111, Inc.

Hello everyone and thank you for joining 111's conference call today. On the call today from the company are Dr. Gang Yoo, co-founder and executive chairman, Mr. Jung Liu, co-founder, chairman and CEO, Mr. Luke Chen, CFO of 111's major 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 would 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 expected 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 on the comparative financial performance on a year-over-year basis. With that, I'll now turn the call over to 111 CEO, Mr. Jianling Yu. Please go ahead.

Thank you for joining our first quarter 2023 earnings call. The information that we'll be discussing here is also provided in the slides earlier today on the company's website. I encourage you to download the presentation along with the earnings report at ir.111.com.cn. I'll begin by providing an overview of the macro environment, followed by a review of our recent operational performance. Additionally, I will comment on our continued commitment to industrial digitization, driving revenue and margin growth, fortifying upstream supply capabilities, enhancing operational efficiency, and outlining our future strategies. Subsequently, our CFO, Mr. Luke Chen, will present a detailed analysis of our financial results, ensuring a thorough understanding of our organization's financial standing. As many of you are aware, in the first quarter of 2023, China's economy achieved a solid start. It was reported that the GDP reached 28.5 trillion yuan, growing by 4.5% compared to the same period last year. The economic recovery remained positive as the effect of various policies gradually became evident. Both online and offline economic activities resumed. The medicine market in both B2B and B2B segments also experienced aligned growth with China's economy in Q1 of 2023. Meanwhile, through the COVID-19 pandemic, China has undergone a transformative phase in its healthcare industry, embracing digitization and achieving remarkable progress. The adoption of electronic medical records has streamlined data management, enhancing efficiency and accuracy. Telemedicine services have expanded, enabling remote consultations and bridging the gap in healthcare access, particularly in rural areas. online pharmacies, and e-commerce platforms have revolutionized the medication procurement, offering convenience and accessibility to patients. China's commitment to digitizing the healthcare sector during the pandemic has not only improved the efficiency, but also paved the way for innovative healthcare solutions and improved patient outcomes. I'm pleased to report that leveraging these transformative trends in the healthcare industry, 111, as a prominent healthcare technology company in China, has experienced solid growth and improved all of our operating metrics. With a focus on digital healthcare solutions, 111 has capitalized on the rising demand for digital medical service platforms for both B2C and B2B customers. Through our robust technological infrastructure and strategic partnerships, 111 has effectively connected patients with pharmacies, healthcare professionals, pharmaceutical companies, and other healthcare service providers. Our growth trajectory showcases the immense potential of digitization in revolutionizing healthcare delivery and improving overall patient experiences in China. During the first quarter of 2023, the company rose to the challenge and achieved 3.7 billion RMB in revenues, an increase of 23.9% year-over-year, marking the 19th consecutive quarter of YOY growth since our IPO. I'm also pleased to report that our gross profit reached 236 million RMB, representing Margin growth rate of 22.7% year-over-year. Our B2B business remains the key driver of revenue growth. In Q1, B2B revenue rose to $2.3 trillion RMB, representing a year-over-year increase of 24.9%, and a gross profit increased to $211 million RMB, an increase of 25.5% year-over-year. The hard-earned margin growth is the result of our consistent adherence to 111's customer-centric philosophy and our strong determination to create value for our customers. Meanwhile, we are thrilled to share this exciting news with our stakeholders that our non-GAAP operating profit has finally turned positive. Compared to a loss from operations as a percentage of net revenues of 2.4% in 2017, 2022, reaching our goal of quarterly break-even at the non-GAAP operating income level. With hard work and dedication, we're now seeing the fruits of our labor and progress towards achieving our financial goals. This milestone not only reflects our company's focus on efficiency and cost management, but also our commitment to delivering value to our customers. We believe there will be plenty of challenges lying ahead and there will be ups and downs in our business, but we will work tirelessly to create more value for our customers and shareholders. Now allow me to take a moment to discuss the progress we have made on our operation. Let me start from our supply side. We have successfully enhanced our partnership with upstream pharmaceutical partners by promoting mutual understanding, upgrading cooperation level, enhancing supply chain efficiency, and bolstering our comprehensive digital capabilities. As our business continues to expand and as we position ourselves as an effective commercialization partner, we will continue to offer value-add services to pharmaceutical enterprises. At present, we assist hundreds of pharmaceutical companies in drug commercialization, digital marketing, and market insight. For example, on our B2C platform, in addition to the successful launch of Hua Medicine's Dozac Leiton, Sanofi's Allegra made its debut on 111, marking its first online nationwide release on the platform. This medication is indicated for the treatment of seasonal allergic rhinitis and a chronic idiopathic urticaria in individuals aged 12 and above. The introduction of Allegra in China and its availability on 111 not only improves accessibility for patients, but also provides a better medication experience through professional guidance from healthcare professionals and pharmacists. I personally experienced severe allergic symptoms during the spring season. And taking traditional antihistamine drugs often leaves me feeling excessively drowsy, hampering my ability to work effectively. However, with the introduction of this medication on our platform, I, as a patient, have been able to enjoy the convenience of accessing online doctor consultations and having the medication delivered right to my doorstep. This experience has been nothing short of a wonderful, especially when compared to the hassle of visiting a physical hospital, enduring the registration process, and enduring long queues before finally seeing a doctor and obtaining a prescription. To exacerbate matters, there is also no guarantee that the hospital stocks the specific drug are required, knowing that there are countless individuals across the country facing similar issues. I'm thrilled that they too can now benefit from 111's digital healthcare platform. Meanwhile, on our B2B platform, through our partnerships with downstream pharmacists, we can deliver digital value to upstream pharmaceutical companies with our newly developed digital tool, Telescope. Telescope serves as a lens for pharmaceutical companies, allowing them to gain a more direct and comprehensive view of their drug sales and pricing dynamics real time. By leveraging advanced data analytics and