00:02 Good day and thank you for standing by. Welcome to the 111, Inc. Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. At this time all participants’ are in the listen-only mode. After the speakers’ presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. 00:34 And now I'd like to hand the conference over to Ms. Monica Mu, IR Director of 111, Inc. Thank you. Please go ahead.

00:44 Thank you, operator. Hello, everyone, and thank you for joining us today. On the call today from 111 are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of our major subsidiary; Mr. Harvey Wangg, COO; and Monica Mu, Investor Relations Director. 01:15 As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The company’s earnings press release was distributed earlier today and together with our earnings presentation are available on the company's IR website at ir.111.com.cn. 01:47 Before we get 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 the current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which could cause actual results to differ materially. 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 statement as a result of new information, future events or otherwise, except as required under applicable law. 02:53 Please note that all numbers are in RMB and all comparisons refer to year-over-year comparison, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis. 03:19 With that, I will turn the call over to our CEO, Mr. Junling Liu.

03:28 Well, good morning, and good evening, everyone. Thank you for joining our fourth quarter and fiscal year 2021 earnings call. The information that we'll be discussing here are also provided in the slides that have been posted earlier today on the company's website. And I would encourage you to download the presentation along with the earnings report at ir.111.com.cn. 03:59 I'm pleased to report that 111 had a great fourth quarter and a great year in 2021. We achieved our target and saw improvements across all operating metrics. 111 has achieved a critical scale about of $2 billion in revenue with a significant margin improvement. Gross segment profit grew 3 times as fast as revenue growth in Q4. And the Company's total revenue grew 13-fold in the last four years. We now have a clear line of sight through profitability in the near-term. 04:40 We have built an infrastructure that will enable us to service pharmaceutical companies, doctors, pharmacies and patients. We have created the largest virtual pharmacy network with 385,000 stores and growing. We have formed partnerships with over 500 globally renowned and the domestic pharmaceutical companies. Our technology platform is state-of-the-art and is already playing the role of transforming China's health care industry. We feel very proud of the ecosystem we have built to-date as it will enable us to scale our business to the next level. 05:23 China's healthcare industry is massive and it's more than 7% of GDP and growing. 111 has developed a business model in the S2B2C space with unique advantages, unrivaled national sales network and coverage, fast growing partnerships with drug manufacturers, world-class supply chain and ecosystem powered by its state-of-the-art digital platform to capitalize on this massive market. 05:55 Please allow me to talk briefly about the state of the business…

31:33 Thank you, Junling, and good morning, and good evening, everyone. I want to begin by thanking all of our colleagues for their resilience and hard work over fiscal 2021, as we have navigated a challenging environment for making necessary changes to improve our operating situation and cost efficiency, while maintaining our competitive edge. We remained resolute in our focus to achieve quarterly breakeven at non-GAAP operating income level in 2022 as soon as possible. 32:11 Moving to the financials, my prepared remarks will focus on a few key business and financial highlights. You can refer to the details of the fourth quarter and fiscal year 2021 results from Slide 18 to 21 in Section 3 of our presentation. Again, all comparisons are year-over-year and all numbers are in RMB, unless otherwise stated. 32:39 Let's start with the fourth quarter results. Total net revenues for the quarter grew 31% to RMB3.5 billion, which is within our guidance range. We are pleased to report that our gross segment profit for the quarter has grown at 98%, which is 3 times as faster as the revenue growth. Strong top line growth for the quarter was mainly attributable to our B2B segment revenue growth at a 35% to RMB3.3 billion. The gross segment profit for B2B segment has increased by 133% with gross segment margin up from 3% to 5.2%, which reflected our ability to rapidly expand our business scale by steadily improve our margin. 33:34 Our B2C segment revenue decreased 23% to RMB100.9 million with gross segment margin improved from 17.5% to 24.8%. Total operating expenses for the quarter were, up 27.9% to RMB357 million. As a percentage of net revenue, total operating expenses for the quarter was down to 8.9% from 9.4%, as we continue to enhance our operating leverage and…

39:26 Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Zoe Bian from Citi. Please ask your question.

39:57 Thank you, management, for taking my question. I'm Zoe Bian from Citi. I have three questions. The first is, could you share the drivers of gross margin increase in 4Q '21? And what kind of GM level would you expect in 2022? 40:16 And the second question is, we are very glad to hear 111 would achieve quarterly non-GAAP operating profit breakeven this year and what's your growth outlook in 2022? The third one is that the SEC named five Chinese companies under the Holding Foreign Companies Accountable Act. What kind of actions would you take in case of the listing risk? Thank you.

