111, Inc.

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. Jung Ling 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 to 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. Junglin Lu. Please go ahead.

Good morning and good evening, everyone. and thank you for joining our first quarter 2024 earnings call. The information we'll be discussing here is also available in the slides posted earlier today on the company's website, and I encourage you to download the presentation as well as the earnings report from our investor relations website at ir.111.com.cn. For the first quarter of 2024, we are thrilled to kick off the year with solid performance. Notably, we turn to quarterly operational profitability for the first time after years of dedicated effort towards long-term resilient growth with strategic operational refinements. In this call, I'll provide an overview of the macro environment, highlight some exciting opportunities ahead that will follow the financial highlights and updates on our ongoing technology empowerment, as well as the supply-side efforts. Finally, I'll delve into our future growth strategy before our Chief Financial Officer, Mr. Luke Chen, presents a thorough analysis of our financial performance. Looking into the micro-environment for our industry, the National Anti-Corruption Campaign in the healthcare sector that began in May 2023 is continuing this year. Recent developments indicate a deepening of this campaign, with regulatory and ethics enforcement efforts targeting the entire industry chain. The industry anticipates that scrutiny on ethical practices is becoming the longer process that will foster transparency and integrity in healthcare transactions, particularly in hospital procurement, which will ultimately promote healthy industry competition and development. As a result, more drug sales are expected to transition to retail pharmacies that are more accessible and transparent compared to the hospital system. This transition is encouraged by the state and is poised to benefit us as we specialize in the outside hospital pharmaceutical market where we expect huge potential and prospects. Considering current economic and capital market conditions, entry barriers for new startups in this growing industry are formidable, especially when we add in the healthcare industry's high regulatory standards and requirements. We are, however, strategically positioned to adopt a market-oriented approach to the outside hospital pharmaceutical market, We aim to empower the entire industry chain through a business model that emphasizes superior operational efficiency and customer satisfaction. Our goal is to capture greater market share in this thriving sector by offering a comprehensive, cost efficient product range with unparalleled focus on customer experience. To achieve this, We've introduced various mechanisms, including enabling first-party teams to deepen relationships with pharmaceutical companies and incentivizing merchants to offer competitive price products on our digital platform. Combined with advanced technology, these mechanisms drive robust traffic, operational efficiency, and high sales volumes. By utilizing leading-edge technology, rich data insights, and innovative service models, we're strengthening 111's value proposition to both upstream and downstream customers. Also of note is the digital transformation of the entire value chain in the healthcare industry. As we are in a leadership position in this digital revolution, we are committed to reshaping the healthcare industry's value chain through our fully digitized operating system. By empowering the upstream and downstream segments with highly efficient digital solutions, we are driving continuous operating cost reductions. Our high-quality digital technology facilitates effective sales, procurement, and operations management. including customer demand analysis, product inventory management, and warehouse allocation. In the first quarter, we continued to generate positive strides in digitization, which I will discuss further later on. Excitingly, our company achieved a qualitative change in operational efficiency after years of development. In the first quarter, we realized income from operations for the first time, validating the efficacy of our growth strategies and business model. Our income from operations reached 3.7 million RMB during the period, compared with a loss from operations of 21.7 million RMB a year ago. Non-GAAP income from operations even more than tripled to a record high of 8.9 million RMB. The achievements are particularly significant, considering a slight 4.6% yearly decrease in the first quarter revenue. This fall was attributed to a higher baseline set in the first quarter of 2023 during the peak of the pandemic, which led to increased market demand for health-related products and medications. However, the market has since stabilized and normalized. The profitability largely stems from ongoing improvements in operational efficiency, driven by continuous enhancements across pretty much all business functions. Our total operating expenses for the first quarter accounted for 5.8% of net revenue, down 120 basis points from the previous year. Specifically, we've achieved noteworthy reductions in various expense categories, We've managed to cut fulfillment expenses to 2.5% of net revenues this quarter, down from 2.8% in the same quarter last year, reflecting