Hello, everyone, and thank you for joining 111's Conference Call today. On the call today from the company are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of 111's Major Subsidiary and Mr. Haihui Wang, COO. As a reminder, today's conference call is being broadcast live via webcast. The company's earnings press release was distributed earlier today and along with the earnings presentation are available on the company's IR website. Before the conference call gets started, let me remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors all of which would cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year-over-year comparisons unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year-over-year basis. With that, I will turn the call over to 111's CEO Mr. Junling Liu.

Good morning and good evening, everyone. Thank you for joining the fourth quarter and full year 2024 earnings call. The information we'll be discussing here is also available in the slides posted earlier today on the company's website. I encourage everyone to download the presentation as well as the earnings report from our investor relations website @ir.111.com.cn. 2024 was a year of significant challenges stemming from the macroeconomic pressures and ongoing healthcare reforms. These headwinds have impacted the broader healthcare industry, yet we delivered our first ever operational profitability and positive operating cash flow, an important milestone in our company's history. This solid performance is a direct result of our diligent execution of strategic initiatives to boost operational efficiency and cement us as one of the most efficient Healthcare platform operators in the sector. It also underscores our agility and resilience in navigating unfavorable and complex market conditions. Beyond financial performance, we also advanced our technologies and strengthened our supply chain infrastructure, laying the foundation for long-term growth. These improvements position us to better meet future demand with greater speed and lower costs, ultimately driving value across the industry. Next, I will provide a deeper look into the current industry landscape, outline our outlook and opportunities, and highlight key financial achievements. I will also share updates on our advancements in technology and supply chain infrastructure, as well as the recent industry recognition. Finally, I will discuss our growth strategies for navigating this challenging environment before handing over to our CFO, Mr. Luke Chen, for a detailed analysis of our financial performance. Turning to the macroeconomic landscape, economic uncertainties in China have led to increasingly cautious consumer behavior, slowing discretionary spending and significantly dampening retail sales growth. The healthcare sector is no exception. According to the National Bureau of Statistics, China…

Thank you, Jimmy, and good morning, evening everyone. I want to begin by thanking all of our colleagues for their resilience and hard work over fiscal year 2024 as we navigated a challenging environment for making necessary changes to improve our operation and cost efficiency while maintaining our competitive edge. moving to the financials, my prepared remarks will focus on a few key business and financial highlights. You can refer to the details of the fourth quarter and fiscal year 2024 results from slide 17 to 20 in section two of our presentation. Again, all comparisons are year-over-year and all numbers are in RMB unless otherwise stated. Let's start with the fourth quarter results. Total net revenues were RMB3.8 billion and gross segment profit was RMB202.5 million. Due to an unfavorable macro environment, macroeconomic environment, net revenues and gross segment profit decreased 6.3% and 5.5% respectively. Total operating expenses for the quarter decreased 50.1% to RMB209.8 million. As a percentage of net revenues, total operating expenses for the quarter were down to 5.5% from 10.2% as we continue to enhancing our operating leverage and optimizing our operating efficiency. Fulfillment expenses accounted for 2.7% of Q4 net revenues as compared to 2.5% in the prior year. Sales and marketing expenses as the percentage of net revenue for the quarter was 2%, down from 4.2% a year earlier. G&A expenses accounted for 0.5% of net revenue, down from 2.4% in the previous year, and technology expenses accounted for 0.4% on net revenue, down from 1.2% in the same quarter 2023. As a result, non-GAAP loss on operations was RMB2.3 million, representing an improvement of 95.8% from RMB55.2 million in the prior year. As a percentage of net revenues, non-GAAP loss from operations accounted for 0.1% in the quarter, down from 1.3% a…

