111, Inc.

Good day and thank you for standing by. Welcome to the 1118 Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press dial zero. And now I'd like to hand the conference over to Ms. Monica Mu, IR Director of 111, Inc. Thank you. Please go ahead.

Thank you, Operator. Hello, everyone, and thank you for joining us today. On the call today from 111 are Dr. Gong Yu, Co-Founder and Executive Chairman, Mr. Junling Liu, co-founder, chairman, and CEO, Mr. Luke Chen, CFO of our major subsidiary, Mr. Harvey Warren, COO, and Monica Mu, Investor Relations Director. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The company's earnings press release was distributed earlier today and together with our earnings presentation are available on the company's IR website at ir.111.com.cm. Before we get started, let me remind you that this call may contain forward-looking statements made under the safe harbor 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 would cause actual results to differ materially. For more information about this risk, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statement 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 comparison, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis. With that, I will turn the call over to our CEO, Mr. Jingling Liu.

Well, good morning and good evening, everyone. Thank you for joining our fourth quarter and the fiscal year 2021 earnings call. The information that we'll be discussing here are also provided in the slides that have been posted earlier today on the company's website. And I would encourage you to download the presentation along with the earnings report at ir.111.com.cn. I'm pleased to report that 111 had a great fourth quarter and a great year in 2021. We achieved our targets and saw improvements across all operating metrics. 111 has achieved a critical scale of about $2 billion in revenue with a significant margin improvement. Growth segment profit grew 3x as fast as revenue growth in Q4. and the company's total revenue grew 13-fold in the last four years. We now have a clear line of sight to profitability in the near term. We have built an infrastructure that will enable us to service pharmaceutical companies, doctors, pharmacies, and patients. We have created the largest virtual pharmacy network with 385,000 stores and growing. We have formed partnerships with over 500 globally renowned and domestic pharmaceutical companies. Our technology platform is state-of-the-art and is already playing the role of transforming China's healthcare industry. We feel very proud of the ecosystem we have built to date as it will enable us to scale our business to the next level. China's healthcare industry is massive. and is more than 7% of GDP and growing. 111 has developed a business model in the S2B2C space with unique advantages, unrivaled national sales network and coverage, fast-growing partnerships with drug manufacturers, world-class supply chain, and an ecosystem powered by its state-of-the-art digital platform to capitalize on this massive market. Please allow me to talk briefly about the state of the business at a high level. I will then cover our recent operational performance, followed by some details on how we will continue to deliver margin growth and the future strategies. Then our CFO, Luke Chen, will take over to walk you through our financial results. Just as the concept of new retail is transforming the retail industry through integration of online and offline experiences for consumers. 111 is leading the charge to revolutionize the healthcare services industry in China by leveraging digital technology and the power of the internet to connect patients with medicines and healthcare services. We continue to build upon our integrated online and offline platform to improve efficiency, optimize business processes, improve and expand access to medicine and healthcare services nationwide, and provide a better experience for patients and healthcare providers. Digital technology has fundamentally transformed the retail industry in China, and business and regulatory leaders saw the potential of leveraging the technology to reshape other industries as well. Hence, in 2019, the Chinese government formally included industrial internet as one of its national strategies and launched numerous incentives to encourage digitization and integration of online and offline services. As recently as two weeks ago, during China's NPC and CPCC's two sessions, the government reiterated its commitment to industrial internet and expressed the desire to speed up its development to usher in a new digital economy. Digitizing the healthcare industry has been our goal since the very beginning of 111. Today, we are, without a doubt, one of the leading industrial internet players in the healthcare sector. While China's economy continues to grow, Many sectors nevertheless face the problem of overcapacity today and the pharmaceutical industry is no exception. We see this as a tremendous opportunity to leverage digital technology and reconstruct the value chain in the healthcare industry. Industries that are typically well suited to reap the benefit of industrial internet have the following characteristics. First, the industry is sufficiently large to benefit from digitization and integration. China's pharmaceutical market is a 3 trillion plus RMB industry, with pharmaceutical product sales topping 2.4 trillion RMB in 2019 and is projected to reach 4.2 trillion RMB by 2026. Second, the industry is fragmented. with multiple upstream