Ladies and gentlemen, good day, and welcome to the Yatsen 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 Lyu, Head of Strategic Investment and Capital Markets. Please go ahead..

This conference call is being recorded, and a webcast replay will be available on Yatsen’s investor relations website at ir.yatsenglobal.com. I will now turn the call over to Mr. Jinfeng Huang. Please go ahead, David..

bolstering 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. Thanks to team’s efforts, we are already seeing some signs of progress.

One such sign is the improvement in our gross margin, which reached 69% in the first quarter, an increase of 0.4 percentage points, respectively, on a year-over-year and a quarter-over-quarter basis. We achieved these gross margin gains by relentlessly focusing on building brand equities and reducing unprofitable discounts and promotions.

Encouragingly, our Perfect Diary Loose Powder won [indiscernible] makeup of the year award and was included on the National Business Daily 2022 China Gen-Z brand list. These awards not only underscore the ongoing Perfect Diary’s brand and product but also a powerful validations of our brand-building approach.

We have expanded our brands and launched a new product for the new year. Starting with skincare in March, DR.WU released its new triple-action repaired serum along with a campaign highlighting the product’s efficacy in repairing acne’s marks and enhancing DR.WU’s dermatologists brand credentials.

In April, Eve Lom launched a new branding campaign with breathtaking visuals centered around Muslin Cloths British botanical garden, awakening customer sense of sight, smell and touch, while [reinterpretating] a vision of radiant skin beauty for a new generation.

Not to be outdone, in May, Galénic introduced its new Secret D’ Excellence product series, an anti-aging serum featuring as the core ingredient, combining the breathtakingfinary of the branch of an insistence on branch precision and science to reinforce reputation for elegant yet effective skincare products.

The energy and excitement of these campaigns are matched by robust financial results for our skincare brands, with net revenues growing by 68.5% 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. 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 Little Ondine profitability profile by streamlining operations and concentrating on the zero product category, namely the eyeliner, where it enjoys strong brand recognition among our core group of loyal customers.

For Pink Bear, on the other hand, we developed a strategy combining with good [indiscernible] product with the breakthrough reason to buy an IP crossovers appealing to its old 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 Little Ondine and the Pink Bear. From increasing third-party online and off-line distribution to tailoring our maximizing strategies on Tmall and Douyin as we seek incremental uplift opportunities for revenue and profitability amid this difficult market environment.

This marketing efficiency enhancements across the brand portfolio help 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 570 million].

And as a percentage of total net revenues, our non-GAAP selling and marketing expenses reached 54%, a decrease of 7 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 focusing -- we are focused on mitigating the adverse impact of pandemic-related disruptions on our offline stores. During the first quarter, many of our off-line stores were shut down due to pandemic restrictions, while those stores that remained open witnessed reduced traffic and in-store spending.

We expect this situation to persist and possibly worsen in the second quarter. Accordingly, we proactively initiated a number of 4 optimizations in the first quarter and accrued and recorded certain store closure-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 and given the dynamic retail environment in China this year. COVID-19’s adverse impact also extends to our logistics and supply chain.

To ensure that we are able to obtain critical orders ahead of the crucial May 20 and June 18 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 reduced 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, revamped our compensation structure and optimized our talent pool.

As a result, our total head count 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.

Accumulated effect of our various cost optimization initiatives is we achieved of 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 effect of prolonged COVID-19 impacts on the economy.

We will remain focused on those 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 [indiscernible] of our product differentiating efforts, R&D continues to be a key area of investment.

We recorded RMB 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 R&D 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 Douyin live streaming operations. Building on the previous quarter’s momentum, total net revenue from our Douyin channel grew by over 150% year-over-year in the first quarter of 2022, making it our third largest channel by revenues, behind Tmall and our offline source.

After more than a year of extensive testing and optimization, we have developed and honed various techniques to maximize ROI on across our various brands. In particular, Perfect 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 spending through. And 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 add that socially responsible corporate citizens.

