Ladies and gentlemen, good day, and welcome to the Yatsen's Third Quarter 2022 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 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. Please see the earnings release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. Joining us today on the call from Yatsen's senior management team 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 Web site 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 third quarter 2022 earnings conference call today. We started the year by launching a five-year strategy outlining our plans to evolve our business and drive the long-term and sustainable growth. With this strategy target as our roadmap, the management team continued to fine-tune our business model. Although negatively impacted by the softening beauty market and the resurgence of COVID-19, our Skincare Brands recorded solid growth in the third quarter of 2022. We have also seen improvements in gross margin, net loss, and non-GAAP net loss on account of our cost optimization plan. Overall, our sales in the third quarter of 2022 continued to experience slowdowns as a result of challenging macro headwinds and the lower levels of consumer spending, which have been exasperated by resurgence of COVID-19. Beauty retail sales in the third quarter of 2022 went down by 3.2% year-over-year according to the [latest] [Ph] data published by China National Bureau of Statistics. Sales of both color cosmetics and skincare products on Tmall fell by double digits year-over-year in the third quarter of 2022 extending the downward trend in the second quarter of 2022. Our total net revenues for the third quarter of 2022 declined by 36.1% year-over-year to RMB857.9 million, meeting the high end of our revenue guidance. Let's look at our revenue mix in detail. Net revenues from Skincare Brands increased by 33% year-over-year to RMB 269.4 million, as a highlight, total net revenues of our fast-growing clinic and the premium brands, DR.WU, Eve Lom, and GalÃnic delivered solid growth of [69%] [Ph] year-over-year this quarter. In terms of revenue contribution, our Skincare Brands contributed 31.4% of total net revenues for the third quarter of 2022, which has exceeded 30% of total net revenues for two…

Thank you, David, and hello, everyone. Before I get started, I would like to clarify that all financial numbers presented today are in Renminbi amount, and all percentages -- all percentage changes referred to year-over-year changes unless otherwise noted. Total net revenues for the third quarter of 2022 decreased by 36.1% to RMB857.9 million from RMB1.34 billion in the prior year period. The decrease was primarily attributable to a 48.8% decrease in net revenues from our color cosmetics brands, partially offset by a 33% increase in net revenues from our skincare brand. Gross profit for the third quarter of 2022 decreased by 35.2% to RMB591.3 million from RMB911.8 million in the prior year period. Gross margin for the third quarter of 2022 increased to 68.9% from 67.9% in the prior year period. The increase was primarily driven by increased sales of higher gross margin products from our skincare brand, cost optimization, and stricter pricing and discount policies across all of our brand portfolios. Total operating expenses for the third quarter of 2022 decreased by 33.1% to RMB857 million from RMB1.28 billion in the prior year period. As a percentage of total net revenue, total operating expenses for the third quarter of 2022 were 99.9% as compared with 95.4% in the prior year period. Fulfillment expenses for the third quarter of 2022 were RMB63.8 million as compared with RMB102 million in the prior year period. As a percentage of total net revenues, fulfillment expenses for the third quarter of 2022 decreased to 7.4% from 7.5% in the prior year period. The decrease was primarily attributable to a decrease in warehouse and the logistics cost due to optimization of our procurement capacity. Selling and marketing expenses for the third quarter of 2022 were RMB564.8 million as compared with RMB911.3 million in the…

Yes, thank you. [Operator Instructions] And today's first question comes from Dustin Wei with Morgan Stanley.

Thanks for taking my questions. First question is related to the W11 performance. I'm wondering if management can comment in terms of the performance by brand or by Skincare Brands and the Color Brands. And do we expect that the GP margin in fourth quarter to be sequentially lower versus the quarter because of the promotion for W11? And the second question related to the performance for the Skincare Brands in third quarter, it sounds like, excluding Abby's Choice, the other three major skincare brands performed pretty strongly. But could you elaborate a little more in terms of maybe provide a range of the performance or some of the different strategy and their progress? And from a management's perspective, the key Skincare Brands performance is kind of a little ahead of the expectation or there is something more to do?

