YI

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 just saw a 3.6% year-over-year growth in 2024 per capita healthcare expenditure. This represents a sharp decline of 12.4% points from the 16% growth in the prior year and the lag behind the 5% GDP growth during the same period. At the same time, downstream pharmacies continue to face pressure from ongoing health care reforms, including adjustments to individual medical accounts, face the rollout of coordinated outpatient benefits and heightened regulatory oversight. These reforms aim to build a more sustainable and efficient healthcare system, ultimately benefiting well managed pharmacy chains with strong product offerings and service capabilities. However, the transition period presents short-term challenges as the industry adapts to new policies and regulatory frameworks. Another key factor impacting pharmacies is an aggressive expansion that took place during the pandemic. Optimism about long-term healthcare demand led to a surge in new store openings, but market growth has not kept pace. As a result, China's total retail pharmacy sales dropped by 2.2% in 2024, according to Zhongkang data. With more stores competing in a stagnant market per store, revenues have fallen, intensifying industry competition. Newer stores still in their growth phase, face additional pressure, weighing on short-term profitability. Large pharmacy chains are already feeling the impact. For instance, Jianzhijia or JZJ Chain Drugstore expect its net profit attributable to shareholders, excluding non-recurring gains analysis, to decline by up to 69% in 2024, followed by 66% and a 45% decline for Yixintang or YXT Health and the Shanghai Del Ye or Shanghai no.1 Pharmacy Co. respectively. Independent pharmacies with limited resources face even greater financial strain. Given its challenging backdrop, digital transformation is no longer optional. It is essential. Pharmacists must cope with weaker consumer sentiment, slower healthcare spending and shifting patient behaviors while managing cost pressure and operational inefficiencies. The key to survival and growth lies in innovation, rethinking service delivery, optimizing product categories, enhancing client management and improving operational coordination across stores. This is where digitization and AI driven solutions come in. As a pioneer in the digital revolution, we have integrated leading technologies across our operations from sales and procurement to customer demand identification, inventory optimization and warehouse allocation. Our fully digitized operating system also empowers our upstream and downstream partners to reduce costs, improve efficiency and enhance service quality. Beyond the necessity of digital transformation, we remain highly confident in China's long-term healthcare market, supported by two key structural trends. First, the ongoing anti-corruption campaign in the healthcare sector is driving greater transparency in hospital procurement which is anticipated to expedite the shift of drug sales and prescriptions to retail pharmacies. This transition represents a trillion RMB out of hospital pharmaceutical distribution market that could eventually account for nearly half of the entire pharmaceutical distribution sector. In the short-term, however, policy execution remains uneven across provinces and cities with uncertainties and delays in medical reform, refinement and implementation. In the 2025 Government Work Report, China called for promoting the coordinated development and governance of healthcare, medical insurance and the pharmaceutical sector. It aims to steadily advance provincial level coordination of basic medical insurance while improving its financing and benefit adjustments mechanisms. Once these adjustments are fully in place, particularly with on time payments from government, national medical insurance, pharmacy chains will be among the primary beneficiaries. As a trusted partner to chain pharmacies, we're well positioned to capitalize on this growth. With an extensive and price attractive product portfolio and a relentless focus on customer experience, we strive to strengthen our leadership and expand market share in this dynamic landscape. Second, China's rapid aging population will fuel sustained growth in healthcare consumption while the government encourages the silver economy. Despite recent fluctuations, China's healthcare expenditure as a percentage of GDP remains significantly lower than that of developed countries, indicating ample room for expansion. As healthcare needs continue to rise, we believe the overall trajectory of the pharmaceutical and health care market will remain strong over the long-term. Turning to our financial highlights, our rigorous and disciplined approach to raising operational efficiency delivered meaningful improvements in Q4 despite ongoing short-term headwinds. We effectively reduced total operating expenses by half year-over-year, bring them to just 5.5% of revenues, down 470 basis points from the prior year. While fulfillment expenses rose slightly as a percentage of revenues, primarily due to a one-time warehouse relocation fee. We drove reductions across multiple cost categories. Selling expenses declined by 220 basis points to 2% of net revenues from 4.2% a year ago, while the general and administrative expense ratio fell by 190 basis points and the technology expense ratio decreased by 80 basis points. Excluding share-based compensation, our operating expense ratio improved by 130 basis points to a record low 5.3%. For the full year 2024, we achieved a yearly profit from operations for the first time with income from operations reaching RMB2.1 million, representing a sharp turnaround from an operational loss of RMB350.1 million in 2023. Our bottom line improved by RMB332.7 million or 94% 0.1% from a year ago. On a non-GAAP basis, income from operations was RMB22.3 million compared to the RMB123.9 million lost a year earlier. Non-GAAP bottom line improved by RMB126.6 million or 99.5% from 2023. Additionally, we generated yearly positive operating tax flow of RMB263 million for the first time. These milestones highlight the efficiency of our strategic initiatives and the resilience of our business model. In 2024, we reduced operating expenses by 31% year-over-year, lowering them to 5.7% of revenues, down 230 basis points from 8% in 2023. While fulfillment expenses remain largely unchanged as a percentage of revenues, the general and administrative expense ratio declined 100 basis points to 0.5%. Selling expenses fell to 2.2% in revenues compared to 3% in the prior year while technology expenses dropped to 0.5% of revenues from 0.8% a year earlier. Excluding share-based compensation, operating expenses as a percentage of revenues decreased 90 basis points to 5.6%. Our high operational efficiency was driven by strategic investments in infrastructure and optimized personnel arrangements. By prioritizing sustained growth, we have continuously enhanced our industry leading digital capabilities for operations, marketing, supplier empowerment and supply chain. This ensures that our technology driven efficiencies remain a key competitive advantage. In Q4, our advanced digital infrastructure contributed to further reductions in technology and staffing expenses, reinforcing our ability to adapt to evolving market conditions while positioning us for future opportunities. Although our revenues are smaller than some more established players, our operational efficiency is a key differentiator. As one of the most efficient healthcare E-commerce platforms, we remain committed to driving further cost reductions and enhancing profitability through scalability and refined execution. This unwavering focus on leveraging technology to drive operational excellence across various aspects is a cornerstone of our strategy. The savings generated from our continuous optimizations will bolster our financial flexibility allowing us to strategically allocate resources and reinvest in tech advancements, business growth and customer experiences at the right moment. From a technological standpoint, we have been strengthening our digital capabilities by investing in system development, advanced models, algorithms and data applications. These efforts are designed to fortify our core competitiveness in the digital landscape. As a result, we have made further strides in in leveraging digital and AI technologies. First, powered by our proprietary intelligent JVP platform and inventory sharing technology, we have achieved foundational system level integration with upstream partners to establish a unique decentralized inventory network that enhances stock volume and availability. This development, enabled by smart demand forecasting algorithms and an advanced inventory management system has successfully expanded platform accessible SKUs by 33,000 and inventory availability by RMB290 million in 2024. By strengthening our supply capability, we are not only optimizing efficiency but also ensuring real time elastic response capabilities to meet customer demand. Second, we have optimized our marketing strategies to stimulate demand and build intelligent operational systems to support key events by leveraging cutting edge technology. During our flash sales event from November to December, we utilized advanced data analytics and AI driven insights to fine tune discount mechanisms or implement necessary technology upgrades for our operational system nearly every week. This tech driven efforts drove user retention and higher transaction volumes. The results speak for themselves. Gross Merchandise Volume GMV in December increased by 17% from the prior month while gross profit grew by 8%. Notably, average revenue per user or ARPU surged about 18% and average revenue per order or ARPO rose by 14%. These results underscore the strategic value of our technology investments and effectiveness of our precision targeted promotions and a tech enabled intelligent platform. Finally, 2025 marks a pivotal year for AI technology development in China and the world. As an industry leader at the forefront of technological innovation, we have made AI a key focus in advancing our capabilities and it plays a critical role in driving our intelligent demand analysis, optimizing supply chains and enhancing market responsiveness. For example, by integrating technology advancements with deep business collaboration, our AI powered Borguan catalog can better utilize procurement data from our operations and thousands of partners pharmacies to identify market trends, analyze consumer behavior shifts and update demand lists more precisely. We assigned greater weight to high demand products in assortment strategy while giving regional attention to long tail goods to meet specific demands. On the technology front, we improved forecasting accuracy from 71% to 82%. As a result, the broadband catalog introduced 6,598 new products in 2024 contributing over RMB905 million in GMV. The platform wide stock out rate dropped from 4.9% to 2.4%, setting the industry benchmark for supply chain efficiency. We also re-engineered our data pipeline reducing demand list generation time from five hours to just 30 minutes, a tenfold efficiency boost. By prioritizing precision forecasting plus real time response, we have established a model to demonstrate smart integration of cost reduction, operational efficiency and business growth and ecosystem synergy in the healthcare e-commerce industry. Beyond technology, we are leading supply chain management with expanded infrastructure and continual innovations in warehousing and order delivery for enhanced efficiency cost reductions ensuring high quality services. Next, I'd like to move to new achievements made. The initiation and expansion of the Kunpeng Network is one of the most important milestones achieved in 2024. It's designed to streamline logistics services while lowering costs both internally and externally. This advanced cross fulfillment center transshipment model has established an integrated highly efficient logistics network connecting our five major super hubs across East, Central, South, North and Southwest China. By incorporating first mile and last mile services, we are heading towards a comprehensive Kunpeng National Network with seamless end to end supply chain control. In Q4, we expanded last mile delivery coverage to additional metropolitan areas including Wuhan, Guangzhou, Chongqing and Tianjin. With 28 transportation routes now in operation, our network continues to strengthen this reach. Our ability to execute at scale is reflected in our growing external customer base which increased by 17 in Q4, a 20% rise from the previous quarter. Operationally, we have also achieved significant improvements for the full year 2024, the order damage rate dropped by 56% while average delivery time improved by nearly a full day. Financially, the Quantum network generated RMB7.1 million in total gains in 2024, including cost savings. In the future, we plan to integrate fulfillment centers on the corporation into the network, further enhancing our distribution infrastructure and logistics efficiency. Moreover, in 2024, negotiations with key logistics partners led to a 5% reduction in JD logistics, delivery fees and the total savings of RMB1.22 million from SF Express and ZTO. In addition, through rent negotiations and strategic warehouse relocations, we achieved RMB8.63 million in annual cost savings including one time relocation expenses. These endeavors combined with improvement in warehouse labor efficiency and packaging optimization resulted in a 4.9% year-over-year reduction in fulfillment costs to RMB381 million in 2024. Furthermore, to enhance our supply and distribution of capabilities and align with our strategy for the nationwide Kunpeng network, we have expanded our supply chain infrastructure with seven new fulfillment centers going online in Q4. These additions include centers in Guangzhou, Wuhan, Shijiazhuang, Jinan, Chongqing, Xinjiang and Hunan. The new centers will reduce delivery times for local customers while expanding our national network to a total of 18 fulfillment centers. This will enable us to to deliver to over 300 major cities within 24 hours and nationwide within 72 hours. Our rapid fulfillment center expansion is a testament to the effectiveness of our current margin friendly franchise model, a collaborative approach that transforms existing warehouses into full-fledged fulfillment centers in a significant shorter time frame supported by our fully digitized systems and processes, especially in remote regions. Under this model, 111 holds a share of the gross merchandise value. In 2025, we plan to expand our fulfillment center's footprint by adding at least 15 more centers. As we reflect in Q4 performance, I'd like to highlight several key industry recognitions that underscore our market leadership and a strong regional influence. First, we were recognized as the most valuable healthcare and pharmaceutical company for investment, highlighting our strong growth potential and long-term value creation. Second, we were ranked among the top 100 private enterprises in Chongqing. Third, we're honored as an outstanding case of a productive internet service platform in Shanghai's Pudong New District, recognizing our innovative approach to digital transformation in healthcare e-commerce. Meanwhile, our tech portfolio now includes 33 patents upon four new additions in Q4. These latest patterns reflect our commitment to technological advancements and a strategic focus on enhancing efficiency, safety and user experience. This includes a group chat content semantic analysis-based incident monitoring system and a method which leverages AI driven language processing to improve real time risk detection and crisis management. We have also developed a doctor allocation algorithm based on consultation data, optimizing physician matching to enhance service efficiency and patient outcomes. Additionally, we introduced an advanced drug sorting method and system improving fulfillment accuracy and efficiency. Lastly, our emotional analysis system based on pharmaceutical purchase pathways provides deeper insight into customer behavior, allowing us to refine personalized services and consumer engagement. We're deeply grateful for the recognition from both local markets and the industry. These accolades will undoubtedly bolster our credibility as we continue to solidify our market position and foster innovation within the sector. Last but not least, I'll provide an overview of our growth strategies for revenue margin and profit. As we look ahead to 2025, we remain optimistic, although fully prepared for many challenges lying ahead. On the supply side, we have strategically consolidated resources from major commercial players across the country through our JBP initiative and we will continue to prioritize investment in the JBP platform to optimize the range of product offerings. This model has already proven its significant value in connecting new partners and enhancing our supply capabilities. Additionally, our wholesale purchasing models will expand the promotion of key products from leading pharmaceutical companies, leveraging our strong digital marketing network. To further strengthen our supply capabilities, we're increasing the number of Franchise fulfillment centers in multiple underserved provinces, thus expanding our reach. Finally, our Kunpeng National Network will ensure an integrated approach to managing products and logistics across the entire country. With these enhanced supply capabilities, we can better offer customers the most comprehensive selection of pharmaceutical products at competitive prices. On the other side, we're strategically stimulating customer engagement and loyalty through high impact initiatives such as flash sales events which led to substantial traffic and demand and enhanced customer retention. Together with GROW Project aims to increase customers share of wallet, strengthening relationships and driving further growth. It focuses our mid-tier customers enhancing service quality across all sales stages to meet their core needs, fuel their business development and ultimately elevate our platform's value and scale. Moreover, by utilizing Inovatix online and offline integrated marketing models including Brand Live Streams and the Number One Summit, we are directly connecting industries with end customers, creating new growth avenues while reinforcing our brand as a leader in customer centric digital driven solution. We remain steadfast in our commitment to driving operational efficiency, recognizing it as a critical factor of our continued success in a competitive and fast evolving market. The integration of AI and fully fledged digitization is essential for us to maintain our industry leading efficiency but also deepen customer engagement and enable the creation of innovative products and services. These initiatives are well aligned to reinforce our market leadership. Technology is not just an enabler, it is the backbone of our strategy empowering us to build a more agile, intelligent and customer centric business in an evolving healthcare landscape. At the heart of this transformation is AI which we are leveraging to redefine how we interact with customers, optimize decision making and enhance operational efficiency. We have made significant investments in AI driven analytics, automation and digital infrastructure to elevate customer engagement, customized experiences and improve service delivery. Our AI powered tools analyze vast amounts of data in real time enabling predictive insights that allow us to anticipate market shifts, refine resource allocation and drive smarter decision making. Our 100% digitized platform is not just about efficiency, it is a dynamic intelligent engine that continuously leans, learns and adapts allowing us to proactively shape industry trends rather than react to them. As the industry undergoes rapid transformation, our commitment to leading edge technologies ensure we remain at the forefront. We remain steadfast in advancing our AI driven digital transformation, embedding intelligent automation, machine learning and next generation customer interfaces into our operations. Our goal is to seamlessly integrate technology and human expertise, creating frictionless, intelligent and engaging experiences that redefine how customers and businesses interact in the healthcare sector. With that, I'll hand the call to our CFO, Mr. Luke Chen, to walk through our financials. Thank you.

