111 Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 15, 2023

There are 9 speakers on the call.

Operator

Hello, everyone, and thank you for joining 111's conference call today. On the call today from the company are Doctor. Gang Yu, Co Founder and Executive Chairman Mr. Jiang Liu, Co Founder, Chairman and CEO Mr. Luke Chen, CFO of 111's major subsidiary and Mr.

Operator

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 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 could cause actual results to differ materially.

Operator

For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward looking statements as a result of new information, future events or otherwise expected as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year over year comparisons unless otherwise stated. Please also refer to the earnings press release for detailed information on the comparative financial performance on a year over year basis. With that, I'll now turn the call over to 111's CEO, Mr.

Operator

Junling Yu. Please go ahead.

Speaker 1

Thank you for joining our Q1 2023 earnings call. The information that we'll be discussing here is also provided in the slides earlier today on the company's website. I encourage you to download the presentation along with the earnings report at ir.111.com.cn. I'll begin by providing an overview of the macro environment followed by a review of our recent operational performance. Additionally, I will comment on our continued commitment to industrial digitization, driving revenue and margin growth, fortifying upstream supply capabilities, enhancing operational efficiency and outlining our future strategies.

Speaker 1

Subsequently, our CFO, Mr. Luke Chang, will present a detailed analysis of our financial results, ensuring a thorough understanding of our organization's financial standing. As many of you are aware, in the Q1 of 2023, China's economy achieved a solid start. It was reported that the GDP reached KRW 28.5 trillion, growing by 4.5% compared to the same period last year. The economic recovery remained positive as the effect of various policies gradually became evident.

Speaker 1

Both online and offline economic activities resumed. The medicine markets in both B2B and B2B segments also experienced aligned growth with China's economy in Q1 of 2023. Meanwhile, through the COVID-nineteen pandemic, China has undergone a transformative phase in its healthcare industry, embracing digitization and achieving remarkable progress. The adoption of electronic medical records has streamlined data management, enhancing efficiency and accuracy. Telemedicine services have expanded, enabling remote consultations and bridging the gap in healthcare access, particularly in rural areas.

Speaker 1

Online pharmacies and e commerce platforms have revolutionized medication procurement, offering convenience and accessibility to patients. China's commitment to digitizing the healthcare sector during the pandemic has not only improved the efficiency, but also paved the way for innovative healthcare solutions and improved patient outcomes. I'm pleased to report that leveraging these transformative trends in the healthcare industry 111 as a prominent healthcare technology company in China has experienced solid growth and improved all of our operating metrics. With a focus on digital healthcare solutions, 111 has capitalized on the rising demand for digital medical service platforms for both B2C and B2B customers. Through our robust technological infrastructure and strategic partnerships, 111 has effectively connected patients with pharmacies, healthcare professionals, pharmaceutical companies and other healthcare service providers.

Speaker 1

Our growth trajectory showcases the immense potential of digitization in revolutionizing healthcare delivery and improving overall patient experiences in China. During the Q1 of 2023, the company rose to the challenge and achieved RMB3.7 billion in revenues, an increase of 23.9% year over year, marking the 19th consecutive quarter of Y o Y growth since our IPO. I'm also pleased to report that our gross profit reached RMB236 1,000,000, representing a margin growth rate of 22.7 percent year over year. Our B2B business remains the key driver of revenue growth. In Q1, B2B revenue was RMB1 1,000,000,000 representing a year over year increase of 24.9 percent and gross profit increased to RMB211 1,000,000, an increase of 25.5 percent year over year.

Speaker 1

The hard earned margin growth is the result of our consistent adherence to 111's customer centric philosophy and our strong determination to create value for our customers. Meanwhile, we are thrilled to share this exciting news with our stakeholders that our non GAAP operating profit has finally turned positive. Compared to a loss from operations as a percentage of net revenues of 2.4% in 2022, reaching our goal of quarterly breakeven at the non GAAP operating income level. With hard work and dedication, we're now seeing the fruits of our labor and the progress towards achieving our financial goals. This milestone not only reflects our company's focus on efficiency and cost management, but also our commitment to delivering value to our customers.

