111, Inc.

Hello everyone and thank you for joining 111's conference call today. On the call today from the company are Dr. Gang Yu, co-founder and executive chairman, Mr. Junling Liu, co-founder, chairman and CEO, and Mr. Luke Chen, CFO of 111's major subsidiary, and Mr. Harvey Wong, 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 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 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 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'll turn the call over to 111 CEO, Mr. Junling Liu. Please go ahead.

Good morning, and good evening, everyone.

Thank you for joining our fourth quarter 2023 earnings call. The information we'll be discussing is also available in the slides that were posted earlier today on the company's website. I encourage you to download the presentation as well as the earnings report from our investor relations website at ir.111.com.cn. As we gather here today, I'm reminded of the journey we've embarked on over the past year, a journey characterized by unprecedented challenges, yet remarkable resilience and innovation. In the ever-evolving landscape of healthcare, our team at 111 has not only navigated through those turbulent waters, but has also set new benchmarks, proving that strategic agility and unwavering commitment are the bedrocks of our success. Today, I'm here to share with you the milestones we've achieved, the challenges we've overcome, and the exciting path that lies ahead for us. Our discussion today will encompass a comprehensive overview of our operational and strategic frameworks, painting a picture of our company's enduring strength and our vision for a future where healthcare is transformed by technology and innovation. Then our Chief Financial Officer, Mr. Luke Chen, will present a thorough analysis of our financial performance. Now let me start with the macro situation in our industry. The year 2003 marked a significant turning point for China's economy and the healthcare industry. As we emerged from the shadows of the pandemic, the industry faced a new challenge, adapting to the post-pandemic normalization and responding to the accelerating shift towards digital health solutions. These dynamics presented both opportunities and obstacles, reshaping the competitive landscape and accustomed expectations. The anti-corruption crusade that swept through the hospital system in 2023 is poised to significantly reshape the landscape of the healthcare industry. This stringent campaign saw some hospital presidents being apprehended for engaging in bribery, casting a long shadow over the traditional methods of business conduct within the sector. As a consequence, pharmaceutical companies are now grappling with new challenges in getting their medications adopted by hospitals, marking a pivotal shift away from the norm of sales strategies. This heightened scrutiny on ethical practices is not just a temporary hurdle, but a transformative force, heralding a new era of transparency and integrity in healthcare transactions. This evolution in the healthcare ecosystem is set to redirect the flow of drug sales moving some of them out of the hospitals and into the more accessible and diverse realm of retail pharmacies. Such a transition underscores the paradigm shift towards a more open and competitive market where efficiency and the value dictate the dynamics of drug distribution and sales rather than the traditional practices. Our company, strategically positioned at the nexus of this transformation, embraces the shift tide with a business model that empowers pharmacists. We're at the forefront of championing a competitive landscape where success is predicated on operational excellence, customer satisfaction, and the delivery of genuine value. By leveraging cutting-edge technology and innovative service models, we aim to enhance the capabilities of pharmacies, enabling them to thrive in this new environment of increased accountability and competition. In this transformative period, our company stands ready to support pharmacies in navigating the complexities of this new landscape. providing them with the technology, insights, and network needed to excel. We welcome the dawn of a new era in healthcare, one characterized by fairness, efficiency, and innovation, and we remain dedicated to playing a pivotal role in shaping its emergence. Through collaboration, innovation, and a steadfast commitment to ethical business practices, we look forward to contributing to a healthier, more transparent healthcare system for all. Another significant phenomenon to note is that healthcare industry traditionally seen as conservative and slow-moving is now at the forefront of technological innovation. This shift is driven by several factors, an aging population, rising healthcare costs, and increasing consumer demand for personalized and accessible care. In response to these trends, One More Mind has strategically positioned itself as a leader in the digital healthcare revolution. Our approach has been focused on enhancing our core offerings through digitization, and operational efficiency. The year 2023 emerged as a beacon of hope, marked by numerous promising developments that signaled positive developments I just talked about. Nonetheless, it unfolded to reveal itself as one of the most challenging periods in recent history. The initial optimism surrounding a post-pandemic rebound proved to be short-lived. as the reality of the economic landscape setting, characterized by various formidable challenges that tested the resilience and adaptability of business across the board. This period saw a notable downturn in pharmacy same-store sales, a critical indicator of consumer engagement and market health. which declined as customers tightened their belts in response to the uncertain economic climate. Furthermore, the sector was engulfed in fierce pricing competition, with businesses aggressively lowering prices in a bid to capture market share, thereby escalating the challenges associated with maintaining profitability and growth. This period underscores the importance of agility, resilience, and strategic foresight in navigating the complexities of the contemporary business environment. 