111, Inc. (NASDAQ:YI) Q4 2024 Earnings Call Transcript

111, Inc. (NASDAQ:YI) Q4 2024 Earnings Call Transcript March 20, 2025

Operator: 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. Haihui 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 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 111’s CEO Mr. Junling Liu.

Junling Liu: Good morning and good evening, everyone. Thank you for joining the fourth quarter and 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 @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 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% 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 health care reforms, including adjustments to individual medical accounts, face the rollout of coordinated outpatient benefits and 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 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, Jianzhijia or JZJ Chain Drugstore expect its net profit attributable to shareholders, excluding non-recurring gains analysis, to decline by up to 69% in 2024, followed by 66% and a 45% decline for Yixintang or YXT Health and the Shanghai Del Ye or Shanghai no.1 Pharmacy Co. respectively. Independent pharmacies with limited resources face even greater financial strain. Given its challenging backdrop, digital transformation is no longer optional. It is essential. Pharmacists must cope with weaker consumer sentiment, slower healthcare 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 called for promoting the coordinated development and governance of healthcare, 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, national medical insurance, pharmacy chains will be among the primary beneficiaries. As a trusted 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 healthcare expenditure as a percentage of GDP remains significantly lower than that of developed countries, indicating ample room for expansion.

As healthcare 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, bring 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. We drove 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 2024, we achieved a yearly profit from operations for the first time with income from operations reaching RMB2.1 million, representing a sharp turnaround from an operational loss of RMB350.1 million in 2023. Our bottom line improved by RMB332.7 million or 94% 0.1% from a year ago. On a non-GAAP basis, income from operations was RMB22.3 million compared to the RMB123.9 million lost a year earlier. Non-GAAP bottom line improved by RMB126.6 million or 99.5% from 2023. Additionally, we generated yearly positive operating tax flow of RMB263 million 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 remain 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% in 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 data applications. These efforts are designed to fortify our core competitiveness in the digital landscape. As a result, we have made further strides in 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 RMB290 million 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 for our operational system nearly every week.

This tech driven efforts drove user retention and higher transaction volumes. The results speak for themselves. Gross Merchandise Volume GMV in December increased by 17% from the prior month while gross profit grew by 8%. Notably, average revenue per user or ARPU surged about 18% and average revenue per order or ARPO 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 Borguan 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 regional 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 RMB905 million in GMV. The platform wide stock out rate dropped from 4.9% to 2.4%, setting the 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 and business growth and ecosystem synergy in the healthcare e-commerce industry. Beyond technology, we are leading supply chain management with expanded infrastructure and continual innovations 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 Kunpeng 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 last mile services, we are 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 Quantum network generated RMB7.1 million in total gains in 2024, including cost savings. In the future, we plan to integrate fulfillment centers on the corporation into the network, further enhancing our distribution infrastructure and 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 RMB1.22 million from SF Express and ZTO. In addition, through rent negotiations and strategic warehouse relocations, we achieved RMB8.63 million in annual cost savings including one time relocation expenses.

These endeavors combined with improvement in warehouse labor efficiency and packaging optimization resulted in a 4.9% year-over-year reduction in fulfillment costs to RMB381 million in 2024. Furthermore, to enhance our supply and distribution of capabilities and align with our strategy for the nationwide Kunpeng 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 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 time frame 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’re honored as an outstanding case of a productive internet service platform in Shanghai’s Pudong New 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 patterns reflect our commitment to technological advancements and a 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 an advanced 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 bolster our credibility as we 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 JBP initiative and we will continue to prioritize investment in the JBP 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 Franchise fulfillment centers in multiple underserved provinces, thus expanding our reach. Finally, our 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 loyalty through high impact initiatives such as flash sales events which led to substantial traffic and demand and enhanced customer retention. Together with GROW Project aims to increase customers share of wallet, strengthening relationships and driving further growth. It focuses our 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 Inovatix online and offline integrated marketing models including Brand Live Streams and the Number One Summit, we are directly connecting industries with end customers, creating new growth avenues while reinforcing our brand as a leader in customer centric digital driven solution.

