Earnings Call Transcript - YI Q1 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the First Quarter 2022 Earnings 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 today's conference is being recorded. And now I'd like to hand the conference over to your first speaker today, Monica Mu, Investor Relations Director. Please go ahead.

Monica Mu, Investor Relations Director

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 myself, Monica Mu, Investor Relations Director. 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. 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 current market and operating conditions. They 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 our earnings press release for detailed information of our comparative financial performance on a year-over-year basis. With that, I will turn the call over to our CEO, Mr. Junling Liu.

Junling Liu, CEO

Thank you for joining our first quarter 2022 earnings call. The information that we'll be discussing here is also provided in the slides that have been posted earlier today on the company’s website. I would encourage you to download the presentation along with the earnings report at IR.111.com.cn. I will first speak briefly about the macro environment before covering our recent operational performance. I will also provide some color on how we will continue to deliver revenue and margin growth, strengthen upstream supply capabilities, and improve operational efficiency, as well as our future strategies. Now, Mr. Luke Chen will walk you through our financial results. As many of you are aware, the Chinese government instituted shutdowns of numerous cities to curb the spread of the COVID Omicron variant. Among those cities impacted, Shanghai was hit the most where a majority of our staff is located. This has had a severe impact on China's economy. I'm pleased to report that despite these challenges, 111 achieved growth and improved all of our operating metrics. Q1 2022 will mark our 15th consecutive quarter of year-over-year growth since our IPO. Although the majority of the residents of Shanghai can move freely now, the aftermath of the COVID pandemic is still lingering. During this challenging period, 111 put forth tremendous effort. As the number of cases rose in several cities in China, local lockdowns were imposed. As a result, 111 had to shut down our East China fulfillment center, which is one of our key hubs. In addition, transportation and logistics were strictly regulated in pandemic-hit areas. Many of our orders were stuck in transit due to various local policies in many cities, which significantly increased our fulfillment costs in the quarter. Because the overall supply chain was disrupted, we also experienced a severe shortage of medicine supplies as we were not able to replenish inventory. At the same time, pharmacies in many cities suspended the sale of various types of drugs such as antibiotics and anti-viral medications. In the face of these challenges, 111 quickly set up a pandemic relief program with a virtual command center providing ongoing instructions. Our company and staff worked diligently and leveraged the full scope of 111’s online and offline platform and the Smart Supply Chain to service affected areas. Despite the severe impact of the pandemic, the company rose to the challenge and achieved RMB2.98 billion in revenues, an increase of 14.9% year-over-year marking the 15th consecutive quarter of year-over-year growth since our IPO. Our gross profit reached RMB192 million, representing a margin growth rate of 66.3% year-over-year, which was over four times our revenue growth rate. Our B2B business remains the key driver of revenue growth. In Q1, B2B revenue reached RMB2.87 billion, representing a year-over-year increase of 17%. The gross profit increased to RMB168 million, an increase of 90.7% year-over-year, over five times the revenue growth rate. This hard-earned margin growth is a result of our consistent adherence to 111’s customer-centric philosophy and our strong determination to create value for our customers. With the lingering COVID pandemic and remote work arrangements, we established a new standard operating procedure and a business continuity plan, showcasing our resilience and flexibility, as well as the emergency backup capability of our national intelligent supply chain. I'd like to elaborate on our plans to continue to grow our margins. Firstly, we will reduce procurement costs by directly sourcing from pharmaceutical companies. This has been highly effective in lowering product costs. We now source from over 550 globally renowned and domestic pharmaceutical companies and will continue to deepen our strategic relationships with our partners. Secondly, we will optimize our product assortment and structure. With annual sales revenue of over RMB10 billion, we are serving a vast market while balancing our product portfolio with healthy margins. Thirdly, we will enhance our industrial internet capabilities. Our digital platform provides a comprehensive solution for pharmaceutical companies by integrating doctors, pharmacists, medical assistants, patients, and medical representatives onto our internet hospital. The service module also provides online remote consultations, e-prescriptions, patient education, patient support, and refill services. These features enable us to provide customized omni-channel digital marketing solutions for pharmaceutical companies. The market continues to show strong demand for our diverse portfolio of service solutions. Our service revenue achieved RMB29 million, an increase of approximately 70% year-over-year. As a result, the non-GAAP loss from operation as a percentage of net revenues decreased to 2.4% from 5.2% in the same quarter last year. Although the current environment has brought numerous challenges for our business, we remain committed to executing our strategy to continue to grow our revenue and gross margin. Our goal remains firm to achieve quarterly breakeven at the non-GAAP operating income level in 2022. Now, let me discuss our achievements on the supply side. Through continuous optimization of product assortment, gross profit improvement, supply chain efficiency enhancements, and comprehensive digital capability boosting, 111 has deepened partnerships with upstream pharmaceutical