111's response to these challenges illuminates a path forward, highlighting the potential for reinvention and growth even in the face of daunting obstacles. As the company continues to adapt and evolve, it remains steadfast in its commitment to delivering value to its customers, stakeholders, and the broader community, reinforcing its role as a pivotal player in the healthcare industry. In the fourth quarter of 2022, we experienced a peak over the pandemic. Our pharmaceutical sales significantly surged. reaching unprecedented highs due to increased demand for health-related products and medications. This surge set a challenging high baseline for the subsequent year. In Q4 2023, while our revenue witnessed a slight euro via reduction of 1%, closing at 4.1 billion RMB, World Second Profit had a 15.5% decrease compared to the same period in the previous year. Our total operating expenses witnessed an increase to 420.8 million RMB from 361.9 million RMB in the corresponding quarter of the previous year. This escalation in expenses was primarily due to decisive measures undertaken to terminate the ESOP granted for future years and to implement further reductions in our workforce. These steps were pivotal in realigning our operational strategy and ensuring long-term sustainability. Despite these significant actions, our dedication to improving operational efficiency remained steadfast. By meticulously managing our operational costs and continuously seeking efficiency improvements, we were able to offset some of the financial impacts of these strategic decisions. A critical aspect of our financial management strategy involved excluding share-based compensation expenses, which amounted to 151.4 million RMB for the quarter compared to 68.7 million RMB for the same quarter of the previous year. After adjusting for these expenses, our total operating expenses as a percentage of net revenues demonstrated a notable improvement, decreasing to 6.6% from 7.1% in the same quarter of the previous year. It is also great to note that our operational efficiency has shown continuous improvement. Specifically, we've managed to lower the fulfillment expenses to 2.5% of net revenues this quarter. down from 2.9% in the same quarter last year, reflecting a decrease in fulfillment costs by 14.7%. Sales and marketing expenses, after adjusting for share-based compensation, have decreased as a percentage of net revenues to 2.6% in this quarter from 2.7% in the previous year. Our general administrative expenses have remained stable at 0.9% of net revenues, identical to the previous year. Technology expenses, after excluding share-based compensation, have also maintained their proportion of net revenues at 0.6%, the same as last year. Looking back at the entire 2023 annual performance, As an impressive demonstration of resilience and the strategic acumen, 111 has posted a robust increase in net revenues, reaching 14.9 billion RMB and marking a commendable year-over-year growth of 10.6%. This growth underscores the company's successful navigation through market dynamics and its ability to capture a larger share of the digital health market. Equally noteworthy is the modest yet positive uptick in the growth and profit, which climbed by 1.1% a year over the year to 849 million RMB. On the financial stewardship front, 111 has shown remarkable prudence and efficiency in managing its operating expenses, which totaled 1.2 billion RMB, a continuous decrease from 1.21 billion RMB in the previous year. When adjusting for share-based compensation expenses, the total operating expenses as a percentage of net revenues notably decreased to 6.5% this year from 7.8% last year, signaling a leaner and more streamlined operational structure. Furthermore, the company has successfully reduced its loss from operations, both on a GAAP and non-GAAP basis, demonstrating enhanced operational efficiency and tighter financial control. The GAAP loss from operations decreased to 2.3% of net revenues, down from 2.7% last year. while the non-GAAP loss from operations notably decreased to 0.8% from 1.6% last year. These improvements, coupled with healthy liquidity positions of 673.7 million RMB in cash, restricted cash, and a short-term investment, as of December 31st, 2023, position 111 on a solid foundation for future growth and innovation. Please allow me a moment to underscore the progress we've achieved in our operations during the fourth quarter and entire 2023. This period has been characterized by our continued focus on advancing digitization and improving our management processes, laying the groundwork for even more substantial returns on this strategic investment in the times ahead. At the heart of our business expansion is our commitment to operational efficiency. achieving through the strategic integration of technology across our supply chain, demand fulfillment, and overall operations. Our progress is fundamentally attributed to the efficient application of technology innovations that refine our ability to anticipate and fulfill customer demands with unmatched speed and accuracy. This technological synergy enhances our operational capabilities, allowing us to execute with greater precision and adaptability. The result is a highly efficient operational model that drives continuous growth by optimizing every facet of our business from supply to demand through the intelligent use of the technology. For example, Our smart sales effort, driven by the Eagle Eye analytics tool, streamlined customer interactions and marketing strategies to boost efficiency dramatically. Currently, we optimize pharmacy operations by segmenting customers effectively. Providing targeted service strategies, implementing an