Yatsen Holding Limited

Ladies and gentlemen, good day, and welcome to the Yat-Sen Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Eileen Yu, Head of Strategic Investment and Capital Markets. Please go ahead.

Thank you, Operator. Please note that 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 forelooking 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's non-GAAP financial results. Joining us today on the call from Yasin's senior management are Mr. Jinfeng 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. Xinzong Huang. Please go ahead, sir.

Thank you, Irene, and thank you, everyone, for participating in Yasen's third quarter 2022 earnings conference call today. We started the year by launching a five-year strategy. outlining our plans to evolve our business and drive the long-term and sustainable growth. With this strategy target as our roadmap, the management team continued to fine-tune our business model. Although negatively impacted by the softened beauty market and the resurgence of COVID-19, our skincare brands recorded solid growth in the third quarter of 2022, We have also seen improvements in gross margin net loss and long gap net loss on account of our cost optimization plan. Overall, our sales in the third quarter of 2022 continued to experience slowdowns as a result of challenging market headwinds and the lower levels of consumer spending, which have been exacerbated by resurgence of COVID-19, Beauty retail sales in the third quarter of 2022 went down by 3.2% year-over-year, according to the adjusted data published by China National Bureau of Statistics. Sales of both color cosmetics and skincare products on Tmall fell by double digits year-over-year in the third quarter of 2022, extending the downward trend in the second quarter of 2022. Our total net revenues for the third quarter of 2022 declined by 36.1% year-over-year to RMB $857.9 million, meeting the high end of our revenue guidance. Let's look at our revenue mix in detail. Net revenues for skincare brands increased by 33% year-over-year to RMB $269.4 million, As a highlight, total net revenues of our fast-growing clinic and premium brands, Dr. Wu, Yves Long, and Galantique, delivered solid growth of 69% year-over-year this quarter. In terms of revenue contribution, our skincare brands contributed 31.4% of total net revenues for the third quarter of 2022, which has exceeded 30% of total net revenues for two consecutive quarters. Compared with 15.1% of total net revenues for the third quarter of 2021, our color cosmetic brands, on the other hand, saw a 48.8% decline year-over-year in total net revenues to RMB 569.3 million. reflecting the continued softness in market demand for our color cosmetics, as well as intensified industry competition from both domestic and international brands. Growth margin for the third quarter of 2022 increased by 1% to 67.9% for the third quarter of 2021 due to increased sales of higher growth margin products from our skincare brands. cost optimization, and stricter pricing and discount policies across all our brand portfolios. Our net loss margin was 24.6% in the third quarter of 2022, representing an improvement of 3.2 percentage points from the second quarter of 2022 or 2.4 percentage points from the previous year period. Our non-GAAP net loss margin was 14.7% in the third quarter of 2022, representing an improvement of 7.1 percentage points from the second quarter of 2022, or 1.4 percentage points from the prior year period. The improvement is acceptable to our continued cost optimization. Now I will share some of the quarter's major initiatives and developments. In the third quarter of 2022, our business teams were active in developing and strengthening our portfolio of high-performing brands tailored to Chinese consumers' evolving needs and tastes. Dr. Wu recently launched new products infused with triple-action repair technology, which was proven efficacious on the iconic repair serum. We celebrated the brand's 19th anniversary with its loyal customers across China, especially those with sensitive or ex-pro skin who seek efficient products designed for their skin types. Yiflong achieved robust growth despite the challenging industry environment. While the brand remained strong in premium cleanser category, we expanded to serum category by launching Radiance prepare Huichino Seren. In September, Yiflong partnered with the Equisite Herald Tea Rooms in Shanghai to cultivate a worldly and luxurious experience for the celebrated brand. Galenique also recorded very strong online growth in the third quarter of 2022. We have gained more market share and stayed number one for two consecutive quarters in the premium Seren category on Douyin, While our hero VC Theron maintained its leading position, the Secret D'Excellence Active Theron also experienced steady growth in the third quarter of 2022. The launch of the Secret D'Excellence Active Theron in the third quarter of 2022 was attended by industry experts and thought leaders and raised awareness of the brand. amplifying its leadership in the premium dermatological skincare sphere. While our color cosmetics business experienced a year-over-year decline of 48.8%, we saw improved growth margin in aggregate. Our color brands went through channel optimization and promotion control to develop sustainable business models. Perfect Diary sales on Douyin achieved strong year-over-year growth of 97% and ranked number two among all color cosmetics brands. Another improvement from number three ranking is achieved last year. We have also closed underperforming offline stores throughout 2022. As a result, as of September 30, 2022, we operated a total of 198 experienced stores of the Perfect Diary brand, representing a net reduction of 88 stores since the beginning of the year. In the fourth quarter, this offline store optimization program will continue and we are constantly monitoring the market situation of the offline retail space to best support our brand strategies moving forward. In addition to channel optimization, we are also adjusting the category Meats to increase our market share in facial makeup and the complexion products. Perfect Iris translucent blurring loose powder and upgrades that add anti-doubleness efficacy in addition to the original smart lock technology gained more market share in the loose powder category on T-more compared to last quarter. We also applied this patent technology to the newly launched ClearCover three-color concealer palette as an attempt to expand it to other facial categories. Our robust new product launch and healthy pipeline are backed by continuous investments in R&D. R&D expenses increased to 3.9% from 2.7% of net revenues in the prior year period. We debated at the International Federation of Societies of Cosmetics Chemistry Congress with two cutting-edge technologies in September. We will continue our efforts to build a strong R&D capability as our core strategy for future growth. We are also constantly reminded of the importance of our commitment to our environmental, social, and governance programs. In the third quarter of 2022, Yasen donated computers and the projection equipment to the government of Zhouchentang, located in Guangdong province, to help improve the township's information technology infrastructure. We are actively involved in elevating the quality of life of those in more challenging circumstances and will continue to take the initiative to assume corporate social responsibility and contribute our support in the future. While we expect the retail environment to remain challenging for the rest of 2022 and for the first half of 2023, we have sufficient resources to meet our strategy objectives. During the Double 11 Shopping Festival this year, we saw outstanding performance in our skincare brands. Glanik achieved high triple digits year-on-year sales growth, Yves Long and Dr. Wu got the first place in premium cleanser category and acne control category with their Hero Products Cleanser and the Madelique Gentle Renewal Serum, respectively, on T-Morph. In summary, we have already made significant progress in our strategy evolutionary journey. With higher contribution from our skincare brands, improved growth margin, and significantly narrowed net loss in the third quarter of 2022. With the cash, restricted cash, and short-term investment balance of RMB 2.6 billion at the end of this quarter, we have sufficient resources and flexibility in pursuit of our long-term strategy goals. With that, I will now turn the call over to our CFO, Donghao Yang. to discuss our financial performance. Thank you, everyone.