partners and strengthened relationships with downstream pharmacy customers. We assist hundreds of pharmaceutical companies and thousands of distributors with drug commercialization, digital marketing, and other services. For example, our One Health virtual franchise model enables over 10,000 small-to-medium-sized pharmacies to provide superior products and services to their customers, utilizing our platform for better product selection, procurement, and inventory management, as well as accessing our distribution tools. Operating efficiency remains a continuous focus in our strategic imperatives. With the growing scale of our business and enhanced technological capabilities, our operational efficiency continues to improve. During our weekly business reviews, we analyze metrics to ensure that as an organization, we must deliver improved operating efficiency continuously. Each metric has a team assigned to ensure accountability for the goals we set. As a result, we are glad to see increased revenue and gross margins, while sales and marketing expenses in Q1 decreased to 3.9% from 4.7%. General and administrative expenses decreased to 1.6% from 2%, and technology expenses decreased to 1.3% from 1.9% in the same quarter last year. The overall reductions in sales and marketing, general and administrative, and technology expenses year-over-year are 6.2%, 7.9%, and 21.5% respectively. 111 has been certified by the Chinese Ministry of Science and Technology as a National High-Tech Enterprise and designated as a specialized high-end technology enterprise by the Shanghai Municipal Commission of Economy and Information in 2021. We are very proud of these distinctions, and we are committed to continuous innovation and improvement. To further reduce general and administrative costs, we focus on our organizational structure and improving employee network efficiency through multiple operational tools. We have developed several innovative marketing strategies, yielding positive results, including building standard promotional workflows that improve efficiency and increase ROI by over 40% year-over-year. We have established tiered user-specific operational mechanisms to boost customer retention and activity. We also develop innovative social-based marketing, including group buy promotions, game-based coupon grabbing, lotteries, etc. I would also like to brief you on 111’s ESG efforts during the pandemic. As a provider of PPE and everyday healthcare products, we have played a key role in the ongoing fight against COVID. We were appointed by the Shanghai government as a supply guarantee enterprise. Many pharmacies and medical institutions struggled with supply chain issues, and we stepped in to fill the gaps. We have over 100,000 different types of medicine available for sale on our platform. During the shutdown period, we collected purchase orders via a proprietary 111 purchase channel, and specially assigned personnel processed them through the company's pandemic relief program, ensuring the fastest delivery possible. For patients with chronic diseases, we provided medication registration and ensured specialized personnel were available to follow up urgent requests for medicine. I'm proud of our government relations team's work during this challenging time. Through their efforts, we managed to open special channels that enable daily shipping of supplies to Shanghai from our fulfillment center, essential for many chronic patients. We received countless letters from customers praising our services, underscoring the social value we deliver to our communities. Our One Clinic online hospital platform launched a free virtual clinical services program, allowing doctors to provide online consultations, prescription renewals, and other services. By creating a free and convenient place for doctors and patients to connect, our online prescription orders increased by 20%. 111 proactively organized donation initiatives for Shanghai nursing homes and other organizations. We have provided pharmacies free access to our O2O platform and have recruited volunteers to deliver drugs in hard-hit areas. Lastly, we offer PPEs and other supplies for companies where employees have returned to the office. 111 is dedicated to the health of Shanghai residents, and our ESG efforts align with our core values. We will firmly fulfill our social responsibilities as we have always done. Under China's 14th five-year plan for national economic and social development, the digital economy has been elevated to a vital position and is expected to enter a period of rapid expansion through 2025. Digitizing the healthcare industry has been our goal since our inception. We see this as a tremendous opportunity to leverage digital technology and reconstruct the value chain in the healthcare sector. To achieve this, we have built a world-class technology platform that is transforming China's healthcare industry and optimized our S2B2C business model with our unrivaled national sales network. This has made us an attractive commercialization partner, as evidenced by our growing partnerships with pharmaceutical companies. Our infrastructure supports all players in the healthcare industry, including pharmaceutical companies, pharmacists, doctors, and consumers. We have created the largest virtual pharmacy network in China with about 400,000 pharmacies and strategic partnerships with over 550 renowned global and domestic pharmaceutical companies. We take pride in the ecosystem we have built, as it will enable us to scale our business to the next level. Looking forward, we will continue our efforts to improve and expand our business and further consolidate our leading position in this medical service industry. We aim to deliver high-quality, sustainable growth and create market value for our shareholders while recognizing our responsibilities to the community and the environment. By consolidating our strengths in supply chain and technology, we will help our upstream and downstream partners with digital transformation, enhancing interactions with their customers. Our ultimate goal is to achieve profitability as soon as possible and create value for our shareholders and society at large. We wish to thank all the investors who have supported us. Now, I'll hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