We remain steadfast in our commitment to driving operational efficiency, recognizing it as a critical factor of our continued success in a competitive and fast evolving market. The integration of AI and fully fledged digitization is essential for us to 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 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.

Luke Chen: Thank you, Jimmy, and good morning, evening everyone. I want to begin by thanking all of our colleagues for their resilience and hard work over fiscal year 2024 as we navigated a challenging environment for making necessary changes to improve our operation and cost efficiency while maintaining our competitive edge. moving to the financials, my prepared remarks will focus on a few key business and financial highlights. You can refer to the details of the fourth quarter and fiscal year 2024 results from slide 17 to 20 in section two of our presentation. Again, all comparisons are year-over-year and all numbers are in RMB unless otherwise stated. Let’s start with the fourth quarter results. Total net revenues were RMB3.8 billion and gross segment profit was RMB202.5 million.

Due to an unfavorable macro environment, macroeconomic environment, net revenues and gross segment profit decreased 6.3% and 5.5% respectively. Total operating expenses for the quarter decreased 50.1% to RMB209.8 million. As a percentage of net revenues, total operating expenses for the quarter were down to 5.5% from 10.2% as we continue to enhancing our operating leverage and optimizing our operating efficiency. Fulfillment expenses accounted for 2.7% of Q4 net revenues as compared to 2.5% in the prior year. Sales and marketing expenses as the percentage of net revenue for the quarter was 2%, down from 4.2% a year earlier. G&A expenses accounted for 0.5% of net revenue, down from 2.4% in the previous year, and technology expenses accounted for 0.4% on net revenue, down from 1.2% in the same quarter 2023.

As a result, non-GAAP loss on operations was RMB2.3 million, representing an improvement of 95.8% from RMB55.2 million in the prior year. As a percentage of net revenues, non-GAAP loss from operations accounted for 0.1% in the quarter, down from 1.3% a year ago. Non-GAAP net loss attributable to ordinary shareholders was RMB14.8 million, representing an improvement of 74.9% from RMB59 million in the previous year. As a percentage of net revenues and GAAP, net loss attributable to ordinary shareholders accounted for 0.4% in the quarter, down from 1.4% a year earlier. As for our fiscal full year 2024, I would like to run through a few highlights, again you can refer to details in our deck and earning release of our comparisons to our full year 2023.

Our full year 2024 net revenues are RMB14.4 billion and the gross segment profit was RMB829.2 million. Net revenues and the gross segment profit had a 3.7% and a 2.3% decrease respectively. For full year 2024, total operating expenses decreased 31% to RMB827.1 million as a percentage of net revenues, total operating expenses decreased by 230 basis points to 5.7% from 8% a year earlier. Fulfillment expenses accounted for 2.6% of net revenues as compared to 2.7% in the previous year. Sales and marketing expenses as a percentage of net revenues reduced to 2.2% this year from 3% in 2023. G&A expenses accounted for 0.5% of net revenue down from 1.5% a year earlier. Technology expenses account for 0.5% of net revenues as compared to 0.8% in 2023.

As a result, income from operations was RMB2.1 million compared to loss from operations of RMB351 million in 2023. Non-GAAP income for operations was RMB22.3 million compared to net GAAP loss on operations of RMB123.9 million in 2023. In GAAP net loss attributed to ordinary shareholders as the potential net revenues decreased to 0.3% by 1.1% a year ago. We are confident that we are on the right path towards profitability driven by our robust technology capabilities and these capabilities will continue to enable us to scale our business efficiently and enhance our operation performance, ultimately delivering profitability and maximize value for all our shareholders. Please refer to slides 21 to 25 of the appendix section for our selected financial statements and a quick note on our cash position as of December 31, 2024, we had cash and cash equivalents, restricted cash and short-term investment of RMB518.3 million and we have achieved first ever annual positive operating cash flow.

