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, 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 and along 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 will turn the call over to one-on-one CEO, Mr. Zhenling Liu.

Good morning and good evening, everyone. Thank you for joining the Fox Clubs and the full year 2024 earnings call. The information we'll be discussing here 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. 2024 was a year of significant challenges stemming from the macroeconomic pressures and ongoing healthcare reforms. These headwinds have impacted the broader healthcare industry Yet, we delivered our first-ever operational profitability and the positive operating cash flow, an important milestone in our company's history. This solid performance is a direct result of our diligent execution of strategic initiatives to boost operational efficiency and cement us as one of the most efficient healthcare platform operators in the sector. It also underscores our agility and resilience in navigating unfavorable and complex market conditions. Beyond financial performance, we also advanced our technologies and strengthened our supply chain infrastructure, laying the foundation for long-term growth. These improvements position us to better meet future demand with greater speed and lower costs. ultimately driving value across the industry. Next, I will provide a deeper look into the current industry landscape, outline our outlook and opportunities, and highlight key financial achievements. I will also share updates on our advancements in technology and supply chain infrastructure, as well as the recent industry recognition. Finally, I will discuss our growth strategies for navigating this challenging environment before handing over to our CFO, Mr. Luke Chen, for a detailed analysis of our financial performance. Turning to the macroeconomic landscape, economic uncertainties in China have led to increasingly cautious consumer behavior, slowing discretionary spending, and significantly dampening retail sales growth. The healthcare sector is no exception. According to the National Bureau of Statistics, China just saw a 3.6% year-over-year growth in 2024 per capita healthcare expenditure. This represents a sharp decline of 12.4 percentage points from the 16% growth in the prior year and the lag behind the 5% GDP growth during the same period. At the same time, downstream pharmacies continue to face pressure from ongoing healthcare reforms, including adjustments to individual medical accounts, phased rollout of coordinated outpatient benefits, and a heightened regulatory oversight. These reforms aim to build a more sustainable and efficient healthcare system, ultimately benefiting well-managed pharmacy chains with strong product offerings and service capabilities. However, the transition period presents short-term operational challenges as the industry adapts to new policies and regulatory frameworks. Another key factor impacting pharmacies is an aggressive expansion that took place during the pandemic. Optimism about long-term healthcare demand led to a surge in new store openings, but market growth has not kept pace. As a result, China's total retail pharmacy sales dropped by 2.2% in 2024, according to Zhongkang data. With more stores competing in a stagnant market, per-store revenues have fallen, intensifying industry competition. Newer stores still in their growth phase face additional pressure weighing on short-term profitability. Large pharmacy chains are already feeling the impact. For instance, Jian Zhijia or JZJ chain drug store expect its net profit attributable to shareholders excluding non-recurring gains and losses to decline by up to 69% in 2024, followed by 66% and a 45% decline for Yi Xin Tang, or YXT Health, and the Shanghai Di Yi Yao Ye, or Shanghai No. 1 Pharmacy Co., respectively. Independent pharmacies with limited resources face even greater financial strain, Given this challenging backdrop, digital transformation is no longer optional. It is essential. Pharmacies must cope with weaker consumer sentiment, slower health care spending, and shifting patient behaviors while managing cost pressure and operational inefficiencies. The key to survival and growth lies in innovation, rethinking service delivery, optimizing product categories, enhancing client management, and improving operational coordination across stores. This is where digitization and AI-driven solutions come in. As a pioneer in the digital revolution, we have integrated leading technologies across our operations, from sales and procurement to customer demand identification, inventory optimization, and warehouse allocation. Our fully digitized operating system also empowers our upstream and downstream partners to reduce costs, improve efficiency, and enhance service quality. Beyond the necessity of digital transformation, we remain highly confident in China's long-term healthcare market, supported by two key structural trends. First, the ongoing anti-corruption campaign in the healthcare sector is driving greater transparency in hospital procurement, which is anticipated to expedite the shift of drug sales and prescriptions to retail pharmacies. This transition represents a trillion RMB out of hospital pharmaceutical distribution market that could eventually account for nearly half of the entire pharmaceutical distribution sector. In the short term, however, Policy execution remains uneven across provinces and cities, with uncertainties and delays in medical reform refinement and implementation. In the 2025 government work report, China fought for promoting the coordinated development and governance of health care, medical insurance, and the pharmaceutical