Speaker 1

We believe there will be plenty of challenges lying ahead and there will be ups and downs in our business, but we will work tirelessly to create more value for our customers and shareholders. Now allow me to take a moment to discuss the progress we have made on our operation. Let me start from our supply side. We have successfully enhanced our partnership with upstream pharmaceutical partners by promoting mutual understanding, upgrading corporation level, enhancing supply chain efficiency and bolstering our comprehensive digital capabilities. As our business continues to expand and as we position ourselves as an effective commercialization partner, we will continue to offer value add services to pharmaceutical enterprises.

Speaker 1

At present, we assist hundreds of pharmaceutical companies in drug commercialization, digital marketing and market insight. For example, on our B2C platform, in addition to the successful launch of Huya Medicine's Cells at Learton, Sanofi's Alibra made its debut on 111, marking its first online nationwide release on the platform. This medication is indicated for the treatment of seasonal allergic rhinitis and a chronic idiopathic urticaria in individuals aged 12 and above. Introduction of Allegra in China and its availability on 111 not only improves accessibility for patients, but also provides a better medication experience through professional guidance from healthcare professionals and pharmacists. I personally experience severe allergic symptoms during the spring season and taking traditional antihistamine drugs often leaves me feeling excessively drowsy, hampering my ability to work effectively.

Speaker 1

However, with the introduction of this medication on our platform, I as a patient have been able to enjoy the convenience of accessing online doctor consultations and having the medication delivered right to my doorstep. This experience has been nothing shorter than wonderful, especially when compared to the hassle of visiting a physical hospital enduring the registration process and enduring long queues before finally seeing a doctor and obtaining a prescription. To exacerbate matters, there is also no guarantee that the hospital stocks the specific drug are required. Knowing that there are countless individuals across the country facing similar issues, I'm thrilled that they too can now benefit from 111's digital healthcare platform. Meanwhile, on our B2B platform, through our partnerships with downstream pharmacists, we can deliver digital value to upstream pharmaceutical companies with our newly developed digital tool, Telescope.

Speaker 1

Telescope served as a lens for pharmaceutical companies, allowing them to gain a more direct and comprehensive view of their drug sales and pricing dynamics real time. By leveraging advanced data analytics and market insights, Telescope enables these companies to analyze sales patterns, identify pricing opportunities and make data driven decisions to optimize their strategies. With TELESSCOPE, pharmaceutical companies can assess the performance of their products in real time, identify market trends and adjust their marketing campaigns accordingly. This invaluable tool not only provides a clearer understanding of the market landscape, but also assists in forecasting demand, refining pricing strategies and ultimately maximizing sales and profitability. On the other end, we are deeply committed to empowering downstream pharmacies in a digital way, offering comprehensive support across all aspects of pharmacy operations.

Speaker 1

Our solutions not only provide cost effective medical product options with satisfactory services, but help them streamline processes and enhance operational efficiency. Through our network and partnerships, we negotiate competitive pricing and favorable terms with suppliers, allowing pharmacies to access products at lower costs. Additionally, leveraging technology such as automated ordering system and efficient logistics, we ensure timely delivery and reduce operational expenses for pharmacies. By offering cost effective products and efficient services, we enable pharmacies to deliver value to their customers and maintain their competitiveness in the market. Particularly, by the end of Q1, our One Health virtual franchise model enables around 20,000 pharmacies provide superior products and services to their customers.

Speaker 1

All participating pharmacists can use our platform to better manage their product selection, procurement and inventory management, as well as accessing our distribution tools through our digital SaaS services, including smart sourcing, digital marketing, O2O and CRM. Thirdly, operating efficiency remains a continuous focus in our strategic imperatives. With growing scale of business and enhanced technological capabilities, 1 on 1's operational efficiency continues to improve. We're glad to see that revenue and the gross profit have both increased, whereas as a percentage of net revenue, the sales and marketing expenses in Q1 was down to 2.41% from 3.85%. General and administrative expenses was down to 1.12% from 1.61 percent and technology expenses was down to 0.68% from 1.31% in the same quarter last year.

Speaker 1

The total amount of sales and marketing expenses, general and administrative expenses and technology expenses year over year has been reduced by 22.3%, 13.9% and 35.1% respectively. We have made significant efforts to enhance management efficiency through various measures. Firstly, we have implemented a strategic reduction of redundant staff, carefully optimizing workforce allocation, while leveraging technology to automate certain tasks. Secondly, we have upgraded our standard operating procedures and streamlined management processes to eliminate redundancies and enhance productivity. Additionally, we have prioritized better corporate governance practices fostering a culture of accountability and transparency across the organization.

