Ladies and Gentlemen good day and welcome to the Yatsen First-Quarter 2021 Earnings Conference Call. Today's conference 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.

Thank you operator, please note that 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 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 Yatsen'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. For a definition of non-GAAP financial measures and the reconciliation of GAAP and non-GAAP financial results, please see the earnings release issued earlier today. Joining us today on the call from Yatsen'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 Yatsen's investor relations website at ir.yatsenglobal.com. I will now turn the call over to Mr. Jinfeng Huang. Please go ahead, sir.

Thank you, Irene. And thank you, everyone, for participating in Yatsen's first-quarter 2021 earnings conference call today. Starting off the year on a solid note, Yatsen achieved a 42.7% year-over-year growth in total net revenues in the first quarter, Supported by a healthy growth of our proprietary brand and robust performance of Little Ondine and Abby's Choice and other brands Yatsen's portfolio. So during the quarter, the number of DTC customers increased 11.6% year-over-year to 9.6 million. While revenue per DTC customer also increased by 24.5% from approximately RMB98.7 to RMB 123 per customer. So we ended the quarter with gross margin of 68.6%, an improvement of approximately 7 percentage points compared to 61.7% in the first quarter last year. So we went into the year with a clear execution plan to optimize our brands' performance, expand our portfolio and enhance our core capabilities. Our key focus has been under flagship proprietary brands, particularly to upgrade its positioning and a price point from mass to a higher-end mass market in order to further extend its growth potential. So we have set out to achieve this through more disciplined pricing and discount policies, which successfully raise proprietary's average selling price, average order value and gross profit margin during the quarter. At the same time, we continue to introduce new products that excite and delight our customers, such as the new Eve Lom brands lip gloss line, as well as the Pink Fuel lipstick gift set, which were designed for the Chinese New Year holiday season and Valentine's Day. These new products, complemented by the launch of a number of proprietary skincare products in our off-line stores in early May, represent refinement and premiumization of the proprietary product line this year. So looking forward, we have further plans to launch new products…

Thank you, [David] and hello, everyone, before I get started, I would like to clarify that all financial numbers presented today are in RMB amount and all percentage changes referred to year-over-year changes unless otherwise noted. Total net revenues for the first quarter of 2021 increase by 42.7% to RMB1.4 billion from RMB1 billion for the first quarter of 2020, primarily attributable to the increases in the number of B2C customers, as well as revenue from our B2C customer during the period. Gross profits for the first quarter of 2021 increased by 58.8% to RMB991.6 million from RMB624.4 million for the first quarter of 2020. Gross margin improved by approximately seven percentage points to 68.6% in the first quarter of 2021, compared to 61.7% in the same period of 2020, on the back of white disciplined pricing and discounts policies. On the business end, we saw increased sales are generated from higher-margin brands and through experience stores. We have also creatively premiumized our product offerings, enabling us to achieve higher average order value and better margin outcomes. Total operating expenses for the first quarter of 2021 were RMB1.3 billion compared to RMB800.3 million for the first quarter of 2020. As a percentage of total net revenues, total operating expenses increased to 92.4% from 79.1 % in the first quarter of 2020. Fulfillment expenses for the first quarter of 2021 were RMB92.7 million, compared to RMB107.1 million for the first quarter of 2020. As a percentage of net revenues, fulfillment expenses decreased from 10.6% in the first quarter of 2020 to 6.4% in the first quarter of 2021. The decrease in percentage was primarily due to the normalization of logistics expenses compared to the first quarter of 2020 during which the logistics expenses were higher due to the impact from COVID-19.…

Thank you. [Operator instructions] Our first question today comes from Dustin Wei with Morgan Stanley. Please go ahead.