and downstream players. This rings true for the pharmaceutical industry with over 7,600 pharmaceutical producers and 13,000 pharmaceutical wholesale enterprises in the upstream and 555,000 pharmacies in the downstream. And third, the industry still generally operates on the traditional models and the legacy systems and the processes that are inefficient and the cubism. Again, this is very much true for the pharmaceutical industry where traditional transaction models are largely inefficient. Medicine and products have to go through multiple intermediaries from pharmaceutical companies to primary suppliers and to a multi-tiered distribution system before reaching the pharmacies and then finally to patients. Further, a lack of clarity and the general opaqueness in the industry have added to the inefficiencies. And finally, the challenges facing the industry can be solved through tools such as digitization, integration of multiple platforms, and the payment system upgrades. It is clear that the pharmaceutical industry is in need of modernization, and we have the tools to help reshape the industry. Many parts of the value chain here can be reconstructed through digital technology, and the 111 uniquely delivers a holistic healthcare platform that integrates medicine with healthcare services to the benefit of all parties within the broader healthcare ecosystem, from pharmaceutical companies to doctors to healthcare providers, and of course, the patients. Our digital platform offers cohesive online and offline solutions with improved efficiency compared to traditional players. Today, we directly source from more than 500 global and domestic pharmaceutical companies, and our digital solutions serve more than 385 pharmacies across the country. Between our online pharmacy and the network of pharmacies, we're able to deliver healthcare products and services to tens of millions of patients nationwide. In China's latest 14th five-year development plan for digital economy, we can see that the digital economy has been elevated to a vastly important position. China's digital economy will enter a period of fast expansion by 2025. The digital economy driven industrial transformation is now setting off a huge wave. One of our key focuses in the past few years is to develop tools that help open online channels for traditional brick and mortar businesses while enabling them to operate more efficiently and better serve their customers. Our smart supply chain platform has enabled patients living in rural areas to receive medicine and healthcare services in the comfort of their homes. And by expanding our reach and service offerings, we strive to be a key player in building a new value chain in one of China's biggest industries. Moving on to our Q4 financial performance, we're pleased to report another solid quarter with net revenue of 3.46 billion RMB, an increase of 31% year-over-year. marking the 14th consecutive quarter of year-over-year growth since our IPO. Growth segment profit grew 98% year-over-year, among which B2B segment profit increased 133% year-over-year. In our previous quarter's earnings call, I mentioned that we will be laser-focused on growing our margin dollars, and we delivered on that, with margins growing 3x as fast as revenue growth. Non-GAAP loss from operations as a percentage of net revenues decreased from 4.2% in the fourth quarter of 2020 to 2.2% in this quarter. This brings us another step closer to profitability. We're also pleased to report that our full year revenue for 2021 exceeded the 10 billion RMB milestone for the first time. reaching 12.4 billion RMB with a year-over-year increase of 51%. The market continues to show strong demand for our diverse portfolio of service solutions. Our service revenue for 2021 increased 103% year-over-year, among which B2B service revenue grew 195% year-over-year. Our gross segment profit for 2021 reached 620 million, an increase of 70% year-over-year. It is worth noting that our B2B segment profit increased 126% year-over-year. As a leading digital player in the healthcare industry, we remain committed to investing in our technology. Expenses in R&D totaled R189.3 million, representing an increase of 106% year-over-year. This enabled the company to build the next generation digital platform, and we are very pleased to be awarded 19 patents in 2021. Our B2B business remains the key glider of revenue growth. For fiscal year 2021, B2B revenue reached 11.9 billion RMB, representing a year-over-year increase of 59%. and the gross segment margins have also steadily improved from 3.6% in Q1 to 3.8% in Q2 and 4.4% in Q3 and 5.2% in Q4. We live in an extremely volatile world with enormous uncertainties. The company's primary strategic focus is to grow gross margin and achieve profitability as soon as possible. I'd like to take a few minutes to elaborate on concrete measures in this regard. One, increase product gross margin and grow service revenue. Direct sourcing from pharmaceutical companies has been highly effective in lowering the cost of products that we sell. Thus, we will continue to deepen our relationship with our existing 500 plus partners, as well as securing new partnerships. This provides us with a wider drug selection, lower cost, and support to our pharmacy partners to improve their knowledge of products so they can better serve their customers. Our digital platform creates tremendous value by matching downstream demand with upstream supply. Downstream pharmacy customers get a very clear view of all our product offerings, and they