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 year ago. Non-GAAP net loss attributable to ordinary shareholders was RMB14.8 million, representing an improvement of 74.9% from RMB59 million in the previous year. As a percentage of net revenues and GAAP, net loss attributable to ordinary shareholders accounted for 0.4% in the quarter, down from 1.4% a year earlier. As for our fiscal full year 2024, I would like to run through a few highlights, again you can refer to details in our deck and earning release of our comparisons to our full year 2023. Our full year 2024 net revenues are RMB14.4 billion and the gross segment profit was RMB829.2 million. Net revenues and the gross segment profit had a 3.7% and a 2.3% decrease respectively. For full year 2024, total operating expenses decreased 31% to RMB827.1 million as a percentage of net revenues, total operating expenses decreased by 230 basis points to 5.7% from 8% a year earlier. Fulfillment expenses accounted for 2.6% of net revenues as compared to 2.7% in the previous year. Sales and marketing expenses as a percentage of net revenues reduced to 2.2% this year from 3% in 2023. G&A expenses accounted for 0.5% of net revenue down from 1.5% a year earlier. Technology expenses account for 0.5% of net revenues as compared to 0.8% in 2023. As a result, income from operations was RMB2.1 million compared to loss from operations of RMB351 million in 2023. Non-GAAP income for operations was RMB22.3 million compared to net GAAP loss on operations of RMB123.9 million in 2023. In GAAP net loss attributed to ordinary shareholders as the potential net revenues decreased to 0.3% by 1.1% a year ago. We are confident that we are on the right path towards profitability driven by our robust technology capabilities and these capabilities will continue to enable us to scale our business efficiently and enhance our operation performance, ultimately delivering profitability and maximize value for all our shareholders. Please refer to slides 21 to 25 of the appendix section for our selected financial statements and a quick note on our cash position as of December 31, 2024, we had cash and cash equivalents, restricted cash and short-term investment of RMB518.3 million and we have achieved first ever annual positive operating cash flow. To date the company has a total outstanding amount of RMB1.08 billion recorded under redeemable loan, controlling interest and accrual expenses and other current liabilities. This amount is owed to a group of investors in one pharmacy technology pursuant to their 2020 equity investment as previously disclosed in accordance with terms of this investment. 111 has received a redemption request from certain of such investors. Following communication and negotiation, the company has reached agreements or obtained commitment letters from investors representing approximately 97% of total amount to reschedule their repayments, allowing for phased repayments over extended periods if the holders exercise their redemption rights. To date, the company has already paid a portion of the repurchase of funds upon signing the agreement. In January 2025, an application tribute in Shanghai ruled in favor of an investment seeking redemption requiring the company's Hong Kong subsidiary to repurchase the investment share in one pharmacy technology for RMB30 million plus accrued interest. We do not expect the arbitration outcome to have any impact on the business operations of our PRC entities and we remain in active discussions with net investors to negotiate and finalize our mutually agreed revised repayment schedule. We will provide updates to investors if there are any significant developments. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