sector. It aims to steadily advance provincial-level coordination of basic medical insurance while improving its financing and benefit adjustments mechanisms. Once these adjustments are fully in place, particularly with on-time payments from government's national medical insurance, pharmacy chains will be among the primary beneficiaries. As a trustee partner to chain pharmacies, we're well-positioned to capitalize on this growth With an extensive and price attractive product portfolio and a relentless focus on customer experience, we strive to strengthen our leadership and expand market share in this dynamic landscape. Second, China's rapid aging population will fuel sustained growth in healthcare consumption while the government encourages the silver economy. Despite recent fluctuations China's health care expenditure as a percentage of GDP remains significantly lower than that of developed countries, indicating ample room for expansion. As health care needs continue to rise, we believe the overall trajectory of the pharmaceutical and health care market will remain strong over the long term. Turning to our financial highlights, our rigorous and disciplined approach to raising operational efficiency delivered meaningful improvements in Q4. Despite ongoing short-term headwinds, we effectively reduced total operating expenses by half year-over-year, bringing them to just 5.5% of revenues, down 470 basis points from the prior year. While fulfillment expenses rose slightly as a percentage of revenues, primarily due to a one-time warehouse relocation fee. With growth reductions across multiple cost categories, selling expenses declined by 220 basis points to 2% of net revenues from 4.2% a year ago, while the general and administrative expense ratio fell by 190 basis points, and the technology expense ratio decreased by 80 basis points. Excluding share based compensation, our operating expense ratio improved by 130 basis points to a record low, 5.3%. For the full year of 2024, we achieved a yearly profit from operations for the first time, with income from operations reaching 2.1 million RMB, representing a sharp turnaround from an operational loss of 350.1 million RMB in 2023. Our bottom line improved by 332.7 million RMB or 94.1% from a year ago. On a non-GAAP basis, income from operations was 22.3 million RMB compared so that 123.9 million RMB lost a year earlier. Non-GAAP Baltimore Line improved by 126.6 million RMB, or 99.5% from 2023. Additionally, we generated yearly positive operating cash flow of 263 million RMB for the first time. These milestones highlight the efficiency of our strategic initiatives and the resilience of our business model. In 2024, we reduced operating expenses by 31% year-over-year, lowering them to 5.7% of revenues, down 230 basis points from 8% in 2023. While fulfillment expenses remained largely unchanged as a percentage of revenues, the general and administrative expense ratio declined 100 basis points to 0.5%. Selling expenses fell to 2.2% revenues compared to 3% in the prior year, while technology expenses dropped to 0.5% of revenues from 0.8% a year earlier. Excluding share based compensation, operating expenses as a percentage of revenues decreased 90 basis points to 5.6%. Our high operational efficiency was driven by strategic investments in infrastructure and optimized personnel arrangements. By prioritizing sustained growth, we have continuously enhanced our industry-leading digital capabilities for operations, marketing, supplier empowerment, and supply chain. This ensures that our technology-driven efficiencies remain a key competitive advantage. In Q4, our advanced digital infrastructure contributed to further reductions in technology and staffing expenses, reinforcing our ability to adapt to evolving market conditions while positioning us for future opportunities. Although our revenues are smaller than some more established players, our operational efficiency is a key differentiator. As one of the most efficient healthcare e-commerce platforms, we remain committed to driving further cost reductions and enhancing profitability through scalability and refined execution. This unwavering focus on leveraging technology to drive operational excellence across various aspects is a cornerstone of our strategy. The savings generated from our continuous optimizations will bolster our financial flexibility, allowing us to strategically allocate resources and reinvest in tech advancements business growth, and customer experiences at the right moment. From a technological standpoint, we have been strengthening our digital capabilities by investing in system development, advanced models, algorithms, and the data applications. These efforts are designed to fortify our core competitiveness in the digital landscape. As a result, we have made further strides in leveraging digital and AI technologies. First, powered by our proprietary intelligent JVP platform and inventory sharing technology, we have achieved foundational system-level integration with upstream partners to establish a unique decentralized inventory network that enhances stock volume and availability. This development enabled by smart demand forecasting algorithms and an advanced inventory management system has successfully expanded platform accessible SKUs by 33,000 and inventory availability by 290 million RMB in 2024. By strengthening our supply capability, we are not only optimizing efficiency, but also ensuring real-time elastic response capabilities to meet customer demand. Second, we have optimized our marketing strategies to stimulate demand and build intelligent operational systems to support key events by leveraging cutting-edge technology. During our Flash