Thanks for taking my questions. And my first question's regarding the guidance for the second quarter. It seems like it suggests that 3% to 7% quarter-on-quarter growth versus the first quarter. And I feel it seems weaker-than-normal seasonality for cosmetics. So, is there sort of an adjustment going on with the like some strategy change or so management tends to be conservative? So, the first question regarding the guidance. The second question is that given the competition on color cosmetics seems to be -- become more intense, so is there any strategy change for the management sort of in terms of allocating more marketing resources to the skin care rather than color cosmetics? Is that kind of part of the reason that our sales growth's slightly sort of lower than previously? And the third question is regarding the net losses in the second -- in the first quarter. So, the net loss on sort of the ratio is slightly higher than fourth quarter last year. I think that's mainly because of higher selling and marketing. So, is there any further elaboration of that and how should we look at that ratio for the full year? Thank you very much.

So, for the quarter-over-quarter growth, I think the first thing we want to clarify is right now, our brand portfolio has been changing dramatically. So, we have three years -- we have three brands last year, but now we have seven brands. And in skin care, now we have four. So, you're right. So, when we are thinking about the resource allocation for the coming quarters, we may allocate more resources into the skin care growth. And the skin care growth might not be as dramatic as color cosmetics. However, we think the growth of skin care, especially the luxury centers of the skin care category is more sustainable and that this might influence the bottom line as well. So, for the second thing about the competitiveness of the color cosmetics market, so, if we look at the new monitored data -- so, last year, Yatsen as a company were -- was ranked as the No. 5 and then on, so, in 2019. In 2020, the company was ranked at No.4. But if you look at a growth rate of the 2020 over 2019 growth rate, at the -- based on the same database, Yatsen was growing at over 30%, while the No. 1, No. 2 was declining and that the No.3 was just growing at a single digit. So, if we look at the overall color cosmetics, we think we still have high-growth potential and that we will work to continuously expanding our brand in color cosmetics and we are -- we will continue to invest to grow our existing brands, including Perfect Diary until we become the No. 1 company in terms of value share in color cosmetic markets. So, your third question is about the increase in sales and marketing. So, in the first quarter this year, because we newly acquired a couple of the skin care brands, at the early integration stage, the investment in brand building and also cleaning the inventory for the distributors will be the two core things that we need to do. So, the investment for the -- our newly acquired brands, for example, we just announced the brand ambassador for Galenic in the first quarter. And then we believe the investment into strengthening the brand equity and then improving the brand awareness will be reflected in the growth in the coming quarters for our skin care brands.

Yeah. And one other thing I want to add is in Q1 we spent some money testing the effectiveness of new traffic-acquisition channels. Channels that is doing quite good and some others to figure out the best -- the most efficient, cost-effective way to acquire traffic and market or products. And on top of that we are trying to put in place a more disciplined approach to ROI optimization. So, now, we're allocating our resources to maximize our ROI to allocate resources across different brands. And now, we have seven of them to make sure that we have the highest return on our investments. So, going forward, you just mentioned in Q1, our non-GAAP net loss is 16%. Going forward, we do expect our net loss to come down and we are actually more confident about our future prospects of profitability going forward because now we're building this sizable and sustainable skin care business.

Thanks a lot, Jinfeng and Donghao. So, if I can just have a follow-up on that. So, are we still sort of aiming for like break-even or even better profitability for 2022, given the change of the focus toward more skin care?

Well, now, we are actually not in a position to give guidance on profitability two or three years from now. But as I said earlier, we're now even more confident about our future prospects of turning this business profitable.

Thank you very much again.

[Operator instructions] The next question comes from Luzi Li with Bank of America. Please go ahead.

