111 Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 23, 2024

There are 10 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. Zhongling Liu, Co Founder, Chairman and CEO Mr. Luke Chen, CFO of 111's major subsidiary and Mr.

Operator

Harvey Wang, COO. 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. For more information about these risks, please refer to the company's filings with the SEC.

Operator

111 does not undertake any obligation to update any forward looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year over year comparisons unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year over year basis. With that, I will turn the call over to 111's CEO, Mr. Zhong Lin Lu.

Operator

Please go ahead.

Speaker 1

Good morning and good evening, everyone, and thank you for joining our Q1 2024 Earnings Call. The information we'll be discussing here is also available in the slides posted earlier today on the company's website, and I encourage you to download the presentation as well as the earnings report from our Investor Relations website at ir. 111.com.cn. For the Q1 of 2024, we are thrilled to kick off the year with solid performance, notably we turned to quarterly operational profitability for the first time after years of dedicated effort towards long term resilient growth with strategic operational refinements. In this call, I'll provide an overview of the macro environment, highlight some exciting opportunities ahead that will follow the financial highlights and updates on our ongoing technology empowerment as well as the supply side efforts.

Speaker 1

Finally, I will delve into our future growth strategy before our Chief Financial Officer, Mr. Luke Chang, presents a thorough analysis of our financial performance. Looking into the macro environment for our industry, the national anti corruption campaign in the healthcare sector that began in late 2023 is continuing this year. Recent developments indicates a deepening of this campaign with regulatory and ethics enforcement efforts targeting the entire industry chain. The industry anticipates that stricter scrutiny on ethical practices is becoming the longer process that will foster transparency and integrity in healthcare transactions, particularly in hospital procurement, which would ultimately promote healthy industry competition and development.

Speaker 1

As a result, more drug sales are expected to transition to retail pharmacies that are more accessible and transparent compared to the hospital system. This transition is encouraged by the state and is poised to benefit us as we specialize in the outside hospital pharmaceutical market where we expect huge potential and prospects. Considering current economic and capital market conditions, entry barriers for new startups in this growing industry are formidable, especially when we add in the healthcare industry's high regulatory standards and requirements. We are, however, strategically positioned to adopt a market oriented approach to the outside hospital pharmaceutical market. We aim to empower the entire industry chain through a business model that emphasizes superior operational efficiency and customer satisfaction.

Speaker 1

Our goal is to capture greater market share in this thriving sector by offering a comprehensive cost efficient product range with unparalleled focus on customer experience. To achieve this, we've introduced various mechanisms, including enabling first party teams to deepen relationships with pharmaceutical companies and incentivizing merchants to offer competitive price products on our digital platform. Combined with advanced technology, these mechanisms drive robust traffic, operational efficiency and higher sales volumes. By utilizing leading edge technology, rich data insights and innovative service models,

Speaker 2

that are

Speaker 1

strengthening 111's value proposition to both upstream and downstream customers. Also of note is the digital transformation over the entire value chain in the healthcare industry. As we are in a leadership position in this digital revolution, we are committed to reshaping the healthcare industry's value chain through our fully digitized operating system. By empowering the upstream and downstream segments with highly efficient digital solutions, we are driving continuous operating cost reductions. Our high quality digital technology facilities effective sales, procurement and operations management, including customer demand analysis, product inventory management and warehouse allocation.

Speaker 1

In the Q1, we continued to generate positive strides in digitization, which I will discuss further later on. Excitingly, our company achieved a qualitative change and operational efficiency after years of development. In the Q1, we realized income from operations for the first time, validating the efficacy of our growth strategies and business model. Our income from operations reached RMB3.7 million during the period, compared with a loss from operations of RMB21.7 million a year ago. Non GAAP income from operations even more than tripled to a record high of RMB8.9 million.

Speaker 1

The achievements are particularly significant considering a slight 4.6% year over year decrease in the Q1 revenue. This fall was attributed to a higher baseline set in the Q1 of 2023 during the peak of the pandemic, which led to increased market demand for health related products and medications. However, the market has since stabilized and normalized. The profitability largely stems from ongoing improvements in operational efficiency, driven by continuous enhancements across pretty much all business functions. Our total operating expenses for the Q1 accounted for 5.8% of net revenue, down by 120 basis points from the previous year.