Speaker 1

Lastly, we have made substantial investments in technology solutions that improve operational efficiency, such as advanced analytics, robotic process automation and digital platforms. These concerted efforts aim to drive efficiency, reduce costs and ultimately deliver enhanced value to our stakeholders. To further improve operational efficiency, we will keep on focusing on implementing our strategy, flattening our organizational structure and improving the work efficiency of our employees through multiple operational tools. Regarding logistics, our fulfillment costs have decreased significantly, thanks to our upgraded self owned warehouse operation and joint venture warehouses. By investing in our infrastructure and technology, we have been able to optimize our supply chain processes and achieve greater efficiency.

Speaker 1

These efforts have allowed us to deliver our products to customers faster and more accurately, while also lowering our fulfillment costs to 2.78% from 3.1% as a percentage of net revenue. We will continue to prioritize these initiatives as we seek to provide the best possible customer experience and remain competitive in the market. It is also worth noting that we have further sharpened our focuses to operate on the principles of value creation, being customer centric and strengthening our supply base. Across the organization, as part of our organizational change initiative, we have established an in house advisory department dedicated to driving strategic improvements across multiple disciplines. This department plays a pivotal role in analyzing customers' needs, enabling us to refine our product assortment to better align with market demand.

Speaker 1

By closely monitoring market trends and leveraging customer insights, we can intelligently adjust pricing to ensure competitiveness while maximizing profitability. Additionally, the advisory department works towards optimizing internal resource allocation, streamlining processes and enhancing operational efficiency. Through those efforts, we aim to continually improve our ability to meet customer expectations, achieve optimal pricing strategies and drive efficient allocation of resources across the organization. Digitizing the healthcare industry has been our goal since our inception. Under China's 14th 5 year plan for national economic and social development, digital economy has been elevated to a vital position and expected to enter a period of rapid expansion through 2025.

Speaker 1

We see this as a tremendous opportunity to leverage digital technology and reconstruct the value chain in the healthcare industry. To achieve this, we have built a world class technology platform that is already transforming China's healthcare industry. We have built industry leading smart supply chain platform that is uniquely tailored to optimize our digitization model and unrivaled national sales network providing comprehensive coverage and a sophisticated multi channel digital platform that serves new in this massive market. This has made us an attractive commercialization partner as evidenced by our growing number of partnerships with pharmaceutical companies. Our design to serve many players in the healthcare industry, pharmaceutical companies, pharmacies, doctors and we have created the largest virtual pharmacy network in China with about 440,000 pharmacies and have strategic partnerships with over more with more than 500 globally renowned and domestic pharmaceutical companies.

Speaker 1

We feel very proud of the ecosystem we have built to date and it will enable us to scale our business to the next level. Now let me spend a moment to talk about our future initiatives. 1, align our product assortment and structure with customers' needs. We are committed to enhancing the customer experience by optimizing our product assortment in accordance with customers' needs. Through diligent efforts and the utilization of information collected from various channels, including customer feedback, market research and data analytics, we continuously optimize our product offerings.

Speaker 1

By leveraging insights obtained from these sources, the company ensures that the right products are readily available to meet the diverse demands of customers. This approach not only enables us to deliver tailored solutions, but also allows for an exceptional and customized procurement experience. 2, reduce procurement costs. Direct sourcing from pharmaceutical companies has been highly effective in lowering the cost of products. We now source from over 500 global renowned and domestic pharmaceutical companies and we will continue to deepen our strategic relationship with our existing partners as well as securing new partnerships.

Speaker 1

In the meantime, many new metrics have been set to drive our procurement team to perform better in the cost down campaign. This will provide us with a wide range of drug selection at lower cost. 3, be competitive with intelligent pricing. As a digital medicine platform, especially in B2B area, we are dedicated to continuously improve our market position by optimizing our pricing strategy through an intelligent pricing system. Leveraging advanced algorithms and data analysis, we meticulously evaluate market dynamics, competitor pricing, customer demand and other relevant factors to determine the most competitive and a profitable pricing for our products.

Speaker 1

This approach allows us to strike a balance between affordability for our customers and profitability for our business. By adopting this intelligent pricing system, we aim to gain a larger market share by attracting new customers, retaining existing ones and establishing ourselves as a trusted and a cost effective partner in the pharmaceutical industry. 4, invest in smart supply chain. We are committed to optimizing our supply chain to ensure efficient procurement, storage and delivery processes. By establishing strong partnerships with pharmaceutical companies, we can source high quality products directly from them, enabling us to streamline the supply chain and minimize delays.