Hi. Thank you, management, for taking my question. So, my first question is also on the guidance for Q2. So, I recognize that Q2 basically is the easiest base or has the easiest base if we look at the last year. So, is it fair to say in Q2 maybe is likely the best quarter in terms of the run rate -- gross run rate? This is my first question. And the second question is if we look at DTC growth -- DTC channel growth. So, previous -- in a previous -- in the past, we actually see the number of DTC customers grow faster than the actual value. So -- but in this quarter, in Q1 of this year, we actually see the higher ASP growth than the number of customer. So, are we going to see a similar trend in the future or it's just a like one-off? And if this is the case, so how can we achieve the higher ASP in the future, particularly for that Perfect Dairy. So, you just mentioned that we achieved some brand upgrade for Perfect Dairy brand. So, are we seeing the discount rate -- lower discount rate, or we have a higher ASP for the newly launched products and then we give the similar level of discount? So, this is my second question. And my third question is also on the margin side. So, for the Q1, we do see the higher selling and distribution ratio. But my question is whether this is more about the newly acquired brand or newly -- new brand? Or we actually see the quite average-- quite similar ratio for a different kind of -- for different brands? So, if we purely look at Private Diary, how is the trend versus the last year same time? Thank you.

OK. For the first question, let's discuss about our Q2 guidance, about our growth. So, if you look at the brand portfolios we are having right now and then also we just launched a new skin care brand. So, this brand -- so there's like -- even the price point is lower than Perfect Diary. But this brand, it has a very young brand equity, to attract the new category engines. So, the brand's targeting the young and Gen Z and Gen X consumers, who are newly adapting to color cosmetic products. So, the reason we do that is that we are right now upgrading the Perfect Diary product portfolios with two things. One thing is for existing products, where we will have this modest range on discount and promotions. And then for our newly launched products, we are trying to catch up the upgrade and the premiumization share of the consumers. So that's why we can see an increase in gross margin of the -- in the first quarter so having said that, so Little Ondine in the Quarter 2 last year had a very dramatic growth. So this year, we are also thinking about adjusting the investment level for Little Ondine as well. So for the second quarter, we believe the growth reflects our change in the resource allocation with more focus on skincare brands, with more focus on adjusting the investment model for Little Ondine and Abby's Choice, with more focus on price up and also the premiumization of Perfect Diary. So that the -- that's why we think the growth will have some impact on the bottom line for the second quarter. And we believe the shift of the growth model will be more sustainable and more -- will become more robust in the coming quarters.…

Thank you. Thank you. Just one follow-up. So in terms -- so you just mentioned that in the rest of the year, maybe we will see a better margin profile, given our strategy shift. So in this case, so are we looking for non-GAAP net profit narrow versus last year? Or we're still seeing a similar level? Thank you.

Sorry, as I said earlier, we're not in the position to give guidance on profitability for the rest of the year. But I said earlier as we are trading out of our existing brands and introducing more luxury skin care brands with higher margins, we are more confident on the profitability of our business going forward.

Maybe I can just add one thing here is the change reflects our resource allocation -- reallocation among the brands, among our portfolios. So our resources will invest in the skin care category and also continuously invest in the new brands of the color cosmetics. So that's why we think this will impact our bottom line. But sorry about that, we are not going to give you any guidance on this one. Can we come to the next question? Thank you.

The next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Thank you, [David] and Donghao. So two questions. So one, could you -- is it possible to give us a rough sense of the sales contributions from your own organic brands versus the newly acquired brands, both in terms of this quarter, as well as the implied in your second-quarter guidance? And then secondly, [David], you mentioned that in your remarks that nontraditional channel sales contributions have increased this quarter, including the short videos in TV and experience stores. Should we expect this trend to continue going forward? And also, would it be possible for you to elaborate on your strategy in these new channels? And then lastly, a quick one is, is there any update on the repurchase rate that you can share with us? Thank you.