efficient smart sourcing system, introducing cloud prescription services, utilizing the pharmacy operation analysis board, and employing a pharmacy CRM system, among other adjustments. This comprehensive strategy not only identifies pharmacy needs, with unparalleled precision, but also furnishes them with the necessary tools to excel in a competitive market efficiently. This cohesive and efficiency-oriented approach ensures that every facet of our operation is streamlined for peak performance, embodying our commitment to enhancing operational efficiency across the board. A pivotal extension of this strategy is our commitment to offering a comprehensive selection, ensuring an expansive assault of medication and medical equipment. This not only amplifies our operational efficiency, but also caters to a wider range of customer needs and preferences, thereby enriching the diversity of our product offerings. This holistic approach underlines our dedication to not just streamlining operations, but also to providing an extensive variety of products, further positioning us as a leader in operational excellence and market breadth. Our JVP merchant business is at the center of the effort of providing the best selection for our customers. To ensure these partners can have great experience on our platform, our teams work tirelessly to offer a range of services to our GDP partners, including automating transactional workflows, cutting down the stock-to-shelf timeframe from hours to mere minutes, and similarly optimizing the replenishment process for peak efficiency. We also offer critical tools, such as immediate sales visualization, allowing merchants to efficiently perform data queries through mobile devices thousands of times per day. This capability empowers them to execute data-driven decisions swiftly and accurately. Another key highlight of our achievements was the significant optimization of our supply chain and the innovative cost-saving measures implemented in our warehouse operations. Through strategic redesigns and the integration of cutting-edge technology, we were able to streamline our storage and distribution processes, resulting in multiple reductions in operational costs. The optimization not only improved our logistical efficiency, but also enhanced our overall supply chain resilience, ensuring faster and a more reliable delivery of goods to our customers. These investments reflect our commitment to operational excellence and our ability to adapt and innovate in response to dynamic market demands. Strengthening our sales efficiency was a major focus in 2023, leading to significantly higher productivity per unit output. By refining our sales strategies and leveraging advanced analytics, we managed to optimize our sales force's performance and improve our market penetration. This achievement is indicative of our strategic approach to sales management and our ability to effectively harness data and technology to drive growth and maximize returns on investments. The pivotal element of our strategy this year was the upgrade of our supply offerings, marked by a substantial increase in the absolute value of our private label brands. This development not only diversified our product portfolio, but also enhanced our brand equity and the customer trust. By focusing on quality and innovation, we have successfully positioned our own brands as leaders in their respective categories, contributing to our overall market strength and sustainability. Reflecting on the entirety of 2023, it's evident that the year was rich in acknowledgments and accolades for our efforts and achievements. One of the accomplishments this year was our intensified focus on technological innovation, which led to the addition of four new patents to our portfolio. This investment in technology underscores our dedication to staying at the forefront of industry advancements and maintaining a competitive edge. By pioneering novel solutions and securing intellectual property rights, we are not only enhancing our product offerings, but also contributing to the broader technological landscape, setting new standards for innovation and excellence. Following an array of concerted efforts by 111, the company has achieved significant milestones, marking its prominence and innovation within the e-commerce and internet service sectors. These endeavors have not only exemplified 111's commitment to excellence, but have also cultivated in the attendance of two prestigious recognitions in Q4 2023. Firstly, 111 has been honored as the 2023 Shanghai e-commerce demonstration enterprise, a testament to its leading role in advancing the e-commerce landscape. Excuse me. Demonstrating the exemplary practices and driving digital e-commerce innovation, in Shanghai. This accolade reflects 111's successful integration of technology and commerce, setting benchmarks for industry peers. Secondly, the company has been recognized as a Shanghai key productive internet service platform, highlighting its significant contributions to the internet services domain. This designation underscores 111's impact on enhancing the digital infrastructure and the services in one of Shanghai's most dynamic and technologically advanced districts. Together, these recommendations underscore 111's influential position in shaping the future of digital commerce and internet services, solidifying its status as a pioneer in the industry. A significant milestone for the year was the listing in Shanghai Data Exchange. With over 720,000 product master data and 1.2 million enterprise master data entries covering 99.6% of the pharmaceutical market, 111 Inc.' 