Luke Chen, CFO

Thank you, Junling, and good morning or good evening, everyone. 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 first quarter 2022 results from Slide 16 to 18 in Section 2 of our presentation. Again, our comparisons are year-over-year and all numbers are in RMB unless otherwise stated. Despite all the challenges from the pandemic lockdown in many cities across the country during the quarter, we have continued to grow our top line and gross profit. Total net revenues for the quarter grew 15% to RMB2.98 billion. We are pleased to report that our gross segment profit for the quarter grew 66%, which is over four times the growth rate of our revenue. Top-line growth for the quarter was mainly attributable to our B2B segment revenue growth at 17% to RMB2.87 billion. The gross segment profit for the B2B segment has increased by 91% with gross segment margin up from 3.6% to 5.9%, reflecting our ability to steadily expand our business scale while rapidly improving our margins. Our B2C segment revenue decreased 21% to RMB130 million, with gross segment margin improving from 19.4% to 21.6%. Total operating expenses for the quarter were up 2% to RMB295 million. As a percentage of net revenues, total operating expenses for the quarter decreased to 9.9% from 11.1% as we continued to enhance our operating leverage and optimize our operational efficiency. Fulfillment expenses as a percentage of net revenue for the quarter was 3.2%, up from 2.6% in the same quarter of last year. The increase was mainly attributable to our investment in expanding the capacity of our fulfillment centers to support future growth. The pandemic lockdown in various parts of the country also temporarily caused an increase in delivery costs. Sales and marketing expenses as a percentage of net revenue for the quarter was 3.9%, down from 4.7% in the same quarter last year. General and administrative expenses as a percentage of net revenue accounted for 1.6%, down from 2% in the same quarter last year. Technology expenses accounted for 1.3% of net revenue, down from 1.9% in the same quarter last year. As a result, the non-GAAP loss from operations narrowed to RMB72.4 million, compared to RMB135.9 million in the same quarter of last year. As a percentage of net revenues, non-GAAP loss from operations decreased to 2.4% in the quarter from 5.2% in the same quarter last year. Non-GAAP net loss attributable to ordinary shareholders was RMB80.6 million, compared to RMB109.3 million in the same quarter of last year. As a percentage of net revenues, non-GAAP net loss attributable to ordinary shareholders decreased to 2.7% in the quarter from 4.2% in the same quarter of last year. As you can see, we are improving our financial performance quarter-by-quarter and we're very close to profitability. We have strong confidence that we'll reach breakeven at a quarterly non-GAAP operating level this year. Please refer to Slide 19 to 23 of the appendix section for selected financial statements. A quick note on our cash position as of March 31, 2022; we have cash and cash equivalents, restricted cash, and short-term investments totaling RMB901.4 million. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Operator, Operator

Thank you. Your first question comes from the line of Xipeng Feng from CICC. Please go ahead.