To date the company has a total outstanding amount of RMB1.08 billion recorded under redeemable loan, controlling interest and accrual expenses and other current liabilities. This amount is owed to a group of investors in one pharmacy technology pursuant to their 2020 equity investment as previously disclosed in accordance with terms of this investment. 111 has received a redemption request from certain of such investors. Following communication and negotiation, the company has reached agreements or obtained commitment letters from investors representing approximately 97% of total amount to reschedule their repayments, allowing for phased repayments over extended periods if the holders exercise their redemption rights. To date, the company has already paid a portion of the repurchase of funds upon signing the agreement.

In January 2025, an application tribute in Shanghai ruled in favor of an investment seeking redemption requiring the company’s Hong Kong subsidiary to repurchase the investment share in one pharmacy technology for RMB30 million plus accrued interest. We do not expect the arbitration outcome to have any impact on the business operations of our PRC entities and we remain in active discussions with net investors to negotiate and finalize our mutually agreed revised repayment schedule. We will provide updates to investors if there are any significant developments. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Q&A Session

Operator: Thank Your first question comes from Robert Sassoon with Water Tower Research.

Robert Sassoon: Hi, how are you doing? Very resilient performance in the face of adverse conditions. So let me ask you on that point, the unfavorable macroeconomic environment, can you actually specify how that has actually affected the company’s performance in the quarter and of course for 2024 as a whole?

Junling Liu: Good morning, Robert. Yes, sure. So first of all, even with the very tough macro environment we achieved a major milestone in the company’s history by delivering the first ever operating profits both at the non-GAAP and debt level. We also achieved a positive cash flow over $263 million. And, in the meantime, we slashed operating expenditure by 130 basis points to 5.3% of revenue, making us one of the most efficient operators in the industry. And even compared with some of the really gigantic state-owned established companies. And also, our bottom line improved by almost RMB350 million at the GAAP level. And I’m very proud of the team who worked tirelessly throughout the year. The dedication and focus on executing our strategy is really outstanding.

In 2024, we managed to significantly increase our product range by innovative business models like the franchise, the warehouse I spoke about in my script and shared inventory with the upstream supply and partners who worked extremely hard to offer competitive prices. We substantially increased our fulfillment centers to increase our reach. And AI also has become an integral part of our business operations and it made us extremely efficient to a level where we can compete against the biggest giants in the industry. That’s the accomplishments that our team achieved and that which translated into the operating profit and a positive cash flow. Thank you.

Robert Sassoon: Right. That’s a good answer. Thank you. Your gross margin nevertheless has still continued to improve year on year in the fourth quarter and in the full year. So what are the main factors driving that? And can you provide more color on gross margin trends?

Junling Liu: Yes. We achieved gross margin improvement, yet at the same time, offered customers very competitive prices. There is no magic here. So first of all, in order to offer the best selection for our customers, we insist on providing both low margin and a high margin products. And of course, the low margin products don’t make money. What we did is that we outsourced part of the low margin products to our partners who reside closer to their customers to save on shipping costs in order to having in order to have a reasonable margin with competitive pricing. Secondly, the teams have specific goals and the KPIs to sell the higher margin products, including our own private label products. The other thing we do is we try to use a decentralized model to encourage our suppliers to store their inventory into our warehouses on a consignment basis, and we offer holistic services.

Speaking of services, in addition to what I just mentioned, I mean, I’ve also developed other service modules such as supply chain financing, the live streaming and so on. So the service revenue stream will continue to be one of the core metrics we manage with great diligence. In the last part of the list, we constantly tweak our assortment management and the AI assisted data analytics enable us to really optimize our assortment. Thank you.

Robert Sassoon: So moving on to the operating expenses side, it seems you’ve managed to decrease that quite significantly. And the fourth quarter operating expenses as a percentage of revenues further decreased year on year to 5.5%. So how was this achieved?