's information brand series listed on the Shanghai Data Exchange epitomizes the company's significant contributions and the leading edge in digitizing the pharmaceutical industry. This remarkable achievement not only showcases 111's innovative capabilities and a strategic foresight, but also solidifies its pivotal role in advancing the digital transformation of healthcare, furthering its commitment to enhancing industry efficiency. Receiving national recognition from MOFCON as a demonstration e-commerce enterprise and being named a Shanghai e-commerce demonstration enterprise were among our most prestigious accomplishments in 2023. These honors are a testament to our innovative business practices, our leadership in digital commerce, and our contribution to the development of the e-commerce industry. They underscore our commitment to excellence and our role as a pioneer in the digital transformation of commerce. As we look forward to our future growth initiatives, it is clear that our path is paved with strategic investments in key areas that will propel our company to new heights. Firstly, focusing on operational efficiency is fundamental to our approach. Recognizing efficiency as a core competitive advantage, we are dedicating resources towards enhancing our operational frameworks and processes. This involves investing in advanced technologies and methodologies to streamline our operations, reduce waste, and improve productivity. By doing so, we aim to not only accelerate our response times to market changes, but also to ensure that we can deliver services and products with greater speed and precision. This focus on operational excellence is expected to drive significant improvements in our overall performance, making us a formidable competitor in the marketplace. Secondly, offering a comprehensive selection of products is essential to meeting customer needs and creating a sustainable competitive mode for our company. In the coming periods, we will intensify our efforts to understand and anticipate the evolving preferences of our customers. This will involve leveraging data analytics and market research to ensure our product portfolio is both diverse and aligned with customer demand. By doing so, we aim to not only satisfy the immediate needs of our customers, but also to foster long-term loyalty and trust, thereby solidifying our market position. The enhancement of our ecosystem with partners, including JVP and marketplace merchants, is another pillar of our future initiatives. We recognize the value of nurturing stronger, more collaborative relationships with our partners as a means to expand and prosper together. Through these partnerships, we aim to create a synergistic ecosystem where shared knowledge, resources, and capabilities can lead to mutual growth and success. By aligning our goals and strategies with our partners, we anticipate unlocking new opportunities for innovation and market expansion. In addition to the most comprehensive selection within the industry, we are also making low pricing one of our strategic priorities. We are convinced that our advanced digital capabilities will enable us to obtain unparalleled operational efficiency. It is our belief that the true measure of our success is in our ability to transfer these efficiency gains directly to our customers, offering them exceptional value without compromising on quality. By implementing this strategy, we are not just focusing on comedic benefits, but are laying the groundwork for long-term recognition and loyalty from our customers. Our commitment to maintaining low prices coupled with our unmatched selection is expected to become a hallmark of our brand identity. Over time, this dedication will be acknowledged by our customers and will stand as one of our key competitive advantages. Optimizing our organization structure is also on our agenda. We are committed to creating a more agile, flexible, and responsive organization that can quickly adapt to changes and seize new opportunities. This involves evaluating and realigning our teams, processes, and systems to ensure they are conducive to our strategic objectives. By fostering a culture of continuous improvement and adaptability, we aim to enhance our operational effectiveness and drive sustainable growth. Lastly, our commitment to digitization remains unwavering. In an era where technology is continually reshaping industries, we aim to stay ahead by embracing digital transformation across all factors of our business. This includes investing in digital tools and platforms to enhance our operational efficiency, customer engagement, and product innovation. By doing so, we aim to unlock new growth avenues, improving customer experiences, and streamline operations. Digitization is not just a strategy for us. It's a fundamental aspect of our vision for the future. Together, these initiatives present our comprehensive approach to ensuring long-term growth and success. By focusing on these key areas, we are confident in our ability to navigate the challenges ahead and seize opportunities that the future holds. As we approach the conclusion of my remarks, I want to reflect on the journey 1.1.1 has undertaken, an expedition marked by both adversity and triumph. Our commitment has remained unshaken. We steadfastly pursue our mission to lead the wave of innovation in the healthcare industry. Our passion for launching groundbreaking initiatives and our dedication to excellence in service delivery shine even against the backdrop of the industry dynamic challenges. It's this very landscape that has tested our resilience and sharpened our strategic vision. transforming potential obstacles into avenues for growth and innovation. I extend our heartfelt gratitude to not only our investors, whose unwavering support has been a cornerstone of our journey, but also to our dedicated employees. Your hard work, creativity, and perseverance have been instrumental in our achievements this year. Together, We've navigated the challenges and seized opportunities, embodying a culture of collaboration and excellence. With profound appreciation, I pass the microphone to Mr. Luke Chen, who will present an in-depth analysis of our financial outcomes. Thank you, each and every one of you, for contributing to our shared vision of a healthier future.