Ladies and Gentlemen good day and welcome to the Yatsen Second 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, a reconciliation of GAAP to 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.

Irene, and thank you, everyone, for participating in Yatsen's second quarter 2021 earnings conference call today. So our total net revenue grew 53.5% year-over-year in the second quarter in line with our guidance due to steady contribution from our flagship Perfect Diary brand and better-than-expected performance of our newly launched and acquired brand. So the number of DTC customers increased by 13.3% year-over-year to 10.2 million. And average net revenue per DTC customer went up by 17.6% to RMB117 from RMB99 during the second quarter of 2020. So this solid result came despite intensifying competition and rising customer acquisition costs even as China's beauty market grew at about 20% overall during the second quarter, growth in the premium segment and in skincare was notably stronger than other market segments. So we believe this market development validates a set of strategic growth initiatives we launched in May to sharpen our growth model. Specifically, we are optimizing internal resources and organization structures to enhance the power of our brands to facilitate positive innovation, capitalize on new growth channels and optimize cost structures and efficiencies. But this ongoing transformative process will continue into mid September, even though we have already seen some early signs of success in the latest quarter. So with our proven ability to disrupt the traditional beauty industry using a digitalized latest DTC model, we are now building a portfolio of durable, iconic brands supported by consumers insight and innovation. So we believe this strategic initiatives are essential tools to position us on the path of a high-quality sustainable growth, particularly as we prepare for a busy season in the lead up to Singles Day in the fourth quarter. During the second quarter, we launched several new products under our flagship [technical difficulty] Translucent Blurring Loose Powder with Smartlock technology,…

Thank you, David and hello, everyone. Before I get started, I'd like to clarify that all financial numbers presented today are in renminbi amount and all percentage changes refer to year-over-year changes unless otherwise noted Total net revenue for the second quarter of 2021 grew by 53.5% to RMB 1.53 billion from RMB993.2 million in the prior year period. The growth was primarily attributable to increased contribution from diversified sales channels and newly launched and acquired brain. Gross profit for the second quarter of 2021 increased by 65.1%, for approximately RMB1 billion from RMB607 million in the prior year period. Gross margin improved by 4.6% percentage point to 65.7% in the second quarter 2021 as compared with 61.1% in the prior year period, but that all increased sales generated from higher margin brands and products. We have also seen the continuation of the premiumization plan for the Perfect Dairy brands in the quarter, enabling us to achieve higher average order value and better margins. Total operating expenses for the second quarter of 2021 increased by 51% to RMB1.41 billion from RMB935.3 million in the prior year period. As a percentage of total net revenues, total operating expenses decreased to 92.6% from 94.2% in the prior year period. Fulfillment expenses for the second quarter of 2021 were RMB118 million as compared with RMB81.7 million in the prior year period. As a percentage of net revenue, fulfillment expenses decreased to 7.7% from 8.2% in the prior period. This was mainly attributable to the high base effects of the prior year period, during which logistics costs were high as a result of the COVID-19 pandemic last year. Selling and marketing expenses for the second quarter of 2021 were RMB972.5 million as compared with RMB622.5 million in the prior year period. As a percentage…

[Operator Instructions] And our first question will come from Dustin Wei of Morgan Stanley. Please go ahead.

Hello, management. Thanks for taking my questions. So first question is really regarding the third quarter guidance. So it sounds like it's because the base kind of issue in the third quarter last year that provide my company sort of provide the very conservative or low guidance. It's now -- it sounds like it's not because the current COVID outbreak. So that's little -- to me, it's a little confusing. So, just appreciate if you can clarify that point. And if we are looking for 5% to 10% sales growth, I think by brand are we going to assume the Perfect Dairy could be declining in third quarter or could you provide some of the colors like by brand or by channel? So that's the first question regarding the guidance. And the second question is consequently we think about the margin or profit for third quarter. If we are assuming like 5% to 10% sales growth, that does that mean company will also control the variable costs. So we are still continue to see sort of rationalization ROI and reduction on net loss ratio, or because of sort of operating leverage. In fact, in the third quarter, we will temporarily in the quarter seem like a bigger loss or bigger loss ratio. And the third point is back to David's prepared remark, talk about the transformation plan. Appreciate if management can provide some of the details about the goal of that transformation, the operational target or financial target, and how long that will expect that change will be done and we are going to see some of the better financial results. That's my three questions. Thank you very much.

