percentage points to 12.6% due to the deleveraging effect from the reduction in our revenues. In addition to optimizing our fixed expenses, we have further changed our total headcount in the second quarter our fulfillment expenses remain flat as the percentage of total net revenues, despite operational disruption stemming from COVID-19. Overall, our non-GAAP net loss margin of 21.8% reflects the exceptionally challenging external environment in the second quarter, as well as the numerous initiatives we took to adjust our business with inventory loose and the store closure provisions totaling 7.6% of total net revenues. As we look back at our second quarter, we see it as an arduous chapter in our five-year development journey, a crucible from which a stronger and a more resilient Yasen will emerge. We generated a net cash inflow for operations of RMB 111.9 million, the first positive quarterly net cash flow recorded since our IPO, and ended the second quarter with RMB 3.06 billion of cash and a short-term investment. While we expect the external environment to remain challenging in the near term, we have ample financial flexibility to meet our strategic objectives and continue our journey of evolution. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.