sales event from November to December, we utilized advanced data analytics and AI-driven insights to fine-tune discount mechanisms or implement necessary technology upgrades from operational systems nearly every week. These path-driven efforts drove user retention and higher transaction volumes. The results speak for themselves. Gross merchandise volume, or GMV, in December increased by 17% from the prior month, while gross profit grew by 8%. average revenue per user, or R pool, surged by 18%, and average revenue per order, or R pool, rose by 14%. These results underscore the strategic value of our technology investments and effectiveness of our precision-targeted promotions and a tech-enabled intelligent platform. Finally, 2025 marks a pivotal year for AI technology development in China and the world. As an industry leader at the forefront of technological innovation, we have made AI a key focus in advancing our capabilities, and it plays a critical role in driving our intelligent demand analysis, optimizing supply chains, and enhancing market responsiveness. For example, By integrating technology advancements with deep business collaboration, our AI-powered broadband catalog can better utilize procurement data from our operations and thousands of partners' pharmacies to identify market trends, analyze consumer behavior shifts, and update demand lists more precisely. We assigned greater weight to high demand products in assortment strategy while giving original attention to long-tail goods to meet specific demands. On the technology front, we improved forecasting accuracy from 71% to 82%. As a result, the broadband catalog introduced 6,598 new products in 2024. contributing over 905 million RMB in GMV. The platform-wide stock-out rate dropped from 4.9% to 2.4%, setting an industry benchmark for supply chain efficiency. We also re-engineered our data pipeline, reducing demand list generation time from five hours to just 30 minutes, a tenfold efficiency boost. By prioritizing precision forecasting plus real-time response, we have established a model to demonstrate smart integration of cost reduction, operational efficiency, business growth, and ecosystem synergy in the healthcare e-commerce industry. Beyond technology, we are leading supply chain management with expanded infrastructure and continual innovation. in warehousing and order delivery for enhanced efficiency, cost reductions, ensuring high-quality services. Next, I'd like to move to new achievements made. The initiation and expansion of the compound network is one of the most important milestones achieved in 2024. It's designed to streamline logistics services while lowering costs both internally and externally. This advanced cross-fulfillment center transshipment model has established an integrated, highly efficient logistics network connecting our five major super hubs across East, Central, South, North, and Southwest China. By incorporating first mile and the last mile services, we're heading towards a comprehensive Kunpeng national network with seamless end-to-end supply chain control In Q4, we expanded last mile delivery coverage to additional metropolitan areas, including Wuhan, Guangzhou, Chongqing, and Tianjin. With 28 transportation routes now in operation, our network continues to strengthen this reach. Our ability to execute at scale is reflected in our growing external customer base. which increased by 17 in Q4, a 20% rise from the previous quarter. Operationally, we have also achieved significant improvements for the full year 2024. The order damage rate dropped by 56%, while average delivery time improved by nearly a full day. Financially, the Kunta network generated 7.1 million RMB in total gains in 2024, including cost savings. In the future, we plan to integrate fulfillment centers under cooperation into the network, further enhancing our distribution infrastructure and the logistics efficiency. Moreover, in 2024, negotiations with key logistics partners led to a 5% reduction in JD logistics delivery fees and the total savings of 1.22 million RMB from SF Express and VTO. In addition, through rent negotiations and the strategic warehouse relocations, we achieved 8.63 million RMB in annual cost savings, including one-time relocation expenses. These endeavors combined with improvement in warehouse labor efficiency and the packaging optimization resulted in a 4.9% year-over-year reduction in fulfillment costs to 381 million RMB in 2024. Furthermore, to enhance our supply and distribution capabilities and align with our strategy for the nationwide component network, we have expanded our supply chain infrastructure with seven new fulfillment centers going online in Q4. These additions include centers in Guangzhou, Wuhan, Shijiazhuang, Jinan, Chongqing, Xinjiang, and Hunan. The new centers will reduce delivery times for local customers while expanding our national network to a total of 18 fulfillment centers. This will enable us to deliver to over 300 major cities within 24 hours and nationwide within 72 hours. Our rapid fulfillment center expansion is a testament to the effectiveness of our current margin-friendly franchise model, a collaborative approach that transforms existing warehouses into full-fledged fulfillment centers in a significant shorter timeframe, supported by our fully digitized systems and processes especially in remote regions. Under this model, 111 holds a share of the gross merchandise value. In 2025, we plan to expand our fulfillment center's footprint by adding at least 15 more centers. As we reflect in Q4 performance, I'd like to highlight several key industry recognitions that underscore our market leadership and a strong regional influence. First, we were