Junling Liu: Yes, I mean, it’s always a tough battle to balance our bottom line and top line. A deep cut in the OpEx could end up a big loss in the top line. And our core competence really comes from being efficient. And over the years, we have developed a very sound approach. Staffing optimization is critical. We constantly review and adjust our org structure and headcounts as this is where expenses can easily get out of control. The other thing we do is there are few buckets of expenses in our operations. Very, very simply put it, you have fulfillment, which is the biggest portion of our OpEx. You have sales and you have G&A. G&A also includes the technology team. We break down each line item of those expenses and manage with very fine granularity.

To give an example like fulfillment, we will break it down into warehouse rental, the number of employees, the shelving cost, the picking cost, the racking material and the shipping costs, the damage rate, return, etcetera. Each of the above category has someone responsible to hit the target. Lastly, of course, the most essential element is really our digital capabilities. Over the years, we have invested hundreds of millions of yuan into technology, and our whole operation is 100% digitized, which provides real time data. And that real time data enable us to make real time adjustments. And this year, we want to ensure that the company will need to go through an AI transformation. And I’m really looking forward to updating our efforts in customer interfaces and the underlying AI system architecture.

Thank you, Robert.

Robert Sassoon: Thank you for that detailed answer. Just a final question from me. Obviously, it’s quite impressive that you despite the really adverse conditions that you are facing, you actually posted your first ever annual operating profit and positive operating cash flow. So can you just go through what the key drivers behind that milestone were? And how sustainable is this profitability going forward more importantly?

Luke Chen: Yes, Robert, let me answer this question. Yes, we have all noticed we have achieved first half of annual operating profit and positive cash flow in 2024 on a whole year basis. And we believe the key drivers behind our relentless efforts to improve our leverage efficiency. You can count on there while maintaining our revenue scale, our operating expenses decreased two thirty basis points for year over year in 2024 and our long-term improved by 31%. We also well managed our working capital to generate positive operating cash flow, our time between RMB 263 million. Our accounts payable days are about forty-five days and our accounts receivable days is about ten to twelve days and our inventory turnover days are about twenty-five to thirty days.

So we are highly efficient and well managed compared to as gaining expansion even compared to those dynamic players. We believe that we have built a solid foundation for 2025 and onwards. In 2025, we will continue to build up the scale in total margin and efficiently with this AI support. And our profitability and positive cash flow generation, we believe will be sustainable. Thank you, Robert.

Robert Sassoon: Thanks for all that. And I’ll jump back in the queue.

Operator: Your next question comes from Xipeng Feng with CICC.

Shifan Sun: Okay. Thank you for taking my questions. This is [ph]Shifan Sun from CICC. Congratulations on your great progress in 2024. I have two questions actually. The first one is just a quick follow-up question on expense control. I just wondered if there’s any further expense control action that we could look forward to in 2025? And another question is about revenue and earnings. Given the current market environment, what’s the driver to support revenue growth, especially considering that we also need to maintain a good profit margin? Thank you.

Luke Chen: You look forward to taking that cost. [indiscernible]

Haihui Wang: Hi, Shifan. This is Harvey. I’ll take your question regarding this operation cost. And actually looking back on each operation cost last year, from an annual perspective, they were basically optimized in a very structured way. While, of course, many of these optimizations will gradually upgrade from those small and temporary improvements to structural optimization. And in this year, 2025, of course, in next year and in the future, we will definitely continue to utilize AI and our Internet technologies to continuously optimize their costs. This has already become ingrained in our DNA of our company and on our each employee. And the second question regarding the growth. And actually, on our supply side, we adopt a decentralized model and adding more and more other fulfillment centers, as Shireen just mentioned.