Speaker 1

Furthermore, we're implementing a mixed model approach, combining direct sales and consignment business to optimize warehouse operations by strategically managing inventory levels and help sell large quantities of partners of consignment stock. To ensure continuity of supply, our dedicated continuity of supply department focuses on optimizing procurement practices, reallocating resources when necessary and maintaining optimal storage levels to meet the demand and ensure the availability of products in a healthy condition. By implementing these measures, we aim to reduce costs and deliver exceptional service to our customers. 5, relentlessly driving operational efficiency. Our commitment to driving operational efficiency is steadfast and we're implementing strategic measures to achieve this goal By prudently reduce labor costs with technological supplement, we aim to optimize our workforce while maintaining productivity levels.

Speaker 1

Additionally, we're actively engaging in negotiations with 3rd party vendors like logistics suppliers to secure competitive rates, optimizing logistic network, enabling us to streamline our supply chain and minimize costs. We have ground sales team across the country to cover over 440,000 pharmacies. Productivity from each sales rep will be vitally important to our business. Detailed measures and the metrics are reviewed each month and ensure continuous improvement. Furthermore, we recognize the critical importance of improving management skills and decision making qualities as these factors directly impact our operational effectiveness.

Speaker 1

Through focused efforts in these areas, we are confident that we can reduce overall operational expenses to a minimum level, ensuring sustainable growth and success. We founded the company without too much resources and connections. Therefore, our survival depends on making ourselves efficient and also making our partners more efficient. This will be our most important competitive advantage. With the scale of our business continues to grow, our leverage will grow as well.

Speaker 1

We aspire to be the most efficient operator in the industry. 6th, keep building 1 Health project for spiral growth. We will continue to actively engage pharmaceutical companies and the pharmacies within the digital framework of the 1 Health project, utilizing an ecosystematic approach with beneficial outcomes. By cultivating strong partnerships and collaboration, we strive to attract more pharmaceutical companies and pharmacists to join our program, expanding the network and generating additional opportunities for growth. Through comprehensive market analysis, tailored marketing strategies and the data driven insights, we work closely with our partners to optimize their product offerings, enhance sales performance and drive profitability.

Speaker 1

1 Health Network has reached 20,000 stores and we expect more to join this digital franchise. 7, committing to digitization. We are committed to consistently invest in digitization as we firmly believe that it will yield long term benefits. By embracing digital advancements, we can optimize our processes, enhance efficiency and unlock new opportunities for innovation. Through strategic allocation of resources to R and D, we can stay at the forefront of technological advancements and drive groundbreaking solutions that meet the evolving needs of our customers.

Speaker 1

By prioritizing digitization and nurturing our culture of innovation, we ensure that our organization remains agile, competitive and well positioned to sustain growth in the ever evolving landscape of the healthcare industry. To sum up, in the face of post COVID opportunities, 111 aims to position itself at the forefront of the healthcare industry, driving positive change and delivering superior services in the evolving post pandemic landscape. We wish to thank all investors who have supported us. Now, I will hand the call to Mr. Luke Chen to walk through our financial results.

Speaker 1

Thank you.

Speaker 2

Thank you, Junling, and good morning or evening everyone. Moving to the financials, my prepared remarks will focus on a few key business and the financial highlights. You can refer to the details of the Q1 2023 results from Slides 15 to 18 in Section 2 of our presentation. Again, all comparisons are year over year and all numbers are in RMB unless otherwise stated. Let's start with the Q1 results.

Speaker 2

For the quarter, we partially benefited from the lifting of COVID related restrictions since December last year. Our top line and growth segment profit continued to grow. Total net revenues for the quarter grew 24 percent to RMB3.7 billion and gross segment profit for the quarter grew 23% to RMB236.2 million. Top line growth for the quarter was mainly attributed to our B2B segment revenue growth at 25% to RMB3.6 billion. The gross segment profit for B2B segment has increased by 26% with gross segment margin kept stable at 5.9%, which reflected our ability to steadily expand our business scale and our margin.