can choose the products that best meet their consumers' needs. For pharmaceutical companies, we're able to provide information such as the profile of customers for a certain product, including the location, quantity, and pricing, which is invaluable to our upstream partners since it allows them to make informed decisions on customer habits rather than trial and error. Another lever we can pull to improve our margins is through optimization of our product assortment and structure. When we first started, new players like us had to significantly invest in pricing to acquire customers, which contributed to our thin margins during the initial years. Now that we're serving a majority of the market, we're in a position to balance our portfolio of products with high velocity SKUs, which may have a low margin profile, but drive traffic to our site, where those products are often purchased along with other products with higher margin profiles. We currently have over 5,000 SKUs with very healthy margin profiles, and we are working diligently to ensure that these items get on the shelves of the pharmacies that we serve. With a vast network of pharmacies, we're very confident that we will be able to help many smaller pharmaceutical companies in commercializing their products. Not only do we make more profits, but also help the pharmacies to improve their gross margin. Service revenue is also an area that we expect to see continued growth and provide margin-appreciative revenue for the company. In 2021, we have seen growing demand for a number of our service offerings, including growing popularity for one of our digital marketing services. Our service module provides a closed-loop solution for pharmaceutical companies by integrating doctors, pharmacists, medical assistants, patients, and medical representatives onto our internet hospital. The service module also provides online remote consultation, e-prescription, patient education, patient support, and online refill. This enables us to provide customized omni-channel digital marketing solutions for pharmaceutical companies both through our One Pharmacy platform as well as through our key strategic partners. At present, Over 2,000 SKUs utilize our digital marketing solutions, and these products are promoted to numerous pharmacies and their customers through our digital marketing platform. There has been increasing demand amongst our large customer base for supply chain financing solutions, which is another service that we offer and has provided us with a consistent revenue stream. We offer short-term credit lines at attractive interest rates to a selected number of our pharmacy customers and the suppliers who keep inventory in our warehouse. This service helps our customers better manage their cash flow while also improving our overall gross margin dollars, which is already in the tens of millions for 2021. There are also a number of other service solutions that have seen an uptick in interest. amongst our pharmacy partners, including our cloud prescription service, One Drug Expression O2O service, and our One Health digital franchise service. We will continue to innovate and create more service offerings that add value to our partners, and we expect our service revenue to continue to grow to a size which will positively impact our P&L. Two. improve operational efficiency to increase the technology investment. We are firm believers of using technology to drive efficiency. In 2021, our technology R&D expenses reached 189 million R&D, up by 106% year-over-year. 19 patents were awarded in digital medicine, big data, and intelligent supply chain management In addition to the 19 patents, we also independently developed more than 30 proprietary systems, which empowers ecosystem partners in areas such as intelligent supply chain, fast platform building, intelligent sourcing, doctor-patient management, digital marketing, and a price intelligence system. We have won multiple awards, including the National HITECH Enterprise Award from the Ministry of Science and Technology and the top 10 leaders in new pharmaceutical retail in China from Meenat. Powerful supply chain system and platforms are the cornerstone of our business growth. We have expanded the floor space of eight fulfillment centers across China to 228,000 square meters, up by 148% year-over-year. We use algorithms and big data analysts to establish a fast turnover area at each fulfillment center, resulting in much better utilization of warehouse space. We maintain an industry-leading inventory turnover at 28 days and believe that we still have space for further improvements. Our proprietary price intelligence system, or PIS, enables us to optimize our pricing dynamically in real time. It allows us to apply our company's pricing strategy to drive optimization algorithms to set the prices for massive number of SKUs. Based on historical and real-time data, these algorithms analyze SKU level demand and the supply correlation, seasonality, competition, promotion events, price elasticity, and the regional dependency. So the cash tick models are used for optimization. Our Hawkeye is a digital sales team management tool. It kicks start a day for a sales manager by allocating customized tasks, such as sending out refill reminders to customers management to see relevant data in real time so that corrective actions can be taken quickly if necessary. Hawkeye has been captured the interest of some of our upstream partners who have also started using it as part of their relationship management tool. We have