Yatsen is passionate about promoting women’s public welfare and empowerment. On International Women’s Day, Yatsen and a [indiscernible] jointly launched the women without limits campaign.

We invited women from different industries and diverse identities to share their life of 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 outbreaks.

With Perfect Diary cooperating with logistics companies to develop a code, this code improved 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 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 15. This first annual report provides a comprehensive review of our ESG activities.

In a world full of uncertainty, we believe Yatsen 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 Yatsen as we set off our new 5-year plan.

Although the current and foreseeable market conditions remain challenging, we plan to evolve, narrow our operating loss and continue to delight customers in China and around the world with our primary high-quality beauty products. 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 renminbi amounts, and all percentage changes refer to year-over-year changes unless otherwise noted.

Total net revenues for the fourth -- first quarter of 2022 decreased by 38.3% to RMB 891 million from RMB 1.44 billion in the prior year period. The decrease was primarily attributable to the 45.6% decrease in net revenues from our color cosmetics brands, partially offset by the 68.5% increase in net revenues from our skincare brands.

Gross profit for the first quarter of 2022 decreased by 38% to RMB 614.5 million from RMB 991.6 million in the prior year period. Gross margin for the first quarter of 2022 increased to 69% from 68.6% in the prior year period.

The increase was primarily attributable to our continuous efforts to improve our gross margin, including through increasing sales from our higher-gross-margin products as well as through optimization of pricing discounts and promotions.

Total operating expenses for the first quarter of 2022 decreased by 30.9% to RMB 922.5 million from RMB 1.33 billion in the prior year period. As a percentage of total net revenues, total operating expenses for the first quarter of 2022 were 103.5%, as compared with 92.4% in the prior year period.

Fulfillment expenses for the first quarter of 2022 were RMB 73.9 million, as compared with RMB 92.7 million in the prior year period. As a percentage of total net revenues, fulfillment expenses for the first quarter of 2022 increased to 8.3% from 6.4% in the prior year period.

The increase was primarily attributable to a decrease in the economies of scale of our fixed fulfillment expenses, partially offset by certain cost-saving initiatives related to fulfillment assets instituted during the first quarter of 2022.

Selling and marketing expenses for the first quarter of 2022 were RMB 604.7 million, as compared with RMB 1.04 billion in the prior year period. As a percentage of total net revenues, selling and marketing expenses for the first quarter of 2022 decreased to 67.9% from 72.1% in the prior year period.

The decrease was primarily attributable to our continuous efforts to optimize the efficiency of our marketing spending, partially offset by the expenses related to the closure of certain offline experience stores.

General and administrative expenses for the first quarter of 2022 were RMB 208.1 million, as compared with RMB 172.3 million in the prior year period. As a percentage of total net revenues, general and administrative expenses for the first quarter of 2022 increased to 23.4% from 11.9% in the prior year period.

The increase was primarily attributable to the increases in salaries and share-based compensation expenses. Research and development expenses for the first quarter of 2022 were RMB 35.8 million, as compared with RMB 27.7 million in the prior year period.

As a percentage of total net revenues, research and development expenses for the first quarter of 2022 increased to 4% from 1.9% in the prior year period.

The increase was primarily attributable to the increases in personnel costs, raw materials, equipment and share-based compensation expenses, reflecting our commitment to enhancing our research and development capabilities.

Loss from operations for the first quarter of 2022 decreased by 10.3% to RMB 308 million from RMB 343.3 million in the prior year period. Operating loss margin was 34.6%, as compared with 23.8% in the prior year period.

Non-GAAP loss from operations for the first quarter of 2022 decreased by 34.1% to RMB 170.1 million from RMB 258.3 million in the prior year period. Non-GAAP operating loss margin was 19.1%, as compared with 17.9% in the prior year period.

Net loss for the first quarter of 2022 decreased by 8.7% to RMB 291.4 million from RMB 319 million in the prior year period. Net loss margin was 32.7%, as compared with 22.1% in the prior year period.

Net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the first quarter of 2022 was RMB 0.46, as compared with RMB 0.5 in the prior year period. Non-GAAP net loss for the first quarter of 2022 decreased by 33.6% to RMB 155.6 million from RMB 234.3 million in the prior year period.

