111, Inc. (NASDAQ:YI) Q4 2022 Earnings Call Transcript

111, Inc. (NASDAQ:YI) Q4 2022 Earnings Call Transcript March 24, 2023

Operator: 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. Harvey Wang, COO. As a reminder, today’s conference call is being broadcast live via webcast. The company’s earnings press release, was distributed earlier today and together with the earnings press release are available on the company’s IR website. Before the conference call gets started, let me remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management’s current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which could cause actual results to differ materially.

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. Please go ahead.

Junling Liu: Good morning and good evening everyone. Thank you for joining our fourth quarter and fiscal year 2022 earnings call. The information that we will be discussing here are also provided in the slides that have been posted earlier today on the company’s website. And I would like to encourage you to download the presentation along with the earnings report at ir.111.com.cn. In today’s call, I will talk about some of the latest regulatory development in the healthcare industry and what it means to the company. I will also cover our strategies for building growth momentum, improving operational efficiency and strengthening supply base. Then I will spend some time to speak about the performance of Q4 and full year of 2022 before handing the call to Mr. Luke Chen, who will walk you through our financial results.

2022 proved to be a very challenging year for many businesses, including 111. Everybody in China is thankful that COVID is behind us and anxious to get on with life as to normal. One of the most important trends post-pandemic will be the digitization of the healthcare industry. COVID-19 pandemic has shown how important healthcare services are in society, but it has also highlighted the limitations of the traditional healthcare services. With the introduction of digital technology, healthcare services have become more accessible for both consumers and businesses. With digital tools and platforms, healthcare providers can increase access to care, improve patient outcomes and better manage the challenges posted by public health emergencies. Digital technology has emerged as one of the key capabilities in solving the uncertain disturbance factors of the COVID-19 pandemic.

The importance of digital technology in healthcare is likely to increase in the future. And thus, its usage will continue as a critical trend in the healthcare industry. In May 2022, the State Council of China issued the 14th 5-year plan for national health, which clearly proposed to accelerate the construction of national health implementation, promote information interconnection and the construction of Internet hospitals, Internet class chronic disease management and other projects. This is expected to help improve access to healthcare for people in remote areas as well as streamline healthcare services. In June 2022, the National Health Commission of China issued the rules of the supervision of Internet diagnosis and treatment, which further provided new guideline for the development of Internet diagnosis and treatment norms.

In September 2022, the state administration of market supervision and administration issued the measures for the supervision and administration of drug network sales, which provided clearer requirements for the high-quality development of the pharmaceutical e-commerce industry. In October 2022, the report of the 20th National Congress of the Communist Party of China clearly pointed out that high-quality development is the primary task of building a socialist modern country and all around the way. As one of the four key directions of people’s well-being, healthcare industry is regarded as a strategic priority for development. With the increasing adoption of digital technology, the healthcare industry has been undergoing significant advancements towards digital transformation.

As the nation is quickly approaching an aging society, one can bet that healthcare expenditure from both the government and personal wallet will grow at a fast pace. All those policies will become tremendous tailwind in our business. 111 aims to create a leading digital healthcare platform in China with a mission to connect patients with medicine and healthcare services physically. The platform offers a wide range of healthcare services, including consultations, diagnosis, delivery of medicine, tools to enable both upstream pharmaceutical manufacturers, and downstream pharmacies. Consumers can access these services through the digital platform, enabling them to receive medical advice and consultation services from the safety of their homes.

Businesses can leapfrog the traditional way of conducting business and can access a range of services digitally with much greater efficiency. This digital platform has made healthcare services more accessible, convenient and affordable for individuals and businesses with great user experience. Based on the rapid development in the past few years, the company’s development strategy has begun to shift from expanding scale and acquiring customers to pursuing businesses with higher value, focusing on value creation, better customer experience and a stronger supply base. In order to achieve the above, the company realigned operations with the goals set in three areas. When it comes to new projects, the decision-making process starts from the value it can create for upstream and downstream customers.

Proof-of-concept also comes from feedback from real customers instead of management imagining in the isolation of office. Ideas and projects always fight for attention. In order to ensure that they are always creating maximum value for their customers, management emphasizes competition on the basis of value creation. This could be measured in a number of ways, including increased efficiency, improved outcomes or a better overall experience. Projects that have the greatest potential to create significant value for customers are prioritized over those that are likely to provide fewer benefits. And once the project has been approved, management ensures that the team working on it is fully focused on delivering maximum value at every stage of development.