Speaker 1

Specifically, we've achieved noteworthy reductions in various expense categories. We've managed to cut fulfillment expenses to 2.5% of net revenues this quarter, down from 2.8% in the same quarter last year, reflecting a decrease in fulfillment costs by 13.8%. Our general and administrative expenses have fallen to 0.5% of net revenues from 1.1% a year ago. Technology expenses were 0.5 percent of net revenues as well, down from 0.7% a year earlier. Selling expenses have slipped as a percentage of net revenues to 2.3% in this quarter from 2.4% in the previous year.

Speaker 1

Excluding share based compensation, our operating expenses as a percentage of net revenues have decreased 60 basis points to 5.7%. Additionally, our operating cash flow also turned positive. Our operational efficiency was achieved through strategic investments in infrastructure and staffing as we continue focusing on key areas for long term and sustainable growth. The digital capability we have built over the years is at a very sophisticated level to deliver value and quality performance to end customers, allowing us to reduce technology and staffing expenses. Our ambition has always been to become the most efficient healthcare e commerce operator in the industry.

Speaker 1

With our relatively small scale and current revenue level, we have already demonstrated our exceptionally high operational efficiency, which even surpasses that of large traditional park players. This makes us very proud and we will continue to be settled towards setting an industry benchmark for efficiency as our goal, while sustaining profitability. When we grow in scale and refine our operations, operating costs are likely to further grow, contributing to higher efficiency. Our effort in this area will be relentless as we firmly believe this is going to be our competitive advantage and we are not afraid of any competition. Next, let's delve into operational accomplishments of the quarter, which was marked by continuous progress in technology empowerment.

Speaker 1

These advancements not only bolster our operational efficiency, but also pave the way for enhanced returns in the future, a testament to our commitment to innovation and excellence. We're seeing the initial benefit of transitioning from a product intermediary to becoming a tech powered healthcare platform. Through the digitization of various business models such as the JVP and Marketplace, coupled with the introduction of the joint venture and the franchise warehouses, as well as a self built logistics network to connect upstream and downstream customers, we have propelled 111 into a new platform that's widely recognized by both upstream and downstream partners. The shift has effectively ramped up cash flow, slashed inventory turnover and enriched partnerships. This has fostered a synergistic ecosystem with shared knowledge, resources and capabilities that drive improved growth and success.

Speaker 1

Our AI treatment initiatives have already yielded positive results in our operations. By utilizing AI and large language models and advanced algorithms to optimize low price strategies and traffic allocation mechanisms, our order conversion rate saw encouraging improvements. These results highlight the success of our technology team's efforts in AR application development. One major challenge we faced was data cleaning due to the lack of common standards in the industry and the multiple names a single drug can have across different companies and regions. AI proved to be invaluable in automating this labor intensive task enabling us to contribute industry data to the Shanghai Data Exchange.

Speaker 1

We're also impressed by the impact of 111 Health, our AI powered tool developed by our tech team. It effectively addresses both internal and external customer issues, reducing the need for additional staff and cutting expenses. Although it is still early days, we anticipate further AI applications will continue to streamline our operations and drive innovation. Additionally, we continued digital empowerment for merchants with the launch of merchant side mobile tools. These tools provide digital features such as merchant mobile reports, business compasses and sales management, enabling our partners to access real time business performance anytime, anywhere.

Speaker 1

We already saw a daily average usage rate of over 70% for these innovative features, which is very encouraging for further innovations. Furthermore, we can also use our intelligent system to match the most optimal carriers, which costs costs and enhances delivery efficiency. For every single order before it goes out for delivery, our system can make real time decisions on which carrier to use based on logistics info collected as well as volume and date. Every single order is selected by the system and assigned to a carrier with the order automatically allocated to the most suitable warehouse for delivery. Diving deeper into our supply side efforts, we empower our assortment team through our broadband intelligent data platform by analyzing the best selling categories and products.