40:48 Okay, Zoe. This is, Harvey. I'll take the first one regarding gross margin. In 2021, our year-over-year gross margin growth has reached a 126%, and especially in Q4 the margin growth rate is 133% Y-o-Y, which is 3.8 times of our revenue growth rate. In our previous quarter's earnings call, we did mention that we will be very concentrated in growing our margin dollars and we delivered that with B2B margin growing 3.8 times as fast as our revenue grows. So first of all, direct sourcing from pharmaceutical companies has been highly effective in lowering the cost of the product. We have currently direct sourcing from 515 in the national and domestic pharmaceutical companies. These provides us with much wider selection, the lower cost to enable our downstream pharmacies to better serve their customers. 42:14 Secondly, our digital platform creates tremendous value by matching downstream demand with upstream supply. For our pharmaceutical partners, we are able to provide information gathering from our 385,000 pharmacies, such as likely profile of customers for certain drugs, including location, the quantity, pricing, which is invaluable to our upstream pharmaceutical company, to help them make decisions based on customer habit and needs. 43:04 Thirdly, very important driver on our margin improvement is through optimization of our product assortment and structure. With our current volume which has exceeded RMB10 billion, we are in a position to balance our portfolio of products with high velocity SKUs, low traffic driver, which may have low margin profile. But together with other products with higher margin profile, we currently have over 5,000 SKUs with very healthy margin profile. And not only do we make more profit from these SKUs, but also they will help our pharmacy customers to improve their gross margin. 44:01 And last, but not least, our technology and tools also contribute a lot to improve efficiency of our margin management. For example, our price intelligence system, our SSS, Smart Sourcing System, Smart Replenishment Systems, et cetera. And moving forward, we definitely can see our margin growth rate in the next quarter should be much faster, faster than our revenue growth rate. And our B2B business should be getting more and more healthy. Thank you.

44:42 Zoe. Thank you for your questions, I'll probably take your second and third question. With the growth outlook, our view is very positive for our business and we would definitely grow faster than the market growth, but one thing I want to assure you is that our margin, it's going to grow even faster. 45:04 And with your -- regards to the third question about the -- I guess the recent very volatile stock price movement of ADRs. I think it's very encouraging, starting from yesterday at least there is a quite some positive development, even the Chinese Vice-Premier, Liu He, expressed during his finance committee meeting that the government will continue to support the Chinese companies to continue to list overseas and quite a number of other encouraging messages. But that -- those are the things that's beyond our control. What I want to relay here is that as a company we will focus to grow our business and we are going to focus to execute our strategy and we're going to focus on growing our enterprise value. And in the meantime, based on the last couple of day’s development, we are hopeful that both the Chinese and American regulatory bodies can find some middle ground to work together around the PCAOB issue. Thank you.

46:19 Thanks a lot management. Look forward to this year’s operation.

46:25 Thank you.

46:28 Thank you. Our next question comes from the line of Xipeng Feng from CICC. Please ask your question.

46:38 Hi, this is Xipeng from CICC and thank you for taking my questions, and congratulations on the company progress. While I have two questions actually, my first question is about the financials. Well, we see that the company's gross margin continue to increase over the past four quarters, could you please share some more insights on the lift on gross margin? 47:03 And the other question is about business development. In 2021, the company formed partnerships with over 500 global and domestic pharmaceutical companies. We also note that the company is exploring a new specialized Internet hospital model with the number of pharmaceutical names. So could you please share some more colors on this? And in particular what value would these cooperation bring to the company or even the industry? Thank you.

47:40 Look, Xipeng, this is, Harvey. Thank you for your question. I'll again talk about margin, especially our B2B margin. I think, yes, we are seeing a very good trend on our margin improvement and last quarter it’s the margins world-wide gross rate is 133%, and the entire year of 2021 the margin gross rate is 126%. So, couple of initiated regarding -- we have actually included in last year to improve our margin including from supply chain side, the direct sourcing, direct sourcing from those pharmaceutical company. Per country, we have a 515 international domestic pharmaceutical companies we direct source from. 48:41 And also our product assortment changed a lot in last year. In previous years when we were still focusing on acquiring more customers, our platform and the majority of our sales coming from those very high velocity SKUs, those SKU who brought us traffic, who brought those pharmacies onto our platform. And now with our current volume about $2 billion, we are -- we have changed our assortment strategy. We are bringing more and more SKUs with higher margin profile. Currently, we have over 5,000 SKUs with a very healthy margin profile. And those SKUs we can call it high margin SKUs for us. They are also high margin SKUs for our pharmacy customers. 50:02 And also we have -- you can see from our P&L, we have a very good increase in our services revenue, which also bring us additional profit. And for the services side, definitely we provide quite a number of services, not only into pharmaceutical company, but also from last year we provide services to our downstream customers and those pharmacies and also the -- our 1 Health digital franchise service, this is a big project which also bring us services revenue. So all together with all these initiatives, we are seeing a very good margin improvement trend and we believe in the coming next quarters in 2022, we will continue the momentum on our margin improvement and get our business more and more healthy. Thank you, Xipeng.