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, okay. The fulfillment centers the franchise fulfillment centers, they have their own inventory and our system where share their inventory with ours and present to customers and only realize the sales wins so well platform. It’s a very complex system and right now we already have 11 franchise fulfillment centers and in the future, we’re adding another plan 15. So with more of that, we can quickly increase our selection with a much lighter asset, much higher efficiency. So this is giving you all information about the whole data and that’s also we use industry data, we use our own data, we use our partners’ data, our customers’ data by direct connections with their ERP systems. So with AI’s assistant power department, we’re able to achieve very high efficiency accuracy, achieved about 95% accuracy and forecasting accuracy reached 82%. So, we also talk about the AI, what we have done last year. So we built the so called AI powered price index tool to better predict, optimize our pricing strategies. So that’s already used. We use also large data large sampling models to build so called AI business intelligence for the Chart BI, Oracle system. This is generated AI product using the large semi model technology. Well, right now, we can our employees, our people, we can all be using the chat with the system acquiring the system information. For example, we got what’s the why the conversion base was down for certain regions last week by using the natural language and getting the data back. And we’ll also build customer service powered by AI system, reducing our service staff. This year, we’ll make AI as a very big part of our strategy, okay? We would have a plan to develop various AI agents and be sold all the way. And we integrate AI as a core engine to drive end to end technology integration, spanning the price intelligence, product selection, supply chain optimization and the customer service. So that’s probably answered the first question about how we use technology for the management. Let me also talk about the supply chain optimization. How we will achieve better efficiency. I know that the selecting a big cost is the fulfillment. Also, right now, with more fulfillment centers, adding more the franchising fulfillment centers, we are closer to customers. So our loss now delivery cost will be reduced. However, we need to balance the distribution of inventory among the warehouses to make sure that we reduce the long distance cross region delivery, but have more regional delivery. So that’s the part we are open in, okay. So last year, when we negotiated with all the carriers to make sure that we have a lot of regional delivery and with regional cost. Also, we relocated our warehouse much more efficient, okay, super hubs. Now adding more franchising warehouses will have a much better more regional delivery, better through the clinical network, we were able to redistribute our inventory to all those franchising for semiconductor as well as our super hubs. And we also use the clinical network to do first now for our large suppliers and also do last now for large customers. And the protocol network is very efficient. Not only the cost is 20%, thirty % lower and asking for 35% logistics, but also big draw in debt stream. So those are the benefits of the Kumbo network. So this year, we extend our laws to include all our franchising partners, okay. But still we’re only accomplishing the connection among all supercars. So this will we really anticipate a decrease in our recent past. So hope this answers your question, Billy.

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.

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 Lu, 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 together with the earnings presentation are available on the Company's IR website. Before the conference call gets started, let me remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which can 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.