Speaker 1

Combined with online and offline transaction data and industry data, as of Q1 2024, the broadband catalog included a total of 6,567 new products contributing to approximately RMB 460,000,000 cumulatively, while reducing the group's top product out of stock rate to 2.8% from 5.2%. Moreover, in a move to optimize operations and add value to the supply side, we launched a new delivery and candidate model to streamline logistics not only for us, but also for merchants. We've established the Kunpeng Pharmaceutical Logistics Network to provide professional logistics service. Our Kuangtong project optimizes internal cost reduction with 20% lower distribution costs compared to traditional logistics. Secondly, it empowers the external supply chain.

Speaker 1

Previously, each merchant had to send their product samples to various warehouses individually. Now they can consolidate their shipment to 1 warehouse first and then our system will intelligently distribute them to the respective locations. This makes a major improvement in efficiency as well as provides a service to merchants, which we can charge for separately. Merchants using this service can save costs and their damage rates resulting from transportation can fall as much as 60%. With the support of the KunTong project, strengthened the business negotiations and our intelligent selection of the most optimal carriers, logistics expenses scrapped.

Speaker 1

This together with lower delivery costs, less warehouse labor costs and generated from enhanced work efficiency and decreased warehousing expenses primarily led to a 14% year over year reduction in fulfillment costs to RMB89 1,000,000 in the Q1. Meanwhile, the company has innovated its supply chain model by unveiling joint venture warehouses. The new model is poised to revolutionize our expansion strategy, slashing investment timelines and capital expenditures, while accelerating nationwide coverage. Previously, we invested in and built our own warehouses, which may take at least 2 years to see profitable operations. The new model allows us to partner with the strategic warehouse owners to achieve growth and reduce intensive CapEx expenditure by leveraging partners' existing assets and our proprietary digital system.

Speaker 1

We've also garnered significant accolades and new patents all demonstrating valued recognition from government agencies and professional institutions for our business practices, operational performance and dedicated innovations. These affirm our pioneering role in digital commerce transformation. Notably, we were honored as 2023 Shanghai Industrial Internet Demonstration Platform by the Shanghai Municipal Commission of the Economy and Informitization solidifying our position as a digital service platform for the pharmaceutical industry chain. This recognition elevates our commitment to digitization, enhancing service capabilities and driving technological innovation. We earned the prestigious title of 2023 to 2024 Shanghai E Commerce Demonstration Enterprise from the Shanghai Municipal Commission of Commerce, showcasing our pivotal role in enhancing high quality e commerce in the city.

Speaker 1

In April, we secured a new patent for our voice service enhancement system, expanding our technology portfolio to 24 patents. This reaffirms our ongoing commitment to innovation, enabling more intelligent responses to customer inquiries and maintaining our technological leadership in the industry. Next, I'm going to discuss our strategies for future growth revenue, margin and profit. We remain committed to delivering efficient, cost effective, one stop shopping experiences that meet customer needs and secure our competitive edge. Utilizing data analytics and market research, we can anticipate customer preferences, ensuring our offerings align with demand while prioritizing low pricing through advanced digital capabilities.

Speaker 1

This commitment ensures exceptional value without compromising quality, fostering long term loyalty and recognition from customers. Another core strategy is to deepen our partnerships with pharmaceutical companies. By closely collaborating with these partners, we aim to better serve the needs of our customers with a diversified medicine portfolio and to drive mutual growth. We've made significant strides in this area and we'll continue to do so, particularly by leveraging our digital marketing network to promote sales, especially in lower tier cities. Our extensive digital marketing network provides us with a powerful platform to showcase the products of our pharmaceutical partners.

Speaker 1

Through targeted campaigns and promotions, we'll be able to increase brand visibility and drive sales in previously underserved markets. This benefits not only our partners, but also enhances our position as a leading e commerce platform in the pharmaceutical sector. Amid the evolving market situation, our private label business demonstrates impressive results. Its revenues surged 89% from the previous year in the Q1, while gross profit grows 55% with a gross margin of 29%. This line of business currently encompassing 3 distinct brands enabled us to offer a diversified product portfolio that significantly contributes to our gross margin.

Speaker 1

Additionally, it strengthens our brand equity and enhances customer trust. Moreover, we will accelerate our investment in the JBT platform, which has been attracting an increasing number of partners, which substantially increased our product range. The growth trajectory of this model is particularly exciting as it indicates the growing value proposition of our innovative business model and its ability to draw interest from a diverse range of stakeholders. Looking ahead, our efforts for the JBT platform will include enhancing its features and functionalities to address the needs of our partners as well as expanding its reach to a wider partner base. We believe that BDP will continue to be a key driver of our growth and the competitiveness in the years to come.

