111 Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 21, 2024

There are 8 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. Junling Liu, Co Founder, Chairman and CEO and 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 would 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, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year over year comparisons unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year over year basis. With that, I'll turn the call over to 111's CEO, Mr.

Operator

Junling Lu. Please go ahead.

Speaker 1

Good morning and good evening, everyone. Thank you for joining our Q4 2023 earnings call. The information we'll be discussing is also available in the slides that were posted earlier today on the company's website. I encourage you to download the presentation as well as the earnings report from our Investor Relations website at ir.111.com.cn. As we gather here today, I'm reminded of the journey we've embarked on over the past year, a journey characterized by unprecedented challenges yet remarkable resilience and innovation.

Speaker 1

In the ever evolving landscape of healthcare, our team at 111 has not only navigated through those turbulent waters, but has also set new benchmarks proving that strategic agility and unwavering commitment are the backdrops of our success. Today, I'm here to share with you the milestones we've achieved, the challenges we've overcome and the exciting path that lies ahead for us. Our discussion today will encompass a comprehensive overview of our operational and strategic frameworks, painting a picture of our company's enduring strength and our vision for a future where healthcare is transformed by technology and innovation. Then our Chief Financial Officer, Mr. Luke Chen will present a thorough analysis of our financial performance.

Speaker 1

Now let me start with the macro situation in our industry. The year 2003 marked a significant turning point for China's economy and the healthcare industry. As we emerged from the shadows of the pandemic, the industry faced a dual challenge, adapting to the post pandemic normalization and responding to the accelerating shift towards digital health solutions. These dynamics presented both opportunities and obstacles, raising the competitive landscape and accustomed expectations. The anti corruption crusade that swept through the hospital system in 2023 is poised to significantly reshape the landscape of the healthcare industry.

Speaker 1

This strengthened campaign saw some hospital presidents being apprehended for engaging in bribery, costing a long shadow over the traditional methods of business conduct within the sector. As a consequence, pharmaceutical companies are now grappling with new challenges in getting their medications adopted by hospitals, marking a pivotal shift away from the norm of sales strategies. This heightened scrutiny on ethical practices is not just a temporary hurdle, but a transformative force heralding a new era of transparency and integrity in healthcare transactions. This evolution in the healthcare ecosystem is set to redirect the flow of drug sales, moving some of them out of the hospitals and into the more accessible and diverse realm of retail pharmacies. Budget transition underscores the paradigm shift towards a more open and competitive market, where efficiency and the value dictates the dynamics of drug distribution and sales rather than the traditional practices.

Speaker 1

Our company strategically positioned at the nexus of this transformation embraces the shape types with a business model that empowers pharmacies. We're at the forefront of championing a competitive landscape where success is predicted is predicated on operational excellence, customer satisfaction and the delivery of genuine value. By leveraging cutting edge technology and innovative service models, we aim to enhance the capabilities of pharmacies enabling them to thrive in this new environment of increased accountability and competition. In this transformative period, our company stands ready to support pharmacies in navigating the complexities of this new landscape, providing them with the technology inside the network needed to excel. We welcome the dawn of a new era in healthcare, one characterized by fairness, efficiency and innovation, and we remain dedicated to playing a pivotal role in shaping its emergence.

Speaker 1

Through collaboration, innovation and a steadfast commitment to ethical business practices, we look forward to contributing to a healthier, more transparent healthcare system for all. Another significant phenomenon to note is that health care industry traditionally seen as conservative and slow moving is now at the forefront of technological innovation. This shift is driven by several factors, an aging population, rising healthcare costs and increasing consumer demand for personalized and accessible care. In response to these trends, Wang Mangan has strategically positioned itself as a leader in the digital healthcare revolution. Our approach has been focused on enhancing our core offerings through digitization and operational efficiency.

Speaker 1

The year 2023 emerged as a beacon of hope, marked by numerous promising developments that signal positive developments I just talked about. Nonetheless, it unfolded to reveal itself as one of the most challenging periods in recent history. The initial optimism surrounding a post pandemic rebound proved to be short lived as the reality of the economic landscape setting characterized by various mutable challenges that tested the resilience and adaptability of business across the board. This period saw a notable downturn in pharmacy same store sales, a critical indicator of consumer engagement and market health, which declined as customers tightened their belts in response to the uncertain economic climate. Furthermore, the sector was engulfed in fierce pricing competition with businesses aggressively lowering prices in a bid to capture market share, thereby escalating the challenges associated with maintaining profitability and growth.