Good morning and good evening, everyone. Thank you for joining our third quarter 2024 earnings call. The information we will be discussing 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 at ir.oneoneone.com.cn. China's challenging macroeconomic environment continues to have an impact on our entire industry, including both the upstream and downstream sectors. While challenges are inevitable, we still achieved a stellar performance maintaining operational profitability for three consecutive quarters. This achievement is primarily driven by our ongoing enhancements in operational efficiency, which have helped us to navigate the unfavorable environment. In today's call, I will provide an in-depth overview of the current market situation facing our industry as well as the long-term outlook and the opportunities ahead, along with our key financial highlights. I will also discuss how we are leveraging new technologies to strengthen operations, our supply side initiatives and our recent outlooks. Finally, I will outline our future growth strategy before handing over to our CFO, Mr. Luke Chen, who will provide a detailed analysis of our financial performance. First, on the macroeconomic side, in light of weak consumer sentiment, sales growth in retail goods has slowed in China. Our industry is also experiencing cautious household spending on healthcare. According to data from the National Bureau of Statistics, per capita healthcare expenditures growth rate declined 11.5% points from a year earlier for the first nine months. Additionally, our downstream pharmacies are facing ongoing healthcare reforms, including adjustments to individual medical accounts and the gradual implementation of coordinated outpatient benefits alongside increased the regulatory oversight. While these reforms are designed to drive long-term development of the industry, the short-term outlook remains challenging. An aggressive expansion of pharmacies was fueled by optimism during the pandemic, while the total number of stores has increased. Market growth has not kept pace as evidenced by a 2.2% decrease in China's retail pharmacy sales from the first nine months of 2024, according to Zhongkang Kaisi system data. This disparity has led to reduce per store revenues and intensify the competition among pharmacies. Many large chain pharmacies are now grappling with a significant decline in net profit, while independent pharmacies with their limited resources are under even greater pressure. For instance, Yixintang or YXT Health reported a 94% year-over-year decline in Q3 net income attributable to ordinary shareholders followed by a 68% decrease at Jianzhijia or JZJ Chain Drugstore, 37% at Laobaixing or LBX Pharmacy Chain, and 22% at DaShenLin or DaShenLin Pharmaceutical Group. Against this backdrop, it is more critical than ever for digital transformation in this industry, which presents vast opportunities for us. Pharmacies must navigate the subdued consumer sentiment, slower growth in household healthcare spending and the shifts in patient behavior, while addressing cost pressures alongside operational efficiencies. Looking ahead, there needs to be more innovation in service delivery and strategic adjustments to categories to sustain growth and adapt to a transforming market. For this, digitization and AR applications could serve as solutions for retail development. As a leader in this digital revolution, we have already implemented cutting edge digital technologies to enhance every aspect of our operations from sales and procurement to customer demand analysis, inventory management, and warehouse allocation and so on. We are committed to empowering our upstream and downstream partners with our fully digitized operating system further reducing their ongoing cost and increasing efficiency. In addition to the unstoppable trend of digital transformation, we remain optimistic about China's healthcare market in the long-term for two key reasons. First, the deepened national anti-corruption campaign in the healthcare sector, which will foster greater transparency and integrity in hospital procurement is expected to accelerate the shift of drug sales and prescriptions to retail pharmacies. This will become a RMB1.1 trillion out of hospital pharmaceutical distribution market, which will amount for almost half of the entire distribution market within about three years. Our customer focus is on chain pharmacies and with our expertise in the out of hospital pharmaceutical market, we are well positioned to capture the significant growth opportunities this shift brings. By offering a comprehensive and cost-efficient product range coupled with an unwavering commitment to customer experience, we aim to increase market share in this sector where challenges and opportunities coexist. Second, we expect China's large aging population and the rise of the silver economy to drive significant demand for healthcare consumption. Given the healthcare expenditure as a proportion of GDP in China, it is still lower than in-depth developed countries. The overall upward trend in the pharmaceutical and healthcare market remains strong in the long run. In Q3, our commitment to operational efficiency continued to drive significant results, with huge profit from operations for third consecutive quarter. Income from operations in Q3 was RMB2.4 million compared to an operating loss of RMB80.4 million in the same quarter last year. Non-GAAP income from operations was RMB7.1 million compared to a non-GAAP loss of RMB54 million in Q3 of the prior year. This performance improvement underscored the effectiveness of our growth strategies and the resilience of our business model. We observed consistent positive changes across nearly all business segments. Total operating expenses in Q3 were 5.8% of net revenues, a 160 basis points decrease from the prior year. Fulfillment expenses remained steady at 2.8% of net revenues in line with the previous year. However, we successfully reduced the general and administrative expenses to 0.4% of net revenues from 1.3% a year ago. Selling expenses decreased to 2.1% of net revenues, compared to 2.6% in the prior year. Technology expenses were 0.5% of net revenues, down from 0.7% a year earlier. Excluding share-based compensation, operating expenses as a percentage of net revenues dropped 100 basis points to 5.7%. Additionally, we remained positive operating cash flow of RMB110 million for the third consecutive quarter. Our investment in infrastructure and optimal staffing allocation have proven to be effective in navigating the current economic challenges, while maintaining robust performance. We have maintained our focus on areas that foster long-term sustainable growth ensuring that our digital capabilities remain at the forefront of industry standards. This quarter, our advanced digital infrastructure consistently delivered exceptional value to our customers with further reductions in technology and staffing expenses. These operational efficiencies have not only allowed us to withstand a competitive market, but have also supported our ability to adapt and thrive amidst the economic uncertainties as well as prepare us for long-term opportunities. While our revenue remains comparatively smaller than some more established players, we continue to boast operational efficiency metrics positioning us competitively. We remain dedicated to setting the industry benchmark for efficiency with a clear goal of reducing operating cost even further and improving profitability with more refined and the bigger operations. This steadfast commitment is a cornerstone of our strategy and represents a vital part of our unique competitive advantage of moat. Those savings from our ongoing efficiencies will add flexibility and strength to our business while reinforcing our position as a leading healthcare e-commerce operator. They could be reinvested into strategic areas such as technological innovation, market expansion and enhanced customer engagement when appropriate. Technologically, we continue to invest in system development, models, algorithms and the data applications to build our core competitiveness in digitization. Consequently, we have made notable advancements by applying digital and AI technologies that have strategically positioned us for continued success. With our digitized JBP platform and inventory sharing technology, we seamlessly integrated with upstream suppliers to form a unified and a comprehensive stock pool that has significantly bolstered stock volume and availability. This advancement has enriched the product selection of additional 23,000 new SKUs. As a result, our supply capacity has been strengthened ensuring that we can meet customer demands more effectively and efficiently. We also utilized the supply chain optimization and smart pricing tools for the B2C online retail segment to enrich product offerings and adapt to market demands. This resulted in 100% increase in product categories and a record high customer conversion rate of over 13%. This progress highlights the significant impact of data driven decision making and the platform innovation in sustained growth within the challenging retail environment. Moreover, we made outstanding progress in applying AI-driven solutions, particularly in the Chinese herbal medicine sector. By training and refining algorithm models for specification recognition, we increased the recognition accuracy of our AI model from 77% to an impressive 98.18% through multiple iterations. The accuracy rate of content matching for herbal medicine has similarly improved rising from 43% to 96%. Our competitive edge gets sharpened by optimizing inventory management and enhancing product offerings. Our focus on continuous technological innovation is strategically important as it supports our mission to build a resilient, efficient and customer-oriented business for adapting to evolving industry needs. By integrating advanced digital technologies and AI solutions, we are laying the groundwork for future growth and making ourselves better navigate future market challenges. Next, let's delve into our supply chain management. We are setting an industry benchmark in supply chain excellence, consistently innovating in procurement, warehousing and order fulfillment to elevate efficiency. Our expansion of the Kunpeng network is pivotal aimed at providing streamlined logistics services that enhance both internal and external operations at a lower cost. During Q3, these cross-fulfillment center transshipment model enabled an extended proprietary network that connects our five major super hubs across East, Central, South, North and the Southwest China. This development is setting the stage for a comprehensive Kunpeng National Network, enriched with first mile- and the last-mile services to ensure seamless end-to-end supply chain control. I want to highlight that under the Kunpeng pharmaceutical logistics network, we added eight new transportation routes in Q3, bringing a total to 28. The network also increased its external customer base by 12, reaching 16.7% rise from Q2. This project achieved the cost savings of more than RMB5.3 to date. As the quantum network scales and integrates last mile services, we have witnessed a decrease in logistics and delivery expenses. When combined with optimized warehouse labor, packaging and warehousing, these efforts have driven an 8% year-over-year reduction in fulfillment costs to RMB277 million in the first three quarters. Moreover, to drive future growth and coordinate with our strategy for the nationwide network, we also strengthened our supply chain infrastructure. We completed the Guangzhou fulfillment center relocation project in Q3, which is projected to yield monthly cost savings of RMB800,000. We're also expanding our fulfillment centers nationwide with four new facilities in Wuhan, Guangzhou, Ji’nan and Shijiazhuang, amplifying our existing supply capabilities. These centers notably cut delivery times for local customers by up to two days, reinforcing our ability to cover over 300 major cities within 24 hours and nationwide within 72 hours. With each new center, we reduced local fulfillment cost by as much as 20%, providing clear strategic advantages. The expansion is also marked by an upgrade in our product assortment with the Guangdong Center adding 5,000 new SKUs. Now, our network encompasses 15 fulfillment centers. Five of these centers act as central hubs supporting deeper penetration into Tier 3 to 60s where over 60% of our pharmacy customers base spread resides. To further enhance retail service, we have adopted a collaborative approach for faster fulfillment center expansion by transforming existing warehouses into full-fledged fulfillment centers with 100% use of our digitized systems and other processes, we cut setup time by 70%. Our newly adopted franchise model which provides 111 with a share of gross merchandise value presents a highly effective margin friendly solution for reaching remote regions. 111 plans to expand its fulfillment centers footprint by adding at least five more centers over the next year. Furthermore, as we review this quarter's achievements, I would like to highlight some significant honors that underscore our operational strength and the strong business influence in the regional markets, along with our continued technological advancements. In September, our Southwest operation center, Chongqing Yihao Pharmaceutical Co. Ltd. was named among the top 100 service industry enterprises in Chongqing for the second consecutive year. In October, our Central China operation center, Hubei Yihao Pharmaceutical Co. Ltd. was included in the top 100 Private Enterprises in Wuhan list for the second consecutive year. Additionally, in October, our South China operations center Guangdong Yihao Pharmaceutical Co. Ltd. earns a place on the 2024 Top 100 Private Enterprises in Guangdong and was also named among the Top 50 Private Service Enterprises in Guangdong for 2024. We greatly appreciate recognition from local markets and the industry and believe these acknowledgments will enhance our credibility as we continue to expand our footprint and drive innovation in the healthcare e-commerce space. Last but not least, I'd like to outline our growth strategies for revenue, margin and profit levels. At 111, our business approach emphasizes providing customers with the most comprehensive selection of pharmaceutical products at attractive prices for greater customer engagement. Through leveraging data analytics and market research, we can efficiently refine our product portfolio to align with customer preferences, while maintaining competitive pricing by utilizing intelligent digital tools. We're also committed to enhancing our cooperation with pharmaceutical companies. By expanding these collaborations, we aim to diversify our range of medicines on our digitally empowered platform, increasing sales that generate neutral growth, especially across lower tier cities. Our robust digital marketing network is integral to this strategy, enabling pharmaceutical companies curate and showcase their product offerings more effectively. We will also utilize targeted marketing initiatives to raise brand awareness and expand to previously underserved markets. Through our platform, pharmaceutical companies can access valuable insights, strengthen their product selection, and efficiently scale their operations. For us, as we provide optimized product portfolio and sell more products, we will see an improvement in our overall profitability. Moreover, we are prioritizing investments into our JBP platform. This unique model has proven highly effective in engaging new partners and offering the broader range of products, showcasing its powerful value proposition. By refining the platform to satisfy partner needs and extending its reach, we expect to cultivate a more diverse partner base and unlock expanded sales opportunities. As we continue to enhance and scale the platform, we believe this model will solidify our competitive position and evolve into a catalyst for stronger growth and profitability. We remain focused on enhancing operational efficiency, supported by ongoing investments in leading technologies that streamline processes, reduce waste and boost productivity. Our emphasis on AI and a full-scale digitization is critical to maintaining industry leading efficiency, improving customer engagement and fostering the development of new products and services. These efforts are designed to reinforce our market leadership and stimulate fresh growth avenues. Digital transformation is pivotal to our future. With 100% of our internal systems now digitized, we have enhanced financial outcomes, while positioning ourselves as a transformative leader empowering the industry. Our full spectrum technological ecosystem supports internal processes and extends its benefits to upstream and downstream customers offering them access to the state-of-the-art digital solutions and specialized expertise. Looking ahead, we will amplify our commitment to digital innovation by integrating emerging technologies into our operations to create more seamless, more efficient customer experience. With that, I'll hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