Thank you so much for the question, Dustin. So, first thing, let's discuss a little bit about the guidance. So as I mentioned before, we need to take the Q2 and Q3 combined to look at the growth rate. One of the key reasons is because of the unusual seasonality of last year because of the COVID. So if we look at the Q3 guidance, we cannot provide an average breakdown of the pipeline, but we still see a very healthy growth trend of Perfect Diary remain there. Because of the ROI adjustment, now we have more brands in skincare category and therefore [indiscernible], we continue to shop in the ROI. And then -- so for that two brands, we’ve been allocating the resources into the skincare growth. So that what we see about the Q3 guidance. And then you talk about the COVID impact on Q3, we see some moderate impact on our offline stores, because right now less than -- one-third of the offline store were impacted by the COVID. So, we continue to already chip into consideration of the impact of the COVID in our acquisition of the offline sales. So, for the transformation plan, we think is we take some initiative to really sharpen our growth model. So that means a few things. First, we continue to improve our ROI, so it will be reflecting on the sales and marketing percentage of the total revenue and also improvement on the bottom line. Second is that right now we -- so in the past quarter, we actually allocated our internal resources into skincare brands, which means we move some of the best performers from cosmetics to skincare BU. So, that is under the assumption that we think our growth in the color cosmetic category will continue. However, we see a higher, more intense competition in color cosmetics. So right now we are focusing on the growth on Perfect Diary, and also because we already take some very good initiative to grow the skincare brand. We see the momentum on DR.WU, Galenic, Eve Lom and Abby's Choice is moving pretty well. We will continue to invest in the skincare line growth.

Thank you, David. If I can just follow-up on sort of the -- from margin or the profit aspect of the questions for third quarter. Should we take the third quarters margin a little bit abnormal because of this low growth where you think the ROI and the margin kind of improvement will continue despite the sort of a little bit low growth for the third quarter itself?

I think -- so, if we think about the Q3 and Q4 growth, so normally, the Q4 growth comes from the investment on the Q3, because we need to take the repeat purchase rate into consideration. So normally the new user we acquired in Q3, will come back during the single state promotion. So for Q3, the investments on our flagship brand like Perfect Diary and also the skincare brands will still be high. But somehow we see the chain because of the optimized ROI and lower sales and marketing percentage of revenue. So the bottom line like improvement will continue.

Okay, thank you very much, David. Thank you.

Thank you so much, Dustin.

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

Thank you so much, David. So I have quick three questions. So just to follow-up on the guidance, I think in understanding the seasonality if I just simply add the second quarter actual revenue, plus kind of your third quarter guidance, it kind of seems to imply around 25% to 30% growth on a Y-o-Y basis. Is this around a level of normalized growth that we should look for going forward beyond fourth quarter and beyond? That's the first question. Second question is, would you have any update on the offline store expansion. I recall that you had around 100 new opening target for this year that seems like due to the COVID situation, other kind of factors, so far the store opening has been slower than the target. And lastly, I just wanted to hear some thoughts on kind of the weaker July numbers across the industry. Do you have any thoughts here? Do you think this is more of a pull forward of demand towards June 18, or is this something -- any other factors that we should think about in terms of interpreting July and August numbers? Thank you.

… so much. To answer your first question about the looking for the guidance on Q4 and also other quarters next year, we think the -- so we -- I probably will take the Q1 into consideration as well. So the average grocery of Q1 to Q3 will be something that we believe will be a more accurate reflection of our growth looking forward. And going back to your second question about the offline stores. So in Q2 this year, we nearly opened around -- Irene, can you help me address the second question of the offline store opening?

Yes. So, so far we have at the end of second quarter, we have 273 stores open compared to at the end of the year 241. So that's a net increase of 32 stores. We expect to continue to open more stores, but given the repeat -- repeated COVID situations, the number of stores that we plan to open may drop a little bit compared to the number that we gave earlier.