Thank you. First question for the W11 results, for Skincare Brands; right now, our GalÃnic, Eve Lom, and DR.WU achieved robust sales growth in W11 with [indiscernible] for each of the brands. So, some of the hero products of each of the brand are performing quite well. I think GalÃnic has a high triple-digit year-on-year sales growth, and also achieved as the top of the new brands for Tmall W11. And so, for the VC serum, it's also a high triple-digit year-on-year sales growth. And we also launched a new product, the Secret D'Excellence serum, and that becomes the imported essence [indiscernible]. Eve Lom still continued to taking the number one premium cleanser category. And also, for DR.WU, right now the Renew Serum is already pretty strong in the acne control category. And some of the new products of DR.WU are performing really well; especially the triple-action repair serum is ranking at the top four repair serum on Tmall. So, looking forward, I think the -- that some of the hero products of the Skincare Brands will help to contribute the growth of the brands and, in aggregate, improving the percentage of the revenue of our total revenue in the future. For Color Cosmetics, well, I think right now our Color Brands are still facing a pretty big challenge. And also Perfect Diary has been undergoing a turnaround. So, we prioritize profitability and we applied very strict pricing and discount policies across all those Color Brands in order to improve the growth margin and also improve the profitability, as well as protecting the brand image. So, looking forward for Q4, I think we are on the right trend to continue optimizing the gross margin, and also the bottom line.

Well, on your second question, gross margin. Well, gross margin has a lot to do with the category mix, and inventory provision, a lot of things. And we're not in position to make comment on the gross margin in Q4. But what I can tell you is, over the long-term, as the skincare business grows stronger and take a higher percentage in the total product mix, and we believe, in the long-term, our gross margin will be an upward trend.

Got it, thank you. Can I ask one more question related to the expenses and the restructuring. So, understanding that company has been focused on like store closure, organization optimization, et cetera, so can we have an update on the status now, like do we expect that those exercise will be pretty much done in the fourth quarter this year or some of those will continue into the 2023 depending on the macro environment? And is there some number that you can share in terms of the sort of one-off costs like for the full-year this year or year-to-date, including the human resource, like, severance costs or one-off store closure costs, kind of one-off expenses that we likely won't see in 2023?

All right. So, we have been pretty aggressive in closing the number of [indiscernible] store due to mostly the challenges in our macroeconomic situation, especially caused by COVID-19. So, at the beginning of this year, we have more than or close to 300 stores. But according to our current plan, by the end of this year, we're going to have a little over 100 -- about 100 stores, including self-operated stores and the franchise stores. Well, in terms of the expenses that we've incurred in the -- during the process, well, it has been quite substantial. We can provide with a breakdown if you want after this call. But going into next year, I don't think we're going to incur a substantial loss or substantial expenses due to store closure-related provision expenses because now, I think we have reduced the total number of stores to a very manageable level.

Got it. Thanks a lot for answering my questions.

Sure, thank you.

Thank you. And the next question comes from [Quan Yu Lin] [Ph] with CICC.

Hi, and thanks for taking my questions. I've got two questions. The first one regarding Color Cosmetics. It seems that sales of Color Cosmetics keeps decreasing each quarter. However, we still believe in the company's competitive edge in color cosmetics as well as the brand asset of PD. So, at what time or what sales size do management expect the Color Cosmetics will return to growth? So, this is the first question. And my second question is related to guidance for the fourth quarter. So, the total net revenue is expected to decrease by 30% to 40% in the fourth quarter. Could you elaborate more about the trend of color cosmetics and the skincare, like just to put it down by category? Thanks.