Speaker 1

This period underscored the importance of agility, resilience and strategic foresight in navigating the complexities of the temporary business of the contemporary business environment. 111's response to these challenges illuminates a path forward, highlighting the potential for reinvention and the growth even in the face of daunting obstacles. As the company continues to adapt and evolve, it remains steadfast in its commitment to delivering value to its customers, stakeholders and the broader community, reinforcing its role as a pivotal player in the healthcare industry. In the Q4 of 2022, we experienced a peak over the pandemic. Our pharmaceutical sales significantly surged, reaching unprecedented highs due to increased demand for health related products and medications.

Speaker 1

This surge set the challenging high baseline for subsequent year. In Q4 2023, while our revenue witnessed a slight year over year reduction of 1%, closing at RMB4.1 billion. Gross segment profit had a 15.5% decrease compared to the same period in the previous year. Our total operating expenses witnessed an increase to RMB420.8 million from RMB361.9 million in the corresponding quarter of the previous year. This escalation in expenses was primarily due to decisive measures undertaken to terminate the ESOP granted for future years and to implement further reductions in our workforce.

Speaker 1

These steps were pivotal in realigning our operational strategy and ensuring long term sustainability. Despite these significant actions, our dedication to improving operational efficiency remains steadfast. By meticulously managing our operational costs and continuously seeking efficiency improvements, we were able to offset some of the financial impacts of these strategic decisions. A critical aspect of our financial management strategy involves excluding share based compensation expenses, which amounted to RMB151.4 million for the quarter compared to RMB68.7 million for the same quarter over the previous year. After adjusting for these expenses, our total operating expenses as a percentage of net revenues demonstrated a notable improvement, decreasing to 6.6% from 7.1% in the same quarter of the previous year.

Speaker 1

It is also great to note that our operational efficiency has shown continuous improvement. Specifically, we've managed to lower the fulfillment expenses to 2.5% of net revenues this quarter, down from 2.9% in the same quarter last year, reflecting a decrease in fulfillment costs by 14.7%. Sales and marketing expenses after adjusting for share based compensation have decreased as a percentage of net revenues to 2.6% in this quarter from 2.7% in the previous year. Our general and administrative expenses have remained stable at 0.9 percent of net revenues, identical to the previous year. Technology expenses, after excluding share based compensation have also maintained their proportion of net revenues at 0.6%, the same as last year.

Speaker 1

Looking back at the entire 2023 annual performance as an impressive demonstration of resilience and the strategic acumen, 111 has posted a robust increase in net revenues reaching RMB14.9 billion and marking a commendable year over year growth of 10.6%. This growth underscores the company's successful navigation through market dynamics and its ability to capture a larger share of the digital health markets. Equally noteworthy is the modest yet positive uptick in the gross segment profit, which climbed by 1.1% year over year to RMB849 1,000,000. On the financial stewardship front, 111 has shown remarkable prudence and efficiency in managing its operating expenses, which totaled RMB1.2 billion, a continuous decrease from RMB1.21 billion in the previous year. When adjusting for share based compensation expenses, the total operating expenses as a percentage of net revenues notably decreased to 6.5% this year from 7.8% last year, signaling a leaner and a more streamlined operational structure.

Speaker 1

Furthermore, the company has successfully reduced its loss from operations, both on a GAAP and non GAAP basis, demonstrating enhanced operational efficiency and tighter financial control. The GAAP loss from operations decreased to 2.3% of net revenues, down from 2.7% last year, while the non GAAP loss from operations notably decreased to 0.8% from 1.6% last year. These improvements coupled with a healthy liquidity positions of RMB673.7 million in cash, restricted cash and a short term investment as of December 31, 2023, position 111 on a solid foundation for future growth and innovation. Please allow me a moment to underscore the progress we've achieved in our operations during the Q4 and entire 2023. This period has been characterized by our continued focus on advancing digitization and improving our management processes, laying the groundwork for even more substantial returns on this strategic investment in the times ahead.

Speaker 1

At the heart of our business expansion is our commitment to operational efficiency, achieving through the strategic integration of technology across our supply chain, demand fulfillment and overall operations. Our progress is fundamentally attributed to the efficient application of technology innovations that refine our ability to anticipate and fulfill customer demands with unmatched speed and accuracy. This technological synergy enhances our operational capabilities, allowing us to execute with greater precision and adaptability. The result is a highly efficient operational model that drives continuous growth by optimizing every facet of our business from supply to demand through the intelligent use of the technology. For example, our smart sales effort driven by the Eagle Eye Analytics tool streamline customer interactions and our marketing strategies to boost efficiency dramatically.

