Yatsen Holding Limited

Ladies and gentlemen, good day and welcome to the Yatsen Second Quarter 2025 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.

Thank you, Operator. Please note that discussion today will contain four loose 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 Irrigation 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 discussion. A general discussion of the risk factors that could affect Yahoo'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 local information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. We see the earnings release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP to the non-GAAP financial results. Joining us today on the call from Yat-sen's senior management are Mr. Junfeng Huang, our founder, chairman, and CEO. and Mr. Do Haoyang, 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 Yassin Investor Innovation's website at ir.yassinglobal.com. I'll now turn the call over to Mr. Xu Fenghuang, who is still happy.

Thank you, Irene, and thank you, everyone, for joining ESSEN's second quarter 2025 earnings conference call today. I will begin with a brief macro overview and a summary of our financial results, followed by an update on how our R&D-driven initiative have supported the healthy development of our brand portfolio. China's beauty industry saw another modest quarter. According to the adjusted data published by the National Bureau of Statistics, beauty sales increased by 2.6% year-over-year, falling short of the 5.4% growth in total retail sales of consumer goods. Specifically, during May and June, the key promotion period around the June 18 shopping festival, beauty sales rose by 4.4% in May, but declined by 2.3% in June. Despite the uncertain environment, we stayed focused on educating our R&D journey strategy. Anchored in our vision of becoming a world-class pioneer in beauty innovation, We have continued expanding our international innovation network, attracting top global R&D talent, and deepening collaborations across industry, academia, and research institutions. These efforts have laid a solid foundation for both product innovation and brand equity, which in turn supports the rebound in our financial performance. Building on the momentum that began in the fourth quarter of 2024, we delivered year-over-year revenue growth and achieved non-gap proportionality for the third consecutive quarter. In the second quarter of 2025, total net revenues grew by 36.8% year-over-year, significantly exceeding our previous guidance. Revenues from skin care programs increased 78.7% year-over-year, given by an 88.1% growth in the combined revenue from our three major skincare brands, Hellenic, Dr. Woo, and Yves Long. Our color cosmetics brands also delivered year-over-year growth of 8.8%, with Perfect Diary brand back on the growth trajectory. As operating leverage began to take effect, coupled with our efforts to improve efficiency in our operations and marketing spend, we narrowed our net loss margin to 1.8% from 10.8% for the prior year period and achieved a non-GAAP net profit margin of 1.1% for the second quarter of 2025, as compared with non-GAAP net loss margin of 9.4% for the prior year period. Let me now walk you through some brand and product highlights powered by our solid R&D infrastructure. Galenix posted strong results, supported by a robust product of highlights and effective product marketing. Our No.1 VC Serum continues to lead sales, while our upgraded Brightening Micro Mask, featuring the brand's micro-perfusion and active anchor technology, ranked number one among premium single-use masks on both Tmall and JD during the June 18 period. The number two VA serums also received increasing positive feedback, particularly on Douyin. In addition to online growth, we began expanding Granite's offline presence, opening experience stores in Guangzhou, Shanghai, Wuhan, and Shenzhen by the end of June. These stores are designed to strengthen brand visibility and deepen consumer engagement. Dr. Wu also benefited from a more diverse and balanced product portfolio. Its purifying renewable essence toner formulated with a gentle acid complex effectively adjusted the antioxidant and brightening of oily and acne-prone skin. This product resonates strongly with its targeted consumers and reinforce the brand positioning as a leader in professional skin renewal. The second quarter also marked a key milestone for Pervidari. Since the launch of the BioLip Essence Lipstick in September 2023, Pervidari has embraced a new philosophy of makeup skinification. Building on this, we introduced the third-generation biotech technology and applied it to facial makeup. The new BioPhase Essence Foundation provides a flawless finish while supporting the skin barrier. We also launched the Translucent Blurring Setting Powder, powered by the Smart Lock technology to control oil, combat oxidation, and reduce dullness. This innovation played a key role in putting Pocadary back on its growth path As our commitment to R&D remains central to our long-term strategy, we continue to strengthen our capabilities and presence in the scientific community. In May, we participated in the 2025 China Cosmetic Science and Technology Conference in Yunnan as a guest speaker and joined a roundtable discussion on emotional skincare at the 2025 International Cosmetic Innovation Conference in Shanghai. In June, our joint laboratory with Regene Hospital unveiled its latest innovation at the 30th International Council of Nurse Congress in Helsinki, Finland. We are also proud of our ongoing social responsibility initiative. During the second quarter of 2025, our Create a Beautiful Life program launched in partnership with the China Women's Development Foundation, celebrated the graduation of its first 2025 cohort in Guizhou. Now in its fifth year, the program provides free professional makeup training for low-income women, helping them pursue new opportunities in employment and entrepreneurship. Meanwhile, Dr. Wu has entered the third year of his campus charity tour, promoting scientific skincare education, and raising skin health awareness among university students across China. In summary, we are beginning to see tangible results from our long-term focus on R&D. We remain committed to nursing our brands and delivering exceptional products to our customers. With that, I will now turn the call over to our CFO, Donghao Yang, to discuss our financial performance. Thank you, everyone.

Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in RMB amounts, and all percentage changes refer to year-over-year changes, unless otherwise noted. Total net revenues for the second quarter of 2025 increased by 36.8% to $1.09 billion from $794.5 million for the prior year period. This increase was primarily due to a 78.7% year-over-year increase in net revenues from skincare brands combined with an 8.8% year-over-year increase in net revenues from color cosmetics brands. Gross profit for the second quarter of 2025 increased by 39.5% to $850.4 million from $609.4 million for the prior year period. Gross margins for the second quarter of 2025 increased to 78.3% from 76.7% for the prior year period. The increase was primarily driven by an increase in sales of higher gross margin products. Total operating expenses for the second quarter of 2025 increased by 21.7% to $905.9 million from $744.6 million for the prior year period. As a percentage of total net revenues, total operating expenses for the second quarter of 2025 were 83.4% as compared with 93.7% for the prior year period. Fulfillment expenses for the second quarter of 2025 were $63.3 million as compared with $51.2 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the second quarter of 2025 decreased to 5.8% from 6.4% for the prior year period. The decrease was primarily due to further improvements in logistics efficiency. Selling and marketing expenses for the second quarter of 2025 were $722.4 million as compared with $544.7 million for the prior year period. As a percentage of total net revenues, selling and marketing expenses for the second quarter of 2025 decreased to 66.5% from 68.6% for the prior year period. The decrease was primarily driven by the leveraging effect of higher total net revenues in the second quarter of 2025. General and administrative expenses for the second quarter of 2025 were $84.1 million as compared with $119.1 million for the prior year period. As a percentage of total net revenues, general and administrative expenses for the second quarter of 2025 decreased to 7.7% from 15% for the prior year period. The decrease was primarily driven by lower payroll expenses resulting from a reduction in general and administrative headcount coupled with the leveraging effect of higher total net revenues in the second quarter of 2025. Research and development expenses for the second quarter of 2025 were $36.1 million as compared with $29.7 million for the prior year period. As a percentage of total net revenues, research and development expenses for the second quarter of 2025 decreased to 3.3% from 3.7% for the prior year period. The decrease was primarily driven by the leveraging effect of higher total net revenues in the second quarter of 2025. Loss from operations for the second quarter of 2025 was $55.5 million as compared with $135.2 million for the prior year period. Operating loss margin was 5.1% as compared with 17% for the prior year period. Non-GAAP loss from operations for the second quarter of 2025 was 20.4 million as compared with 111.9 million for the prior year period. Non-GAAP operating loss margin was 1.9% as compared with 14.1% for the prior year period. Net loss for the second quarter of 2025 with $19.5 million as compared with $85.5 million for the prior year period. Net loss margin was 1.8% as compared with 10.8% for the prior year period. Net loss attributable to essence ordinary shareholders for diluted EDS for the second quarter of 2025 was 0.19 RMB as compared with 0.8%. for the prior period. Non-GAAP net income for the second quarter of 2025 was $11.5 million as compared with non-GAAP net loss of $74.9 million for the prior period. Non-GAAP net income margin was 1.1% as compared with non-GAAP net loss margin of 9.4% for the prior period. Non-GAAP net income attributable to Yasmin's ordinary shareholders for diluted ADS for the second quarter of 2025 was 0.13 RMB as compared with non-GAAP net loss attributable to Yasmin's ordinary shareholders for diluted ADS of 0.67 RMB for the prior year period. As of June 30, 2025, we had cash, restricted cash, and short-term investments of $1.35 billion as compared with $1.36 billion as of December 31st, 2024. Net cash generated from operating activities for the second quarter of 2025 was $77.7 million as compared with net cash used in operating activities of $148.2 million for the prior year period. Looking at our business outlook for the third quarter of 2025, we expect our total net revenues to be between $778.6 million and $880.1 million, representing a year-over-year increase of approximately 15% to 30%. These forecasts reflect our current and preliminary view on the market and operational conditions, which are subject to change. With that, I would now like to open the call to Q&A. Operator?