Non-GAAP net loss margin was 17.5%, as compared with 16.2% in the prior year period. Non-GAAP net loss attributable to Yatsen’s ordinary shareholders per diluted ADS for the first quarter of 2022 was RMB 0.25, as compared with RMB 0.37 in the prior year period.

As of March 31, 2022, the company had cash, cash equivalents and short-term investments of RMB 2.97 billion, as compared with RMB 3.14 billion as of December 31, 2021. For the first quarter ended March 31, 2022, net cash used in operating activities was RMB 104.1 million, as compared with RMB 466.1 million in the prior year period.

For the second quarter of 2022, the company expects its total net revenues to be between RMB 808.3 million and RMB 960.8 million, representing a year-over-year decline of approximately 37% to 47% primarily due to continued industry-wide softening of color cosmetics demand and the continued negative impact from COVID-19 on offline experience stores, online order fulfillment capabilities and supply chain.

This forecast reflects the company’s current and preliminary views 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?.

[Operator Instructions] 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. [Operator Instructions] The first question comes from Dustin Wei with Morgan Stanley..

My first question is like I wish management could quantify a little bit for the COVID impact from both like sales, market consumer perspective, offline store and also, I think, from the product delivery or any supply chain disruption.

And do you actually see some of the easing situation like coming from like March, April, to May? Second question is based on the improvement in the loss reduction and the much sort of better ROI, but also we have this bigger headwind from COVID.

Like just want to check if management still stick to the target to maybe for 2023 to get to turnaround or making some small profits. And I guess the third question is that if David could provide a little more highlights for the key brands.

I think you talked about it in the prepared remarks, but just anything that you -- to highlight? Especially in the current competitive environment and the current macro weakness, what’s your thoughts and initiatives for the key brands as well as for the key channel? You mentioned, Douyin but I just wonder if you can elaborate more like what’s some of the detailed sort of initiatives that you are focused on..

David, do you want to take the first question, on the impact of the COVID-19 on our operations?.

Sure. I think, if you look at the numbers that the -- of the retailers and also the beauty industries and growth in April, and then we can clearly see the total retails declined by 11.1% and also the another 22.3% decline in the beauty industry.

I think that is the very important sign about the impacts of the COVID for our business, including like online and offline. And for our offline specifically, I think in April we see that around like [50%] of our stores has been impacted by the COVID.

For online, because of the logistics and also the supply chain, I mean, the disturbance in Shanghai area, and then -- so that has the impact, -- negative impact, for our new product launch and also for our customer coverage. So if we look ahead about what we are going to -- or to hedge the risk of the COVID.

And also we have been very focused on our new growth model. And then so we are shifting more and more resources into brands. And so I can answer the third question, first, which is what kind of initiatives we have taken for strengthening our brand portfolios in skincare. I think right now Galénic and DR.WU are growing really fast.

For DR.WU, I think the brand has a very unique and distinctive brand equity which is focused on dermatologists brand. And so this year, the brand has launched a very important product, which is the triple-active repair serum, which helps the product to expand into -- to covering more, bigger group of the customer base.

And we see the momentum of DR.WU is pretty strong. And for Galénic, we just launched the Snow Algae Serum, which has expanded the brand from the VC serum into a bigger benefit space.

And so based on the initial launch results of the 2 new products with Douyin or Tmall, we foresee the 2 products will become very strong, supporting pillar for both brands growth in the future. And for this year, one of the most important initiatives is we actually take a brand relaunch for Eve Lom.

So right now the brand has been -- the brand equity has been expanding from print to brand to more like a luxury skincare brand. So the campaigns we just launched, which is the, has been very well received by the consumers. So I think, looking forward about the skincare expansion, we will devote more resources into Galénic, DR.WU, Eve Lom.

And I believe those brands have high gross margin. And then -- and also the profitability for the whole company..