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

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

Good morning, Robert. Yes, sure. So first of all, even with the very tough macro environment we achieved a major milestone in the company’s history by delivering the first ever operating profits both at the non-GAAP and debt level. We also achieved a positive cash flow over $263 million. And, in the meantime, we slashed operating expenditure by 130 basis points to 5.3% of revenue, making us one of the most efficient operators in the industry. And even compared with some of the really gigantic state-owned established companies. And also, our bottom line improved by almost RMB350 million at the GAAP level. And I’m very proud of the team who worked tirelessly throughout the year. The dedication and focus on executing our strategy is really outstanding. In 2024, we managed to significantly increase our product range by innovative business models like the franchise, the warehouse I spoke about in my script and shared inventory with the upstream supply and partners who worked extremely hard to offer competitive prices. We substantially increased our fulfillment centers to increase our reach. And AI also has become an integral part of our business operations and it made us extremely efficient to a level where we can compete against the biggest giants in the industry. That’s the accomplishments that our team achieved and that which translated into the operating profit and a positive cash flow. Thank you.

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

Yes. We achieved gross margin improvement, yet at the same time, offered customers very competitive prices. There is no magic here. So first of all, in order to offer the best selection for our customers, we insist on providing both low margin and a high margin products. And of course, the low margin products don’t make money. What we did is that we outsourced part of the low margin products to our partners who reside closer to their customers to save on shipping costs in order to having in order to have a reasonable margin with competitive pricing. Secondly, the teams have specific goals and the KPIs to sell the higher margin products, including our own private label products. The other thing we do is we try to use a decentralized model to encourage our suppliers to store their inventory into our warehouses on a consignment basis, and we offer holistic services. Speaking of services, in addition to what I just mentioned, I mean, I’ve also developed other service modules such as supply chain financing, the live streaming and so on. So the service revenue stream will continue to be one of the core metrics we manage with great diligence. In the last part of the list, we constantly tweak our assortment management and the AI assisted data analytics enable us to really optimize our assortment. Thank you.

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

Yes, I mean, it’s always a tough battle to balance our bottom line and top line. A deep cut in the OpEx could end up a big loss in the top line. And our core competence really comes from being efficient. And over the years, we have developed a very sound approach. Staffing optimization is critical. We constantly review and adjust our org structure and headcounts as this is where expenses can easily get out of control. The other thing we do is there are few buckets of expenses in our operations. Very, very simply put it, you have fulfillment, which is the biggest portion of our OpEx. You have sales and you have G&A. G&A also includes the technology team. We break down each line item of those expenses and manage with very fine granularity. To give an example like fulfillment, we will break it down into warehouse rental, the number of employees, the shelving cost, the picking cost, the racking material and the shipping costs, the damage rate, return, etcetera. Each of the above category has someone responsible to hit the target. Lastly, of course, the most essential element is really our digital capabilities. Over the years, we have invested hundreds of millions of yuan into technology, and our whole operation is 100% digitized, which provides real time data. And that real time data enable us to make real time adjustments. And this year, we want to ensure that the company will need to go through an AI transformation. And I’m really looking forward to updating our efforts in customer interfaces and the underlying AI system architecture. Thank you, Robert.

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

Yes, Robert, let me answer this question. Yes, we have all noticed we have achieved first half of annual operating profit and positive cash flow in 2024 on a whole year basis. And we believe the key drivers behind our relentless efforts to improve our leverage efficiency. You can count on there while maintaining our revenue scale, our operating expenses decreased two thirty basis points for year over year in 2024 and our long-term improved by 31%. We also well managed our working capital to generate positive operating cash flow, our time between RMB 263 million. Our accounts payable days are about forty-five days and our accounts receivable days is about ten to twelve days and our inventory turnover days are about twenty-five to thirty days. So we are highly efficient and well managed compared to as gaining expansion even compared to those dynamic players. We believe that we have built a solid foundation for 2025 and onwards. In 2025, we will continue to build up the scale in total margin and efficiently with this AI support. And our profitability and positive cash flow generation, we believe will be sustainable. Thank you, Robert.

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

Your next question comes from Xipeng Feng with CICC.