And actually, there is a new fulfillment center just opened this week. And we also bring a greater variety of our product selection. And we established a digital external competition mechanism. This mechanism prompts upstream suppliers, our upstream especially those pharmaceutical companies, to continuously reduce their costs and also to offer more and more competitive prices. While on our demand side, our focus is on seizing the most efficient and competitive trends for our customers in this industry. We launched the Growing Together program recently and also last year end, we launched fresh sales festival. It’s every Monday and Tuesday every week, until now. And also our AI powered intelligent procurement system. With all that, we aim to obtain more shared wallets from our customers, especially from those chain store customers.

While expanding our scale, we will reduce cost and definitely enhance our profitability.

Junling Liu: Thank you, Shifan.

Shifan Sun: Okay. That’s very clear. I have no further questions. Thank you.

Operator: Your next question comes from Zoe Bian with Citi.

Zoe Bian: Hi. This is Zoe from Citi. Thank you for taking my questions. My first question is about, can you talk about more about your technology advancement in the past year, especially in AI applications? And some of your competitors are offering AI empowered solutions to graduate medical institutions. Are you considering launching a similar business and will AI be a key part of your future growth? My second question is about the reducing fulfillment cost. What are your key initiatives last year to further reduce the cost? And what are further potentials in the future? My third question is, how much are you budgeting for AI investment?

Luke Chen: Okay. Let me answer your question. Let me review that what we have accomplished last year through the technology. Last year, we had two critical initiatives or strategies. One is that using technology to drive efficiency towards profitability. So we have accomplished that. And second was to drive more towards the platform business instead of heavy asset set of own business. So let me just go to that and talk more about AI, how we invest in AI about the function AI. So as you can see that first of all, we drive more for the platform business, okay. We build a lot of systems. One system was kind of set of services system for building R&D subsidy system. So we do that system for merchants on our platform and they will have monitoring system, have pricing and have pricing and have pricing system and kind of a day to DIY with the DIY service, they do it by themselves.

Through that, we can handle over 1,000 merchants and 30,000 SKUs promotions per week. And all the promotions achieved good results, more than doubled their sales through that promotion. So behind the technology was kind of everything was on good technology. Second, what’s important, we call shared inventory. We were the first in the industry to start shared inventory for BRC. All of these sound very easy, but very complex in the systems and in the processes because B customers purchase by customs and B customers purchase by units, how we build the system not only to handle the differences, but also have the supply chain to manage the whole different processes. So we accomplish that. But we send it back to sharing between our inventory and our DPP partners as well as what Binny mentioned, the franchise fulfillment centers, okay.

The fulfillment centers the franchise fulfillment centers, they have their own inventory and our system where share their inventory with ours and present to customers and only realize the sales wins so well platform. It’s a very complex system and right now we already have 11 franchise fulfillment centers and in the future, we’re adding another plan 15. So with more of that, we can quickly increase our selection with a much lighter asset, much higher efficiency. So this is giving you all information about the whole data and that’s also we use industry data, we use our own data, we use our partners’ data, our customers’ data by direct connections with their ERP systems. So with AI’s assistant power department, we’re able to achieve very high efficiency accuracy, achieved about 95% accuracy and forecasting accuracy reached 82%.

So, we also talk about the AI, what we have done last year. So we built the so called AI powered price index tool to better predict, optimize our pricing strategies. So that’s already used. We use also large data large sampling models to build so called AI business intelligence for the Chart BI, Oracle system. This is generated AI product using the large semi model technology. Well, right now, we can our employees, our people, we can all be using the chat with the system acquiring the system information. For example, we got what’s the why the conversion base was down for certain regions last week by using the natural language and getting the data back. And we’ll also build customer service powered by AI system, reducing our service staff.

This year, we’ll make AI as a very big part of our strategy, okay? We would have a plan to develop various AI agents and be sold all the way. And we integrate AI as a core engine to drive end to end technology integration, spanning the price intelligence, product selection, supply chain optimization and the customer service. So that’s probably answered the first question about how we use technology for the management. Let me also talk about the supply chain optimization. How we will achieve better efficiency. I know that the selecting a big cost is the fulfillment. Also, right now, with more fulfillment centers, adding more the franchising fulfillment centers, we are closer to customers. So our loss now delivery cost will be reduced. However, we need to balance the distribution of inventory among the warehouses to make sure that we reduce the long distance cross region delivery, but have more regional delivery.