Well, I think we were still aiming to break even or to turn profitable for the full year next year, but that depends on how the COVID-19 situation improves. Well, if it’s over by the end of this year, I think chances are we will be able to achieve our goals, but that will actually depend on the situation of the virus..

May I have just one follow-up on men brand Perfect Diary brand? This year obviously is very important for Perfect Diary brand itself to go through so many changes in terms of the way you do marketing and, I guess, new product launch, so could you also share some colors on what’s the current focus on Perfect Diary brand?.

Sure. I think, for Perfect Diary -- so we are looking at a number of growth drivers to really ease the sales decline, but at the same time, the most important thing is to improve the brand’s profitability. So there are a few things we are doing right now. For one thing we are continuing momentum in Douyin.

And then so right now we have more and then stronger direct working relationship with the top KOLs. And also we are also continuing to improve our own brand live streaming capabilities. And then also the second initiative we take is going to launch new products.

So right now we just launched the [indiscernible] series as part of the [6/18] promotion period. I think, based on the -- our operation on social media, the product is pretty well received by our core customers. The third thing we are going to do is to expand our third-party distribution at major offline beauty retailer chains.

So on the other hand, another thing I want to highlight is the -- we really want to improve the bottom line for the brand, so which we will eventually improve -- optimizing Perfect Diary’s offline stores network throughout the whole year..

The next question comes from Christine Cho with Goldman Sachs..

So I have 2 quick questions.

So I think you mentioned that, I think, the operating environment still remains quite challenging in the second half, but how should we think about the recovery path in the second half and also next year? What are some of the key drivers that we need to watch for to see industry re-acceleration as well as our own market share gains? That’s the first question.

Secondly, can you elaborate a little bit more on your plans for selling and marketing spend if you look at first half of this year versus the second half?.

I think, for the whole industry, one of the key indicator is still the year-on-year growth rate. Right now we see a very -- pretty big decline in April. And how the number is going to be in the third quarter -- in the fourth quarter will become one of the key decision factors about reflecting the health conditions of the whole industry.

So having said that, I think we need to be very cautious about the impact of the supply chain for the whole industry because right now, if we look at the -- a lot of the manufacturers, OEM/ODMs partners which located in Shanghai, big Shanghai areas, I mean, all of those suppliers have been -- had a very strong impact of the very strict COVID-19 policy.

So that will be -- if all the players in this industry a very big challenge for the new product, innovations or existing product supply in the second half of this year. So that’s what we think about the COVID right now..

So any voluntary follow-up?.

Yes. And for the second question that Christine asked, about the sales and marketing expense changes going forward. So currently, if we look at this quarter, we have a 7 percentage point reduction of the sales and marketing expense compared to a year earlier.

So this, the actual number and the reduction, is actually higher, but it was partially offset by some onetime expenses related to closure of some of offline stores due to the resurgence of the COVID-19.

And then going forward, we think there are a couple of drivers will help us continue to reduce our sales and marketing expenses as a percentage of revenue. Number one is ongoing optimization of the offline store. And then secondly as the ongoing optimization of ROI, which will help reduce the traffic expenses for all our brands in the portfolio.

So those will be the 2 main drivers going forward for sales and marketing..

Next question comes from Kian Lin [ph] from CICC..

My first question is that what are the company’s strategies on June 18 shopping festival such as price strategies and marketing strategies.

And how much will we leverage top KOLs? And also how do the management see the competition this year? My second question is that we’ve seen Yatsen established OpenLab in 2021 and have increased investments on R&D, showing the company’s growing capabilities in pursuit for sustainable growth, so could the management give some updates on our R&D results? And how will the results be applied in the product development in the future?.

I think, for the first one, about our preparation for the June 18 promotion, one of the key initiatives we take is to launch new product and also for some brand upgrade for the big promotion event. So in May, we launched a few very important new SKUs for Perfect Diary, Little Ondine, Pink Bear, basically all of our brands.

So we are looking forward to those new initiatives’ performance for the promotion event. On the other hand, we’re also strengthening our brand equity because right now, if you look at the promotion event of the June 18, we clearly see that the discount rate and also price competition has become really strong.