Speaker 1

Currently, we optimize pharmacy operations by segmenting customers effectively, providing targeted service strategies, implementing an efficient smart sourcing system, introducing cloud prescription services, utilizing the pharmacy operational analysis board and employing a pharmacy CRM system among other advancements. This comprehensive strategy not only identifies pharmacy needs with unparalleled precision, but also furnishes them with the necessary tools to excel in a competitive market efficiently. This cohesive and efficiency oriented approach ensures that every facet of our operation is streamlined for peak performance, embodying our commitment to enhancing operational efficiency across the board. A pivotal extension of this strategy is our commitment to offering a comprehensive selection, ensuring an expansive assortment of medication and medical equipment. This not only amplifies our operational efficiency, but also caters to a wider range of customer needs and preferences, thereby increasing the diversity of our product offerings.

Speaker 1

This holistic approach underlines our dedication to not just to streamlining operations, but also to providing an extensive variety of products further positioning us as a leader in operational excellence and market breadth. Our JBP Merchant Business is at the center of the effort of providing the best selection for our customers. To ensure these partners can have great experience on our platform, our teams work tirelessly to offer a range of services to our GDP partners, including automating transactional workflows, cutting down the stock to shelf time frame from hours to near minutes and similarly optimizing the replenishment process for peak efficiency. We also offer critical tools such as immediate sales utilization, allowing merchants to efficiently perform data queries through mobile devices thousands of times per day. This capability empowers them to execute data driven decisions swiftly and accurately.

Speaker 1

Another key highlight of our achievements was the significant optimization of our supply chain and the innovative cost saving measures implemented in our warehouse operations. Through strategic redesigns and the integration of cutting edge technologies, we were able to streamline our storage and distribution processes, resulting in multiple reductions in operational costs. The optimization not only improved our logistical efficiency, but also enhanced our overall supply chain resilience, ensuring faster and a more reliable delivery of boots to our customers. These investments reflect our commitment to operational excellence and our ability to adapt and innovate in response to dynamic market demands. Strengthening our sales efficiency was a major focus in 2023, leading to significantly higher productivity per unit output.

Speaker 1

By refining our sales strategies and leveraging advanced analytics, we managed to optimize our sales forces performance and improve our market penetration. This achievement is indicative of our strategic approach to sales management and our ability to effectively harness data and technology to drive growth and maximize returns on investments. A pivotal element of our strategy this year was the upgrade of our supply offerings, marked by a substantial increase in the absolute value of our private label brands. This development not only diversified our product portfolio, but also enhanced our brand equity and customer trust. By focusing on quality and innovation, we have successfully positioned our own brands as leaders in their respective categories, contributing to our overall market strength and the sustainability.

Speaker 1

Reflecting on the entirety of 2023, it's evident that the year was rich in launch in acknowledgments and accolades for our efforts and achievements. One of the accomplishments this year was our intensified focus on technological innovation, which led to the addition of 4 new patents to our portfolio. This investment in technology underscores our dedication to staying at the forefront of industry advancements and maintaining a competitive edge. By pioneering novel solutions and securing intellectual property rights, we are not only enhancing our product offerings, but also contributing to the broader technological landscape, setting new standards for innovation and excellence. Following an array of intrinsic efforts by 111, the company has achieved significant milestones marking its prominence and innovation within the e commerce and Internet service sectors.

Speaker 1

These endeavors have not only exemplified Fanhua Man's commitment to excellence, but I'm also confident in the attendance of 2 prestigious recognitions in Q4 2023. Firstly, 111 has been honored as the 2023 Shanghai eCommerce Demonstration Enterprise, a testament to its leading role in advancing the e commerce landscape, demonstrating the exemplary practices and driving peaceful e commerce innovation in Shanghai. This accolade reflects 1 of 1's successful integration of technology and commerce setting benchmarks for industry peers. Secondly, the company has been recognized as a Shanghai key productive Internet service platform highlighting its significant contributions to the Internet services domain. This designation underscores our momentum impact on enhancing the digital infrastructure and the services in one of Shanghai's most dynamic and technologically advanced districts.

Speaker 1

Together, these recognitions underscore 111's influential position in shaping the future of digital commerce and Internet services, solidifying its status as a pioneer in the industry. A significant milestone for the year was the listing in Shanghai Data Exchange with over 720,000 product master data and 1,200,000 enterprise master data increase covering 99.6% of the pharmaceutical market 111 Inc. Information brand series listed on the Shanghai Data Exchange epitomizes the company's significant contributions and the leading edge in digitizing the pharmaceutical industry. This remarkable achievement not only showcases 111's innovative capabilities and the strategic foresight, but also solidifies its pivotal role in advancing the digital transformation of healthcare, furthering its commitment to enhancing industry efficiency. Receiving national recognition from Ofcom as a demonstration e commerce enterprise and being named a Shanghai E Commerce Demonstration Enterprise among our most prestigious accomplishments in 2023.