recognized as the most valuable healthcare and pharmaceutical company for investment, highlighting our strong growth potential and long-term value creation. Second, we were ranked among the top 100 private enterprises in Chongqing. Third, we were honored as an outstanding case of a productive internet service platform in Shanghai's Pudong District, recognizing our innovative approach to digital transformation in healthcare e-commerce. Meanwhile, our tech portfolio now includes 33 patents upon four new additions in Q4. These latest patents reflect our commitment to technological advancements and the strategic focus on enhancing efficiency, safety, and user experience. This includes a group chat content semantic analysis-based incident monitoring system and a method which leverages AI-driven language processing to improve real-time risk detection and crisis management. We have also developed a doctor allocation algorithm based on consultation data, optimizing physician matching to enhance service efficiency and patient outcomes. Additionally, We introduced and advanced the drug sorting method and system, improving fulfillment accuracy and efficiency. Lastly, our emotional analysis system based on pharmaceutical purchase pathways provides deeper insight into customer behavior, allowing us to refine personalized services and consumer engagement. We're deeply grateful for the recognition from both local markets and the industry. These accolades will undoubtedly boost our credibility as we'll continue to solidify our market position and foster innovation within the sector. Last but not least, I'll provide an overview of our growth strategies for revenue, margin, and profit. As we look ahead to 2025, We remain optimistic, although fully prepared for many challenges lying ahead. On the supply side, we have strategically consolidated resources from major commercial players across the country through our JVP initiative, and we will continue to prioritize investment in the JVP platform to optimize the range of product offerings. This model has already proven its significant value in connecting new partners and enhancing our supply capabilities. Additionally, our wholesale purchasing models will expand the promotion of key products from leading pharmaceutical companies, leveraging our strong digital marketing network. To further strengthen our supply capabilities, we're increasing the number of franchised fulfillment centers in multiple underserved provinces, thus expanding our reach. Kunpeng National Network will ensure an integrated approach to managing products and logistics across the entire country. With these enhanced supply capabilities, we can better offer customers the most comprehensive selection of pharmaceutical products at competitive prices. On the other side, we're strategically stimulating customer engagement and the loyalty through high-impact initiatives such as flash sales events, which led to substantial traffic and demand and enhanced customer retention. The Together We Grow project aims to increase customers' share of wallet, strengthening relationships, and driving further growth. It focuses on mid-tier customers, enhancing service quality across all sales stages to meet their core needs. fuel their business development, and ultimately elevate our platform's value and scale. Moreover, by utilizing innovative online and offline integrated marketing models, including brand live streams and the number one summit, we're directly connecting industries with end customers, creating new growth avenues while reinforcing our brand as a leader in customer-centric digital driven solutions. We remain steadfast in our commitment to driving operational efficiency, recognizing it as a critical factor of our continued success in a competitive and a fast evolving market. The integration of AI and fully fledged digitization is essential for us. so maintain our industry-leading efficiency, but also deepen customer engagement and enable the creation of innovative products and services. These initiatives are well aligned to reinforce our market leadership. Technology is not just an enabler. It is the backbone of our strategy, empowering us to build a more agile, intelligent, and customer-centric business in an evolving healthcare landscape. At the heart of this transformation is AI, which we are leveraging to redefine how we interact with customers, optimize decision-making, and enhance operational efficiency. We have made significant investments in AI-driven analytics, automation, and the digital infrastructure to elevate customer engagement, customized experiences, and improve service delivery. Our AI-powered tools analyze vast amounts of data in real time, enabling predictive insights that allow us to anticipate market shifts, refine resource allocation, and drive smarter decision-making. Our 100% digitized platform is not just about efficiency. It is a dynamic, intelligent engine that continuously leans learns and adapts, allowing us to proactively shape industry trends rather than react to them. As the industry undergoes rapid transformation, our commitment to leading-edge technologies ensure we remain at the forefront. We remain steadfast in advancing our AI-driven digital transformation, embedding intelligent automation machine learning, and next-generation customer interfaces into our operations. Our goal is to seamlessly integrate technology and human expertise, creating frictionless, intelligent, and engaging experiences that redefine how customers and businesses interact in the healthcare sector. With that, I'll hand the call to our CFO, Mr. Luke Chen, to walk through our financials.

Thank you. Thank you, Jimmy, and good morning, good evening, everyone.