Cracker Barrel Old Country Store, Inc.

Hello, everyone, and thank you for joining 111's conference call today. On the call today from the company are Dr. Gung Yoo, co-founder and executive chairman, Mr. Junling Liu, co-founder, chairman, and CEO, Mr. Luke Chen, CFO of 111's Mater subsidiary, and Mr. Harvey Wang, COO. As a reminder, today's conference call is being broadcast live via webcast. The company's earnings press release was distributed earlier today and together with the earnings presentation are available on the company's IR website. Before the conference call gets started, let me remind you that this call may contain forward-looking statements made under the safe harbour provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which can cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year-over-year comparisons unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year-over-year basis. With that, I will turn the call over to 111 CEO, Mr. Junling Liu. Please go ahead.

Good morning and good evening, everyone. Thank you for joining our third quarter 2024 earnings call. The information we'll be discussing is also available in the slides posted earlier today on the company's website. I encourage everyone to download the presentation as well as the earnings report from our investor relations website at ir.111.com.cn. China's challenging macroeconomic environment continues to have an impact on our entire industry, including both the upstream and downstream sectors. While challenges are inevitable, we still achieved a stellar performance, maintaining operational profitability for three consecutive quarters. This achievement is primarily driven by our ongoing enhancements in operational efficiency, which have helped us navigate the unfavorable environment In today's call, I will provide an in-depth overview of the current market situation facing our industry, as well as the long-term outlook and the opportunities ahead, along with our key financial highlights. I will also discuss how we are leveraging new technologies to strengthen operations, our supply-side initiatives, and our recent analytics. Finally, I will outline our future growth strategy before handing over to our CFO, Mr. Luke Chen, who will provide a detailed analysis of our financial performance. First, on the macroeconomic side, in light of weak consumer sentiment, sales growth in retail goods has slowed in China. Our industry is also experiencing cautious household spending on healthcare. According to data from the National Bureau of Statistics, per capita healthcare expenditures growth rate declined 11.5% points from a year earlier for the first nine months. Additionally, our downstream pharmacies are facing ongoing healthcare reforms, including adjustments to individual medical accounts and the gradual implementation of coordinated outpatient benefits alongside increased regulatory oversight. While these reforms are designed to drive long-term development of the industry, the short-term outlook remains challenging. An aggressive expansion of pharmacies was fueled by optimism during the pandemic. While the total number of stores has increased, market growth has not kept pace, as evidenced by a 2.2% decrease in China's retail pharmacy sales from the first nine months of 2024, according to Zhongkang Huixi system data. This disparity has led to reduced per store revenues and intensified the competition among pharmacies. Many large chain pharmacies are now grappling with significant declines in net profit, while independent pharmacies with their limited resources are under even greater pressure. Yixing Tang, or YXT Health, reported a 94% yearly decline in Q3 net income attributable to ordinary shareholders, followed by a 68% decrease at Jianjujia, or JZJ China drugstore, 37% at Laobaixin, or LBX Pharmacy chain, and 22% at Daxianlin, or Daxianlin Pharmaceutical Group. Against this backdrop, it is more critical than ever for digital transformation in this industry, which presents vast opportunities for us. Pharmacists must navigate the subdued consumer sentiment, slower growth in household healthcare spending, and the shifts in patient behavior, while addressing cost pressures alongside operational efficiencies. Looking ahead, there needs to be more innovation in service delivery and strategic adjustments to categories to sustain growth and adapt to a transforming market. For this, digitization and AR applications could serve as solutions for retail development. As a leader in this digital revolution, we have already implemented cutting-edge digital technologies to enhance every aspect of our operations, from sales and procurement to customer demand analysis, inventory management, and warehouse allocation, and so on. We are committed to empowering our upstream and downstream partners with our fully digitized operating system, further reducing their ongoing costs and increasing efficiency. In addition to the unstoppable trend of digital transformation, we remain optimistic about China's healthcare market in the long term for two key reasons. First, the deepened national anti-corruption campaign in the healthcare sector, which will foster greater transparency and integrity in hospital procurement, is expected to accelerate the shift of drug sales and prescriptions to retail pharmacies. This will become a trillion RMB out-of-hospital pharmaceutical distribution market, which will amount for almost half of the entire distribution market