Speaker 1

These honors are a testament to our innovative business practices, our leadership in digital commerce and our contribution to the development of the e commerce industry. They underscore our commitment to excellence and our role as a pioneer in the digital transformation of commerce. As we look forward to our future growth initiatives, it is clear that our path is paved with strategic investments in key areas that will propel our company to new heights. Firstly, focusing on operational efficiency is fundamental to our approach. Recognizing efficiency as a core competitive advantage, we are dedicating resources towards enhancing our operational frameworks and processes.

Speaker 1

This involves investing in advanced technologies and the methodologies to streamline our operations, reduce waste and improve productivity. By doing so, we aim to not only accelerate our response times to market changes, but also to ensure that we can deliver services and products with greater speed and precision. This focus on operational excellence is expected to drive significant improvements in our overall performance, making us a formidable competitor in the marketplace. Secondly, offering a comprehensive selection of the products is a simple to meeting customer needs and creating a sustainable competitive moat for our company. In the coming periods, we will intensify our efforts to understand and anticipate the evolving preferences of our customers.

Speaker 1

This will involve leveraging data analytics and market research to ensure our product portfolio is both diverse and aligned with customer demand. By doing so, we aim to not only satisfy the immediate needs of our customers, but also to foster long term loyalty and trust, thereby solidifying our market position. The enhancement of our ecosystem with partners, including JVP and Marketplace Merchants is another pillar of our future initiatives. We recognize the value of nurturing stronger, more collaborative relationships with our partners as a means to expand and prosper together. Through these partnerships, we aim to create a synergistic ecosystem where shared knowledge, resources and capabilities can lead to mutual growth and success.

Speaker 1

By aligning our goals and strategies with our partners, we anticipate unlocking new opportunities for innovation and market expansion. In addition to the most comprehensive selection within the industry, we're also making low pricing one of our strategic priorities. We are convinced that our advanced digital capabilities will enable us to attain unparalleled operational efficiency. It is our belief that the true measure of our success is in our ability to transfer these efficiency gains directly to our customers offering them exceptional value without compromising on quality. By implementing this strategy, we are not just focusing on immediate benefits, but are laying the groundwork for long term recognition and loyalty from our customers.

Speaker 1

Our commitment to maintaining low prices coupled with our unmatched selection is expected to become a hallmark of our brand identity. Over time, this dedication will be acknowledged by our customers and will stand as one of our key competitive advantages. Optimizing our organization structure is also on our agenda. We're committed to creating a more agile, flexible and responsive organization that can quickly adapt to changes and seize new opportunities. This involves evaluating and realigning our teams, processes and systems to ensure they are conducive to our strategic objectives.

Speaker 1

By fostering a culture of continuous improvement and adaptability, we aim to enhance our operational effectiveness and drive sustainable growth. Lastly, our commitment to digitization remains on Weyburn. In an era where technology is continually reshaping industries, we aim to stay ahead by embracing digital transformation across all facets of our business. This includes investing in digital tools and platforms to enhance our operational efficiency, customer engagement and product information and product innovation. By doing so, we aim to unlock new growth avenues, improving customer expenses and streamline operations.

Speaker 1

Digitization is not just a strategy for us, it's a fundamental aspect of our vision for the future. Together, these initiatives present our comprehensive approach to ensuring long term growth and success. By focusing on these key areas, we are confident in our ability to navigate the challenges ahead and seize opportunities that the future holds. As we approach the conclusion of my remarks, I want to reflect on the journey Bongbongbong has undertaken, an expedition marked by both adversity and the triumph. Our commitment has remained unshaken.

Speaker 1

We steadfastly pursue our mission to lead the wave of innovation in the healthcare industry. Our passion for launching groundbreaking initiatives and our dedication to excellence in service delivery shine even against the backdrop of the industry dynamic challenges. It's this very landscape that has tested our resilience and sharpened our strategic vision, transforming potential obstacles into avenues for growth and innovation. I extend our heartfelt gratitude to not only our investors whose unwavering support has been a cornerstone of our journey, but also to our dedicated employees, your hard work, creativity and perseverance have been instrumental in our achievements this year. Together, we've navigated the challenges and seized opportunities, embodying a culture of collaboration and excellence.

