Ladies and gentlemen, good day, and welcome to the Yatsen's Second Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Vice President, Head of Strategic Investment and Capital Markets. Please go ahead.

Thank you, operator. Please note 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 US 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 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'll now turn the call over to Mr. Jinfeng Huang. Please go ahead, David.

Thank you, Irene, and thank you, everyone, for participating in Yatsen's second quarter 2023 earnings conference call today. The beauty industry experienced a modest post-COVID recovery during the second quarter of 2023. According to the National Bureau of Statistics of China, total retail sales of consumer goods grew by 10.7% year-over-year while declining by 2% quarter-over-quarter. More specifically, beauty retail sales rose by 11.5% year-over-year and 0.8% quarter-over-quarter in the second quarter. The year-over-year growth was particularly -- partially affected by the prior year period, low base, while quarter-over-quarter growth indicated a mild recovery pattern during the quarter. Online beauty sales also rebounded and demonstrated by the beauty sales growth on Tmall and Douyin on both a yearly and quarterly basis, mainly driven by promotion activities during the June 18 shopping festival. Against the industry backdrop, we continued to focus on rebalancing our category mix expanding gross margins and improving net margins through enhanced operational efficiency. Our business transformation remained largely on track, evidenced by our second quarter revenue beating the guidance we provided previously. Net revenues from our Skincare Brands increased by 2.3% year-over-year to RMB325.2 million. Within Skincare, our clinical and premium brands delivered another solid performance. With Galenic, DR. WU and Eve Lom, recording 13.3% year-over-year growth in combined net revenues. With respect to revenue contribution, our Skincare Brands accounted for 37.9% of total net revenues in the second quarter, up from 33.4% in the prior year period. Revenues from Color Cosmetics declined in the second quarter as Perfect Diary continued to undergrow our brand transformation. Furthermore, the number of Perfect Diary offline stores totaled 136 as of the end of the second quarter compared with 228 a year ago as a result of targeted closures of underperforming off-line stores. Our product mix optimization, as well as…

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 referred to year-over-year changes unless otherwise noted. Total net revenues for the second quarter of 2023 decreased by 9.8% to RMB858.6 million from RMB951.8 million for the prior year period. The decrease was primarily attributable to a 16.6% year-over-year decrease in net revenue from Color Cosmetics brands, partially offset by a 2.3% year-over-year increase in net revenues from Skincare Brands. Gross profit for the second quarter of 2023 increased by 7.2% to RMB641.6 million from RMB598.3 million for the prior year period. Gross margin for the second quarter of 2023 increased to 74.7% from 62.9% for the prior year period. The increase was driven by, first, increasing sales of higher gross margin products from skincare brands, second, more disciplined pricing and discount policy, and third, cost optimization across all of our brands' portfolios. Total operating expenses for the second quarter of 2023 decreased by 11.3% to RMB776.7 million from RMB875.3 million for the prior year period. As a percentage of total net revenues, total operating expenses for the second quarter of 2023 were 90.5% as compared with 92.0% for the prior year period. Fulfillment expenses for the second quarter of 2023 were RMB58.3 million as compared with RMB69.7 million for the prior year period. As a percentage of total net revenues, fulfillment expenses for the second quarter of 2023 decreased to 6.8% from 7.3% for the prior year period. The decrease was primarily attributable to a decrease in warehouse and logistics costs due to the outsourcing of most of our warehousing and handling operations. Selling and marketing expenses for the second quarter of 2023 were RMB542.8 million as compared with RMB625.7…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Qianye Lin with CICC. Please go ahead.

Thanks for taking my questions. This is Qianye from CICC. And I've got two questions. The first question is regarding profitability. So are we still on check the full year profit. Looking ahead, what are the key drivers that will boost our profitability in the second half of the year. And this is for the first question. And about the second question is regarding growth of Color Cosmetics. We've seen the launch of Perfect Diary, new foundation product. And how has the sales performance been so far? Could you provide insight into the upcoming strategies for Color Cosmetics in the second half of the year? And is there any chance that Color Cosmetics return to growth in the second half of the year? That's my question. Thank you.

Well, thank you very much for your questions. All right. For your first question on profitability, I think we're still on the right track, to improve -- continually improve our profitability over time. If you compare this quarter with the same quarter last year, the improvement on profitability that has been very significant. And your second question, PD found... Well, we've just launched the foundation product for Perfect Diary. It is still too early for us to tell how the new product will perform, but for the second half of the year, especially towards the end of Q3 and beginning of Q4, we're going to launch a major brand upgrade campaign and new product launch for Perfect Diary. We are making preparations for that major campaign, but it's still too early to tell how the campaign will turn out. And there, of course, there will be some uncertainty around the success of that campaign, but we are very confident that -- we can -- we will try our best and hopefully, we can make it a huge success.

Got it. Thank you very much. I have no more questions.

Yeah. Thank you.

[Operator Instructions] The next question comes from Vivi Huang with Morgan Stanley. Please go ahead.

Thank you for taking my question. This is Vivi from Morgan Stanley. So I have two questions. Firstly is on the industry part. So could management give us some color on what is the industry competition like as we enter into the third quarter? Like how is it like in terms of the competition, especially on online and live streaming channels. And I know that this might be a little bit far, but how should we expect on like Double 11 Festival this year? Do you see like if there is any possibility that promotional level will likely to intensify on a year-on-year basis or maybe just compared to 618 Festival this year. Secondly, I would like to ask on our off-line store strategy. Do we expect further store disclosure when we enter into the second half? This is the question that I have. Thank you.

Yeah. Thanks, Vivi, for the question. So on the first question, in terms of the industry outlook and the competition landscape, so what we see is we saw a modest recovery pattern during the second quarter, even though the year-over-year growth rate was good, but it was a low base last year given the lockdown of Shanghai and other cities in Q2 last year. If you look at the quarter-over-quarter growth pattern is actually largely flat, so which implies a recovery by the relatively mild recovery. And we think the beauty market, different segments are all growing, even like within current economic condition, the premium segment is still growing, but at a slightly lower rate. So we do expect that the China beauty market still have headroom to grow given the per capital beauty segment is still relatively low compared to other mature markets. And then looking at competition, over time, we have seen that competition has been intensifying and they're actually divergent performance among different categories and different brands. And one of the very obvious trend is brands with strong product efficacy and brand equities are actually outperforming compared to others. And also consumer behavior has shifted a little bit from previous impulsive buying habits towards more rational behavior, which also kind of demonstrates that [product] (ph) with very strong efficacy and functional value actually probably [trend] (ph) more consumer attention and buy it. So those are some of the key trends that we have seen in the industry.

Yeah. And your second question, in the past two years, we've closed around 150 stores of our off-line stores and most of which we're obviously underperforming and loss-making stores. And going forward, I think we will continue to optimize some of it's worse, but I don't think that we're going to close a substantial number of stores down the road, but optimization will always be our strategy. Thank you.

Got it. That is very helpful. Thank you so much.

Thank you.

[Operator Instructions] 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 at Piacente Investor Relations. Our contact information for IR in both China and the US can be found in today's press release. Thank you, and have a great day.

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