Yes, sure. So, for Perfect Diary, actually you can see for the past three quarter the -- or the -- in Color Cosmetics, in total, the year-over-year decline is in a similar scale. So, we're not actually changing, it's more a stable trend by now. And then, in terms of what we're doing for Perfect Diary, right now the key goal is to achieve profitability. So, how we're going to do that, we think there are two major plans that we are undergoing right now. One is in terms of channel optimization, and the second one is on the product category optimization. And on the channel one, we have alluded earlier is that offline, right now because of the challenging macro environment, so we're closing down a number of stores that will contribute to the sales decline, but we think that will likely to stabilize by the end of this year. And then secondly, in terms of channel mix, you can see all the online channels, Color Cosmetics are also dropping for Douyin. So, we're also doing heavily -- investing heavily on Douyin to promote the growth and attract new customers. So, for this quarter, our Douyin has experienced a year-over-year increase of 97%, so that's how we're pretty comfortable and continues to hope to do well on the Douyin part. So, that's about the channel optimization. And on the product category optimization, Perfect Diary used to be very -- have very high market share on the lip and also eye category. But in terms of complexion and facial makeup, that's actually a larger market that we think we need to tap in and also increase our market share. So, as mentioned in our conference call, right, we are introducing a number of complexion products which are endorsed by our SmartLOCK technology, we are seeing quarter-over-quarter increase of market share in the facial makeup. So, that's another driver I think will help Perfect Diary's brand turnaround and likely turn into a more healthy trend next year.

Yes. Well, regarding your second question about our guidance for Q4, we are guiding the market that our total revenue is going to decline by 30% to 40%. And, the decline will come primarily from our color cosmetics business offset by our fast growth of skincare business. So, the general trend of our business especially our category mix in the future will be very fast and healthy growth in our skincare business. And at the meantime, we are working very hard to try to turn around color cosmetics business.

Got it. Thanks a lot. There's no -- I have no other questions.

Thank you.

Thank you. [Operator Instructions] And our next question comes from Olivia Tong with Raymond James.

Great. Thanks. Good morning. I wanted to ask you about your view on the competitive environment local brand versus international brand, how they stack up, particularly with 11.11? And then also your thoughts as you go into next year? And then specifically for you about fiscal '23, the Q4 guide would suggest that on a two-year stack basis on revenue that the sales deceleration starts to -- it's a greater deceleration in sales. So, as you think about the go-forward over the next 12 months, in your view that sort of a steady state pace now, or is there something that changes materially as you go into fiscal '23? Thank you.

Well, I think as the market -- the growth for the total beauty market right now is already almost zero while sometimes even declining. So, the competition will be intense. But that's -- normal in this market. Though looking at the international players, the [indiscernible] and also continues to [indiscernible] for the whole year since W11 last year. So, domestic front I think that the new brands emerging has kept challenge [indiscernible] industry in the past two or three years, especially on fast-growing [indiscernible] platform. So for us, I think we will be more focused on our strategy instead of focus on the external competition. So, right now we have a very clear strategy to grow our skincare brands in the portfolio and also to turnaround our color business. So, profitability would be the priorities. And also, skincare brand will be the priority. So, when we look forward I think we are executing the strategy consistently and also we will continue to move forward. We expect very clear strategy in the future as well.

Yes, and your second question about our next year's outlook, well, first of all, we do not provide guidance for our any time horizon beyond the next quarter. But anyway, well, for 2023 I think the decline in growth rate I don't think it will be as deep as this year for number of reasons. One, we have been working very hard to turnaround our color cosmetics business. And we are seeing some very good positive signs in our effort. And secondly, we have got very strong growth in our skincare business which we believe will continue into -- well into next year. So, if you consider these two trends together, I think overall our -- next year I think our growth rate of our business will start to stabilize, if not had turn positive, from a year-over-year standpoint.

Thank you so much.

Thank you.

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

Thank you for joining us today. If you have any further questions, please feel free to contact us at Yatsen directly or through our TPG Investors. Our contact information for IR in both China and the U.S. can be found in today's press release. Have a good day. Thank you.

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