OK. So first one, about the organic brand. So if we -- I can clarify here. So even with the brand we acquired, in terms of the growth, we still invest a lot in the new acquired brands. So if you're talking about the revenue split between existing brands, no matter it is incubated or the brands that are coming from last year or the newly acquired brand, the percentage-wise of the newly acquired brand was still relatively small in the total percentage of the revenue. But what we do is we invest in the new brands and then we capture the growth. So until now, I would say that the main growth driver of this community comes from the organic growth, no matter it is the existing brand, incubated brand, or even the acquired brand. So that's about the first -- your first question. And then we're quite happy about even our flagship brand like Perfect Diary growth in the first quarter because we see the growth of Perfect Diary, mainly coming from the newly launched, no matter it's the lipstick products or the category expansion into like the color contact lens and also the skin care products as well. So your first question -- the second question is about the non-traditional channels, for example, the TV or the short video or -- you're right, we see the trend will continue because right now, in the first quarter, as mentioned by Donghao before, we spent some resources in testing the new platforms. For example, as we all know, for some of the short video and also the live broadcasting the apps as they are devoting a lot of resources in building up their e-commerce part of the business, which means in terms of GMV, we see a significant growth potential for those apps and newly emerged platforms. So this is something that we spent a lot of time in the first quarter to study, to see what will be the impact for brands in the future. So in the transitional business model, we have brand-building platforms, social media platform and we have the transactional-based e-commerce platforms like mainly Alibaba and etc. But now we see some of the newly emerging players in this market, they capture both part of the -- of it so they can help you to build brands and that they can help you to complete the transaction. So it means a lot for brands. So that's why we had some test in the first quarter by working together with the top-level management of those platforms. And we are very happy to see some early stage results coming from the test. So looking forward, we think our resource -- our growth outside of the traditional e-commerce platform will continue to lead -- to play as the growth driver for Yatsen as well. So for your third question about repurchase rate. Irene, do you want to share?

Yeah. So for repurchase rate, we have been seeing similar levels in the past. So previously, I think in both when we were IPO-ing and also in the annual report, we mentioned the repurchase rate over a 12-month period has been -- they're seeing around 40%. And then recently, in this quarter, we didn't disclose the actual number, but the level has been in the similar level.

Thank you.

The next question comes from Zhongchao Xu with CICC. Please go ahead. Zhongchao, your line is open.

Hello? Can you hear me?

Hello, Zhongchao.

Yeah, this is Zhongchao from CICC. Thanks for taking my questions. I've got two questions. The first one is what's our specific plan on the skin care business this year? And how will we allocate the resources, say, the marketing and the labor, the team of talent? The second question is, as we test in the new traffic acquisition channels, such as Douyin, you mentioned, could you further elaborate what we did? And how was the performance so far? Thanks.

Well, for the skin care growth, so we think the acquisition of Eve Lom is a very important milestone of the company. So we -- so when we are entering into the skin care category, we -- it takes some time for us to improve our understanding of the category and also the -- to test whether the Company's core capability can be able to apply into the skin category. So based on the early stage in the results in the past few months, we are very glad and confident that the -- so our business model is working in both color cosmetics and skin care. So going back to some of the brands we are like investing in and then we see a very clear growth path for those brands. For example, DR.WU, so we repositioned the brand and are focused on very specific benefit category -- or benefit space for the brand. And then we strengthened the brand equity and then focus on a couple of the SKUs. So if we look at the growth of DR.WU in Tmall, it's actually very consistent and remarkable growth. So this brand has been selling in various live broadcasting in March and April and we see the result was quite impressive. And then this month, we are continuing to invest in the brand building with the top KOLs, optimally designed and so in June, this brand is going to have a big promotion, working with the top KOLs and working on the June 18 promotion event. We will see continuous progress on DR.WU sales in the masstige skincare category. So we think marketing-wise, we --our team has been devoting a lot of resources in understanding the market landscape, understanding the heritage of the brand equity and also reposition the brand to…

Thank you.

Next question comes from Ingrid Zhang with UBS. Please go ahead.

Hi. Thanks, management, for taking my question. I have two questions. The first is Yatsen has been very strong in terms of faster on-product launch, leveraging our strong consumer insights. With the new cosmetics collaboration coming to effect this May, could you share with us the potential impact on our business? The second question is we start out as a very strong Company in mass, masstige segment and particularly in color category. Now, we acquired a new on to premium to prestige skincare brands. Can you share a bit with us as our plan to grow these new skincare brands? Many thanks.