Speaker 1

In addition to driving top line growth, we're also focused on optimizing our operating costs to improve efficiency and profitability. We will step up our efforts to advance several initiatives implemented for achieving this goal. For example, we aim to onboard half of our merchant partners onto our new delivery and attending model will be used upgraded by a house network to enhance inventory management and fulfillment capabilities, thereby reducing lead times and improving customer satisfaction. Additionally, we are adopting AI sales representatives to automate and optimize the sales process driving higher platform traffic and the conversion rates while reducing operational costs. Operational efficiency is simple to our strategy and we will continue investing in advanced technologies to streamline processes, reduce waste, boost productivity and ultimately solidify our leading position in the marketplace.

Speaker 1

An important aspect of our technology investment is AI innovations and digitization. Many parts of our operations are embedded in AI and we fully embrace digital transformation across our business to drive operational efficiency, customer engagement and product innovation, unlocking future growth opportunities. It is important to note that digitization is vital to our vision for the future. With 100% digital operating system internally, we have achieved industry leading operational efficiency. This performance has not only enhanced our bottom line, but also positioned us as a catalyst for transformation across the entire value chain, granting both upstream and downstream customers access to our technological ecosystem and expertise.

Speaker 1

By doing so, we are not just improving our own processes, we are revolutionizing the way our industry operates and reshaping the traditional value chain. We are confident in our ability to remain at the forefront of this digitalization and how it will empower us in higher revenue and profit levels. With that, I'll hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

Speaker 2

Thank you, Qingming, and good morning or evening, everyone. Moving to the financials. My prepared remarks will focus on a few key business and financial highlights. For details on our Q1 2024 results, please refer to Slide 16 to 19, Section 2 of our presentation. Again, our comparisons are year over year and all numbers are in RMB unless otherwise stated.

Speaker 2

Let's start with the Q1 results. Considering the sudden sales surge during the pandemic in Q1 last year, we managed to maintain our revenue net revenue base for the quarter, which decreased 4.6% to RMB3.5 billion. Gross segment profit for the quarter amounted to RMB208.5 million, while gross segment margin was 5.9% for the quarter. Total operating expenses for the quarter decreased 20.6% to RMB204.8 million. As a percentage of net revenue, total operating expenses for the quarter were down to 5.8% from 7% as we continue to enhance our operating leverage and optimize our operational efficiency.

Speaker 2

Procurement expenses as a percentage of net revenue for the quarter were down to 2.5% from 2.8% in the same quarter of last year. Selling and marketing expenses as a percentage of net revenue for the quarter was 2.3%, down from 2.4% in the same quarter of last year. General and administrative expenses as a percentage of net revenue accounted for 0.5%, down from 1.1% in the same quarter of last year. Technology expenses account for 0.5% of net revenue, down from 0.7% in the same quarter of last year. As a result, income from operations was RMB3.7 million compared to loss from operations of RMB21.7 million in the same quarter of last year.

Speaker 2

Non GAAP income from operations was RMB8.9 million compared to RMB2.5 million in the same quarter of last year. As a percentage of net revenues, non GAAP income from operations account for 0.3% in the quarter as compared to 0.1% in the same quarter of last year. Non GAAP net loss attributable to ordinary shareholders was $8,600,000 compared to RMB7.6 million in the same quarter of last year. As a percentage of net revenues, net loss attributable to ordinary shareholders account for 0.2% in the quarter, which is same as last year. As you can see, we are improving our financial performance quarter by quarter and have achieved operating income on a quarterly basis for the first time.

Speaker 2

Please refer to slides 20 to 24 of the appendix section for our selected financial statements. A quick note, our cash position as of March 31, 2024, we had cash and cash equivalents with short cash and short term investments of RMB627.3 million. And we were pleased to report that we have achieved positive operating cash flow during the quarter. As of the date of this earnings release, the company had a total outstanding amount of RMB1.1 billion, which has been included in the balance of redeemable non controlling interest and accrued expenses and other liabilities, earning to a group of investors of 1 Pharmacy Technology pursuant to the equity investment made in 2020 as previously disclosed. As of the date of this earnings release, we have received redemption requests from certain or such investors for a total redemption amount of RMB0.2 billion in accordance with the terms of their initial investments in 1 Pharmacy Technology.