51:09 Let me take the second question. We are so pleased to see that we have earned pharmaceutical companies trust, we demonstrate our values. The pharma companies trust our compliance, trust our transparent corporate governance, our digital platform and our supply chain capabilities and coverage. This is the reason that we formed over 500, in fact 515 strategic partnerships or direct sourcing partnerships with the pharmaceutical companies last year. 51:49 And let me specifically mentioned about the specialized call internet hospital. This is a idea we -- it's our innovation, we initiated about two years ago. We started with Eli Lilly on diabetes, we collaboratively reformed a specialized internet hospital for diabetes patients. We built a patient management platform, on this platform we have doctors, pharmacists, nutritionist, and doctor assistance, together we serve patients. And in fact, more than 60% of patients are from third tier to six tier cities. And this idea demonstrates tremendous value. 52:49 First of all, we can cover patients from the remote areas and they have access to the innovative drugs and they have access to specialized expertise and we have a very high customer loyalty stickiness. At the same time, we have seen that their DOT extended from four months to 5.5 months, which really providing value to the pharmaceutical companies. Started from there, yes with Eli Lilly, we formed specialized hospitals for psoriasis, then for breast cancer. Then we stood the word of mouth through our capabilities we started working within Novartis, Pfizer, Bayer, Sanofi, Celgene, and with many other disease types. And this really only two years of efforts and we have received tremendous success. And now we are working with several others for more and more diseases. And certainty the value both for our partners and for us. Okay, that's the end of my answer.

54:26 Okay, that's very clear and helpful, and congratulations again on the company's progress. Thank you.

54:34 Thank you. Our next question comes from Kenneth Lau from Cornerstone Investment. Please ask your question.

54:42 Thank you. This is Kenneth Lau from Cornerstone, and congratulations for your progress last year. I have three questions, the first one is, how have you executed your business strategies over the past few years? I can ask one by one, so I can take your answers right now. Thank you.

55:02 Sure. So thank you, Kenneth. I think in my script, I briefly talked about our strategy that there is a threat, also through all the earning earnings calls we had over the last three years. It's a three-step strategies pretty simple. First of all, we wanted to grow, to build the infrastructure and the ecosystem. Then after we accomplish that, we'll focus on grow the scale. With scale, we'll be able to get onto Stage 3, which is to grow the margin and profit. And we have absolutely executed and delivered on the strategies and the financial results. It's very telling already and today, I'm very pleased that we report that we have a pretty clear line of sight of profitability in the near future. Thank you. You can move onto the next question.

56:07 Thank you, thank you. Could you elaborate more on your current cash reserves?

56:22 Kenneth, is the question about the cash position?

56:26 Yes, the current cash reserves.

56:29 Okay. Sure. Yes, as we disclosed as of December end 2021, we had cash and the cash equivalents, restricted cash and short-term investments amounted to RMB943 million. If you look at our cash flow statement actually, in Q4, we already achieved overall cash positive. Now as we are close to breakeven, so we believe that our cash reserve is sufficient to support our business expansion. Now if looking at come closely at the working capital we have managed, we managed it very closely. Our inventory is base around like 28, 29 days and with accounts payable 42 to 45 days, this also give us on the actual cash generated. So we are quite comfortable that the cash reserve we hold on hand is sufficient to support our business expansion. Thank you.

57:32 Thank you, guys. That's very good news. And the last question is what's the impact will China's recent policy have on the medical digitization and what opportunities will this growing to the industry generally and your company, specifically in 2022? Thank you.