Throughout the project lifecycle, value creation is a key consideration. Teams are given specific metrics to track their progress and ensure that the project is meeting its goals. And perhaps most importantly, feedback from the customers is constantly solicited and incorporated into the project’s development process. This helps to ensure that the final product is fully aligned with the needs of 111’s customers and provides them with the best possible extent. Being customer-centric is the half of the renewed operational structure. In the past, there have been numerous times when weekly business review metrics are more centered around internal metrics, such as revenue and margin. That would change to metrics related to things like, so we have what customers want, is the pricing competitive enough?

Do they always come back to us? Do they recommend our service to others? All teams will have to go through their own operational metrics to align with customer needs. For instance, a fulfillment center manager will need to reform his or her metrics around how fast do we receive goods, how fast can we deliver to customers, how many items got damaged during transportation, how many complaints are received on a day-to-day basis. The company believes that long-term value is much more important than short-term revenue and margin gains. To achieve long-term value, everyone in the company has to have the mentality that customers come first. With great efforts over the last few years, a decent supply base has been built. But the company believes, moving forward, this supply base needs to be further strengthened.

Although great relationships with major suppliers have been established, through strategic relationships need meet further development. This comes back to the point of value creation. The company has the state-of-the-art technology with many modules scattered in different silos of operations. Once we can integrate all those modules, much greater value can be created. Suppliers can leverage our digital tools to have real-time data on their products coverage, sales and pricing. Additionally, they could only get sales in figures from Tier 1 distributors. Now they have a complete view of business through the lenses of our digital tools. Clearly, those kinds of digital benefits were never available to the pharmaceutical manufacturers in the past.

At best, they have some limited data on a few key customers with direct coverage if they are big enough with a ground sales team. Without surprise, almost all of the suppliers who have seen our digital solutions are delighted by its capabilities. If we continue to deliver such solutions to our upstream suppliers, they will be more and more interested in allocating more resources to 111 as a digital channel. Over time, our supply base will be strong enough to compete against those well-established traditional players. Then the partnership will be based on who can deliver more value to suppliers other than previously established long-term relationships. As digital catalyst in the healthcare industry, 111 has rapidly developed its core competence by digitally connecting key players in this ecosystem.

This makes it possible for digital technology to become an enabler for those players to improve their respective efficiency. With more and more players adopting digital technology, the industry is being transformed. There is a popular terminology in China caught the industrial internet, which should be translated as an industry that’s being transformed by Internet technology. We have laid a very solid foundation and a position for 111 as one of the most important players in the field. So, Internet ties this very traditional industry. Now, let me spend a moment to talk about the key business progress in 111 in both Q4 and the whole year of 2022. Over the past 12 months, the deepened partnership with upstream and downstream companies continued to expand.

Upstream, we have reached direct supply relationship with more than 500 global and domestic pharmaceutical companies, which provides abundant supply of drugs, more competitive costs and more stable supply and support us to help drugstore partners build a more competitive assortment portfolio and improve the gross profit products. Downstream, we provided services to more than 435,000 retail pharmacies. This is around 75% market penetration, providing our pharmaceutical partners in-depth market reach of drug commercialization in the broad market, reducing distribution costs and achieving coverage of more than 890 cities and counties in China within 24 hours and directly or indirectly providing medical services to hundreds of millions of consumers.

We always adhere to the principle that digital technology can effectively improve the efficiency of the industry. In 2022, our technology R&D expenditure reached RMB140 million, with a total R&D expenditure of RMB421 million in the past 3 years. By the end of 2022, 111 owns 9 core intelligent systems, independently developed more than 30 proprietary systems. We were awarded 19 invention patents and have made breakthrough innovations in intelligent supply chain and big data analysis. In 2022, 111 was once again awarded the honorary titles and qualifications of high-tech enterprise certified by the Ministry of Science and Technology, National E-Commerce Demonstration Enterprise by the Ministry of Commerce, Special and New Enterprise by Shanghai City Government, and the Pudong area new R&D institution by Pudong government.