Speaker 1

With profound appreciation, I'll pass the microphone to Mr. Luke Chen, who will present an in-depth analysis of our financial outcomes. Thank you, each and every one of you for contributing to our shared vision of a healthier future.

Speaker 2

Thank you, Zhijing, and good morning or evening, everyone. I want to begin by thanking all of our colleagues for their resilience and hard work over fiscal year 2023 as we navigated a challenging environment for making necessary changes to improve our operational and cost efficiency while maintaining our competitive edge. 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 Q4 and fiscal year 2023 results from Slides 22 to 25 in Section 2 of our presentation. Again, our comparisons are year over year and our numbers are in RMB unless otherwise stated.

Speaker 2

Let's start with the 4th quarter results. Considering the sudden sales surge during the pandemic in Q4 last year, we have managed to maintain our net revenue for the quarter, which slightly decreased 1% to RMB4.1 billion. Gross segment profit for the quarter amounted to $214,000,000 while gross segment margin was 5.2% for the quarter. Total operating expenses for the quarter were up 16.3 percent to RMB421 1,000,000,000, excluding the share based compensation expenses of $151,400,000 for the quarter $68,700,000 for the same quarter last year respectively, total operating expenses as a percentage of net revenues decreased to 6.6% from 7.1% in the same quarter of last year. During the Q4, the company recorded the unrecognized share based compensation of RMB153 1,000,000 upon the cancellation of the share option plan at the company's subsidiary level.

Speaker 2

The company also reported $17,000,000 severance expenses in the quarter as a result of organization optimization. For fulfillment expenses as a percentage of net revenue for the quarter was down to 2.5% from 2.9% in the same quarter of last year. Excluding the share based compensation, sales and marketing services as a percentage of net revenue for the quarter were 2.6%, down from 2.7% in the same quarter of last year. General and administrative expenses accounted for 0.9% of net revenue, which is same as last year and technology expenses accounted for 0.6% of net revenue, which was same as last year. As a result, non GAAP loss from operations was $55,200,000 compared to 39 point $7,000,000,000 in the same quarter of last year.

Speaker 2

As a percentage of net revenues, net GAAP loss from operations accounted for 1.3% in the quarter as compared to 1% in the same quarter of last year. Non GAAP net loss attributable to ordinary shareholders was RMB69 1,000,000 compared to RMB45.7 million in the same quarter last year. As a percentage of net revenues, the GAAP net loss attributable to ordinary shareholders accounted for 1.4% in the quarter as compared to 1.1% in the same quarter of last year. As for our fiscal full year 2023, I would like to run through a few highlights. Again, you can refer to the details in our deck and early release of comparisons to full year 2022.

Speaker 2

Full year net revenues were RMB14,900,000,000 representing a year over year growth at 10.6%. Our B2B segment revenue grew 11.4% to RMB14.6 billion and the B2C segment revenue decreased 14.5 percent to RMB377.4 million. We have achieved the gross segment profit growth at 1.1%. As a result, the combined gross segment margin was 5.7% with B2B segment margin at 5.3% and the B2C segment margin at 21%. For full year 2023, total operating expenses decreased 1% to RMB1.2 billion, excluding the share based compensation expenses of RMB226,200,000 for this year and $157,400,000 for last year, respectively.

Speaker 2

Total operating expenses as a percentage of net revenues decreased to 6.5% this year from 7.8% last year. Procurement expenses accounted for 2.7% of net revenues this year as compared to 3% last year. Excluding the share based compensation, selling and marketing expenses as a percentage of net revenues reduced to 2.5% this year from 3% last year. General and administration expenses account for 0.7% of net revenue this year, down from 0.9%. Technology expenses accounted for 0.6% of net revenue this year as compared to 0.9% of last year.

Speaker 2

As a percentage of net revenues, net GAAP loss from operations decreased to 0.8% this year from 1.6% last year. Non GAAP net loss attributable to ordinary shareholders as a percentage of net revenues decreased to 1.1% this year as compared to 1.9% last year. We are confident that we are handing the right path to profitability. Our strong technology capabilities will continue to enable us to build scale, improve efficiency, deliver profitability and maximize values for shareholders. Please refer to Slide 26 to 33 of the appendix section for our selected financial statements.

Speaker 2

And a quick note on our cash position as of December 31, 2043, we had cash and cash equivalents, with cash and short term investments of RMB674,000,000. As of the date of this earnings release, we had a total outstanding amount of RMB1.1 billion, which has been included in the balance of redeemable and controlling interest and accrued expenses and other current liabilities. Owned to a group of investors of 1 Pharmacy Technology pursuant to their equity investment made in 2022 as previously disclosed. As of the date of this earnings release, we have received redemption requests from certain of such investors for total redemption amount of RMB0.2 billion in accordance with the terms of their initial investment in One Pharmacy Technology. We are currently in the process of negotiating with these investors and other relevant stakeholders regarding the repayment and restructuring of such redemption obligations.

