Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yat-sen fourth quarter and full year 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Liu, Vice President, Head of Strategic Investment and Capital Markets. Please go ahead.

Please note the 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 Security Mitigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and alternatives, 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 Yassen'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 form of 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, Mr. Qi Donghuang, our founder, chairman, CEO, and Mr. Zou Haoyang, our CFO and director. Management will begin with prepared remarks, and the call will conclude with a QA 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. Jinfeng Huang. Please go ahead, Jinfeng.

Thank you, Irene, and thank you, everyone, for participating in Yasen's fourth quarter end of the year 2022 earnings conference call today. 2022 was a year of transformation for Yasen. Early in the year, we launched our new five-year strategy plan with an eye towards long-term sustainable growth and began refining our product category needs, channel mix, and business model accordingly. This roadmap guided our steps amid the myriad challenges in 2022, including the recurrent COVID-19 outbreak and related lockdowns. China's beauty industry continued to struggle with this macro-heaven, and consumer sentiment remained weak overall. Nevertheless, our skincare brand remained a bright spot for 2022, recording solid growth in sales. We also achieved significant profitability improvements, both increasing growth margin and narrowing net loss margins, and turned profitable under non-GAAP measures for the fourth quarter of 2022. According to the adjusted data published by the China National Bureau of Statistics, China's total beauty retail sales in the fourth quarter of 2022 recorded a negative growth of 3.1% year-over-year. While for the full year 2022, China's beauty retail sales declined by 3.2% year-over-year. On Timor, color cosmetic sales fell by double digits, and the sales of skincare products experienced a single-digit decline year-over-year in 2022. However, we have seen a light at the end of the tunnel With the resumption of offline activities and the adjustment of COVID restrictions, the consumer market is well on its way to a recovery in 2023. Against this backdrop, our overall sales slowed down throughout the year. Total net revenues declined by 34.2% year-over-year in the fourth quarter to RMB 1.01 billion. But we need to look at our revenue mix in detail to see the full picture. Net revenues for our skincare brands increased by 42.4% year-over-year to RMB 471.6 million, highlighted by outstanding performance among our fast-growing clinical and premium brands. including Dr. Wu, Galanick, and Yvlon, which recorded a robust growth of 73% year-over-year and a 99.3% year-over-year in combined net revenues for the fourth quarter and the full year of 2022, respectively. In terms of revenue contribution, our skincare brand accounted for 46.9% of total net revenues in the fourth quarter and the 33.5% for the full year of 2022, more than doubling compared with the prior year period in both cases. Our color cosmetic brands, on the other hand, saw a decline of 66.9% year-over-year in sales to RMB 513. and 13.4 million, reflecting the continued softness in the market demand for color cosmetics products, as well as intensified industry competition from both domestic and international brands. As we move into 2023, we will continue to build on our skincare portfolio's success while addressing the challenges in the color cosmetics landscape. Turning now to profitability. Since the higher contribution for our skincare brand, more distinct pricing and discount policies, and continued cost optimization across all our brands, our growth margin increased by 6.1 percentage points to 71.1% for the fourth quarter from 55% a year ago. Net loose margin for the fourth quarter narrowed to 5.5% from 31.1% for the prior year period. Most importantly, we recorded a non-GAAP net income margin for 3.4% for the fourth quarter as compared with a non-GAAP net loose margin of 14.7% for the third quarter and the non-GAAP net loss margin of 21.9% for the prior year period. We have been striving to achieve non-GAAP profitability by elevating operational efficiency and closing underperforming offline stores, among other cost optimization measures. Next, let me share some of our operational highlights from the fourth quarter and the full year 2022. Throughout the year, we created and delivered products tailored to Chinese consumers' preferences. Glanit enjoyed broad success, including with two featured products at the China International Import Expo, its Anti-Oxygen No.1 DC Serum and its newly upgraded Platinum Snow Algae Serum. The latter also ranked among the top five imported serums on Timor during the Double Eleven Shopping Festival. At the same time, Ndoza Wu's Mandelic Daily Renewal Serum put the number one position in both Timor's Agni Treatment and Douyin's Domestic Serum category. while Yves Long's iconic Cleansing Serum and Cleansing Cream ranked first among high-end cleanser products on Tmall. For our color cosmetic brand, we focused on cost optimization and given the overall softening in the color cosmetics market, as well as our own strategy goals for the fourth quarter. Going forward, with the more sustainable business model in mind, We will continue to develop our color cosmetic product portfolio to capitalize on anticipated consumption rebound in 2023. In addition to product development, branding is another key pillar of our strategy transformation. We strive continually to enhance the brand image and the positioning of our various brands among our diverse consumer cohorts. For example, Yiflong hosts its Eternal Gold-themed Global Luxury Club in four cities globally, while also sharing its offline thermal wax therapy experience with Chinese audience at Yiflong's Smart China Wellness Summit in October 2022. Furthermore, Profit Diaries' Read Me Leap Quiz Lipstick was awarded the 2022 National Consumption World of Mouth Product by People's Daily, a powerful commendation of its brand influence. In terms of channel optimization, we selectively closed offline stores and aggressively promoted our Douyin presence to diversify our online channels. As of December 31, 2022, we operated 158 offline experience stores for the Perfect Diary brand, as compared with 286 stores at the end of 2021. This strategy shift has enabled us to cut costs while still enjoying brand exposure across the country. Among our major online channels, Douyin stood out with its relatively high growth. Sales of our products on Douyin grew rapidly throughout 2022. Next, I would like to share some highlights of the progress we have made with our continuous investment in R&D, which provides vital support to new product launches and the long-term development of our brand. For the full year 2022, Our R&D expenses increased to 3.4% of total net revenues from 2.4% for the prior year period. In November, we officially signed a joint laboratory cooperation agreement with Singha Sang University for skin health research, an exciting partnership that will enable us to further explore opportunities in both color cosmetics and skin care. We are also thrilled to announce the appointment of our new Chief Scientific Officer, Ms. Jin Chen. She has over 25 years' experience in research and development in the beauty industry. Prior to joining Yasen, Ms. Chen worked at Estee Lauder for 17 years, serving in a number of senior management and research positions. including as Vice President of APEC R&D since July 2014. And from July 2001 to January 2005, she worked at Revlon, leading technical, quality control, regulatory, and manufacturing organizations. With our CSO on board, we will remain focused on strengthening our R&D capabilities as our core strategy for future growth and product differentiation. Before I wrap up, I would like to mention our environmental, social, and governance performance in 2022. In the latest ESG rating published in December 2022 by the world's largest index company, MSCI, we were upgraded to level A, leading China's cosmetic brands This upgrade clearly reflects our endeavors to improve our product eco-design and carbon footprint, our employee wellness initiative, and our corporate governance, among other ESG enhancements. We also devoted more resources to multiple social welfare programs at both the company and brand levels. Glanit, for instance, launched a new Pink October Limited Edition of its Aqua Infini Treatment Lotion in support of breast cancer research. As always, we remain deeply committed to upholding our corporate social responsibility and will continue to seek new ways to support people and communities in need. While we expect the retail environment to remain challenging for the first half of 2023, we remain confident about the prospects of China's beauty industry. We made significant progress in our strategy transformation in 2022 and have reserved sufficient resources to achieve our strategy objectives in 2023. With growing contributions from our skincare brands, improved growth margins, and streamlined operations, we are well positioned to execute with agility and capitalize on rising opportunities as the consumer market recovers. With that, I will now turn the call over to our CFO, Zhonghao Yang, to discuss our financial performance. Thank you, everyone.