Thank you, Junling, and good morning or evening everyone. Moving to our financial performance. My prepared remarks will focus on a few key business and financial highlights. For details on our third quarter 2024 results, please refer to Slide 17 to 20 in Section 2 of our presentation. Again, all comparisons are year-over-year and all numbers are in RMB unless otherwise stated. Let's start with the third quarter results. Total net revenues were RMB3.6 billion remaining relatively flat compared to the same quarter of last year. Gross segment profit for the quarter grew 10.5% to RMB210.6 million. Total operating expenses for the quarter decreased 23.2% to RMB28.2 million. As a percentage of net revenues, total operating expenses for the quarter were down to 5.8% from 7.4%, as we continue to enhancing our operating leverage and optimize our operational efficiency. Specifically, fulfillment expenses remained steady at 2.8% of net revenues in line with the previous year. Sales and marketing expenses as a percentage of net revenue for the quarter were 2.1%, down from 2.6% in the same quarter of last year. General and administrative expenses accounted for 0.4% of net revenues, down from 1.3% in the same quarter of last year. Technology expenses amounted to 0.5% of net revenue, down from 0.7% in the same quarter of last year. As a result, income from operations were RMB2.4 million compared to a loss from operations of RMB18.4 million in the same quarter of last year. Non-GAAP income from operations was RMB7.1 million compared to non-GAAP loss from operations of RMB54 million in the same quarter of last year. Non-GAAP net loss attributable to ordinary shareholders was RMB12.4 million compared to RMB6.9 million in the same quarter of last year. As a percentage of net revenues, non-GAAP net loss attributable to ordinary shareholders accounted for 0.3% in the quarter, down from 1.8% in the same quarter of last year. As you can see, we are improving our financial performance quarter by quarter and maintained operating profit for the third consecutive quarter. Please refer to Slide 21 to 25 of the Appendix Section for selected financial statements. A quick note on our cash position, as of September 30, 2024, we had cash and cash equivalents, restricted cash and a short-term investment of RMB614.4 million, and we are pleased to report positive operating cash flow for the three consecutive quarters. To date, the Company has total outstanding amount of RMB1.1 billion, which has been included in the balance of redeemable non-controlling interest and accrued expenses and other current liabilities, according to a group of investors of 1Pharmacy Technology pursuant to the equity investment made in 2020 as previous disclosed. 111 received redemption request from certain of such investors in accordance with the terms of their initial investments in 1Pharmacy Technology. Following communication negotiation, the Company has reached agreements and our commitment letters with investors representing approximately 90% of total amount to reschedule the repayments, allowing for phased repayment as extended periods, if the holders exercise the redemption right. The Company has paid a portion of the repurchase funds upon signing the agreement. Additionally, the Company is in ongoing discussions with investors, who is holding the remaining approximately 10% of the total amount. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Thank you. [Operator Instructions] Your first question comes from Jessie Lu with HSBC. Please go ahead.

Thank you for taking my question. This is Jessie from HSBC. First of all, I want to congratulations on delivering a very resilient result despite the challenging macro environment. I have two questions. The first one on OpEx. I noticed that for OpEx, as a percentage of revenue, is around 5.8% to 6% over the past three quarters. I was wondering going forward, is there room for this ratio to further come down and what measures you will plan to do to drive that further improvement in OpEx optimization? The second question is on GP margin. Despite overall revenue has been flat year on year, we saw improvement for gross margin. Can you help us understand the factors driving this improvement? Thank you.

Jessie, first of all, thank you for the questions. With regards to the question about OpEx, the short answer is, yes. We will continue to reduce the expenditure in operating our business, and we will see more and more impressive OpEx numbers, because from day one of the Company, our philosophy has always been to leverage technology to reshape the value chain of the industry and we want to be the leader in operational efficiency. So, how do we do that? We believe that we have already become the leader in operational efficiency in the industry, and we remain committed to continuing our effort in all aspects of our operations. Our optimization across all of the business segments is core in our management's daily work, and we review those metrics on a weekly basis, we call it WBR. And of course, technology is essential in containing OpEx and we benefited big time in the past and no doubt it's going to continue to play an even bigger role in the future. In the meantime, we will constantly optimize our organization and we'll do smart staffing. We believe a lot of those expenses coming from people, and if we could deploy those resources carefully and intelligently, we can achieve our savings. And of course, innovation in all aspects of our business is completely key. I laid out some examples, especially in our supply chain to give you an illustration. That's going to help us to stay competitive. In the past, we only relied on building those fulfillment centers first party ourselves. And obviously, nowadays, we have joint venture fulfillment centers. We also now have franchise fulfillment centers where the upfront capital outlay all paid by our partners, whereas we can service partner within our customers even better to produce a better customer experience. And with regards to your question as to margin improvement, obviously, there are a few things we are doing and we will continue to do. First of all is, the assortment management. We have an internal tool, we call it, the [Borguan]. So, [Borguan] really constantly engage customers' needs and ensure that our assortment is constantly optimized dynamically. With that, the assortment management is taken care of. Of course, the other thing we do is the category management. Once again, this is very important in our margin growth. You'll notice that our margin is growing faster than the revenue. And obviously, there are money-losing categories and there are also money-making categories. It's a fine act in balancing the two. We have to really minimize the money-losing categories and maximize the money-making categories. The other thing, of course, is really important is to manage our upstream suppliers. Our first party team worked really hard to find ways to get better views from the pharmaceutical companies. We're going to make more investments in this area to have better coverage, especially those medium to small farmers from whom we can get better deals. I hope those answer your questions, Jessie.

Yes, very clear. Thank you very much.

Your next question comes from Alvin Miao, a Private Investor. Please go ahead.

Hello. Thank you for taking my questions. It's a wonderful quarter. Actually, I have three questions. The first is with three consecutive quarters of operating profits, does the Company anticipate achieving operating profit for the entire year? The second is supply chain management has always been a key focus for your company. What improvements and efficiency enhancement were made in Q3? And the last question is could you provide more insights into how the Company managed to achieve positive operating cash flow for three consecutive quarters?

Thank you. Alvin, I'll take your first question. That's a great question about, it's going to achieve profitability for the whole year. Yes. So, we are quite optimistic in achieving operational profitability for the whole year. Thank you for that. I'll leave your next question to Haihui.

Yes. Regarding the supply chain management, you are right. It has always been our key focus. And we actually, we emphasize industry benchmarks in our supply chain management. And we continue innovating in sourcing in warehousing and like order fulfillment and the entire supply chain. So, in the past quarter, in Q3, our order fulfillment cost continued to decrease. It dropped from RMB101.6 million of last Q3 to RMB 99.98 million of last Q3. So, there is a net ceiling of RMB1.62 million. And our year-to-date fulfillment cost as a percentage of our revenue also decreased from 2.76% to 2.62%. So, in logistics, we have achieved some of the following progress. The first is our Kunpeng logistics network. We scaled up the chain shipment network and also extended last mile delivery services. So, in this part in this year, our delivery cost has been reduced from 1.35% to 1.31%. And secondly, our labor and packaging cost in our warehouse also has been optimized by our -- by streamlining our operational process. And this part, our labor cost reduction in this year from 0.7% in terms of total revenue to 0.68%. And also, our warehousing cost, for example, we just relocated our South China warehouse. Our warehousing cost, we see a decrease from 0.71% to 0.63%. So, it’s a reduction by 11.3%. And number two, we are actually we are expanding this Kunpeng network to provide professional logistics services, not only to our internal customer, but also to our external customer. So, in Q3, we established this network for our five major fulfillment centers, we call it our National Fulfillment Center, in East, Central, South, North and Southwest China. And we plan to establish this national network with added first mile and last mile services to our upstream and downstream customers to ensure an end-to-end control over with our entire supply chain. Lastly, in Q3, we completed our just as I mentioned, our Guangdong new South China fulfillment center relocation. We expect to have a remarkable cost reduction with this relocation. And also, we are expanding our franchise fulfillment center model nationwide. In Q3, we opened a new facility in Wuhan and Guangzhou, reaching a total of six new model fulfillment centers in operation in Q3. And we expect to have more and more this new fulfillment center in this new model in Q4 and also early next year. Thank you.