within about three years. Our customer focus is on chain pharmacies, and with our expertise in the out-of-hospital pharmaceutical market, we are well positioned to capture the significant growth opportunities this shift brings. By offering a comprehensive and the cost-efficient product range, coupled with an unwavering commitment to customer experience, we aim to increase market share in this sector where challenges and opportunities coexist. Second, we expect China's large aging population and the rise of the silver economy to drive significant demand for healthcare consumption. Given the healthcare expenditure as a proportion of GDP in China, it is still lower than in developed countries. The overall output trend in the pharmaceutical and healthcare market remains strong in the long run. In Q3, our commitment to operational efficiency continued to drive significant results. We achieved profit from operations for the third consecutive quarter. Income from operations in Q3 was 2.4 million RMB compared to an operating loss of 80.4 million RMB in the same quarter last year. Non-GAAP income from operations was 7.1 million RMB compared to a non-GAAP loss of 54 million RMB in Q3 of the prior year. These performance improvements underscore the effectiveness of our growth strategies and the resilience of our business model. We observed consistent positive changes across nearly all business segments. Total operating expenses in Q3 were 5.8% of net revenues, a 160 basis points decrease from the prior year. Fulfillment expenses remain steady at 2.8% of net revenues in line with the previous year. However, we successfully reduced the general and administrative expenses to 0.4% of net revenues from 1.3% a year ago. Selling expenses decreased to 2.1% of net revenues compared to 2.6% in the prior year. Technology expenses were 0.5% of net revenues, down from 0.7% a year earlier. Excluding share based compensation, operating expenses as a percentage of net revenues dropped 100 basis points to 5.7%. Additionally, we remained positive operating cash flow of 110 RMB million for the third consecutive quarter. Our investment in infrastructure and optimal staffing allocation have proven to be effective in navigating the current economic challenges while maintaining robust performance. We have maintained our focus on areas that foster long-term, sustainable growth, ensuring that our digital capabilities remain at the forefront of industry standards. This quarter, our advanced digital infrastructure consistently delivered exceptional value to our customers, with further reductions in technology and staffing expenses. These operational efficiencies have not only allowed us to withstand a competitive market, but have also supported our ability to adapt and thrive. amidst economic uncertainties, as well as prepare us for long-term opportunities. While our revenue remains comparatively smaller than some more established players, we continue to boast operational efficiency metrics, positioning us competitively. We remain dedicated to setting the industry benchmark for efficiency with a clear goal of reducing operating costs even further and improving profitability with more refined and bigger operations. This steadfast commitment is a cornerstone of our strategy and represents a vital part of our unique competitive advantage of Moat. Those savings from our ongoing efficiencies will add flexibility and strength to our business while reinforcing our position as a leading healthcare e-commerce operator. They could be reinvested into strategic areas such as technological innovation, market expansion, and enhanced customer engagement when appropriate. Technologically, we continue to invest in system development, models, algorithms, and data applications to build our core competitiveness in digitization. Consequently, we have made notable advancements by applying digital and AI technologies that have strategically positioned us for continued success. With our digitized JVP platform and inventory sharing technology, We seamlessly integrated with upstream suppliers to form a unified and a comprehensive stock pool that has significantly boosted stock volume and availability. This advancement has enriched the product selection of additional 23,000 new SKUs. As a result, our supply capacity has been strengthened, ensuring that we can meet customer demands more effectively and efficiently. We also utilized the supply chain optimization and the smart pricing tools for the B2C online retail segment to enrich product offerings and adapt to market demands. This resulted in a 100% increase in product categories and a record high customer conversion rate of over 13%. This progress highlights the significant impact of data-driven decision-making and platform innovation in sustaining growth within the challenging retail environment. Moreover, we made outstanding progress in applying AI-driven solutions, particularly in the Chinese herbal medicine sector. By training and refining algorithm models for specification recognition, We increased the recognition accuracy of our AI model from 77% to an impressive 98.18% through multiple iterations. The accuracy rate of content matching for herbal medicine has similarly improved, rising from 43% to 96%. Our competitive edge gets sharpened by optimizing inventory management and enhancing product offerings. Our focus on continuous technological innovation is strategically important as it supports our mission