So that’s the part we are open in, okay. So last year, when we negotiated with all the carriers to make sure that we have a lot of regional delivery and with regional cost. Also, we relocated our warehouse much more efficient, okay, super hubs. Now adding more franchising warehouses will have a much better more regional delivery, better through the clinical network, we were able to redistribute our inventory to all those franchising for semiconductor as well as our super hubs. And we also use the clinical network to do first now for our large suppliers and also do last now for large customers. And the protocol network is very efficient. Not only the cost is 20%, thirty % lower and asking for 35% logistics, but also big draw in debt stream.

So those are the benefits of the Kumbo network. So this year, we extend our laws to include all our franchising partners, okay. But still we’re only accomplishing the connection among all supercars. So this will we really anticipate a decrease in our recent past. So hope this answers your question, Billy.

Zoe Bian: Yes, thank you. My last question is how much are you budgeting for AI investment per year?

Luke Chen: Yes. We have some plans over building our platform to host a series of agents AI agents and we started on the first few and we feel that there are immediate interactions with our customers. This will not only improve customer experience, but also increased our customer stickiness as well as RPU and conversion rate. So through these various applications, we hope to achieve more not only cost reduction, but also customer acquisition. In terms of we are building a team and we are training all our employees AI applications and how we effectively conduct the work to better use of AI.

Zoe Bian: Sure, sure. Got it. Thank you,

Operator: Your next question comes from Sean Yan, private investor.

Unidenified Analyst: First of all, congratulations to you on the first ever annual operating profit and positive operating cash flow. I have two questions about the future plan and outlook of 2025. First question is, are there any plans to expand partnerships with pharmaceutical companies, pharmacies and other healthcare providers? What will be the key focus areas of these collaborations? The second question is, what are your expectations for the market in 2025? Are there any changes in the regulations and laws on the horizons that will impact your business model or your profitability? Thank you.

A – Haihui Wang: Okay, Yan. I think your two questions actually are correlated. I’ll talk about the market first and then about a partnership with upstream and downstream companies. So regarding this market, I think like all the other markets in China, we know there is a reform led by our state government, currently happen in this pharmaceutical area. And the key focus of this reform, we all know is to enhance the efficiency of all steps and all links. The result is to reduce the cost of medical insurance and of course reduce the cost of the medical expenses of the residents. Under this key focus, we as Internet technology company, AI company, we have inherent advantage and also need to take greater responsibility compared to those traditional players.

And they have been very good practices in other industries like in 3C industry and FMCG, etcetera. So we believe that our government will continue to introduce new policies to encourage innovation in this industry to improve efficiency and to reduce costs. So during this reform, we will leverage our advantage in AI, in Internet digitization to consolidate our business values and to create greater value. And then talk about your second question on partnerships. Actually, our business model is to connect our upstream partner, that is pharmaceutical companies, drug providers with those downstream partners, that is pharmacy terminals and even patients through our digital platform. So in future, we will further expand our cooperation with both upstream and downstream partners.

The key is also to enable those drugs to enter China’s retail terminals, that is pharmacy, more effectively and to help those of pharmacy better sell and promote these drugs through an AI powered digital platform. We believe under the wave of AI technology, this will totally change and succeed with the traditional model of drug promotion that relies heavily on human effort. I hope I answered your question. Thank you.

Unidenified Analyst: Thank you for your detailed answer.

Operator: In closing, on behalf of the entire 111 management team, we’d like to thank you for your interest and participation in today’s call. If you require further information or have any interest in visiting 111 in Shanghai, China, please let the company know. Thank you for joining us. That concludes today’s call.