a decrease in fulfillment costs by 13.8%. Our general and administrative expenses have fallen to 0.5% of net revenues from 1.1% a year ago. Technology expenses were 0.5% of net revenues as well, down from 0.7% a year earlier. Selling expenses have slipped as a percentage of net revenues to 2.3% in this quarter from 2.4% in the previous year. Excluding share-based compensation, our operating expenses as a percentage of net revenues have decreased 60 basis points to 5.7%. Additionally, our operating cash flow also turned positive. Our operational efficiency was achieved through strategic investments in infrastructure and staffing as we continue focusing on key areas for long-term and sustainable growth. The digital capability we have built over the years is at a very sophisticated level to deliver value and quality performance to end customers, allowing us to reduce technology and staffing expenses. Our ambition has always been to become the most efficient healthcare e-commerce operator in the industry. With our relatively small scale and current revenue level, we have already demonstrated our exceptionally high operational efficiency, which even surpasses that of large traditional part players. This makes us very proud and we will continue to be suffered towards setting an industry benchmark for efficiency as our goal, while sustaining profitability. When we grow in scale and refine our operations, operating costs are likely to further drop, contributing to higher efficiency. Our effort in this area will be relentless, as we firmly believe this is going to be our competitive advantage, and we are not afraid of any competition. Next, let's delve into operational accomplishments of the quarter, which was marked by continuous progress in technology empowerment. These advancements not only bolster our operational efficiency, but also pave the way for enhanced returns in the future, a testament of our commitment to innovation and excellence. We're seeing the initial benefit of transitioning from a product intermediary to becoming a tech-powered healthcare platform. Through the digitization of various business models such as the JVP and Marketplace, coupled with the introduction of the joint venture and the franchise warehouses, as well as a self-built logistics network to connect upstream and downstream customers, We have propelled 1.1.1 into a new platform that's widely recognized by both upstream and downstream partners. The shift has effectively ramped up cash flow, slashed inventory turnover, and enriched partnerships. This has fostered a synergistic ecosystem with shared knowledge, resources, and capabilities that drive info growth and success. Our AI-driven initiatives have already yielded positive results in our operations. By utilizing AI large language models and advanced algorithms to optimize low-price strategies and traffic allocation mechanisms, our order conversion rate saw encouraging improvements. These results highlight the success of our technology team's efforts in AI application development. One major challenge we faced was data cleaning due to the lack of common standards in the industry and the multiple names a single drug can have across different companies and regions. AI proved to be invaluable in automating this labor-intensive task, enabling us to contribute industry data to the Shanghai Data Exchange. We're also impressed by the impact of 111 help our AI-powered tool developed by our tech team. It effectively addresses both internal and external customer issues, reducing the need for additional staff and cutting expenses. Although it is still early days, we anticipate further AI applications will continue to streamline our operations and drive innovation. Additionally, we continued digital empowerment for merchants with the launch of Merchandise Mobile Tools. These tools provide digital features such as merchant mobile reports, business compasses, and sales management, enabling our partners to access real-time business performance anytime, anywhere. We already saw a daily average usage rate of over 70% for these innovative features, which is very encouraging for further innovations. Furthermore, we can also use our intelligent system to match the most optimal carriers, which cuts costs and enhances delivery efficiency. For every single order, before it goes out for delivery, our system can make real-time decisions on which carrier to use based on logistics info collected, as well as volume and date. Every single order is selected by the system and assigned to a carrier, with the order automatically allocated to the most suitable warehouse for delivery. Diving deeper into our supply-side efforts, We empower our assortment team through our broadband intelligent data platform by analyzing the best-selling categories and products. With big data and sales forecasting algorithms combined with online and offline transaction data and industry data, as of Q1 2024, The broadband catalog included a total of 6,567 new products, contributing to approximately 460 million RMB GMB cumulatively while reducing the group's top product out of stock rate to 2.8% from 5.2%. Moreover, in a move to optimize operations and add value to the supply side, we launched a new delivery and candidate model to streamline logistics not only for us, but also for merchants. We've established the Kunpeng Pharmaceutical Logistics Network to provide professional logistics service. Our