to build a resilient, efficient, and customer-oriented business for adapting to evolving industry needs. By integrating advanced digital technologies and AI solutions, we are laying the groundwork for future growth and making ourselves better navigate future market challenges. Next, let's delve into our supply chain management. We are setting an industry benchmark in supply chain excellence, consistently innovating in procurement, warehousing, and order fulfillment to elevate efficiency. Our expansion of the compound network is pivotal, aimed at providing streamlined logistics services that enhance both internal and external operations at a lower cost. During Q3, this cross fulfillment center transshipment model enabled an extended proprietary network that connects our five major super hubs across East, Central, South, North, and the Southwest China. This development is setting the stage for a comprehensive Kunpeng national network. enriched with first-mile and last-mile services to ensure seamless end-to-end supply chain control. I want to highlight that under the Kunpeng Pharmaceutical Logistics Network, we added eight new transportation routes in Q3, bringing the total to 28. The network also increased its external customer base by 12, reaching 16.7% rise from Q2. This project achieved the cost savings of more than 5.3 RMB to date. As the component network scales and integrates last mile services, we have witnessed a decrease in logistics and delivery expenses. And combined with optimized warehouse labor, packaging, and warehousing, these efforts have driven an 8% year-over-year reduction in fulfillment costs to 277 million RMB in the first three quarters. Moreover, to drive future growth and coordinate with our strategy for the nationwide network, we also strengthened our supply chain infrastructure. We completed the Guangzhou Fulfillment Center relocation project in Q3, which is projected to yield monthly cost savings of 800,000 RMB. We're also expanding our fulfillment centers nationwide, with four new facilities in Wuhan, Guangzhou, Yunnan, and Shijiazhuang, amplifying our existing supply capabilities. These centers notably cut delivery times for local customers by up to two days, reinforcing our ability to cover over 300 major cities within 24 hours and nationwide within 72 hours. With each new center, we reduce local fulfillment costs by as much as 20%, providing clear strategic advantages. The expansion is also marked and an upgrade in our product assortment with the Guangdong Center adding 5,000 new SKUs. Now, our network encompasses 15 fulfillment centers. Five of these centers act as central hubs, supporting deeper penetration into Tier 3 to 6 needs, where over 60% of our pharmacy customers' base resides. To further enhance reach and service, we have adopted a collaborative approach for faster fulfillment center expansion. By transforming existing warehouses into full-fledged fulfillment centers with 100% use of our digitized systems and other processes, we cut setup time by 70%. Our newly adopted franchise model, which provides one-on-one with a share of gross merchandise value, presents a highly effective margin-friendly solution for reaching remote regions. 111 plans to expand its fulfillment centers footprint by adding at least five more centers over the next year. Furthermore, as we review this quarter's achievements, I would like to highlight some significant honors that underscore our operational strength and the strong business influence in the regional markets, along with our continued technological advancements. In September, our Southwest Operations Center, Chongqing Yihao Pharmaceutical Co., Ltd., was named among the top 100 service industry enterprises in Chongqing for the second consecutive year. In October, our central China operation center, Hubei Yihao Pharmaceutical Co., Ltd., was included in the top 100 private enterprises in Wuhan list for the second consecutive year. In October, our South China Operations Center, Guangdong Yihao Pharmaceutical Co., Ltd., earns a place on the 2024 Top 100 Private Enterprises in Guangdong and was also named among the Top 50 Private Service Enterprises in Guangdong for 2024. We greatly appreciate recognition from local markets and the industry and I believe these acknowledgments will enhance our credibility as we continue to expand our footprint and drive innovation in the healthcare e-commerce space. Last but not least, I'd like to outline our strategies for revenue, margin, and profit levels. At 111, our business approach emphasizes providing customers with the most comprehensive selection of pharmaceutical products at attractive prices for greater customer engagement. Through leveraging data analytics and market research, we can efficiently refine our product portfolio to align with customer preferences while maintaining competitive pricing by utilizing intelligent digital tools. We're also committed to enhancing our cooperation with pharmaceutical companies. By expanding these collaborations, we aim to diversify our range of medicines on our digitally-empowered platform, increasing sales that generate mutual growth, especially across lower-tier cities. Our robust digital marketing network is integral to this strategy, enabling pharmaceutical companies to curate and showcase their product offerings more effectively. We will also utilize targeted marketing initiatives to raise brand awareness and expand to previously underserved