So the only way we can -- to address that concern or mitigate that risk is to strengthening the brand equity so that we can maintain a healthy gross margin for sustainable growth.

So that’s what we are doing for the June 18 promotion, but having said that -- so right now we think that there are very big uncertainty about what is going to happen for the mid-year promotion, so that’s why we are giving a relatively wider range of the guidance this year. For the second question, about the R&D.

If you’re looking at the number, yes, we are improving the R&D expenses, but on the other hand, if you’re looking at some of the new initiatives or products we have just launched -- and you can see that there are patents. There are technologies that we developed based on the OpenLab strategy.

For example, the DR.WU triple-active repair serum is a product we co-developed with the Huazhong Science and Technology University. And the patent inside is something that we uniquely owned. And we protect the -- we will create some anti barrier for the competition.

And if you look at the Snow Algae Serum, it is a product we co-developed with Pierre Fabre in the past years; and also the ingredients and also the technology within the, we actually ensure a very high performance of the product efficacy.

So now we can see that, looking forward, there will be more and more patents than technology we develop through R&D, putting into our newly launched products. So in the coming half year, there will be more and more new items especially focused on skincare areas.

And we can see that the R&D efforts have been helping our products to improve the competitiveness in the market and also reflecting in the gross margin and a healthier repurchase rate..

The next question comes from Olivia Tong with Raymond James..

This is Devin Weinstein on for Olivia. First, I wanted to ask a little bit more about the guidance.

So presumably the impact of COVID will be a bit more substantial in Q2 than Q1, but your guidance for the next quarter implies only at the midpoint just a slight increase in the slowdown rate; and on a 2-year stack, a sequential improvement, so I was hoping to get a little bit more color on the environment, the category and your positioning, to get some more context.

And then if you could also comment on the second half. I appreciate some of the earlier comments that you gave but more specifically around some of the pent-up demand you’re expecting to see with lockdowns ending and the easier comps going into the second half. And then my second question is around the cost environment.

It sounds like you’ve done quite a bit of work in terms of reducing head count and rightsizing the -- your personnel.

I’m curious where you think you stand in terms of your long-term goal where the head count needs to be, what kind of other actions you plan taking as well in terms of optimizing your COGS or other operating expenses, just any other areas where you think you can lean out the expenses and bring greater productivity..

I think the first question you said the decline of the beauty industry in April, if we separate like color cosmetics and skincare. Color cosmetics has a bigger -- has a higher decline rate versus skincare. So the reason we are giving this guidance is progression of our estimation of our skincare brands growth for the Q2.

Because we believe the -- right now the skincare industry -- the skincare sector of the beauty industry will be gradually resuming and also mitigating the impact of the COVID from Q2 and Q3 and looking forward.

So that’s why we are devoting more resources growing the skincare brands, which we believe would be fundamentally helping the business to become a profitable business. Having said that, for makeup. So right now we -- for sure, Perfect Diary and Little Ondine have been declining in the past few months.

One of the key reasons we are doing that is we are raising the sales and marketing, the ROI bar, for both brands, which means this will be reflecting in the gradually declining sales and marketing expense.

So right now, on the other hand, if we’re looking forward about our optimization strategy, we think there are a few components that we will focus on.

The #1 and most important thing is still the sales and marketing because, if you look at the Q1 and also for the sales and marketing, we see the opportunity will come once the offline resuming to a normal situation and also we -- our continued effort in optimizing the marketing ROI and also the higher repurchase rate coming from brands.

So all those factors will be contributing to the decrease in sales and marketing. On the other hand, one thing that we will continue to optimize is the G&A because we still see there are some rooms for us to optimize the talent performance.

And also there are -- once the optimization projects are moving forward, we will see the G&A percentage of the total revenue will reflect our continuous effort for that component..

And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments..

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Yatsen directly or TPG investor relations. You can find our contact information for IR in both China and the U.S. in today’s press release. Thank you and have a great day..

The conference has concluded. You may now disconnect. Thank you..