Kunpeng project optimizes internal cost reduction with 20% lower distribution costs compared to traditional logistics. Secondly, it empowers the external supply chain. Previously, each merchant had to send their product samples to various warehouses individually. Now they can consolidate their shipment to one warehouse first and then our system will intelligently distribute them to the respective locations. This makes a major improvement in efficiency as well as provides a service to merchants which we can charge for separately. Merchants using this service can save costs and their damage rates resulting from transportation can fall as much as 60%. With the support of the Quintom project, strengthened the business negotiations, and our intelligent selection of the most optimal carriers, logistics expenses dropped. This together with lower delivery costs, less warehouse labor costs, and it generated from enhanced work efficiency. And decreased warehousing expenses primarily led to a 14% year-over-year reduction in fulfillment costs to 89 million RMB in the first quarter. Meanwhile, the company has innovated its supply chain model by unveiling joint venture warehouses. The new model is poised to revolutionize our expansion strategy, slashing investment timelines and capital expenditures, while accelerating nationwide coverage. Previously, we invested in and built our own warehouses, which may take at least two years to see profitable operations. The new model allows us to partner with strategic warehouse owners to achieve growth and reduce intensive CapEx expenditure by leveraging partners' existing assets and our proprietary digital system. We've also gathered significant accolades and a new patent, all demonstrating valued recognition from government agencies and professional institutions for our business practices, operational performance, and dedicated innovations. These affirm our pioneering role in digital commerce transformation. Notably, we were honored as 2023 Shanghai Industrial Internet Demonstration Platform by the Shanghai Municipal Commission of the Economy and Informatization, solidifying our position as a digital service platform for the pharmaceutical industry chain. This recognition elevates our commitment to digitization, enhancing service capabilities, and driving technological innovation. We earned the prestigious title of 2023 to 2024 Shanghai E-Commerce Demonstration Enterprise from the Shanghai Municipal Commission of Commerce, showcasing our pivotal role in advancing high-quality e-commerce in the city. In April, we secured a new patent for our voice service enhancement system, expanding our technology portfolio to 24 patents. which reaffirms our ongoing commitment to innovation, enabling more intelligent responses to customer inquiries and maintaining our technological leadership in the industry. Next, I'm going to discuss our strategies for future growth, revenue, margin, and profit. We remain committed to delivering efficient, cost-effective, one-stop shopping experiences that meet customer needs and secure our competitive edge. Utilizing data analytics and market research, we can anticipate customer preferences, ensuring our offerings align with demand while prioritizing low pricing through advanced digital capabilities. This commitment ensures exceptional value without compromising quality, fostering long-term loyalty and a recognition from customers. Another core strategy is to deepen our partnerships with pharmaceutical companies. By closely collaborating with these partners, we aim to better serve the needs of our customers with a diversified medicine portfolio and drive mutual growth We've made significant strides in this area and will continue to do so, particularly by leveraging our digital marketing network to promote sales, especially in lower-tier cities. Our extensive digital marketing network provides us with a powerful platform to showcase the products of our pharmaceutical partners. Through targeted campaigns and promotions, we'll be able to increase brand visibility, and drive sales in previously underserved markets. This benefits not only our partners, but also enhances our position as a leading e-commerce platform in the pharmaceutical sector. Amid the evolving market situation, our private label business demonstrates impressive results. Its revenues surged 89% from the previous year in the first quarter, while gross profit rose 55%, with a gross margin of 29%. This line of business currently encompassing three distinct brands enables us to offer a diversified product portfolio that significantly contributes to our gross margin. Additionally, it strengthens our brand equity and enhances customer trust. Moreover, we will accelerate our investment in the JVP platform which has been attracting an increasing number of partners, which substantially increased our product range. The growth trajectory of this model is particularly exciting, as it indicates the growing value proposition of our innovative business model and its ability to draw interest from a diverse range of stakeholders. Looking ahead, our efforts for the JVP platform will include enhancing its features and functionalities to address the needs of our partners as well as expanding its reach to a wider partner base. We believe that JVP will continue to be a key driver of our growth and competitiveness in the years to come. In addition to driving top-line growth, we