We don’t live in the delusion that the same and recognition can translate into business results. The reason why we invest in technology is because we truly believe that technology can bring operational efficiency. We want this to be a core strength of 111. Therefore, we are confident that we will be able to compete in such a crowded industry. Even with current scale, which is relatively small compared to the few big establishments, we can already compete on operational efficiency. OpEx will be a very key metric to tell how efficient a company can be. As we continue to grow in scale, we believe we can run this operation at a much lower rate. The significance of this is that we will be the most efficient operator in the whole industry, which will enable us to compete effectively with the big boys.

One of our strategies moving forward is to continue to build an operation with the lowest cost structure as we want to be the most efficient operator in our space. Innovation is one of the core tenets of our corporate culture and it continues to be the driver for future growth. In the B2B sector, we pioneered the One Health project to more than 12,000 drugstores through digital franchise. The franchise drugstores can use digital SaaS services, including intelligent procurement, O2O, CRM, etcetera to better manage drug selection, procurement, inventory management and customer relationship. Under One Health project, 111 can deliver value to upstream pharmaceutical companies and downstream pharmacies. This model makes it the most efficient way for drugs to reach the hands of consumers from manufacturers as the whole process is digital and transparent.

Our mission has always been to digitally connect drugs and healthcare services to consumers. The proliferation of One Health is a step forward in our mission. In the B2C sector, based on the digital platform and the chronic disease management capability, 111 is helping drug manufacturers to launch their drug on our platform. On February 16, the first official flagship store of Hua Medicine went live on 111’s platform. Immediately, Hua the very first locally approved innovative diabetic oral drug in China, received nationwide coverage, which means patients across the whole country can access the drug on our platform from Day 1 of the launch. 111 also helps Hua Medicine to manage lifecycle of patient care, including initial drug fulfillment, follow-on patient education, drive adherence management, online assistance of patient questions and refill.

We are proud of the fact that our model not only can help patients in accessing newly launched drugs regardless of where they live in the country, but also enable upstream drug manufacturers to leverage our digital capabilities to reach more patients and management with digital tools to achieve better business results. Now, let’s move on to our fourth quarter and full year 2022 results. In Q4, our operating revenue amounted to RMB4.1 billion, representing a year-on-year increase of 19.9%. This is the 18th consecutive quarter of growth since the company’s IPO. Q4’s gross profit increased by 23.8% year-on-year. Gross profit margin increased from 5.9% in the same period last year to 6.1%. Q4 generated positive cash flow of RMB63.2 million from operating activities, the second consecutive quarter of positive cash flow.

From CNY959 million in 2017 to CNY13.5 billion in 2022, our revenue scale has rapidly expanded 14 times in 5 years. In 2022, our total revenue reached CNY13.5 billion, an increase of 8.8% year-on-year. Gross profit increased by 35.3% year-on-year, 4x the growth rate of revenue. And the gross profit margin increased from 5% last year to 6.2% this year. Let’s not forget the struggles we had to endure throughout the whole year with COVID restrictions. For majority of the year, our operations were disrupted in many ways. I won’t bore you with much details but the 9% revenue growth and 35% margin growth is earned with tremendous team effort. Meanwhile, Q4 non-GAAP operation loss narrowed to 0.96% of net income from 2.22% in the same period last year.

In fact, we achieved profitability in December of 2022. Throughout 2022, our operational efficiency continued to improve. Total sales and marketing expenses, general and administrative expenses and technology expenses decreased by 15.5% year-on-year and non-GAAP operating loss narrowed to 1.6% of net income for the full year from 4% in the same period last year. As of December 31, 2022, cash and cash equivalents, restricted cash and short-term investments totaled RMB922.7 million. I’d like to spend a minute to quickly talk about our ESG efforts. Over the past year, with the advantages of digital technology and integrated online and offline platform, the company has actively helped fight the pandemic. During the lockdown, the government deployed a small number of companies to deliver essential goods to residents who are locked down at home.

111 was appointed as one of the critical leading guaranteed enterprises in Shanghai. The company set up a virtual pandemic control command center as soon as the pandemic broke out in Shanghai in early 2022, mobilizing resources from 111 to help our community. We collected purchase orders via proprietary purchase channels and assigned special personnel to process them, whilst ensuring timely delivery to patients. 1 Clinic, 111’s online hospital, launched free online services since the pandemic began and provided free online consultations, free prescription renewal for chronic disease sufferers and other medical services to the public. The company has proactively organized donations and offered anti-pandemic PPEs for enterprises resuming work and production.