Yes. On the cash flow. As you can see, we have achieved GAAP and non-GAAP operating profit for the three quarters, which means that we are no longer burning cash for this business. Instead, we are creating positive cash flows at the operating level for three consecutive quarters. We think we are doing the right thing in terms of working capital control. We have been very focused on improving the turnover dates for inventory and accounts receivable. And we also introduced the third-party supply chain finance to many of our pharmacy customers, and we have also improved the turnover date of accounts receivable. There are still rooms for further improvements and we are confident that we can do better job in the coming quarters. Yes, I hope we I think we answered your questions.

Thank you. Your next question comes from Robert Sassoon with Water Tower Research. Please go ahead.

Hi. Thanks for taking my questions. I have a few of them. So let me start with this one. Based on the current market environment, how would you assess the Company’s performance in the third quarter? What are your expectations for the market environment in the coming quarters? And how do you think those expectations would impact on the development of the Company's B2B and B2C businesses? Let me start with that. I have a few other questions after that.

Thanks, Robert. I'll take this question. First of all, we're pretty proud of the solid performance given the macro situation in China as it's pretty widely known. Both of our upstream and downstream customers are under tremendous pressure. The anti-corruption in the hospitals and also the campaign against Medicare fraud in the pharmacies area will create short term pains, but we are quite optimistic that the industry will be more transparent long-term buyers. And we are quite optimistic about the future business. I'll give you a few reasons. First of all, with China's demographics, especially the aging population, the Medicare needs will definitely go up. And if we look at the big picture, healthcare expenditure in China is about 7%-ish, and whereas in the United States, it's about 20%. There is a huge headroom for the market to grow. And the other point I want to make is that the short-term economic challenge will force both the upstream and downstream customers to be more efficient. And our digital capabilities will really enable us to create more value for both our upstream and downstream customers. I'll stop at that.

Thank you very much for that answer those answers. I have a couple of other questions more on the technical side. What could you actually highlight the progress and achievements that your company has made in the digital capabilities and the IT technology that you've been implementing in the third quarter?

Yes.

And the second -- sorry, I just want to follow up the second question that I had to ask on that one is can you outline the Company's expansion plans in terms of product offerings and partnerships within the supply chain ecosystem?

Okay. Robert, thank you. I will take these two questions. First one, regarding our digital capability and also IT technology, actually, it's not only in the last quarter, actually from day one, we have continued to invest in our system development, our models and also data applications and also always able to build our core competitiveness in our digitalization, also achieving quite a number of results, especially in the past quarter. First, through our JBP platform and the very new inventory sharing technology, we link our upstream suppliers' inventory to form a unified and integrated stock. As a result, we have added in 32,000 new SKUs and as well as they are related to stock volume to further improve our supply capabilities. And the second achievement is in this big data side. For Chinese herbal medicine, we have trained and applied as a leaflet model for specification recognition. For those herbal medicines, it's pretty complicated. So based on these specifications, we developed an AI model that has improved its accuracy from 77% to 98.2% through multiple iterations. Additionally, the accuracy in content matching for the herbal medicine has increased from 43% to 96%. And our upstream and downstream customers, so Chinese government is a big part of their business. So -- and also a headache for everyone. So, with this new technology, we believe we're really helping the entire supply chain to improve our accuracy and efficiency. And regarding the expansion plan, in terms of product offerings and the supply chain side. Actually, for product offerings and our supply chain ecosystem, we started from as Junling just mentioned introduced, we started from a third-party model, which offers a good customer experience. But actually, years later, we realized that it will be -- it would be very efficient to expand our selection offering with a single first-party model along as we can imagine. But you have to do everything. You have to no matter if it's upstream or downstream, you have to do it alone. So, we innovatively reduced our supply chain. Besides our third-party model, currently, we mostly deal with our corporate with our upstream pharmaceutical company. We also set up a JBP model for partnership with distribution companies. And now through the new JBP platform and this whole new inventory sharing technology, we have organically linked upstream merchant industry to form our own integrated stock. So, this is one very important part of our expansion plan in terms of product offerings and also enrich our product selection of additional, I just mentioned, 23,000 new SKUs in a very short period of time. It is just in the past one more month. So, we will imply this technology across the country. And I believe our product offerings will be improved to a new level in the coming quarters with opening of more franchise or joint venture fulfillment center with this JBP platform and with this new inventory sharing technology. Thank you, Robert. Hope I answered your questions.

Yes. That's great. I'll jump back into the queue.