Speaker 2

Our B2C segment revenue increased 0.1 percent to RMB112.9 million with gross segment margin improved from 21.6 percent to 22.3%. Total operating expenses for the quarter decreased 12% to RMB257.9 million. As a percentage of net revenue, total operating expenses for the quarter was down to 7% from 9.9% as we continue to enhance our operating leverage and optimize our operational efficiency. Procurement expenses as a percentage of net revenue for the quarter was down to 2.8% from 3.2% in the same quarter of last year. Sales and marketing expenses as a percentage of net revenue for the quarter was 2.4%, down from 3.9% in the same quarter of last year.

Speaker 2

General and administrative expenses as a percentage of net revenue accounted for 1.1%, down from 1.6% in the same quarter of last year. Technology expenses accounted for 0.7% of net revenue, down from 1.3% in the same quarter of last year. As a result, net income from operations was RMB2.5 million compared to non GAAP loss from operations was RMB72.4 million in the same quarter of last year. Non GAAP net loss attributable to ordinary shareholders was RMB7.6 million compared to the loss of RMB80.6 million in the same quarter of last year. As a percentage of net revenues, non GAAP net loss attributable to ordinary shareholders decreased to 0.2% in the quarter from 2.7% in the same quarter of last year.

Speaker 2

As you can see, we are improving our financial performance quarter by quarter and for the first time we have achieved non GAAP operating income on a quarterly basis. Please refer to Slide 19 to 23 of the appendix section for selected financial statements. A quick note on our cash position as of March 31, 2023, we had cash and cash equivalents, restricted cash and short term investment of RMB878.8 million. As previously disclosed, if our key subsidiary, 1 Pharmacy Technology proposed listing on the stock market was not completed before June 30, 2023, certain PRC investors will be entitled to require us to redeem all or part of their equity for an amount up to RMB1.71 1,000,000. As of today, certain investors have agreed not to exercise their rights before June 30, 2024 to redeem their investment totaling RMB726 1,000,000.

Speaker 2

We are proactively working with the remaining investors, but in case all of such investors choose to exercise their redemption rights, we do not believe such redemption would affect our business and the prospectus as we expect to have sufficient capital resource to fulfill such redemption obligations. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q and A session.

Operator

Thank Your first question comes from Zhipeng Feng from CICC. Please go ahead.

Speaker 3

Congratulations on the company progress. Well, I have 3 questions. My first question is, what are the profit drivers for the year 2023 after achieving a profit in the Q1? And my second question is, what will be the company's operational focus going forward? Last but not least, when we see that the company has just established a strategic cooperation with domestic Internet for enterprise, Tencent.

Speaker 3

Could you please share some more colors on this project? Thank you.

Speaker 1

Yes. Thank you, Siban. I think I'll take the first two questions. And then I think, Gan, you participated in the signing ceremony with Tencent. Maybe you can take that question.

Speaker 1

So the first question with regards to the margin drivers or profit drivers for the remainder year of 2023. I think there are numerous drivers here, just to name a few. First of all, we're going to continue to grow revenue and margin. And with margin growth, that is going to contribute to our bottom line. And secondly, with scale, we aggressively pursue a cost down initiative from the upstream suppliers and all our people on the ground having metrics reviewed almost weekly to ensure that they execute the target set.

Speaker 1

And another driver would be really improved productivity. We have a number of hundreds and hundreds of salespeople on the ground. And we also have many people who are working with suppliers. And of course, detailed plans have laid out for them to improve their productivity. And that's going to be happening on a continuous basis.

Speaker 1

And I spoke in my script briefly about we're going to improve operational efficiency because this to be more efficient is going to help us to deliver better bottom line. And then there are also many innovative initiatives and projects in our technological or digitization efforts. First of all, we started from ourselves to digitize some of the work we do and we can also leverage our internal capabilities and extend the same capability to our upstream pharmaceutical partners and also the downstream pharmacies. And of course, when we talk about to build a stronger supplier base, for instance, we have much better product assortment now. And in particular, our private label is really creating great momentum and we expect that momentum to continue.

Speaker 1

So there are many, many drivers for us to continue to really drive the bottom line improvements. And with regards to the operational focus going forward, so internally, we use 3 sentences. And if I may say that in Chinese, that is So essentially, that is how we really design our operational framework. And if I could translate that, our focus will be value creation, building a customer centric management system and to build a much stronger supply base. So first of all, when it comes to value creation, we have decisions a lot of decisions to make on a daily basis.