Xipeng Feng, Analyst

Okay. Thank you for taking my questions, and congratulations on the company progress. Well, I have three questions. The first one is, what is the impact of recent policies regarding internet healthcare on your company? And my second question is, I see B2B segment is rapidly growing. What's the reason, and how will you maintain the growth momentum? My last question is, could you please elaborate on the company's strategies going forward? Thank you.

Junling Liu, CEO

Thank you, Xipeng. Let me address your first question. I have two points to make. Firstly, if you look at the Healthy China 2030 and the 14th Five-Year Plan, the government has elevated the health of its citizens to a level of national strategy. There are many positive trends for us, and we are very excited about it. We discussed this in previous quarters, and I didn't elaborate much on today's call, but we see digitization and investment in the healthcare industry providing significant tailwinds. Regarding your question about the recent consultation paper where regulatory bodies are outlining detailed measures to ensure the industry complies with new regulations—I believe this is beneficial for the industry's development. Some companies might be adversely impacted, but measures such as prohibiting AI involvement in doctor's consultations and requiring users to upload their health records will affect the landscape. 111 has always maintained strict compliance standards, and the majority of our business comes from the B2B side, which is not adversely impacted. Even in our B2C business, we aim to set high compliance standards. Overall, we perceive more positives than negatives from these policies and believe we should leverage these tailwinds to grow our business.

Luke Chen, CFO

Regarding your second question about B2B; it has been on a consistently healthy growth path. Despite the pandemic, we delivered 91% year-over-year growth on B2B gross margin. Moving forward, we will continue to upgrade our supply chain; that is, leveraging direct and strategic partnerships with more international and domestic pharmaceutical partners to bring more selections at lower costs to our downstream pharmacy and clinic customers. Additionally, we will enhance our digital marketing platform to assist pharmaceutical companies in commercializing their products to pharmacies, clinics, and eventually to patients and consumers. Thus, our B2B business is becoming a platform to effectively link pharmaceutical companies with pharmacies, clinics, and end customers. Adhering to IQVIA's latest report, the volume of China pharmacy and retail has exceeded RMB200 billion in the past 12 months, indicating significant market potential for expansion with healthy margins.

Junling Liu, CEO

To address your third question about strategy; in the past, we discussed our three-step strategy. Firstly, we wanted to build the infrastructure and infrastructure ecosystem—which is why we developed the B2C module, Internet hospital module, and B2B module. Secondly, having established this infrastructure, we sought to achieve scale, which we accomplished in a relatively short time by growing our business substantially. Last year, we achieved significant sales figures. The third step involves growing margins and achieving profitability. In the immediate future, we will continue to focus on increasing revenues and margins while strengthening our supply-side capabilities and operational efficiencies. Our objective is profitability in a multi-trillion-yuan industry, leveraging technology to transform this sector and position ourselves as a key player.

Xipeng Feng, Analyst

Okay. That's clear. Congratulations again on the company progress. Thanks.

Junling Liu, CEO

Thank you.

Luke Chen, CFO

Thank you.

Operator, Operator

Thank you. Your next question is from the line of Jessie Lu from HSBC. Please go ahead.

Jessie Lu, Analyst

Thank you. Can you hear me?

Junling Liu, CEO

Yes.

Jessie Lu, Analyst

Great. Thank you so much for taking my question, and congratulations on the great results despite the challenging environment. I have two questions, if I may. The first is that, as the industry grows, we notice more players in the space for both C2B and D2C. Can you discuss more about the competitive landscape now and your competitive advantages? The second question is regarding the financials. It's very encouraging to see the narrowing net loss. You mentioned the company will continue to work on margins to achieve quarterly breakeven. Can you elaborate on how you propose to achieve this and in which OpEx line we can expect more cost savings? Thank you.