Speaker 2

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 Zhipang Feng from CICC. Please go ahead.

Speaker 3

Hi, this is Qifeng from CICC. Thank you for taking my questions and congratulations on the company progress. Well, I have two questions actually. And the first question is about Vadimiento. While the market seems to be in a depression of 1 on 1, do you prefer while in 2023 in both revenue and gross profit?

Speaker 3

I just wonder what is the reason behind this growth and will that be sustainable in the future? And my second question is about the strategy. Would you please share some more color on the company's development strategy over the next few years? Thanks.

Speaker 2

Xifeng, can you repeat the second question again? What was the question again, strategy?

Speaker 3

Okay. Sure. So, yes, not really. Would you please share some more colors on the company's development strategy regarding the next?

Speaker 1

Okay, got it. Thank you, Sihang. Okay. First of all, with regards to your first question, how we achieve growth in the depressing markets. Fundamentally, it comes to our really capability to adapt and our strategic agility and really the team's resilience.

Speaker 1

If you recall, we really achieved continuous operational efficiency. We continuously reduced our operational expenditure and we continuously pursue the path of increasing productivity per unit output. And the second thing we did was really to expand our selection. We wanted to provide the widest selection across the whole industry, so our customers can have more choices on our platform. And thirdly, of course, really in addition to selection, we offer unparalleled services.

Speaker 1

And this includes from order placement to order fulfillment, the whole process. And can this sustain? Yes, absolutely. And not only will this sustain, it is my belief that we're going to pick up even more momentum. And with regards to your second question, I'd like to talk a little about our future strategy at least in the following sequence of priorities.

Speaker 1

Firstly, we still believe that in order to survive in this razor thin margin market, it is extremely competitive. We have to be efficient. So operational efficiency is going to be at the heart of our company's strategy because this is going to be our key competitive advantage. We want to be the most efficient operator in the industry, full stop. And I believe we are well on our way to become the most efficient operator.

Speaker 1

And secondly, we want to continue with the strategy we had in the past is to provide the widest selection for our customers, so they can have all choices on our platform and they can do one stop shop. They don't have to go to various places. In addition to that, we want to provide the best prices too. We believe that with the great selection and the best price, that's going to build customers' loyalty. And the other thing we're wanting to focus on is to really invest in our capabilities in digitization.

Speaker 1

And we believe this area is going to help to really transform the industry with digital technology. So that pretty much illustrates our strategy, our vision for the future ahead. Thank you.

Operator

Thank you. Your next question comes from Victor Yang, Private Investor. Please go ahead.

Speaker 4

Thank you for taking giving me the chance to raise questions. I have two questions in 2 aspects. First is about the increase in operational loss as a percentage of net revenues. This is notable. Could you provide more insights into the factors contributing to this race and how you plan to address them moving forward?

Speaker 4

The second question is about what Qingling just mentioned about digitalization. What progress has the company made in technological innovation last year? And how will these advancements help the company gain a competitive edge in the future? Thank you.

Speaker 1

Thank you. I think it's great. You noticed that there is an increase in operational expenditure and the loss was greater than we initially anticipated. Let me just explain. First of all, there is a huge sum of ESOP there because we as a management decided to cancel the ESOPs for the year 2024 and the year 2025, there is accounting practice and they have to really put the numbers into Q4 of last year.

Speaker 1

Secondly, we also made a decision in Q4 to further streamline our organization and we had a whole series of organization optimization exercise that created a lot of severance pay. Those 2 expenditures actually took up majority of the loss. If you take that out, our operational loss actually made a very impressive improvement. And of course, with all the measures that have been taken, we look forward to a lot of great things in 2024. Thanks.

Speaker 5

Let me take the second question from Victor on the technology progress. We have invested heavily on technology. Last year, we as a company have made a remarkable progress elaborating AI, big data and supply chain optimization technologies. And we gave some examples. One is the so called telescope initiative, launched for pharmaceutical companies.

Speaker 5

We leverages big data to enhance channel management capabilities such as penetrating marketing sites, demand forecasting and pricing strategy optimization. Binning also mentioned that our company has received 4 new patents and our information so called 111 information brand was listed at Shanghai DataChain. That's quite a milestone. We have exceeding 1,200,000 entries covering more than 99.6% of market data. By employing GPT based large language models and through minimal manual annotations, model training and fine tuning techniques, significant breakthroughs were achieved in drug and pharmacy recognition models and similarity scoring models, our accuracy has reached 99%.