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

You look forward to taking that cost. [indiscernible]

Hi, Shifan. This is Harvey. I’ll take your question regarding this operation cost. And actually looking back on each operation cost last year, from an annual perspective, they were basically optimized in a very structured way. While, of course, many of these optimizations will gradually upgrade from those small and temporary improvements to structural optimization. And in this year, 2025, of course, in next year and in the future, we will definitely continue to utilize AI and our Internet technologies to continuously optimize their costs. This has already become ingrained in our DNA of our company and on our each employee. And the second question regarding the growth. And actually, on our supply side, we adopt a decentralized model and adding more and more other fulfillment centers, as Shireen just mentioned. And actually, there is a new fulfillment center just opened this week. And we also bring a greater variety of our product selection. And we established a digital external competition mechanism. This mechanism prompts upstream suppliers, our upstream especially those pharmaceutical companies, to continuously reduce their costs and also to offer more and more competitive prices. While on our demand side, our focus is on seizing the most efficient and competitive trends for our customers in this industry. We launched the Growing Together program recently and also last year end, we launched fresh sales festival. It’s every Monday and Tuesday every week, until now. And also our AI powered intelligent procurement system. With all that, we aim to obtain more shared wallets from our customers, especially from those chain store customers. While expanding our scale, we will reduce cost and definitely enhance our profitability.

Thank you, Shifan.

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

Your next question comes from Zoe Bian with Citi.

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

Okay. Let me answer your question. Let me review that what we have accomplished last year through the technology. Last year, we had two critical initiatives or strategies. One is that using technology to drive efficiency towards profitability. So we have accomplished that. And second was to drive more towards the platform business instead of heavy asset set of own business. So let me just go to that and talk more about AI, how we invest in AI about the function AI. So as you can see that first of all, we drive more for the platform business, okay. We build a lot of systems. One system was kind of set of services system for building R&D subsidy system. So we do that system for merchants on our platform and they will have monitoring system, have pricing and have pricing and have pricing system and kind of a day to DIY with the DIY service, they do it by themselves. Through that, we can handle over 1,000 merchants and 30,000 SKUs promotions per week. And all the promotions achieved good results, more than doubled their sales through that promotion. So behind the technology was kind of everything was on good technology. Second, what’s important, we call shared inventory. We were the first in the industry to start shared inventory for BRC. All of these sound very easy, but very complex in the systems and in the processes because B customers purchase by customs and B customers purchase by units, how we build the system not only to handle the differences, but also have the supply chain to manage the whole different processes. So we accomplish that. But we send it back to sharing between our inventory and our DPP partners as well as what Binny mentioned, the franchise fulfillment centers,…

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

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

Sure, sure. Got it. Thank you,

Your next question comes from Sean Yan, private investor.

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

Okay, Yan. I think your two questions actually are correlated. I’ll talk about the market first and then about a partnership with upstream and downstream companies. So regarding this market, I think like all the other markets in China, we know there is a reform led by our state government, currently happen in this pharmaceutical area. And the key focus of this reform, we all know is to enhance the efficiency of all steps and all links. The result is to reduce the cost of medical insurance and of course reduce the cost of the medical expenses of the residents. Under this key focus, we as Internet technology company, AI company, we have inherent advantage and also need to take greater responsibility compared to those traditional players. And they have been very good practices in other industries like in 3C industry and FMCG, etcetera. So we believe that our government will continue to introduce new policies to encourage innovation in this industry to improve efficiency and to reduce costs. So during this reform, we will leverage our advantage in AI, in Internet digitization to consolidate our business values and to create greater value. And then talk about your second question on partnerships. Actually, our business model is to connect our upstream partner, that is pharmaceutical companies, drug providers with those downstream partners, that is pharmacy terminals and even patients through our digital platform. So in future, we will further expand our cooperation with both upstream and downstream partners. The key is also to enable those drugs to enter China’s retail terminals, that is pharmacy, more effectively and to help those of pharmacy better sell and promote these drugs through an AI powered digital platform. We believe under the wave of AI technology, this will totally change and succeed with the traditional model of drug promotion that relies heavily on human effort. I hope I answered your question. Thank you.

Thank you for your detailed answer.

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