Junling Liu, CEO

Thank you, Jessie. I will take your first question. Concerning our competition, it primarily arises from traditional distributors, state-owned entities, and newcomers copying our model. We position ourselves differently from traditional players. Our strength lies in leveraging technology to drive efficiency, and we believe digitization is the future. Among the 14,000 distributors in our sector, we believe that traditional players cannot match our capabilities. Even newcomers replicating our model cannot compete with our unique offerings. Our ecosystem is designed to serve all key players, from pharmaceutical companies to doctors, pharmacies, medical representatives, and consumers—providing our largest differentiation. We enable businesses to better serve consumers, creating a unique role that has not been done before. I'm eager to share future progress in subsequent earnings calls, as we believe our ecosystem is optimal for 111's future.

Luke Chen, CFO

Regarding your second question, there are two major factors that led to the significant narrowing of our non-GAAP loss this quarter. Firstly, we saw substantial growth in gross profit and margins, with our gross profit increasing by 66% and gross margin improving from 4.5% to 6.5%. Secondly, we made continuous efforts to enhance operational efficiency. While growing our top line by 15%, our spending on sales and marketing expenses, general and administrative expenses, and technology expenses were reduced by 6.2%, 7.9%, and 21.5%, respectively. Junling mentioned earlier that we will maintain this momentum to build a healthy and profitable business while investing wisely in our spending. In summary, we will focus on three key areas: reducing procurement costs to improve our margin profile, optimizing our product assortment and structure to sell high-margin, in-demand products, and enhancing our industry internet capabilities to improve operational efficiency. We are confident that we will continue this momentum and reach breakeven at the GAAP operating income level this year.

Jessie Lu, Analyst

Thank you. Very clear. Congratulations again.

Luke Chen, CFO

Thank you, Jessie.

Operator, Operator

Thank you. Your next question is from the line of Zoe Bian from Citi. Please go ahead.

Zoe Bian, Analyst

Hi, this is Zoe from Citi. Thank you, management, for taking my question. I have two questions. The first is, what's the impact of the pandemic on your business operations in the second quarter this year, especially on your top line? Will the pandemic affect your quarterly operating profit breakeven target this year? My second question is, what's your current cash balance, and how long can you support your business if there is no new financing? Thank you.

Junling Liu, CEO

Thank you, Zoe. The impact of the pandemic is still lingering. I have to get a PCR test almost every other day, as everywhere we go necessitates producing those new codes, and many restaurants are still not open. Many pharmacies are having difficulty selling the necessary medications, particularly those that are off-the-shelf. The lockdowns and logistics restrictions disrupt the supply chain and raise fulfillment costs. Some compounds are still locked down if even a single positive case is found, and our staff, largely based in Shanghai, cannot travel because of quarantines imposed by cities. These factors will impact our business. However, we have proven our capability to excel during extremely challenging times, as we did in Q1, helping many chronic patients access critical medications. Despite the ongoing challenges, we believe we can still deliver both top line and margin growth in Q2. As of now, we remain committed to our plan of achieving breakeven at an operating level this year.

Luke Chen, CFO

Regarding our cash position, as of March 31, 2022, we have cash and cash equivalents, restricted cash, and short-term investments totaling over RMB901 million. We only experienced a cash outflow of RMB10 million in the first quarter. If you look at our abbreviated cash flow statement, our accounts payable date is around 45 days, and our inventory days average 25 days, providing us with about 20 days of operating cash inflow. Additionally, we have secured working capital financing from several major banks. We believe that our cash reserve is sufficient to support our business expansion.

Zoe Bian, Analyst

Yes, thank you very much. That's very clear.

Junling Liu, CEO

Thank you.

Operator, Operator

Thank you. Your next question is from the line of an unidentified analyst. Please go ahead.