Thank you. And we will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star, then 2. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Our first question today will come from Maggie Huang of CICC. Please go ahead.

Well, thanks for taking my question. This is Maggie Huang from CICC. Firstly, congratulations for meeting our guidance. And I have two questions. My first question is that as we enter into the second half of the year, how should we expect the change of profitability for both skincare and chirocosmetic categories? And how do we intend to, like, strike a balance between promoting new product lines and improving our profitability? And my second question is about competition. So what's our view on the industry competition in Q3 and Q4, particularly the competition from foreign premium brands? That's my two questions. Thank you.

Okay. Thank you very much for your questions. Well, we've always been trying to strike a balance between our growth and profitability, and we don't believe that we have to sacrifice one for the other. And especially now, you know, our high-end skincare brands are growing even faster than our color cosmetics brands, which, you know, tend to have higher growth margin and bottom line. So we're confident that as we grow our business, both in skincare and color cosmetics going forward, and especially skincare is showing a much stronger growth momentum, we believe that we can achieve both growth and profitability. And competition, and I think you're right, competition is going to be becoming more more and more intense going forward, especially as our high-end skincare brand is growing faster. We do expect to have more competition from the international brands. But in order to drive our growth and strengthen our competing position, we are adopting a R&D-driven approach. growth strategy. So for the last four or five years, you know, we've been one of the most aggressive players in the cosmetics industry, you know, to invest heavily in R&D. So now we've built a very, I would say, best-in-class R&D team and R&D infrastructure. Look at our our R&D center in Shanghai is one of the world's top facilities. So that's how we view where to drive our future growth and especially to win the competition against other players in the industry.

Well, it's very clear. I have no more questions. Thank you very much.

Again, to ask a question, please press star and then 1. Our next question today will come from Lin Zhang of CITIC Securities. Please go ahead.

Thank you for taking my questions. I'm Lin Zhang from CITIC Securities, and congratulations on the performance in the second quarter. My first question is for the skincare brands. So I want to ask, who are the key drivers behind the rapid growth of skincare brands, especially for the Atlantic and Dr. Wu in the first half of the year? And what is the outlook for the skincare business in the second half year and the next year? And my second question is, in which aspects will the company make efforts to continuously improve the profitability? Thank you.

Thank you for the question. So for the growth of skincare brands, so we think there are a number of reasons. Primarily, it's because of our continuing investment into R&D and our gradual systematic upgrade of our R&D capabilities. As a result, we have a very strong pipeline of the new product innovations. So just to give you some examples, for example, for Galanix, For the past couple quarters, we have introduced a series of new products, including on top of very successful VC, we introduced the VA serum. And also, the Micromask series has been very successful. And we also widened the offering of the Micromask in terms of different efficacy. And we also upgraded the Micromask recently. And for Dr. Wu, the new access toner has been very successful. So we think mainly from the R&D upgrade and also the new color pipeline. And then in terms of outlook, we have provided the guidance for Q3 of 15% to 30%, which I would think reflects our future outlook in terms of continuous trend of our skincare brands in terms of the development. And then on your second question is our efforts to how to improve the profitability. We are continuing to optimize our channel and product list and at the same time streamline our operating expenses. But I would think most of our brands, some of them given the high growth, We think there's still significant growth potential, and those brands right now remain well below their respective ceilings. That's why we continue plans to invest in the brand awareness and brand equity, especially when there's new product launch. As a result, we think the profitability improvement will be gradual.

Just to add on to Irene's point, You know, we do see clear opportunities to further improve profitability across several dimensions. First, we will continue to optimize our product mix by driving premiumization and hero products with stronger margins. Second, you know, we're improving marketing efficiency through data-driven CRM and better ROI discipline, shifting spending towards higher return channels. Thirdly, you know, we are enhancing supply chain and operational efficiency to reduce costs and improved scale leverage. And lastly, as top line growth continues, we expect to gain operating leverage across six expenses. So altogether, these initiatives give us confidence in steadily expanding profitability while maintaining growth.

Thank you. That's very clear. Thank you very much.

This will conclude our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you again for joining us today. If you have any further questions, please feel free to contact us at Yasin Darakhi. Our contact information for IR in both China and the U.S. can be found in today's press release. Thank you and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.