expended significant capital in R&D and improving our technology. And while these expenses have caused our expenses to increase, we believe that these investments are necessary and separates us from the traditional players in our industry. in the long term by investing in technology early and using the tools we have developed to help our business run more efficiently, we'll be able to reach profitability faster and continue to grow. In fact, the investment in technology is already yielding results as reflected in the improvement in margins and a continuous narrowing of the operational expenses. Three, innovation. explore new business models. In the B2B segment, we launched the One Health initiative to more than 10,000 pharmacies through a digital franchise model, becoming the first in the industry with an S2B2C model. All participating pharmacies can better manage their selection, procurement, inventory, and drug distribution through our digital SaaS services, including smart sourcing, O2O, and CRM, This initiative has helped the 10,000 member stores to provide CRM services for more than 9 million consumers. The B2C segment generated a revenue of 522 million RMB and a gross profit of 109 million RMB. We're one of the few medical tech companies in China that have established an internet hospital license. To serve our CM patients, In a more professional and timely manner, we use our own proprietary system to connect with over 20,000 professional doctors so they can offer online services to patients. Leveraging the OneClinics digital technology and chronic disease and cancer patient management capabilities, we have established collaboration with a number of well-known pharmaceutical companies such as Eli Lilly, Sanofi, Bayer, and InnoVent Biologics, and substantially improved the accessibility of drugs such as Pulse, Zinil, Dupixent, Xarelto, Adelemumab. It is worth mentioning that patients in remote areas of the country can get their refill done simply through our online platform and receive their medication at their doorstep instead of traveling to big cities. to get refills in the past. We firmly believe in the value we could bring to the ecosystem by connecting patients with doctors digitally as we are able to offer a whole suite of out-of-hospital management services which consists of online consultation, e-prescription, patient management, and drug distribution. One can appreciate how patients with chronic conditions can benefit from our platform especially those who live in rural areas of China. Now let me spend a moment to talk about ESG. Social responsibility is always part of 111's core value system. So far, we have provided free online consultation services for more than half a million users during COVID-19 pandemic. In addition, we partnered with hospitals in underserved areas across the country to help people with limited access to healthcare services. We also continue to donate PPEs to areas that are experiencing COVID-19 outbreaks. In addition, we have proactively advocated the environmental philosophy of green lifestyles. We have realized the paperless operations in goods arrival, stocking, picking, stock checking, and other processes in the fulfillment centers. At the same time, we have substantially reduced the use of non-degradable consumables in the transportation and packaging process. In the future, we will continue to endeavor to fulfill our social responsibilities as we have always done in the past, actively participating in the campaign of the building of healthy China. Looking back at the previous earnings calls, our strategy has been very consistent. It's a three-step strategy. First, build the infrastructure and ecosystem. Second, build the scale. And third, grow margin and profit. We believe this is the right strategic steps to take. Although we began the business with thin margins during the first few years, we used our resources to aggressively acquire customers and build a solid customer base. Once we have achieved a broad customer base, we were able to deliver triple digit revenue growth for a few years while building scale. Now we have entered stage three and we're well on our path to reach profitability in the foreseeable future. We're getting more and more excited by the prospect of our business. Achieving profitability is not our end goal. It's only the beginning. Our record so far proves our ability to execute our strategies, and there are many new initiatives internally, and we look forward to keeping you updated on how we unlock the true value of this business. Looking into the future, we believe the government will continue to support the healthcare industry the national strategy of strengthening the digital China infrastructure and the policies of the 14th five-year plan and the goals for 2035 provided us with excellent regulatory tailwinds. And we're excited that we can play an important role of speeding up the digital transformation of the healthcare industry. In 2022, we will double down our efforts in executing our strategy of improving gross margin and operational efficiency. By consolidating our strength in supply chain and technology, we will help our upstream and downstream partners press ahead with digital transformation, hence benefiting consumers. Our goal is ultimately achieve profitability as soon as possible and create value for our shareholders and society at large. We wish to thank all the investors who have supported us all along. Then I will hand the call to our CFO, Mr. Luke Chen, to walk through our financial results. Thanks.