markets. Through our platform, pharmaceutical companies can access valuable insights, strengthen their product selection, and efficiently scale their operations. For us, as we provide optimized product portfolio and sell more products, we will see an improvement in our overall profitability. Moreover, we're prioritizing investments into our JPP platform. This unique model has proven highly effective in engaging new partners and offering the broader range of products, showcasing its powerful value proposition. By refining the platform to satisfy partner needs and extending its reach, we expect to cultivate a more diverse partner base and unlock expanded sales opportunities as we continue to enhance and the scale of the platform, we believe this model will solidify our competitive position and evolve into a catalyst for stronger growth and profitability. We remain focused on enhancing operational efficiency supported by ongoing investments in leading technologies that streamline processes, reduce waste, and boost productivity. Our emphasis on AI and full-scale digitization is critical to maintaining industry-leading efficiency, improving customer engagement, and fostering the development of new products and services. These efforts are designed to reinforce our market leadership and stimulate fresh growth avenues. Digital transformation is pivotal to our future. With 100% of our internal systems now digitized, we have enhanced financial outcomes while positioning ourselves as a transformative leader, empowering the industry. Our full spectrum technological ecosystem supports internal processes and extends its benefits to upstream and downstream customers, offering them access to the state-of-the-art digital solutions and a specialized expertise. Looking ahead, we will amplify our commitment to digital innovation by integrating emerging technologies into our operations to create more seamless, more efficient customer experience. With that, I'll hand it over to Mr. Luke Cheng to walk through our financial results. Thank you.

Thank you, Trini, and good morning or evening, everyone. Moving to our financial performance, My prepared remarks will focus on a few key business and financial highlights. For details on our third quarter 2024 results, please refer to 17 to 20 in Section 2 of our presentation. Again, all comparisons are year-over-year, and all numbers are in IMB unless otherwise stated. Let's start with the third quarter results. Total net revenues were IMB $3.6 billion, remaining relatively flat compared to the same quarter of last year. Wealth and profit for the quarter grew 10.5% to $210.6 million. Total operating expenses for the quarter decreased 23.2% to $208.2 million. As a percentage of net revenues, total operating expenses for the quarter were down to 3.8% from 7.4% as we continue to enhancing our operating leverage and optimize our operational efficiency. Specifically, fulfillment expenses remain steady at 2.8% of net revenues in line with the previous year. Sales and marketing expenses as a percentage of net revenue for the quarter were 2.1%, down from 2.6% in the same quarter of last year. General and administrative expenses accounted for 0.4% of net revenues, down from 1.3% in the same quarter of last year. Technology expenses amounted to 0.5% of net revenue, down from 0.7% in the same quarter of last year. As a result, income from operations were IMB 2.4 million compared to a loss from operations of RMB 18.4 million in the same quarter of last year. Non-GAAP income from operations was RMB 7.1 million compared to non-GAAP loss from operations of RMB 54 million in the same quarter of last year. NGAP net loss attributable to ordinary shareholders was $12.4 million compared to $6.9 million in the same quarter of last year. As a percentage of net revenues, NGAP net loss attributed to ordinary shareholders accounted for 0.3% in the quarter, down from 1.8% in the same quarter of last year. As you can see, we are improving our financial performance quarter by quarter and maintained operating profit for the third consecutive quarter. Please refer to slide 21 to 25 of the appendix section for selected financial statements. A quick note on our cash position as of September 30, 2024, we had cash and cash equivalents, restricted cash, and a short-term investment of RMB $614.4 million. and we are pleased to report positive operating cash flow for the three consecutive quarters. To date, the company has total outstanding amount of RMB 1.1 billion, which has been included in the balance of redeemable non-controlling interest and accrued expenses and other current liabilities earned to a group of investors of one pharmacy technology pursuant to their equity investment made in 2020 as previously disclosed. 111 received redemption requests from certain of such investors in accordance with the terms of their initial investment in one pharmacy technology. Following communication and negotiation, the company has reached agreements and all commitment letters with investors representing approximately 90 percent of total amount to reschedule the repayments, allowing for phase repayments as extended periods if the holders exercise the redemption right. The company has paid a portion of the repurchase funds upon signing the agreements Additionally, the company is in ongoing discussions with investors who is holding the remaining approximately 10% of the total amount. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.