OK. So first one about the replace -- regulation change of the name in the beauty industry. So this is nothing new because we have been discussing this like in the past one year. And then so everything maybe May or June last year and then so we were invited by the government to discuss the potential impact of the law. So we knew that it's going to happen and we have -- we had a very solid plan together with our external partners. And then we consistently communicate with the officials in the related government departments. So right now, we did anticipate challenges from the implement of the new law. So going back to your first question about the speech to market, well, speech to market is what we believe is the core capability of the Company. By that means we are jumping ahead of any like necessary or law we enforced a necessary step of the product launch. So we have a very strict quality control. And also, we have very strict benefit tests for our products as well. So we believe our existing -- the SOP and our existing Company at the center is helping us to benefit from the launch of the new law. So we believe that the main purpose of the law is actually to have a better-regulated market, but mainly targeting on some what we call the low end or the niche brand who are not that com -- in having a strict compliance with the law reinforcement. So that's about the first question. Well, so [Indiscernible] the premium skincare brands, very interesting. You know, when we launched the BC serum, this cover is really like a very high price, with [Indiscernible] And then the label price was RMB 750. And we at…

Thank you.

The next question comes from Kevin Xiang with 86 Research. Please go ahead.

Hi. Thank you for taking my questions. I have two quick questions. The first one is about the offline business. So could you please give us more color on the progress and recovery of our offline experience stores in the second -- in the first quarter and second quarter? And then my second question is also about the offline, but it's about the distributor model because we've noted that's why I see some brands such as Perfect Diary, Little Ondine and Abby's Choice have collaborated with popular offline cosmetic chain store, H.E.A.T. in Chinese. So how should we think about the role of these offline distributor model in the long run? Thank you.

All right. OK. I'll -- thanks for the call. I'll take, Xiang, your first one. Well, currently, we have about 400 -- 245 offline stores and we do have a plan to open another 104 during the rest of the year. And the stores are doing quite well. And from a stand-alone business perspective, it is already profitable. That's about our offline business.

Xiang, to build on the first question. So the reason we are trying like a higher revenue per square meters for the -- for our offline stores. So we drive this, meaning leveraging our category expansion into skincare and also some like foundations. So we launched some interesting products purely for offline. For example the essence and also the pre-makeup lotion and also the moisturizer as well. And then also we also have some like sunshine protectors for our like foundations for offline stores as well. So we see a very specific set of the product, which is more fit with the needs of the our offline consumers. It's playing like -- it's taking a higher percentage of the revenue in our offline stores. And for both subsets of the products, they have higher repeat purchase rate, higher gross margin and better net profit. So that's why we were very happy to see that our offline stores are making money fair enough. So for the second question, the reason why we as a B2B company, why do we need to work with hit. So if we look at Perfect Diary, so Perfect Diary has few very strong infrastructure as we can see for the offline stores network. But you can look at our newly acquired brands, economically, it's not making sense for each of the brand to spend offline stores similar to Perfect Diary. So for example, for Little Ondine, we have plans to open a one offline store in TX Huaihai in Shanghai. So it's a place for the fashion people and also very cool people. But when we are thinking that whether it be the Ondine expand like another 200, 300 stores in China. We think the economy model might not work. So that's why we need to work with one distinctive partner, which can capture some of our brands and then lift them in the offline stores environment. We choose it because the channel can help brands to enhance the brand equity and the mainly focus on driving the consumers like for this experience. And they can deliver the brand message to consumers quite well. And then also for our brands portfolio, the expansion in the -- based on the retailer's model is helping us to reach more -- to be -- to reaching more consumers with lower cost. So that's the reason we are working with one partner right now but having said that, it's the early stage experience – experimental so we will see when the results come back and then we'll have like some more knowledge or to decide whether you should be good move or not.

Thank you.

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. Our contact information for IR in both China and the U.S. can be found in today's press release. Have a great day.

[Operator Instructions]