57:52 Yes, I think I'll take this question. And there are a ton of new policies over the last few years, to name a few. I spoke about the industrial Internet, like in the two sessions, which just ended. It is reiterated the government is committed to industrial Internet and also they emphasized on building the digital economy and develop the digital economy. And another one is the healthy China 2030. In particular, they mentioned to create equitable excess of healthcare services for rural communities. Those policies plus many others, which I won't have enough time to elaborate on during this call, it provided excellent tailwinds for our company regardless the industrial Internet, the digital economy, or better access of healthcare services for rural communities. 59:00 The kind of a design for 111s business model, because many parts of the value chain can be reconstructed by leveraging our digital technology, because our digital platform uniquely delivers a holistic platform that integrates medicine with the healthcare services and it benefits all parties within the overall ecosystem from -- say the pharmaceutical companies, the doctors, the healthcare providers, and of course, the patients, right? 59:40 So our platform offers a cohesive online and offline solutions, which improves efficiency, compared to traditional players. And today we have such a vast network of pharmacies on our network and we have more than 500 direct sourcing relationships. And of course, the indirect relationships are in the 1,000s. Obviously, we can actually breach the tool to really work on our supply demand platform and between our online pharmacy and the network of pharmacies, we are able to deliver products and the services to tens of millions of patients, of consumers nationwide. Thank you.

60:39 Thank you. And best wishes in 2022. Thank you.

60:44 Thank you.

60:46 Thank you. Our next question comes from (ph). Please ask your question.

60:54 Good evening, and good morning. First of all, congratulations to you all for the great start forward. I have three questions respecting the following three expects. First is about narrowing down the loss. Second is about a virtual pharmacy network. And the third question is about supply chain. My first question is, as now the non-GAAP net loss has significantly narrowed, what are the main factors and how do you plan to sustain this trend?

61:37 Hi, Victor, let me answer this questions. Yes, we are very pleased to see that we are one step closer to breakeven. The non-GAAP loss from operations during quarter four narrowed to 2.2%, which attributed to our continued margin improvement, as you can see our margin improved from 3.9% quarter four last year to 4.9% quarter four this year. We believe there is still room to improve. And we're also taking actions to improve our operation and cost efficiency. So when you compare all the expenses from last year to this year you've seen that the leverage as well as cost savings. As Junling and Harvey just explained, we will continue to grow our business in a healthy way, which is profitable growth. And then we believe the trend will continue. And we aim to achieve quarterly breakeven at operating level ASAP in 2022.

62:53 Okay, thank you for the answer. And my question -- my second question is about the virtual pharmacy network as 111, Inc. is covering over 70% of the numbers of pharmacies in China. In addition to the current procurement services, what does the company plan to exploit this larger network?

63:23 Yes. So, and I think it's a great question, Victor. First of all, it is critical to have a solid base of customers and that is why we were relentless during the first few years to bring as many pharmacies as possible onto our platform. With this broad customer base, in addition to the products we sell to them, there are numerous ways to extract value. We design our business model to make those pharmacies successful, right? So currently we have a suite of service offerings to them, which all designed to create more value so they can better serve their consumers. For instance, we have a cloud prescription service, we have the 1 Drug Express O2O service, and we also have the health digital franchise service. 64:25 So the 1 Health digital franchise service, which I mentioned in our last earnings call is doing very well. And another example is that, before we knew it, our supply chain finance is already creating tens of millions of income for us, whilst helping those pharmacies to solve their cash flow challenges. And I won't be able to limit -- to list all those things we are doing, but I can assure you that there will be many more of similar type of innovations in the future. Thank you.

65:04 Thank you for the answer. I think it's very promising to make profit from this network. And here goes to my third question, and I noticed that the company's supply chain capability is at the leading edge in the industry. How do you propose to protect this barrier and exert this competitive action to a further step?

65:31 Okay, let me take that question. Smart supply chain has always been our core competence. And as you can see that we invested heavily in it. Just from our earnings report, we invested -- almost doubled our fulfillment center capacity and throughput last year alone. And we also in the process of improving our fulfillment center efficiency through process improvement, for example fast moving zones, transshipment of goods and more input into our -- in the processing, advancing our supply chain management systems. For example, we use optimization models and algorithms based on real-time data. We optimize selection, optimize our inventories, storage space, optimize our price, fulfillment center operations, including all the picking, packing, sorting the essentially all the processes. So, we believe that we are enhancing our capabilities as -- and you mentioned that our three steps of building infrastructure, we are investing more infrastructure and we are also investing a lot in the -- to believe this based on the infrastructure.

67:05 Okay, thank you. Thank you for the answer.

67:07 Thank you.

67:10 Thank you. Our next question comes from Marcus Shi. Please ask your question.

67:17 Hello, everyone. This is Marcus, I'm Individual Investor of the firm and congrats on the result. So my only one question is about monetization. Seeing the continued growth of the service revenue, so service revenue will be an important source of the income for the firm are going forward? And do you plan to create more revenue-generating products? If so, could you share your plan with us? Thanks.