Speaker 2

Furthermore, we have entered into written agreements and our commitment letters with investors are representing a majority of the total carrying amount for the rescheduled redemption payment. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q and A session.

Operator

Thank you. Your first question comes from Edwin Zhu, individual investor. Please go ahead.

Speaker 3

Good evening. This is Edwin Zhou. I would like to extend my congratulations on the outstanding results achieved this quarter. The impressive performance is a clear testament to the collaborative efforts and strategic initiative taken by the company. I have 2 questions.

Speaker 3

The first is that I have observed a significant double digit sequential decrease in SG and A expense and IT expense this quarter. What is the potential for further reduction in operating expenses? The second one is, has the company initiated any new attempts in IT technology such as AI related projects? Could you elaborate on any particular application? Thank you.

Speaker 1

Yes. Let me just answer the first question with regards to the reduction in SG and A and the operating expenses. Obviously, we have been pursuing the goal to be the most efficient operator in our industry. So with the current resources in hand, we feel that we absolutely can continue to scale our business. When we grow in scale, let's say, when we cross the RMB20 1,000,000,000 threshold, we're very confident we can operate between 4% to 5% range, which means a lot to our business.

Speaker 1

So this quarter with $3,500,000,000 in revenue, we are already operating at 5.7%. And obviously, mind you, we have a lot of potential to grow our gross margin over time as we gain the upper hand in the markets. And of course our ability to deliver profit will stand out in the industry. So fundamentally, our competitive edge will depend on our operational efficiency. And we're going to pursue this relentlessly and we're confident that when we grow in scale and when we further refine and streamline our operations, with confidence that the overall operational efficiency will continue to improve.

Speaker 1

Thank you.

Speaker 2

Let me take the second question, Edwin. You ask about what advancement the company has made in technology and especially related to AI? Let me just mention a few. First of all, as you can see that we have made some initial success in transitioning to platform business. Our platform total GMV reached over 70%.

Speaker 2

And certainly, we have made several progress in several fronts, the launch of JVP, and we'll have speed up our warehouse in development through venture and franchising warehouses. And also we established the Kunpong logistics services to upstream and downstream partners. All these are all these need strong support from IT. And a lot of the new warehouses use our systems, and we provide these services through SaaS. And second, we used large language models to an algorithm to improve our traffic allocation as well as conversion.

Speaker 2

So we have through this process also improved cross selling and you can see that our conversion rate has significantly improved. Also, we have launched various supply chain finance services. Certainly, we have lots of partners, the banks and financial institutions provide the services. We'll have to do the optimal matching for our customers how to match them to the best service and the best providers. And that's also done through our technology and our data service.

Speaker 2

And Junying just mentioned that we established called BorgWar Data Platform. Such a platform uses not only our internal data, online data, but also offline data for our customers and industry data. And through this process, we have introduced this data help us to introduce over 6,000 new products. And these products give us much higher margin rate and the sales rate. So let me just mention this view that's enabled to IT and AI technology.

Speaker 3

Thank you. I'm looking forward to recognizing continued success and even greater achievements in the next quarter.

Speaker 2

I do.

Operator

Thank you. The next question is from Victor Yang, individual investor. Please go ahead.

Speaker 4

Good evening. This is Victor Yang. I'm an individual investor. First of all, congratulations to Gang, Jinlin, Luke and the whole staff of 111 on the impressive performance. I have two questions.

Speaker 4

First is in achieving operating profitability and the net profit this quarter, can you give more details on the strategic initiatives and operational changes that lead to this milestone? And what are you expecting for the rest of the year 2024? Will you last keep this pace of being profitable? This is the first question. And the second question is about the supply chain cost.

Speaker 4

We have noticed a significant reduction in costs in 111's supply chain. Can you explain what measures and actions the company has taken to achieve these results? Thank you.

Speaker 1

Yes. So when it comes to achieving profitability, as an Internet company, it is a real major milestone. Companies in this space have to spend lots of the capital and resources to build out their infrastructure and systems. Our strategy has always been clear. Our first step is to build infrastructure.