So your third question about the overall growth of cosmetic industry in July, this year, like slower growth versus the previous months, and also its lower than our expectation. So I believe one of the key reasons behind is what really drives the growth of previous months. So if you look at the -- so since June or last year, so in the past 12 months, beginning last June to this June, so the whole skincare or the whole cosmetic industry growth was mainly driven by skincare and also premium brand growth. So we see that growth trend right now is getting a little bit like slowing down. And also so that's why the whole market growth we think is weaker. But looking forward, so if we look at the August data, so we still have the confidence on the cosmetic -- color cosmetic growth, as we see there some newly emerging channels are booming. For example, the live broadcasting, live streaming [indiscernible] is growing really fast. So now the company's focus is we need to capture the new flows of the new category entrants and also newly emerging channels like Douyin.

Thank you. That is super clear. Thank you.

Thank you.

The next question comes from Louis Li of Bank of America Securities. Please go ahead.

Hi, David. Hi, Donghao. Thank you for taking my question. My first question is about the second quarter. So you mentioned about the key driver of the quarterly sales growth is about it's from the channel diversification and new product. So could you give us some color on the channel diversification? So versus last quarter or versus -- yes, versus the last quarter, so do we see a further expansion from that sales contributed from outside of Power and Tmall, particularly Douyin? So what is the gross contribution from Douyin now? And I remember that you mentioned that Douyin, the ROI of Douyin in Q1 is still at the trial period. So do we see an improvement from the ROI from this channel? So this is my first question. My second question is also about the guidance. So it seems like the Q3 guidance is a little bit lower. But if we look at -- you just mentioned that normally we see higher sales from Q2 versus Q3, but if we look at the past 2 years it's not the case. And so, in this case, how do we -- how should we look at Q4 when the space becomes even tougher? So is it the 20% to -- 25% to 30% is a normalized growth. And my third question is based on what we are doing for the transformation. So since like we are prioritizing our net loss control versus the sales growth, if that's the case. Thank you.

Thank you, Louis for the question. So first one about the channel miss. Yes, we are seeing a higher growth rate outside of Tmall in terms of channel miss. And then -- so we especially -- we see a very fast growth of the GMV in Douyin because of the live streaming. So in Q1, yes, you we are on a testing period. So the ROI is not that high. In Q2, we significantly improve the ROI. So right now, the growth of Douyin is on a right check. And I believe this will be reflecting on sustainable growth on revenue, and also optimized all of our sales and marketing percentage of total revenue. So about the guidance on the Q3, I think I discussed that for Christine's question. If you're taking the Q2 and Q3 growth combined and then if you're taking Q1 to Q3 combined, we believe the Q1 to Q3 combined will be something that we believe will be more accurate reflection of our growth expectation for quarters moving forward. And then so -- having said that, we believe our performance on Douyin on the live streaming, there are still some opportunities for us to optimize. So we will continue to devote more efforts to surpass our competitors in building channel.

How about my last question? So looking forward, are we prioritizing that the net loss control versus sales growth? Or how do we strike a balance here? Thank you.

I think, so we -- right now, we are taking a more sustainable growth strategy. So the key focus is still on growth. But if we look at the what that mean for Yatsen is that we think that the value of the growth coming from the skincare brands and coming from our premium skincare brands is more valuable for the whole group. So that's why we can -- we will continue to devote more resources into to grow the skincare brands. And then also for our flagship brand for Perfect Diary, as I mentioned before, previously, we did move too fast to reallocate our talent into the skincare BU, and now we think because of the intensifying competition, we need to refocus and also to devote more resources to continue the growth trend of our main brand. So growth will be the key prioritize -- key priority of the company. But the reason we see the optimized bottom line is because we have very high discipline in the ROI -- in the resource allocation to maintain a higher ROI level, but the higher ROI level is reflecting the whole group, which means for all our brands, we are taking the same bar. So that actually means we need to optimize the Abby's Choice and also Little Ondine growth model.

Louis, a bit more color on your second question. So you were -- I believe you were looking at Q2 versus Q3 back in 2019 and then, Q2 and Q3 in 2020 in our business. And you're right. Even back in 2019 our Q3 revenue was actually higher than Q2 by about 11%. And the reason behind that was because back then we were enjoying really high growth feed. So that's why the growth feed or high growth feed actually outweigh the seasonality back in 2019. So that's why in 2019, Q3 was 11%, our revenue was 11% higher than Q2. So if you look at our 2020 last year's number, our Q3 revenue was actually 27% higher than Q2. And that was a reflection of the disruptions in the seasonality patterns that we were talking about. So, you know as David has mentioned several times, it's now -- in Q2 last year, we had that social distancing and quarantine policies in almost all of the country which actually depressed consumer demand and sales, in fact in Q2. But in Q3 the pent up demand from the previous Q1, Q2 were actually released. That's why we saw a much higher Q3 revenue number last year. And that was the seasonality pattern change we were talking about. Hopefully -- I hope that answers your question.