are also focused on optimizing our operating costs to improve efficiency and profitability. We will step up our efforts to advance several initiatives implemented for achieving this goal. For example, we aim to onboard half of our merchant partners onto our new delivery and accounting model. will be used upgraded warehouse network to enhance inventory management and fulfillment capabilities, thereby reducing lead times and improving customer satisfaction. Additionally, we are adopting AI sales representatives to automate and optimize the sales process, driving higher platform traffic and conversion rates while reducing operational costs. Operational efficiency is central to our strategy, and we will continue investing in advanced technologies to streamline processes, reduce waste, boost productivity, and ultimately solidify our leading position in the marketplace. An important aspect of our technology investment is AI innovations and digitization. Many parts of our operations are embedded in AI, and we fully embrace digital transformation across our business to drive operational efficiency, customer engagement, and product innovation, unlocking future growth opportunities. It is important to note that digitization is vital to our vision for the future. With 100% digital operating system internally, we have achieved industry-leading operational efficiency. This performance has not only enhanced our bottom line, but also positioned us as a catalyst for transformation across the entire value chain, granting both upstream and downstream customers access to our technological ecosystem and expertise. By doing so, we're not just improving our own processes, we're revolutionizing the way our industry operates and reshaping the traditional value chain. We are confident in our ability to remain at the forefront of this digitalization and how it will empower us in higher revenue and profit levels. With that, I'll hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

Thank you, Jimmy, and good morning or evening, everyone. Moving to the financials, My prepared remarks will focus on a few key business and financial highlights. For details on our first quarter 2024 results, please refer to slides 16 to 19, section two of our presentation. Again, our comparisons are year over year and all numbers are in RMB unless otherwise stated. Let's start with the first quarter results. Considering the sudden self-surge during the pandemic in Q1 last year, we managed to maintain a net revenue base for the quarter, which decreased 4.6% to $3.5 billion. Gross second profit for the quarter amounted to $208.5 million, while gross second margin was 5.9% for the quarter. Total operating expenses for the quarter decreased 20.6% to $204.8 billion. As a percentage of net revenue, total operating expenses for the quarter were bound to 5.8% from 7% as we continue to enhance our operating leverage and optimize our operational efficiency. Procurement expenses as a percentage of net revenue for the quarter were down to 2.5% from 2.8% in the same quarter of last year. Selling and marketing expenses as a percentage of net revenue for the quarter were 2.3% down from 2.4% in the same quarter of last year. General and administrative expenses as a percentage of net revenue accounted for 0.5% down from 1.1% in the same quarter of last year. Technology expenses accounted for 0.5% of net revenue down from 0.7% in the same quarter of last year. Income from operations was RMB 3.7 million compared to loss from operations of RMB 21.7 million in the same quarter of last year. Man-gap income from operations was RMB 8.9 million compared to RMB 2.5 million in the same quarter of last year. As a percentage of net revenues, NANGAP income from operations account for 0.3% in the quarter as compared to 0.1% in the same quarter of last year. NANGAP net loss attributable to ordinary shareholders was 8.6 million compared to 7.6 million in the same quarter of last year. As a percentage of net revenues, The net loss attributed to ordinary shareholders account for 0.2% in the quarter, which is the same as last year. As you can see, we are improving our financial performance quarter by quarter and have achieved operation income on a quarterly basis for the first time. Please refer to slides 20 to 24 of the appendix section for selected financial statements. A quick note on our cash position as of March 31st, 2024, we had cash and cash equivalents with SHI cash and short-term investment of RMB 627.3 million, and we were pleased to report that we have achieved positive operating cash flow during the quarter. As of the date of this early release, The company had a total outstanding amount of IMB 1.1 billion, which has been included in the balance of redeemable non-controlling interest and accrued expenses and other liabilities, earning to group our investors of one pharmacy technology pursuant to the equity investment made in 2020 as previously disclosed. As of the date of this earning release, we have received redemption requests from certain of such investors for a total redemption amount of RMB $0.2 billion in accordance with the terms of their initial investments in non-pharmacy technology. Furthermore, we have entered into written agreements, and our commitment matters with investors are representing the majority of the total carrying amounts for the rescheduled redemption payment. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.