Speaker 1

And secondly, we have to build scale. And thirdly, we're going to achieve profitability. So that in our previous years, our ECU scripts and earnings calls, we have elaborated on that strategy and we actually delivered. So the fundamental driver to achieve the profitability comes from really operational efficiency by leveraging our digital technology. Of course, our goal is to be the most efficient operator in our industry and we are well on our way.

Speaker 1

When it comes to the future, we feel very confident to sustain profitability with the foundation I've built the trend of drug sales outside of the hospital space and the focus on value delivery to our customers. We'll be very excited by the opportunities going ahead of us.

Speaker 4

Okay. That looks very promising.

Speaker 2

Let me take the question on supply chain. As you can see that last quarter, even last couple of years, supply chain efficiency improvement has been a highlight at the very core of our business. We are very proud of it. As you know that supply chain contains many components, including the sourcing, warehousing, the storage, the warehouse operations, the packaging, the delivery, handling downstream returns, also our own RTVs. So all these are very important parts of the supply chain.

Speaker 2

So we have made progress in all these aspects. First of all, Juni mentioned about sourcing. We go more and more direct to source from the hamsil companies. And then about warehousing, we not only we through process improvement, not only improved our own warehouse cost, but also through joint venture and franchising warehouse, we speed up our capacity expansion. Also, we had new negotiations towards that reduces our rental costs as well as packaging costs.

Speaker 2

Regarding the delivery cost, we have made several improvements. Why is that we have a system that chooses the best optimal assignment of the delivery of each package

Speaker 1

to the best

Speaker 2

logistics service providers. Also, we established the so called the Kunpong Logistics Service. So this service started by serving our internal needs by transshipping goods from all our fulfillment centers. As you know that we have a total of 11 FCs, fulfillment centers, which is already a large very large volume. And we expect all those routes that not only reduce our internal transshipment cost by 100%, but drastically reduce the damage cost.

Speaker 2

The damage cost reduced by 60%. So then we extended the service to our partners, all the JVP partners and all the pumps of companies. We enable them to just ship out one fulfillment center, we make all the distribution. We start to expand that line because that line has truckload capacity as well as lower cost, much, much lower damage cost. So that helps us in the delivery cost.

Speaker 2

Also, as you know, since our damages reduce, also help us in reducing the RTVs. So all these together help us to reduce the total fulfillment cost by a very remarkable amount. We feel that we are becoming the most efficient operator in the industry. Thank you.

Speaker 4

Thank you. Thank you for the answers. And I'm looking forward to seeing continuous growth and more success in the coming months. Thank you.

Operator

Thank you. The next question is from James Bonsor, individual investor. Please go ahead.

Speaker 5

Good evening. This is James Bonsor, an Individual Investor. I would like to congratulate the company on achieving impressive results this quarter first. David and a lot of hard work and persistence has gone into this. And I have two questions as well, if I may.

Speaker 5

Firstly, you mentioned China's anti corruption healthcare campaign is expected to boost the retail pharmaceutical market. How does the company plan to capitalize on this to increase market share? And what specific competitive strengths does the company possess in this growing industry? And then secondly, 111 is known for leveraging digitalization both upstream and downstream in the healthcare sector. Are there any forthcoming plans or measures aimed at further enhancing online engagement for both in the upcoming quarters?

Speaker 5

Thank you.

Speaker 1

Yes. Thank you, James. I'm glad you noticed the anti corruption campaign in the healthcare sector in China. Obviously, we absolutely want to grab this golden opportunity to grow our market share. And today, our scale is still relatively small compared to some of the well established players, especially those traditional players.

Speaker 1

However, we have already built up our core competency, which is our operational efficiency. We don't have the resources and access to free capital or pretty much close to free like some of the state owned enterprises. What we rely on is really our ability to operate this business with the utmost efficiency. The competitive advantage will enable us to offer the widest selection at very competitive prices And over time, customer will recognize this value and buy more and more from us. Hence, our market share and the wallet share will grow.

Speaker 1

And I believe that our internal 100% digital operating system has proven this value when it comes to operational efficiency and we are in a position to really enable both their upstream and downstream customers. And as the nation is pushing digitization, this competitive advantage is going to really create momentum to our business. Thank you.