market insights, Telescope enables these companies to analyze sales patterns, identify pricing opportunities, and make data-driven decisions to optimize their strategies. With Telescope, pharmaceutical companies can assess the performance of their product in real time, identify market trends, and adjust their marketing campaigns accordingly. This invaluable tool not only provides a clearer understanding of the market landscape, but also assists in forecasting demand, refining pricing strategies, and ultimately maximizing sales and profitability. On the other end, We are deeply committed to empowering downstream pharmacies in a digital way, offering comprehensive support across all aspects of pharmacy operations. Our solutions not only provide cost-effective medical product options with satisfactory services, but help them streamline processes and enhance operational efficiency. Through our network and partnerships, we negotiate competitive pricing and favorable terms with suppliers allowing pharmacies to access products at lower costs. Additionally, leveraging technology such as automated ordering system and efficient logistics will ensure timely delivery and reduce operational expenses for pharmacies. By offering cost-effective products and efficient services, we enable pharmacies to deliver value to their customers and maintain their competitiveness in the market. Particularly, by the end of first quarter, our One Health virtual franchise model enables around 20,000 pharmacies to provide superior products and services to their customers. All participating pharmacies can use our platform to better manage their product selection, procurement, and inventory management, as well as accessing our distribution tools through our digital SaaS services, including smart sourcing, digital marketing, O2O, and CRM. Thirdly, operating efficiency remains a continuous focus in our strategic imperatives. With growing scale of business and enhanced technological capabilities, 111's operational efficiency continues to improve. We're glad to see that revenue and the gross profit have both increased, whereas as a percentage of net revenue, the sales and marketing expenses in Q1 was down to 2.41% from 3.85%. General and administrative expenses was down to 1.12% from 1.61%. And technology expenses was down to 0.68% from 1.31% in the same quarter last year. The total amount of sales and marketing expenses, general and administrative expenses, and technology expenses year-over-year has been reduced by 22.3%, 13.9%, and 35.1% respectively. We have made significant efforts to enhance management efficiency through various measures. Firstly, we have implemented is strategic reduction of redundant staff, carefully optimizing workforce allocation while leveraging technology to automate certain tasks. Secondly, we have upgraded our standard operating procedures and streamlined management processes to eliminate redundancies and enhance productivity. Additionally, we have prioritized better corporate governance practices. fostering a culture of accountability and transparency across the organization. Lastly, we have made substantial investments in technology solutions that improve operational efficiency, such as advanced analytics, robotic process automation, and digital platforms. These contrived efforts aim to drive efficiency, reduce costs, and ultimately deliver enhanced value to our stakeholders. To further improve operational efficiency, we will keep on focusing on implementing our strategy, flattening our organizational structure, and improving the work efficiency of our employees through multiple operational tools. Regarding logistics, our fulfillment costs have decreased significantly thanks to our upgraded self-owned warehouse operation and joint venture warehouses. By investing in our infrastructure and technology, we have been able to optimize our supply chain processes and achieve greater efficiency. These efforts have allowed us to deliver our products to customers faster and more accurately, while also lowering our fulfillment costs to 2.78% from 3.1% as a percentage of net revenue. We will continue to prioritize these initiatives as we seek to provide the best possible customer experience and remain competitive in the market. It is also worth noting that we have further sharpened our focuses to operate on the principles of value creation, being customer-centric, and strengthening our supply base. Across the organization, as part of our own organizational change initiative, we have established an in-house advisory department dedicated to driving strategic improvements across multiple disciplines. This department plays a pivotal role in analyzing customers' needs, enabling us to refine our product assortment to better align with market demand. By closely monitoring market trends and leveraging customer insights, we can intelligently adjust pricing to ensure competitiveness while maximizing profitability. Additionally, the advisory department works towards optimizing internal resource allocation, streamlining processes, and enhancing operational efficiency. Through those efforts, we aim to continually improve our ability to meet customer expectations, achieve optimal pricing strategies, and drive efficient allocation of resources across the organization. Digitizing the healthcare industry has been our goal since our inception. Under China's 14th Five-Year Plan for National Economic and Social Development, digital economy has been elevated to a vital position and expected to enter a period of rapid expansion through 2025. We see this as a tremendous opportunity to leverage digital technology and reconstruct the value chain in the healthcare industry. To achieve this, we have built a world-class technology platform that is already transforming China's healthcare industry. We have built an industry-leading smart supply chain platform that is uniquely tailored to optimize our digitization model and unraveled national sales network providing comprehensive coverage and a sophisticated multi-channel digital platform that serves new needs in this massive market. This has made us an attractive commercialization partner as evidenced by our growing number of partnerships with pharmaceutical companies. Our design to serve many players in the healthcare industry, pharmaceutical companies, pharmacies, doctors, and we have created the largest virtual pharmacy network in China with about 440,000 pharmacies and have strategic partnerships with more than 500 globally renowned and domestic pharmaceutical companies. We feel very proud of the ecosystem we have built to date and it will enable us to scale our business to the next level. Now let me spend a moment to talk about our future initiatives. One, align our product assortment and structure with customers' needs. We're committed to enhancing the customer experience by optimizing our product assortment in accordance with customers' needs through diligent efforts and the utilization of information collected from various channels, including customer feedback, market research, and data analytics will continuously optimize our product offerings. By leveraging insights obtained from these sources, the company ensures that the right products are readily available to meet the diverse demands of customers. This approach not only enables us to deliver tailored solutions, but also allows for an exceptional and a customized procurement experience.

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