Speaker 5

And we also mentioned in the supply chain management side, we launched several additional supply chain products last year. We introduced Fire Wheel and Kunpong products for pharmaceutical commercial partners. We provided operational automation tools to our GMP partners, improving system product listing efficiency from hours to minutes. Thus, these few examples can illustrate that how much effort we have invested in technology and what programs are made. Thank you, Victor.

Operator

Thank you. Your next question comes from Ethan Lang from Ionharpun Capital. Please go ahead.

Speaker 6

Hi. First of all, thank you for your success here, Yi Sun. And I want to ask a few questions. First of all, I noticed the company's operational cost has been continuously increasing. What actions did the company take last year in supply chain management and warehouse logistics to improve efficiency and reduce costs and how much potential for improvement remains?

Speaker 6

And I also want to know since the company won numerous awards last year, what is the significance of these awards and their value to the company? And also what is the company's current cash position and will the company continue to burn cash to grow the business?

Speaker 5

Okay. So probably I'll take the first two and then Luca will take the last one. The first question you mentioned is about how we reduce our operational costs. Last year, we focused heavily on reducing costs and enhancing our efficiency. In addition to improving our services, we have made quite some breakthroughs.

Speaker 5

One is that we continue to optimize our fulfillment costs. You can see quite a remarkable reduction in fulfillment costs. And measures such as the improving workforce efficiency, process reengineering, rent reduction and increasing the proportion of regional fulfillment allow the fulfillment cost reach to 2.74%, okay, and it's a significant decrease from the 2.94% of

Speaker 1

the year before.

Speaker 5

Just this alone reduced cost results in cost savings over 20,000,000. We also increased the improved service quality of our supply chain upstream. We launched so called Golden Partner Service, covering upstream customers comprehensively. We provided intelligent warehouse appointment service, simplifying the entire delivery process, reducing supplier warehouse and waiting time by 50% and improving the seat time by 30%. Last year, I mentioned another example on our of course, intelligence supply chain service platform we launched last year.

Speaker 5

We integrated warehouse to warehouse transhipment plus last mile delivery model achieved cost savings of 20% for transshipment and reduced damages on the road by 60% and increase turnover efficiency by 20%. So through this effort, you can see that what we have done to improve our operational efficiency as well

Speaker 2

as the supply chain cost.

Speaker 7

I think the next question

Speaker 5

is about the words we have won last year. Juni mentioned quite a few, including the Shanghai Key Productive Internet service platform sector, all those awards, we feel very proud of earning those. These honors signifies that the company has achieved sustainable, robust and rapid development in fields such as diesel technology innovation, intelligent supply chain management and digital operations. It holds an advanced position among domestic peers. And we believe that we are highly recognized from the industry and the regulatory bodies playing an important role in promoting the tissue transformation and upgrading of pharmaceutical and the health industry.

Speaker 3

Maybe I'd like Luke answer the next question.

Speaker 2

Yes, sure. Yes, about the cash, as we have just disclosed, our cash to cash equivalents, the restricted cash and short term investment amounted to RMB674 1,000,000 as of December 31, 2023. If you're looking at our working capital days, our AP date is around 42 to 45 days. Our imagery date is around 25 to 30 and our AR date is 7 to 12. So basically, we have a positive cash flow on the trading level, which means that the cash received for the sales of drugs and the cash paid for the purchase of the drugs.

Speaker 2

Now, as we discussed that we are very close to profitability and we believe that with our ability to make profit, we will no longer need further cash to grow on this business. Instead, we're confident that this business will create overall positive cash flow for the company. I hope we answered your questions.

Operator

Thank you. Your next question comes from Jada Wu from Arbor Group Capital. Please go ahead. Hi, everyone. This is Jida Wu from Abengru Capital.

Operator

Thank you for taking my Congratulations on your success last year. Here, I've got two questions. The first one is about GBP Business segment. I want to know what are the expected outcomes of the GBP Business segment expansion? And how will it enhance customer experience and operational efficiency?

Operator

And the second one is about your OEM product. What are the complete plans for its OEM products in the future? Thank you.

Speaker 7

Okay. Thank you, Jada. I'll take your two questions. JBT is one of the fastest growing business segments in 111. In last quarter of Q4 2023, JBT business has been growing 25% year over year and is now close to 60% of our total inventory and also our total sales.