Speaker 2

Let me talk about the enabling business we have launched and what we are planning to do. Qing mentioned that we provide a lot of tools for our partners as we are moving towards platform business. So we launched a lot of mobile tools for merchants. They can through these tools, they can see daily reports, their business campus and manage their sales. They can see their product flow, they can see the profile of the customers and prices of their products sold and so on.

Speaker 2

All those important metrics can be seen and revised through the platform. And we are going to launch many more new digital tools for the for our partners. That's 1. 2nd, I mentioned about Ping Pong Logistics Network. Right now, we have more than like 30 or so routes and we are definitely expanding those routes since we see the huge demand from our partners.

Speaker 2

We can also see a very remarkable cost reduction as well as damage reductions. So and those are welcomed by our partners. So we're definitely expanding those. We also go through very regular training and the communication activities to improve the overall supply chain responsiveness and efficiency. Thank you.

Speaker 5

Thank you. I appreciate the extra color and good luck for future implementations.

Speaker 1

Thank you, James.

Operator

Thank you. The next question is from Kieran Wong, Private Investor. Please go ahead.

Speaker 6

Good evening. This is Kirin Wang from Hong Kong. I'm an individual investor. Congratulations on the big progress in this quarter. I have two questions.

Speaker 6

First question, the private label business at the company has shown rapid growth. Do you envision this becoming one of the primary growth drivers in the coming years? And what strategies are in place to develop this business further throughout 2024? Second question is, have you made my any strategic adjustments post COVID to strengthen revenue streams? Are these adjustments expected to have an impact in the upcoming quarters?

Speaker 6

Thank you.

Speaker 7

Okay. I will take the question regarding private label and I think Ping will take the second question. And for private label, we already have a couple of private label register.

Speaker 2

We have

Speaker 7

meaning care that is for our chain store customers. And also we have another brand called Huangjia Zhong You, translate direct translation will be a royal owner. This is for our individual store customer. And also we have Lenny here that is for dietary supplement and also some others like for medical device, etcetera. As Jinxin just mentioned in last quarter, our private label products kept very strong momentum and grow 89% close to 90% Y o Y.

Speaker 7

Most of these private label products have been very well accepted by our pharmacy customers. And currently, I think they are now sold in various pharmacies across the country, including in very remote areas like in Xinjiang, in Xinjiang, etcetera. There are more and more SKUs in our pipeline. Yes, we will keep our investment in this private label, including OTCs, including RF, medical device, battery, supplement, etcetera. Why we put so much effort on this private label.

Speaker 7

I think as you know, private label product has been very key margin contributor and also revenue contribution of those top chain stores, which has been disclosed. You can find this detail in the financial reports. As our customer, our 1 on 1 customer knows pharmacy, they are basically small, medium chain or even individual stores. They don't have such a capability to build up their own brand. So our has become a very attractive solution for these pharmacy customers, because they also need those products to compete with those top trend stores.

Speaker 7

And to conclude, these private label products bring us sustainable profit to 101. They also bring sustainable profit to our pharmacy customers. They are not only high margin for us, also high margin for our customers. And literally, they also help us build up a long term relationship with those customers, because if they want to buy those Guangzhou or Huang Xiaomingo, they only come to 1 on 1.

Speaker 1

Roof during the peak of the pandemic, but we always assumed that the market will normalize fast. And as I spoke earlier, our mindset has always been to have the assortment that really meet customer needs. And I spoke about having BorgWarner as our guide for assortment management. So Broadband is really the tool we use to constantly see feedback from customers what they really need and the objective is to offer the widest selection at the competitive price, including the private label products. So we should really anticipate that we will be adding more and more categories and there should be more and more revenue sources in the future.

Speaker 1

Thank you.

Operator

Thank you. The next question is from Nicolas Kwan from Virtu Capital. Please go ahead.

Speaker 8

Good evening. This is Nick from Rachel Capital. And I have two questions. And my first one is about Hong Kong IPO. So the Chinese authority has been encouraging domestic companies to go public in Hong Kong.

Speaker 8

I'm wondering if the company has been considering a dual listing in Hong Kong. And my second question is about our cash burn rate. Specifically, can you talk about our current cash status versus our redemption expectation? And what measures are we going to take to improve our cash status? Thank you.