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

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 together with the earnings presentation are available on the company's IR website. Before the conference call gets started, let me remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which would cause actual results to differ materially. For more information about these risks, please refer to the company's filing 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 our second quarter 2024 earnings call. The information we will be discussing is also available in the slides posted earlier today on the company's website. I encourage you to download the presentation as well as the earnings report from our Investor Relations website at ir.111.com.cn. As for our performance in the quarter, we're pleased to report that we achieved operational profitability for the second consecutive quarter, which was driven by our ongoing improvements in operational efficiency that overrode challenges in the macroeconomic environment. In today's call, I will discuss the current macro environment, highlights the opportunities ahead and present our key financial achievements. I will also cover how we are leveraging new technologies to enhance operations, recent patent milestones and our efforts on the supply side. Finally, I will outline our future growth strategy before handing over to our CFO, Mr. Luke Chen, who will provide a detailed analysis of our financial performance. First, China's complex economic situation is impacting many industries and healthcare is not immune. The challenging environment is prompting industry stakeholders to explore innovative models for retail development. Despite volatile conditions, there are positive trends in the healthcare industry that present valuable opportunities. The national anticorruption campaign in the healthcare sector initiated in mid-2023 is intensifying this year. Recent developments indicate a broader and more comprehensive approach with regulatory and ethical oversight now targeting an entire industry chain. We anticipate that this rigorous scrutiny will evolve into a long-term process for greater transparency and integrity in healthcare transactions, particularly in hospital procurement. A key outcome of this campaign is the acceleration of transitioning drug sales and prescriptions to retail pharmacies, which offer a more accessible and transparent alternative to the traditional hospital system. This is the shift strongly encouraged by the state. Given our expertise in the out-of-hospital pharmaceutical markets, we're well positioned to capitalize on the significant growth opportunities this shift brings over the long term, along with the expected continued expansion of retail pharmacy stores across China. By offering a comprehensive and cost-efficient product range, coupled with an unwavering commitment to customer experience, we aim to boost market share in this sector, where challenges and opportunities coexist. In parallel, the digital transformation of the healthcare value chain is continuing to gain momentum. The progress is supported by strong initiatives for the industry's high-quality development. In June, China's State Council issued key tasks for depending -- for deepening medical and health system reform in 2024. The focus is on integrated development and the governance of medical insurance, healthcare and pharmaceuticals, while highlighting the critical role of information technology and digitization in driving these reforms. As a leader in this digital revolution, we are dedicated to transforming the industry through our fully digitized operating system by providing both the upstream and the downstream customers with advanced digital technologies will enable them to further cut operating costs and increase efficiency. Our cutting-edge digital solutions enhance every aspect of operations, from sales and procurement to customer demand analysis, product inventory management and warehouse allocation. The meaningful progress we made earlier this year have persisted into Q2, underscoring our ongoing success in digitization. As aforementioned, even with these macroeconomic challenges, we generated profit from operations for two consecutive quarters, reflecting the effectiveness of our growth strategies and business model. In the second quarter, our income from operations reached RMB 3.3 million compared with a loss from operations of RMB 41.4 million a year ago. Non-GAAP income from operations was RMB 8.5 million compared with non-GAAP loss from operations of RMB 17.2 million in the same quarter of last year. The profitability is primarily driven by ongoing improvements in operational efficiency, supported by consistent enhancements across nearly all business functions. In the second quarter, total operating expenses accounted for 6% of net revenues, a decrease of 120 basis points from the previous year, specifically, which made a significant reductions in various expense categories. We've managed to cut fulfillment expenses to 2.6% of net revenues during the quarter, down from 2.7% a year earlier, reflecting a decrease in fulfillment costs by 7.3%. Our general and administrative expenses fell to 0.5% of net revenues from 1.1% a year ago. Selling expenses decreased to 2.3% as a percentage of net revenues from 2.6% in the previous year. Technology expenses were 0.5% of net revenues as well, down from 0.7% a year ago. Excluding share-based compensation, operating expenses as a percentage of net revenues dropped 70 basis points to 5.8%. Additionally, our operating cash flow remained positive for the second consecutive quarter. Our operational efficiency stands from strategic investments in infrastructure and optimal staffing allocation with a focus on key areas that drive long-term sustainable growth. Over the years, we've developed highly sophisticated digital capabilities that allows us to deliver exceptional value and performance to our customers, while significantly reducing both technology and staffing expenses. We have always aimed to become the most efficient healthcare e-commerce operator in the industry. Despite our relatively small revenue, we've already achieved a level of operational efficiency that can compete against some of the more established players. We are committed to setting an industry benchmark for efficiency while maintaining and improving profitability. As we grow and refine our operations, we expect further reductions in operating costs, driving even higher efficiency. Our commitment to this goal is unwavering as we believe it will be a key competitive advantage and help us to build a unique business mode. We can also invest those savings from increased efficiency into other strategic areas such as innovation, market expansion and the customer engagement to support future growth. Next, let's move to how we adopted mobile technology approaches to drive significant improvements across various operational factors. Continuous technology advancement is a cornerstone of our strategy, enabling us to build a more resilient, efficient and customer-centric business poised for greater returns in the future in the evolving healthcare e-commerce industry. First, we developed merchant bidding tools and an automated operating system and integrated a price index driven by big data to deliver intelligent merchant pricing. This has not only reinforced 111's value proposition of low costs but also enhanced procurement efficiency, notably with our digital investment promotion platform and the billing subsidy campaign as the core operational strategies, the procurement conversion rate has risen to a historical high of over 32%. This has significantly improved customer satisfaction and long-term loyalty, which are crucial for sustainable growth. Second, our supply chain fulfillment has seen remarkable improvements in cost reduction and efficiency management through technology-driven enhancements. The optimization of algorithms has led to a notable 11% increase in overall efficiency in warehouse shelving and replenishment and the strategic adjustments in automatic grouping have reduced picking parts by 15%, further boosting outbound efficiency. Additionally, the implementation of a digital logistics network, the last-mile delivery has cut restriction costs by over 5%, underscoring our commitment to operational excellence. Third, our application of AI in product matching has significantly elevated the accuracy and efficiency of our offering, not only in pharmaceutical products, but also in medical devices and health supplement products. The creation of comprehensive databases and the development of sophisticated entity recognition and similarity models have doubled the matching rate. We are dedicated to consistently and continuously advance and upgrade our technological capabilities, which position us as an industry leader in operational efficiency, cost reduction and customer satisfaction. We're pleased to announce the acquisition of four new patents, bringing our total to 28. Among these, is the invention patent for a method for pricing human resource demand and personnel scheduling system, which offers accurate predictions and intelligent scheduling, significantly enhancing HR management efficiency and supporting informed decision-making. Additionally, we secured a breakthrough patent for an adaptive anti-crawler method and a system based on information categories. This technology bolsters our data protection efforts, reducing the risk of bridges, lowering operational costs and improving overall efficiency through automated cost measures. We also obtained two more invention patents, a drug retrieval method and a system based on principal component spectral angle distance and a system for enhancing client load balancing based on URL grouping granularity. These digital technology innovations further improve our operational efficiency, reinforcing our pursuit of quality and growth. Collectively, these patents not only safeguard our intellectual property, but also enhance our market competitiveness, providing robust technical support for our long-term growth and driving the digital transformation of the pharmaceutical industry. Furthermore, we continued to strengthen the supply side during the second quarter. First, our transshipment model, Kunpeng has streamlined logistics and reduced transportation costs, delivering robust progress by consolidating shipments to one warehouse before intelligent distribution, we significantly improved efficiency and lowered internal distribution costs. This also adds value to the external supply chain, showcasing our commitment to leveraging digital technology to empower the sector. Additionally, component approach is particularly cost effective for penetrating remote regions of China, and we now offer this service -- now we offer this service to merchants for a separate fee. In the second quarter, we established a vertical network across five major fulfillment centers, East China, Central China, South China, North China and Southwest China through a trunk plus branch delivery model. This is paving the way for a national Kunpeng pharmaceutical logistics network, ensuring efficient last-mile delivery in supply dense areas with full control of the supply chain. Kunpeng now operates 20 trunk transportation routes and first-mile warehousing services, servicing 72 external clients, up 105% from 37% in Q1. The network supports our business scale of over RMB 200 million and has achieved total cost savings of RMB 2.95 million to date. Kunpeng is transitioning from a cost center to a profit center, enabling external supply chains by providing professional pharmaceutical logistics and distribution services to upstream and downstream partners. This has helped clients reduce costs by 15%. It also addresses industry pain points like mixed cargo handling, high damage rates and inefficient acceptance processes with a 55% reduction in delivery damage rates. This improves our service quality and enhances our customer engagement, solidifying our role as a key enabler in the pharmaceutical supply chain. With the expansion of the Kunpeng logistics network and the last-mile delivery services, delivery expenses decreased. Combined, with reduced warehouse labor, packaging material costs from improved efficiency and lower warehouse expenses, this resulted in a 7% year-over-year reduction in fulfillment costs to RMB 88 million in the second quarter. Moreover, to support future growth and advance our strategy for the nationwide Kunpeng logistics network, we plan to add two more JV fulfillment centers in the third quarter, bringing the total to 13. This expansion includes a second center in Wuhan and the new center in [Onomichi], a city in the Northwest. We expect the expansion of our fulfillment centers will enhance our logistics network, improve service across diverse regions, reduce delivery times and increase overall efficiency. Our supply side efforts are also demonstrated in our expanded cooperation. First, in the second quarter, we entered into a strategic direct supply partnership with comprehensive pharmaceutical enterprise, Beijing Scrianen Pharmaceutical to enhance nationwide drug accessibility and distribution, particularly for Scrianen's flagship products like Scrianen folic acid tablets, the partnership builds on our existing collaboration since 2017, utilizing big data, digital marketing and cloud services to help Scrianen's medications and pregnancy-related products, reach a broader market more efficiently. Second, during a recent visit to ApicHope Pharmaceutical Co., the company engaged in discussions with several pharmaceutical firms regarding various partnership opportunities, which resulted in the formation of an alliance named 1Pharmacy. The objective of this alliance is to foster innovative collaboration and address market challenges through joint efforts. The partnership aims to build a comprehensive, high level and a diversified network by focusing on products with distinctive features such as exclusivity, long-term commitments, traditional Chinese medicine and insurance coverage. This initiative highlights 111's commitment to expanding its partnership network on a broader scale. Finally, let me dive into our strategies for growth in revenue, margin and profit. Our core strategy is to provide highly efficient, cost-effective, one-stop shopping experience that addresses customer needs and solidifies our competitive position. By harnessing data analytics and market research, we can fine tune our product portfolio to match customers' preferences, while prioritizing low prices through intelligent digital tools. Additionally, we will continue to strengthen our partnership network with pharmaceutical companies. By expanding cooperation, we plan to broaden our extensive medicine offerings on our digital technology empowered platform, driving shared growth through enhanced sales, especially in lower-tier cities. Our digital marketing network plays a pivotal role in this strategy, providing a robust platform to highlight our partners' products. Through focused marketing initiatives, we will enhance the brand awareness and penetrate previously underserved markets. This strategic expansion of our partnership network not only benefits our pharmaceutical partners, but also strengthens our position as a leading e-commerce platform in the pharmaceutical sector, which is a foundation for sustained long-term growth. As we drive higher sales volumes and optimize our product offerings, we will see a positive impact on our overall profitability. Another growth engine is our private label business, which generates pleasing results. Driven by increasing demand from customers, its revenue advanced 35% from the previous year in the first half. This line of business featuring three brands, offers customers a diverse range of products, whereas the company enjoys a healthy gross margin of 29%. This also raises our brand equity and builds customer trust. Moreover, we will expedite our investment in the JBP platform. This innovative model has been increasingly attracting new partners and significantly expanding our product lineup, highlighting its compelling value proposition and effectiveness in engaging various stakeholders. By improving the platform to better meet the needs of our partners and expanding its reach, we anticipate a broader and more diverse partner base leading to increased product offerings and sales opportunities. As we continue to refine and scale the platform, we believe it will strengthen our competitive position and become a critical catalyst to long-term growth and profitability. Operational efficiency is central to our strategy and we we're committed to investing and cutting-edge technologies to streamline processes, minimize waste and elevate productivity. Our emphasis on AI innovations and digitization is crucial. By embedding AI and fully digitizing throughout our operations, we aim to generate even greater operational efficiency, enhanced customer engagement and foster new products and services. We are confident these efforts will cement our market leadership as well as stimulate our growth opportunities. Digitization is important to our future and is driving our industry-leading operational efficiency. With our internal operating system being 100% digital, we've not only improved our financial performance, but also established us as a transformative force to reshape the entire industry. Our technological ecosystem extends beyond our operations, providing both upstream and downstream customers with access to our advanced digital tools and expertise. Looking ahead, we believe our continued focus on digitization will maintain our competitive edge and the market leadership, enabling us to achieve higher revenue and profit levels. With that, I will hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