Speaker 1

Really, every decision will have to be made on the basis of the value it creates for our customers or partners. If the value is not that obvious or it's all internal driven and that decision will have to be really based on the power the priority is going to be much, much lower. And being customer centric, all we wanted to do is to really build the superior experience for our customers. For our downstream customers, we essentially have 2 words. 1 is to have, the other one is better, to have lots.

Speaker 1

So essentially, whatever the customers need, we're going to have it. So in other words, we're going to have a vast selection of medications available on our platform. So customers can always find whatever they need. This is going to be the final destination. If they cannot find the same drug elsewhere, they should always know that in 111 they can locate it.

Speaker 1

Now by having it is not good enough and we're going to have a better pricing, competitive pricing. So that is going to be essential for us to really build a superior customer experience. And of course, in order to really create that experience, we have a lot of sub projects or many projects that are going on. For instance, we use our digital tools to really create competitive advantages and we're investing in our smart supply chain. We're doing cost down.

Speaker 1

We're doing the assortment optimization and we also use the data that we directly linked with the pharmacies to help us to better to do a better job in assortment, in pricing. And also the last point with the supply base, obviously, we have built a very strong supply base with more than 500 globally renowned or locally domestically renowned pharmaceutical companies and that is a great base for us to date. But as we speak, each day, we are making progress. And we believe in our supply base is going to be critical. That is why we are really investing heavily in making sure that our supply base will be stronger and stronger with each quarter.

Speaker 1

So I'll handle the last question from Zuong about the Tencent partnership.

Speaker 4

Okay. Let me share the partnership with Tencent. The 101 and the Tencent helped EU formed a strategic partnership in jointly providing technology based services to our customers, including the pharmaceutical companies as well as pharmacies. So we will jointly explore new digital solutions in the especially in the sales field as well as integration of smart pharmaceutical sales software services solutions aiming to improve the efficiency of pharmaceutical sales and facilitate the digital transformation of the entire industry. So we definitely leverage Tencent technology advantages in cloud computing, big data, artificial intelligence and the consumer Internet services to support our intelligent drugstore retail, data center and smart pharmaceutical sales software.

Speaker 4

So those are the major contents of our partnership and that we are already in the process of defining joint projects.

Speaker 3

Okay, that's very

Operator

Thank you. Your next question comes from Lauren Cai from HSBC. Please go ahead.

Speaker 5

Thank you, management, for taking my question. I have two questions. First, I would like to ask about how should we think about the company's top line growth in the next few quarters? And what are the key drivers, especially for B2B business? And my second question is, can you can management share more details on your digital marketing tool, the tele scope?

Speaker 5

And can you share your current strategies and goals towards digital marketing business? Thank you.

Speaker 6

Okay, Lauren. This is Harvey. Let me take your question. And for the first question regarding the growth, firstly, we will continue to upgrade our supply chain. And we will establish the direct and strategic partnership with more somatic and also international pharmaceutical partners, bringing in more and more selection with lower and lower cost to our downstream customers.

Speaker 6

And secondly, we will enhance our digital marketing platform. I will talk about that in your second question, to help pharmaceutical companies to commercialize their new products to pharmacies, clinics and eventually to patients and customers. So our B2B business is becoming a platform to effectively link pharmaceutical company with those pharmacies, clinics and with all the end users. In 2022, the volume of China pharmacy retail has exceeded RMB600 1,000,000,000. It is a big, big market.

Speaker 6

We believe that we have enough room to further expand our business volume, of course, with healthy margin. And on your second question regarding our digital marketing tool, the telescope. Telescope actually serves as a lens for pharmaceutical companies. Actually, when they sit in their office in Shanghai or Beijing, they are able this tool, Telescope, allows them to gain a more direct and comprehensive view of their product sales and also their pricing dynamics real time. By leveraging advanced data analytics and also market insights.

Speaker 6

This tool enables pharmaceutical companies to analyze sales patterns and also to identify pricing opportunities, also to make adjustments and make data driven decisions to optimize their strategies. With this tool, pharmaceutical company can access the performance of their products in real time. Currently, it's T plus 2, T plus 2 days and identify market trends and adjust their marketing campaign accordingly. These 2 not only provides a clearer understanding of the market landscape, but also assists in forecasting demand, refining pricing strategies and also maximizing their sales and profitability. Thank you, Lauren.

Speaker 6

Hope I answered your question.

Speaker 5

Yes, that's very clear. Thank you and congratulations for turning profitable this quarter. Thank you.