In the context of the post-COVID economic promotion measures, 111 was again picked by the government as the designated healthcare platform in the Shanghai Electronic Consumption Voucher campaign in 2022. We provided services and offered citizens of Shanghai to redeem vouchers on our digital platform, helping government and the residents in consumption recovery. Everyone at 111 is proud to be able to contribute to the community. In the future, we will always firmly fulfill our social responsibilities and make continuous efforts to actively contribute to the construction of a healthy China. What a year we had. In a way, we’re very glad 2022 is behind us and COVID-19 has become vague memories. We overcame so many challenges and fought so hard for our business and achieved the great results.

We grew revenue and margin on extremely difficult circumstances. Operating expenditure continues to show great trends which suggest that our operational efficiency will continue to improve. Our bottom line is trending to a breakeven. In fact, we achieved the profitability on a non-GAAP operating level in the month of December 2022. In short, we have made significant progress in our business metrics. We believe that our strong technical capabilities will continue to enable us to build scale and improve efficiency, which will create long-term and sustain the revenue and margin growth. Looking to the future, 111 will continue to operate on the principles of value creation, being customer-centric and strengthening its supplier base. We believe the government will continue to support the healthcare industry’s digital migrations.

The national strategy of strengthening the digital China infrastructure and the policies of the 14th 5-year plan and the goals for 2035 provided us with excellent regulatory tailwinds. And we’re excited that we can play an important role of speeding up the digital transformation of the healthcare industry. We will double down our efforts in growing revenue and margin, improve our operational efficiency and achieve profitability. Considering our track record over the last 4 years, we have proven our capability in executing our strategy. We will continue to be better, delivering great results in the future. We wish to thank all the investors who have supported us along. Then I will hand the call to our CFO, Mr. Luke Chen, to walk through our financial results.

Thank you.

Luke Chen: Thank you, Junling and good morning or evening, everyone. I want to begin by thanking all of our colleagues for their resilience and hard work over fiscal year 2022 as we navigated a challenging environment for making necessary changes to improve our operations and cost efficiency while maintaining our competitive edge. Moving to the financials. My prepared remarks will focus on few key business and financial highlights. You can refer to the details of the fourth quarter and fiscal year 2022 results from Slide 19 to 22 in Section 3 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 for the quarter grew 20% to RMB4.1 billion.

We are pleased to report that our gross segment profit for the quarter have grown at 24%, which is faster than the revenue growth. Strong top line growth for the quarter was mainly attributed to our B2B segment revenue growth at 21% to RMB4 billion. The gross segment profit for B2B segment has increased 31% with gross segment margin up from 5.2% to 5.6%, which reflected our ability to rapidly expand our business scale while steadily improve our margin. Our B2C segment revenue decreased 2% to RMB126 billion with gross segment margin at 21%. Total operating expenses for the quarter were up 17% to RMB363 million. And as a percentage of net revenue, total operating expenses for the quarter was down to 8.8% from 9% as we continue to enhance our operating leverage and optimize our operational efficiency.

Consumers expenses as a percentage of net revenue for the quarter was 2.9% as compared to 3% in the second quarter of last year. And excluding the share-based compensation, sales and marketing expenses as a percentage of net revenue for the quarter was 2.7%, down from 3.4% in the same quarter of last year. G&A expenses accounted for 0.9% of net revenue, down from 1%. And the technology expense accounted for 0.6% of net revenue as compared to 0.7% in the same quarter of last year. As a result, non-GAAP loss from operations for the quarter narrowed to RMB40 million compared to the loss of RMB77 million in the same quarter of last year. As a percentage of net revenues, non-GAAP loss from operations decreased to less than 1% in the quarter from 2.2% in the same quarter of last year.

Non-GAAP net loss attributable to ordinary shareholders was RMB46 million compared to RMB84 million in the same quarter of last year. As the percentage of net revenues, non-GAAP net loss attributable to ordinary shareholders decreased to 1.1% in the quarter from 2.4% in the same quarter of last year. As for our fiscal full year 2022, I would like to run through a few highlights. Again, you can refer to the details in our deck and our earnings release. Our comparison is on to full year 2021. Full year net revenues were RMB13.5 billion, representing a year-over-year growth of 9%. Our B2B segment revenue grew 10% to RMB13.1 billion. This result was achieved despite all the disruptions caused by the lockdowns across the country during the year.