67:52 Okay. Yes, this is a very good question. Thinking of surveys in 2022, we have been growing demand for a number of our service offerings. And for example our service, more deal provides a closed loop solution from the pharmaceutical company by integrating doctors, pharmacists, medical assistants, patients and medical representatives onto our internet hospital. And our services module also provides online remote consultation especially during this, kind of, COVID-19 situation. And also provide e-prescription services and patient education for pharmaceutical companies. Patient support an online refill, this enables us to provide customized omnichannel digital marketing solutions for pharmaceutical companies both through our 1 Pharmacy platform, as well as through our key strategic partners. 69:15 Currently, we have over 2,000 SKUs utilize our digital marketing solutions. And these products are promoted through our pharmacies customers across the country and also promoted to their consumer customers through our digital marketing platform. And there are also a number of other service solutions that has been used among our pharmacy customers, including the cloud prescription service, our 1 Drug Express O2O service, and our 1 Health franchise service, the digital franchise service. We will continue to create and innovate more service offerings that add value for our upstream customer, for our downstream partners, and we expect our services revenue to continue to grow to a size that will positively impact our P&L. Thank you.

70:38 Thanks for sharing.

70:42 Thank you. Our next question comes from (ph). Please ask your question.

70:48 Hi, good evening, and good morning. This is Lae Lee. Thank you for taking my questions. First, let me say I'm very grateful to hear such promising progress, especially under current domestic and international situation. I have two questions today, the first one, I noticed that over the past year the company has doubled is technology investment and its patients have also increased by over a dozen. What areas of business do these patients focus on and what entry barriers are we trying to build here? Thank you.

71:28 Let me take that question. As you can see our company's mission is to digitally connecting patients with medicine and medical services. So we believe that technologies are the core of our business and the key driver of Internet health industry is technology. Certainly, we have an Internet technology, cloud services and data analytics. So we have made a tremendous investment last year alone we more than doubled our technology spending, we build a lot of systems, more than 30 systems, we've earned 19 patents and these patents surrounding, for example, digital patient management platforms, so patient, of course, smart supply chain. Within that, we have lots of systems managing the inventory, managing the selection, managing the warehouse process. 72:33 We also have systems, intelligent system to manage our sales reps, sales teams, web system to manage the third-party logistics, will be a lot of technology. We believe that, this technology allow us to use the massive data to -- we have a clear understanding of our customer profile and behavior. And we have also a clear understanding of competition and the market trend, and using all those intelligence we can make sound decisions.

73:14 Okay, thank you. I think it's very important to halt . And my second question is, if COVID-19 continues, especially the latest outbreak throughout China. How does it affect the company? How do you plan to deal with it? Thank you.

73:43 This question regarding the COVID-19, and we know that -- especially in this month we are -- I think especially even for us in Shanghai heavily affected by the disease. But I think overall we can see the demand for our downstream customers are still there and we can expect, although there are some restriction, especially in the logistics side, but we can still seeing a very strong demand. And especially the good news for us is that COVID-19 help us to educate our pharmacy customer, as well as those consumer customers to go to online for drugs, for medical consultations, and also help the pharmaceutical companies for them to educate them and that they can utilize our online digital marketing tools to promote their new products, especially to those lower-tier cities. 75:16 So I think, yes, the COVID-19 give us -- brought us a lot of trouble, but I think it's also to create a big opportunity for us. And we expect, of course, we hope it will end up soon. But I believe for us and for our upstream and downstream partners, we have already managed to find out a solution to promote the product, to promote the sales through the online tools, through our online services. So we believe that it will help us in the short-term, the period to educate, shorten the period of online expansion. Overall, it should be close on call, but we do take the advantage of all these online tools. For example, for our digital franchise we provide O2O tool to our digital franchise pharmacies. So those pharmacies, they can utilize this tool to reach their customer even under current situation and to serve their customer compared to those traditional pharmacies, and we are offering -- we are enabling them and help them to get more business. I think that is the advantage we have seen. Thank you.

77:09 Okay great to hear that. And I think the company is really doing a valuable contribution to the society. That's all, thank you.

77:22 All right, thank you. There are no further questions at this time. I will now turn the call back to Monica Mu, IR Director, for closing remarks.

77:33 Thank you, operator. In closing on behalf of the entire 111 Management team, we 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 us in Shanghai, China, please let us know. Thank you for joining us today. This concludes the call.

78:02 Thank you. That does conclude our conference for today. Thank you for participating, you may all disconnect.