Got it. Thank you very much. Very clear.

Sure.

The next question comes from Ingrid Zhang of UBS. Please go ahead.

Hi, management. Thanks for taking my question. I have three questions. The first is about the brand. I recall that in the last quarter we commented that Pink Bear is expected to deliver a strong growth this year among all the color brands. Would you please update on the sales trend in this past quarter of Pink Bear. And also for the skincare brand, we are glad to see that DR.WU sales started taking off in the second quarter, but would you share with us other new product launch plans in the second half? And also when will we expect the growth of like Eve Lom and Galenic brands to take off like DR.WU? And second question is about the marketing cost. Would you mind to share a bit color about ROI maybe by at company level or by channels versus peers. Just want to get a feeling about where we are compared with industry? And last question is about the organization structure. Would you please share with us maybe some color about our resource allocation among different online channels and say social marketing values in terms of personnel, marketing budgets, etcetera. Many thanks.

Thank you, Ingrid for the question. So if I remember correctly, so the first question is about our investment plan on the skincare category. We -- right now we are spending more and more effort to grow our skincare brands. So DR.WU is growing really fast. And also we see a very -- also the very fast growth was coming from Pink Bear. So the reason we launched Pink Bear is that when the Perfect Diary is taking a premiumization trend, so the price point of Perfect Diary is moving up. So we see the wide space under the Perfect Diary price point. So we need Pink Bear to take the market share when Perfect Diary is moving up. So we see right now based on the initial sales result of Pink Bear in the past 4 months, it is exceeding our expectation, because we think the Pink Bear's growth is very healthy. It's very high ROI and very fast growth and also the brand positioning is very clear. So the brand is strongly resonated with the younger generation of consumers, which means the brand is changing a lot of new users, of new entrants into the color category. So I think the Pink Bear right now is on track. So Pink Bear right now is really focused on the lip gloss category. But for the second half of this year, the brand will be spending to the eyeshadow category and also some base makeup as well. So we think the fast growing channel of Pink Bear will continue and that will help us to track the growth of our value share gain in the color cosmetics. So for DR.WU, so right now we are really focusing on the Perfect Diary. And also because DR.WU have a very, very strong…

Thanks, David. My last question was about the organizational structure, resource allocation among different online channels and social marketing values in terms of personnel, marketing budgets, etcetera. Say how many people we have for the Douyin channel operation?

I cannot remember the number of the people working with Douyin and Kuaishou right now. But in the past month we were having the strategic view for our past half year, and we see a demand that we need to allocate more talent into the fast moving channel and also fast growing brands. So, because we have a very proficient talent pool, based on our management trainee program, and also we were getting a lot of very experienced people from the industry to join us as well. So, we think -- we have sufficient talent to manage the growth of the given channels. In terms of brand building, brand building is one of the key focus for Yatsen group. So in the past year -- in the past half year, so we hire very talented people, traditional conglomerates and then they brought in a lot of experiences in brand building. So we are strengthening the brand equity in Perfect Diary and also our other brands as well. So we think the investment in brand building will continue to take a bigger percentage of our sales and marketing expense.

Many thanks, David.

Thank you.

The next question comes from Casper [indiscernible] of CICC. Please go ahead.

Hi, this is Casper from CICC, and thank you for taking my question. My first question is about the pace of introducing new product or new brand because we noticed that recently the pace of the introduced new brands is slower than before. So I wonder if the time span for the new product developments longer now. And the second question is about the skincare products of the main brand Perfect Diary. So could you share a bit color about the recent sales performance, and maybe our future plans of the new brand development especially in the skincare category? Thank you.