Speaker 1

Thank you, Aloni.

Operator

Thank you. Your next question comes from Zoe Beyab from Citi. Please go ahead.

Speaker 7

Hi. Thank you for taking my question. May I check how much of the growth of your top line growth in the Q1 came from COVID-nineteen related products? And yes, and we also know you have taken many measures to reduce cost. What's your latest guidance on breakeven?

Speaker 7

Thank you.

Speaker 6

I will take the first question. Definitely the COVID-nineteen those related products, especially in December last year and also this January this year has becoming so popular in this country. Definitely, it brings some of the upside in our business. And but from percentage wise, it's still not that big. So overall, I think in these from March this year, those COVID-nineteen related record has becoming much, much more the trend has been decreased.

Speaker 6

So everything has go back to normal from March.

Speaker 1

Yes. With regards to driving cost down and reducing operational expenditure, if you look at our cost base, we have 3 buckets of expenses, right? So first of all is our fulfillment and secondly is our sales and thirdly, it's the G and A. Given that we founded the company on the basis of being efficient, because we don't have that much resources or connections and obviously, we must be a very efficient operator. And if you look at the last few quarters, our cost to fulfill has steadily coming down and we believe there is still so much we can do to bring down to further bring down the fulfillment cost.

Speaker 1

And with regards to the sales, if you look at our detailed financial report today is about 2.4% in Q1. And we believe that the percentage of expenditure on sales is going to be further reduced and our internal goal is actually 2% within this year. And of course, in the meantime, we'll also use technology to make our head office more efficient to really automate a lot of those work, especially with AI's availability. And our tech team is aggressively looking into it and many projects actually are on trial right now. And we should expect that the G and A cost is going to be continuously going to come down.

Speaker 1

And obviously, you're asking about the breakeven. Just let me give you this picture, right? So even at our current scale, which is RMB13.5 billion last year and we did RMB3.7 billion in the first quarter, We believe if we like we our total OpEx is 6.3% in Q1, Considering during the Chinese New Year, we are really paying our people, we're paying rental, we're paying all those expenses. You've got to shut down the operation for probably 3 weeks or so. That's 6 0.3%.

Speaker 1

In some of the months, we can actually bring it down to the 5% range. And we believe even without the COVID, even without the outliers, and if we do RMB20 1,000,000,000 in sales, we are very confident we can bring down the total OpEx to the 5% range. And let's say if we grow the business to RMB30 1,000,000,000 and we're very confident we'll be operating at subside level, we're talking about 4% something. And imagine if we continue to grow our margin, let's say our margin grows to ideally to 9%, That means our bottom line is going to be around 5%. And we are no different to really some of the retail businesses.

Speaker 1

Although people miss read us as just a pure distributor, but we are far from a distributor. We are a technology company. And we believe that a 5% net margin is actually on that profit is actually quite achievable given time. And as I said before, we want to be an operator that is going to be very efficient, but that's not enough. We aspire to be the most efficient operator in the whole industry.

Speaker 6

Thank you.

Speaker 7

Thanks very much, Mr. Yu and Mr. Lu.

Operator

Thank you. Your next question comes from Kevin Wang, Private Investor. Please go ahead.

Speaker 8

Thanks for sharing. It was a fantastic season and you made a great progress. My question as regarding Sorry, there are some echo.

Speaker 2

Okay, we can hear you.

Speaker 8

Yes, my question is regarding ongoing consolidation in mergers and franchising in downstream pharmacy material industry. Along with competitors going for IPO, how does the company perceive future B2B competition? How will the company strengthen its relationship with downstream customers and establish its own competitive advantage? Thank you.

Speaker 4

That's a very good question. So our major customers are pharmacy chains. For example, in China, the top one pharmacy chains were already serving 95 of them. So we believe that the consolidation will play in our favor. So our established reputation, very strict quality control and transparent supply chain will help us gain the trust from our B customers and pharmaceutical companies.

Speaker 4

And at the same time, as you mentioned that the ongoing consolidation merger franchising certainly will change the whole competitive landscape. So in this case, we'll have to continue to strive for differentiation and innovation. This is what we have mentioned in the Puneen's speech that our new development, remember we built this project Telescope, this illustrates what value can provide to a sponsor of companies to help them gain market insight and market their products through our retail channels. Also, Binny also mentioned the One Health program we provide to our existing B customers their tailored solutions and services. This illustrates how we can empower them in efficiency and the customer stickiness.