Speaker 7

And JVP is not only a supply channel, actually is in fact far beyond a channel. JBP provides a total solution for our upstream partners like pharmaceutical company and also commercial company, including assortment management, price management, inventory management, customer acquisition, digital marketing and also financing services. With the current launch of the 3rd generation of JVP, which provide a much more robust solution for the partners. We can anticipate it will soon it will continue the growth momentum and not only in sales revenue side, but also from profit perspective. And as all these value added services actually will literally help our partners to gain more sales and more profit.

Speaker 7

And at the same time, we're also giving us more profit. Regarding OEM products, there are a couple of some private labels registering 111. We have Guangzhou, which is for our chain store customers and is for our individual store customers. And also non media is for battery supplements. So by last quarter, we already launched 170 Ryzen label SKUs and almost all of these products have been well accepted by our downstream customers.

Speaker 7

And they are now well sold in more than 20,000 pharmacies across the country, including those very remote areas like Xinjiang, Xinjiang, etcetera. And much more SKUs have been in our pipeline, including OTC, including RX, including supplements and also medical devices. As we all know, private label products have been a very important margin contributor of those top listed trend stores, which have been disclosed in their financial reports. But for our majority of our customer, 1 on 1 customer, they are small media, chain store or even individual stores. They don't have the capability to establish their own brand.

Speaker 7

So, Huang Zhao, Huang Zhao, Long Yao become the very attractive solution for them. And in those private label also help us to build up a very long term relationship with those customers. Thank you.

Operator

Thank you. Your next question comes from Mark Siew, Private Investor. Please go ahead.

Speaker 3

Hello. Thanks for presenting. I have two questions. The first is that we are seeing the company as narrowing the loss. What's your future plan to further improve gross margin and to improve profitability?

Speaker 3

The second is that we understand that the Bayer Group has terminated the privatization of the company. What does that mean to the company and what will be company's future plan on capital market? Thank you.

Speaker 7

Okay. Thank you. I will take the first question regarding the margin. And our strategy towards healthy business model has been working very well. And we are seeing significant improvement on our capability to generate more and more profit.

Speaker 7

And firstly, to reduce our fulfillment costs, we direct source from pharmaceutical companies. This has been highly effective in lowering the cost of product. And we now source from over 500 local and international pharmaceutical companies. And we will continue to deepen our strategic relationship with our existing partners and as well as securing new partnerships. And such relationships provide us with a wide range of product selection at a lower cost.

Speaker 7

The second level, which is a key strategy of us, as I mentioned just now, is our JVP model. In the past quarter, it has been growing very well. It's about close to 50% of our total inventory. We are going to launch the new generation of this JGP, which provide a robust system to enable our partners to better manage inventory, manage their price, etcetera. And all these value added services will help our partners to gain more sales and more profit.

Speaker 7

And also at the same time, it will also bring us those value added products for our services. And thirdly, we will continue to optimize our product assortment and structure through our AI technology and deep data. We are much more effective to balance our portfolio of products. Bandung has high velocity, but maybe low margin products, those which drive traffic together with some very healthy margin products. We have now about 5,000 SKUs with very good margin, including our own private label products and new products are from those pharmaceutical companies.

Speaker 7

And we are very confident that we will be able to help those pharmaceutical partners in commercializing their product with high efficiency and high gross margin. And the last but not least, as part of the country's health care strategy, the revolution of medical treatment and the drug sales separation that will bring actual sales to retail market from positive. And well, I believe this will not only bring sales, but also bring more marketing function to retail market, because previously a lot of education is from inside of hospital. Now it comes to the retail market. And these marketing functions and with 1 on 1 capability of those big data, our digital marketing capabilities, we will be able to provide a very effective service to pharmaceutical companies.

Speaker 7

And this will be a good process for 100 and And as we already have those capabilities both in our B2C and B2B model on digital marketing. Thank you.

Speaker 2

Yes. Regarding the privatization, as previously announced, the Bayer Group has officially notified the special committee that they will no longer pursue the privatization of the company. And this means that the company will continue to maintain its listing status in NASDAQ. We think it's good for the company to continue to be a public company and keep the door of the capital market open. As the management, we will continue more meetings with existing and potential investors to help them to understand our business model and update them on our latest development.

Speaker 2

The management team will continue to focus on growing the business and delivering profitability to create value for shareholders. Thank you.

Operator

Thank you. That is all the time we have for questions. 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 Vixing 111 in Shanghai, China, please let the company know. Thank you for joining our call today.

Operator

This concludes the call.

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Earnings Conference Call
111 Q4 2023
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