Our B2C segment revenue decreased 16% to RMB442 million. Although our top line growth was not that satisfactory, we are pleased to report that we have achieved gross segment profit growth at 35%, which is 4x of the revenue growth rate. As a result of the combined gross segment margin was 6.2%, up from 5% year ago. B2B gross segment margin was 5.7%, up from 4.3%. While our B2C segment was 21.8%, up from 20.9%. For full year 2022, total operating expenses decreased to 4.8% to RMB1.2 billion. As a percentage of net revenue, total operating expenses was 8.9%, down from 10.2% last year. Fulfillment expenses accounted for 3% of net revenues this year, comparable to 2.9% last year. Excluding the share-based compensation, and selling and marketing expenses as a percentage of net revenue reduced to 3% this year from 3.7% last year.

G&A expenses account for 0.9% of net revenue this year, down from 1.1%. And the technology expenses account for 0.9% of net revenue this year as compared to 1.3% last year. As a percentage of net revenues, non-GAAP loss from operations for the year decreased to 1.6% this year from 4% last year. Non-GAAP net loss attributable to ordinary shareholders as a percentage of net revenues decreased to 1.1% this year from 4.2% last year. We narrowed our loss amount by more than 50% this year versus last year and reached profitability on a non-GAAP operating level in the month of December. We are confident that our strong technology capabilities will continue to enable us to build scale, improve efficiency and deliver profitability, maximizing values for our shareholders.

Please refer to Slide 23 to 30 of the appendix section for selected financial statements. A quick note on our cash position. As of December 31, 2022, we had cash and cash equivalents, restricted cash and short-term investment of RMB923 million. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin our Q&A session.

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Q&A Session

Operator: Thank you. Today’s first question comes from Xipeng Feng with CICC. Please go ahead.

Xipeng Feng: Hi, this is Xipeng from CICC. And thank you for taking our questions, and congratulations on the company progress. Well, I have two questions. And the first one is, after the company achieved breakeven in last December, what is the specific profit expectation for 2023? And post-pandemic era, what are favorable changes for your company? And how will you respond and take on social responsibility? And these are my questions. Thanks.

Junling Liu: Yes. Thank you, Xipeng. I’ll take on your first question. Yes, thank you for that question. Indeed, we achieved profitability in December 2023 €“ 2022. And moving into 2023, the management is very much optimistic about the prospect of us continuing to make profits. And if you look back the last 4 years, we grew the company from less than RMB1 billion to today RMB13.5 billion in revenue. And I’ll remind you, our margin has been growing faster than revenue. And in the meantime, we are doing a great job in improving our operational efficiency. If you look into the few buckets of the operation expenditure, be it the cost to fulfill our orders, be it the sales cost, the technology expenses, the G&A, it’s all trending much better than last year. We trimmed 15.5% of our operations compared to the revenue percentage. So all those data, all those data points give us a lot of optimism moving into 2023. Thank you, Xipeng.

Harvey Wang: Let me take the second question, Xipeng. So I think that post COVID, the demand for health and well-being products, is enough. We saw that more consumers are going to drugstores which are our customers to buy their medicine and other health products. So we expect an increase in sales for our business is that during the pandemic, the Chinese government has seen the value of Internet to help hospitals and drugstores to reach customers and to help reduce COVID infection and to meet the shortage of hospitals also to improve the visibility of medication to patients in remote areas. So we can see that during the past probably a year or so, CFDA has launched serious new policies to promote online health. Also, the pandemic has influenced the consumer to move to online.

And those customers remain to enjoy benefit convenience of online services even after the pandemic. So the total number of users increased. So, all those changes present a tremendous opportunity for us. And we also need to take that opportunity and take on the social responsibility to align with our government to reach the health . Those are my answers.

Xipeng Feng: Okay. Thank you for your answers. It’s very clear. And thanks for sharing, and congratulations again on the company’s program.

Junling Liu: Thank you.

Operator: Thank you. And our next question today comes from Stephen Lee, an Individual Investor. Please go ahead.

Stephen Lee: Hello?

Junling Liu: Hi, Lee.

Stephen Lee: Yes. Thanks for sharing your Q4 results. I think that was fantastic. I have two questions. Firstly, I would like to know what will be the company’s operational focus going forward. Secondly, as the company’s second consecutive quarter for generating positive operating cash flow, how do you plan to keep this trend and how companies cash position now?