Speaker 4

Hope that answers your question.

Speaker 8

Thank you. That's clear. Congrats

Operator

again. Thank you. Your next

Speaker 7

Hi, this is Stephanie from Pacific Investments. Congratulations on the growing revenues. And I have two questions. The first one is, how was the cash flow situation in the Q1 for the company? And what's the current cash position?

Speaker 7

And the second question is, what are the company's plans for its OEM product in the future? Thank you.

Speaker 2

Thank you, Stephanie for the question. Yes, we have achieved a GAAP operating income in the Q1, which means we're no longer burning cash on operation level. It's good news for us. Additionally, we've been managing cash very carefully in terms of working capital. You can see that our accounts payable date is around 45 days and our inventory days is about 30 days, 30 plus days, so it could give us a lot of free cash.

Speaker 2

We are improving our efficiency and continue to build our scale, which means we are able to negotiating a better trading term with our suppliers. So if you look at the cash flow statement, you will see the negative cash flow for the Q1, but that's mainly because we received a lot of bounce from customers in December when the corporate related restrictions were lifted. So a lot of customer pay advance to us in order to get medicines. But in terms of operation, in Q1, we've been cash positive. At the end of quarter end, the cash and cash equivalents with free cash and short term investments amounted to RMB878 1,000,000.

Speaker 2

So we believe that we have sufficient cash reserve to support our business expansion. I will leave the second question on OEM to Harvey.

Speaker 6

Yes. Regarding the question of OEM, yes, we are working with some of the leading pharmaceutical companies in China to OEM, our private label product. And there are a couple of private label registered in 111. Guangzhou is for our trend store customers and also Huangjia, LongYa is for individual store customers and also some more, for example, like Lanmy Beer for dietary supplement. And by Q1 this year, we already launched more than 70 private label FPUs.

Speaker 6

And more and more FPUs are already in our pipeline. Most of these products have been well accepted by our downstream customers. And as you may know, private label products have been a very, very important margin contributor of all of the top trend stores in China. But for our customers, which are most small and medium stores and small and medium chain store or individual stores, they don't have the luxury and capability to establish their own brand. So Guangzhou and Huangjiao and Rongyao become a very attractive solution for them.

Speaker 6

Yes, thank you. Thank you.

Speaker 7

Yes, thank you and congratulations again.

Speaker 6

Thank you.

Operator

Thank you. Your next question comes from Adam Frank from Grace Capital. Please go ahead.

Speaker 8

Well, thank you for taking my part of my question. Here is Adam Frank from Grace Capital. Congrats to your performance in last quarter. And I have two questions. The first, what's the current progress of company's privatization?

Speaker 8

Well, second is, may I ask if the company has any new technological developments and supply chain and smartphone supply chain progress in recent times? Thank

Speaker 2

you. Yes, let me take the first question on the going private. Our understanding is the going private process is still ongoing. The special committee formed by 3 independent directors is still working with the Bai Group. So we shall make all the necessary disclosures in due course as required by the SEC requirements.

Speaker 2

That's our answer on the growing private questions. Doctor. Li will talk about technology. Okay.

Speaker 4

Let me take the question on technology and supply chain new development. Let me just use a few examples. In fact, Junya had mentioned the telescope, project telescope, right, that uses data intelligence and smart sourcing now used by 1,000 pharmaceutical companies pharmacies, chain pharmacies that uses a lot of AI tools to help all the pharmacy stores to source effectively and optimally. And we also have an internal tool called the BaoGuan system, use big data to help us in assortment management. A very important part of our growth came from our improved selection and out of stock inventory management.

Speaker 4

Regarding supply chain management, let me also give 2 examples. 1 is the transhipment. Right now, we already have 11 warehouses across the country. We try and ship products amongst the warehouses to reduce fulfillment cost. And also we have, Junji mentioned, the joint venture warehouses.

Speaker 4

We closely we leverage partners' resources to facilitate our rapid growth at the same time to improve the availability and improve the time the shipment time to customers. Hope this answers your question.

Speaker 6

Thank you. It's very clear.

Operator

Thank you. There are no further questions at this time. 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 any further information or have any interest in visiting 111 in Shanghai, China, please let the company know. Thank you for joining us today.

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Earnings Conference Call
111 Q1 2023
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