Speaker 2

Yes. Nick, yes, we are actually open to all listing options, including domestic site change and as well as the Hong Kong Stock Exchange. So we will evaluate the options, which will be most suitable for the growth of the company as well as the benefits of our shareholders. Of course, secondary listing or second primary listing in Hong Kong is optioned into consideration. And we will make the appropriate disclosure regarding any listing initiatives according to SEC rules.

Speaker 2

Regarding your second tariff question on the cash position and cash position improvement. As we just disclosed, as of March end of 2024, we had cash and cash equivalents and restricted cash and short term investment of RMB630 1,000,000 and we have achieved positive cash operating cash flow for the quarter. Now you have noticed that we are turning to profit from quarter this year and we no longer burning cash. And we believe our cash at hand are sufficient to support our business expansion. Julian mentioned that we are improving our operation efficiency.

Speaker 2

We want to be the most efficient operator in this industry. It also relates to our working capital management. We have very high working efficiency in working capital management. If you look at our accounts payable date around 45 days, our inventory turnover date around 25 days and our accounts receivable is around 10 days. Now does that give us positive cash flow?

Speaker 2

So we will continue to monitor very closely our working capital, including the initiative to better utilize vision of supply chain finance, so that we will create actual cash at hand. In terms of redemption, we have also disclosed that we are in the process of negotiating with investors on the rearrangement of those redemptions. As a matter of fact, we have already entered into written agreements or commitment letters with investors to rearrange the redemption schedule, which already representing the majority of the total recurring amount. Nick, hope I answered your two questions.

Speaker 1

Thank you.

Operator

Thank you. The next question is from Jeff Wang from Water Tower Research. Please

Speaker 9

This is Jack with Water Tower Research. Congrats on the solid results. It's really interesting to see that 111 has innovated the joint venture warehouse model. So my first question is how well this model support the company's growth? And are there plans to establish additional warehouses under this model in 2024?

Speaker 9

And my second question is that we see that your operational expenses are just below 6% of revenues. So do you believe this figure is already the lowest within the industry? Or would there be opportunities to further enhance operational efficiency? Or is your goal just maintaining this level going forward? Any color you can share on that would be great.

Speaker 9

Thank you.

Speaker 7

Hi, Jack. Regarding the joint venture, this warehouse, I'll take this question. Yes, besides our 1st party managed warehouse, we set up warehouse local operation center by a joint venture model with our in certain province with local partners. And this province including like Gansu, Yunnan and Inner Mongolia, etcetera. So our JD partner, they are basically local leader in pharmaceutical business.

Speaker 7

They have run this business in 10 or 20, even 30 years locally. And they have actual capacity in warehouse. And they already have their logistics network to cover local customer demand. And all these capabilities can help us better serve our customers. You can imagine by using the traditional first party model, we want to set up those warehouse in those remote province, it will take a very little time.

Speaker 7

So with help from our partner, we will set up a JD warehousing model, which provide a local sourcing and also a faster delivery lead time and also a very low damaging and also damage rate has been reduced compared to a long distance shipment. So with the launch of leased JD warehouse, we are seeing business growth in these remote provinces. In 2024, we do have plans to expand this model. And actually, our Xinjiang joint venture is already in a setup process? Thank you.

Speaker 1

Yes. So Jack, I just realized we're going to have time to make my answer fast. So if 6% less than 6%, if it is the best in the industry from our internal research and intelligence, believe it is. And I also want you to give some references like we are still relatively small compared to some of the established players. The biggest player in the industry has a revenue of RMB 700,000,000,000 and last year we only did 15,000,000,000.

Speaker 1

And the value of one shipment from the traditional guys to the hospitals is probably a few 100,000 at least. And our shipment sometimes it runs as low as KRW300. And to give you that comparison to illustrate how efficient our operation is. As I said earlier that we definitely still have room to continue to optimize, staying at the status quo is never in our culture. Thank you.

Operator

Thank you. 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's in Shanghai, China, please let the company know. Thank you for joining us call today. This concludes the call.

Remove Ads
Powered by Quartr
Earnings Conference Call
111 Q1 2024
00:00 / 00:00
Remove Ads