I think in the first half of this year, so we spent more and more effort in developing better products in -- for our [indiscernible] brands. So initially we took a better and fewer strategy to come up with a very innovative and long lasting performance SKUs. For example, the Loose Powder we just launched it takes longer than our traditional products to develop, but the technology and also the Smartlock to Perfect Diary technology right now is becoming a very strong driver to helping the product to gaining share in the market. So if we look at the Loose Powder, and then we believe this one will become a very important milestone of Perfect Diary, because as we all know, the Loose Powder category is one of the -- I would say the strategic focus of one of our very important competitor in this market. So which means when we are gaining share in Loose Powder, it's actually helping us to become more competitive in the market by head-to-head comparison to our main competitor. So you're right that in the first half, we are spending more effort to developing really competitive products. It takes longer time. So the second half of this year, we will see higher frequency of launch of new products. That is mainly because ever since like last Q4 and the first two quarters this year, we have the -- preparing for very innovative product launch in the market. So we just launched the our makeup remover oil. And also we are launching some other new items as well. So for our lipstick, we are going to have a very breakthrough formula, which we are going to launch right before the Singles Day. And therefore our eyeshadow palette, we just launched before I should have had which was become the blockbuster of the eyeshadow category this year. And then by Singles Day, we will see a lot of a new SKU launching among our existing brands, not only for Perfect Diary, but also Little Ondine, Pink Bear and also our skincare brand. So we are confident about our initiative -- new initiative pipeline in the second half of this year.

Okay. Yes, the second question is about the skincare products of our main brand Perfect Diary. So, could you give us some details about the sales performance in Q2 and maybe the guidance into Q3 and Q4?

The skincare product of Perfect Diary is similar to color lines and also male skincare products, which will be the category expansion of Perfect Diary brand. So for the skincare products we launched for our -- in our offline stores. And now we see the percentage of the skincare product lineup as the total revenue of our offline stores has continued growing. And based on the initial feedback from our consumers, they believe the -- that those like skincare items is actually helping to help them to better apply their makeup. So I believe the product performance has been proven and also be well received by the consumers. And we saw after a test period, we are expanding the base skincare product items into other channels as well. So looking forward, we will take in like a higher percentage of the total revenue of Perfect Diary.

Okay. Thank you very much about the very detailed explanation. And I have no other questions. Thank you.

Thank you.

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

Hi, management for taking my questions. I have two quick questions. The first one is about data security. So how does the company evaluate the potential impacts from data security related regulation because based on our understanding, on the one hand, our customer insight and the product development process is what is really data driven. On the other hand, the firm usually spend a lot of dollar in targeted marketing. So I was just wondering if the marketing ROI will be diluted, the sort of database the regulations, this is first one. The second one is about the management team because our ex-COO Vincent resigned due to health reasons. So what have we done to ensure the stable operation and transition, and how do we reallocate the responsibilities of COO to other members?

Kevin, thank you for your question. The first one about the data security loss, so right now our legal counsel is reviewing the draft legislation on data security. So the preliminary view is that data security will not impact us too much, because we have obtained the customer data mainly through the online platforms like Tmall. So, the data from Tmall are pretty well protected. So data obtained for our private domain channels provided voluntarily by consumers. So -- and also we have a very strict data security measures in place to prevent the abuse. So I think, overall, we -- our assessment on the data security loss impact on the company is something that we believe will not be very big. The second question related to our Co Founders, Vincent Lou [ph], so because of the health issue, he actually left the company around in April. So we started the transition in Q2 already. So originally, he's taking the critical responsibility of the company's operation and because we have the second key management, and also my Co Founder, [indiscernible] he's taking the majority part of his responsibility. So in the past 5 months, we see the operation when price moves, and also we are taking the new initiative to sharpen our growth model. So I think the team's morale and also the team's operation efficiency is still in line with our expectation. Although the team has been facing a very competitive environment from the industry and also a very disturbing macroeconomic environment. But the team right now has been quite, I would say, confident about the initiative we are taking. We believe, we are heading on to the right direction and we are sharpening our growth model. And also we see some initial success coming from our brand expansion and also our sales growth in skincare category. So all those -- some of the very important milestones we are making. So looking forward, I believe the organization has been moving to the next stage and then we will continue to work on what we believe will be the right direction and then it will be the long-term focus, and we continue to grow the existing current portfolios, and gaining more share in the cosmetic industry.

Thank you, David. That's very helpful. I have no more questions.

Thank you so much.

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.

Thanks everyone 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 U.S. can be found on today's press release. Thanks and have a great day.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.