Thank you, Junling, and good morning or evening, everyone. Moving to the financials, my prepared remarks will focus on a few key business and financial highlights. For details on our second quarter 2024 results, please refer to Slides 17 to 20 in Section 2 of our presentations. Again, our comparisons are year-over-year and all numbers are in RMB unless otherwise stated. Let's start with the second quarter results. Total net revenues were RMB 3.4 billion and gross segment profit was RMB 207.6 million, relatively flat compared to the same quarter last year. Total operating expenses for the quarter decreased 18.1% to RMB 204.3 million as a percentage of net revenue, total operating expenses for the quarter was down to 6%, down 7.2% as we continue to enhance our operating leverage and optimize our operational efficiency. Specifically, fulfillment expenses as a percentage of net revenue for the quarter were down to 2.6% from 2.7% in the same quarter of last year. Sales and marketing expenses as a percentage of net revenue for the quarter was 2.3%, down from 2.6% in the same quarter of last year. General and administrative expenses accounted for 0.5% of net revenues, down from 1.1% in the same quarter last year. Technology expenses amounted to 0.5% of net revenue, down from 0.7% in the same quarter of last year. As a result, income from operations were RMB 3.3 million compared to loss from operations of RMB 41.4 million in the same quarter of last year. And the non-GAAP income from operations was RMB 8.5 million compared to non-GAAP loss from operations of RMB 17.2 million in the same quarter of last year. Non-GAAP net loss attributable to ordinary shareholders was RMB 8.8 million compared to RMB 33 million in the same quarter of last year. As a percentage of net revenue, non-GAAP net loss attributable to ordinary shareholders decreased to 0.3% in the quarter from 0.9% in the same quarter of last year. As you can see, we are improving our financial performance quarter-by-quarter and maintain operational profitability for the second consecutive quarter. Please refer to Slides 21 to 25 of the appendix section for selected financial statements. A quick note on our cash position as of June 30, 2024, we had cash and cash equivalents, restricted cash and short-term investment of RMB 615.5 million. And we are pleased to report positive operating cash flow for two consecutive quarters. As of the date of this earnings release, the company had a total outstanding amount of RMB 1.1 billion, which has been included in the balance of the redeemable noncontrolling interest and accrued expenses and other current liabilities, according to a group of investors of 1Pharmacy technology pursuant to the equity investment made in 2020, as previously disclosed. As of the date of this earnings release, we have received redemption requests from certain of such investors for a total redemption amount of RMB 0.2 billion in accordance with the terms of their initial investment in 1Pharmacy technology. Furthermore, the company has entered into written agreements and/or commitment letters with investors representing the majority of the total recurring amount. We're continually negotiating with these investors to firm up the redemption request. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

[Operator Instructions] Your first question comes from Xipeng Feng with CICC.

This is Xipeng from CICC, and thank you for taking my questions. And congratulations on the company progress. Well, I have two questions about financials. The first one is, I see that the OpEx ratio in the second quarter decreased compared to that of the second quarter in 2023. So what's your guidance on the expenses ratio in the long run? And my last question is, well, we noticed that the company achieved operating profit in the second quarter. So I just wonder, what's the drivers behind the results and what's your guidance for net profit for the year? Thanks.

Xipeng, yes, good to see you on the call. Thank you for the questions. So let me address the first question first with regards to the OpEx. Perhaps let me start with how we run a lean operation. First of all, we have an in-house developed operating system, which comprises dozens and dozens of other systems. It's 100% digital. At any given time and anywhere, the management can access real-time operations, either it's sales in various regions or different types of customers, categories of products, allocation of the tasks to sales team, fulfillment operations, et cetera. The whole operation is transparent and with real-time data available, we can make decisions and adjustments faster. With continuous optimization of operations, we achieved an operational efficiency that can match some of the well-established designs in the industry. Remind you, compared to those big guys, we have the sales of hundreds of billions and our revenue was still relatively small at RMB 15 billion last year. With a bigger top line, we can further scale down our operational expenditure. We are very confident in that. Our estimate is that if we can run sales at a scale of RMB 20 billion or more, we should be able to operate under 5%. With regards to your second question, how we drove into profitability, it's really like what I've said, first of all, operational efficiency is our core competence and our principle is to provide customers with the richest selection with competitive prices and good services. Obviously, moving into the future, we will continue to invest to build a bigger supply base to ensure that our product assortment meet customers' needs. And of course, one of the cost strategies this year is that we're going to relentlessly pursue competitive prices. This will drive customer loyalty. This will drive more and more customers. This will really increase our ARPU. Coupled with the operational efficiency, we are really in a good position to achieve our goal and sustain our profitability, at least for 2024 if the market conditions remain the same.

Thank you. Okay, that's very clear and short and thanks for the sharing.

Your next question comes from Zoe Bian with Citi.

Thank you for taking my question. This is Zoe from Citi. And I have three questions. The first one is, given that the off-line pharmacy has an operating pressure this year. And I want to know, in case the overall customer demand is decreasing, how will we increase the penetration rate into the pharmacy clients. And the second question is, if your current strategy is still trying to improve profitability instead of the revenue growth? And the third question is, how the retail price -- the retail drug price comparison policies affect 111's operation? Thank you.

Right. Zoe, in line -- was not very clear. If I heard you correctly, I mean, just to repeat the question first, like you were saying that the offline pharmacies are under pressure and how we can improve our penetration rate. Second question is profit, the biggest priority for the company. And the third is, how do we deal with the price comparisons from pharmacy's procurement team.

Yes.

Okay. So if that being the questions, let me just address them one by one. First of all, we anticipate that in the short term, our end customers will experience some challenges and it will be hard to maintain the same-store sales as in the past. However, this presents a great opportunity for 111 to help those pharmacists to overcome the challenges. Indeed, our priority for 2024, will be focusing on profitability, in the meantime, we are optimizing our selection team to ensure that our offerings can meet our customers' demand. A lot of efforts have been made on the supply side and we made a tremendous progress on providing the richest selection for our customers to make it a one-stop shop. We believe that shopping experience is crucial, especially for the small to medium chains. And this way, we can continue to grow our wallet share. As for the price comparisons, we have always anticipated the fact that more and more customers are going to multiple platforms to compare prices before they place the order. This year, we've made low prices as the overarching strategy operationally. We always believe that the way to win the market in the marketplace is to offer the greatest selection with low prices. Let me also add, although the industry is under pressure, if you look around, this is one of the broad industries as more and more stores are opened. The recent data shows that the overall number of pharmacies have reached 700,000, last year was still in the 500 some space, right? This suggests that we're in the right industry. With more stores open up, we have more opportunities to service them. And with the recent anticorruption campaign going on, we also anticipate that the growth from the hospital drug sales will peak and more and more medicines will be sold through online and offline pharmacies in the long term and that's where 111 is well positioned to take advantage of.

Thank you.

Your next question comes from Jessie Lu with HSBC.

Thank you for taking my question. This is Jessie from HSBC, and congratulations on another solid quarter. I have two questions. The first one is on financials. We saw that the net cash generated by operating activity was nearly RMB 100 million in this quarter. So can you help us understand the key factors that help you contribute to this? The second question is on your Kunpeng logistics model. We saw that not only it helps the company to reduce cost and improve efficiency, it also empowers industry chain. Can management share more color and update on the development of the system? Thank you.

Jessie, this is Luke. Let me answer your first question. Yes, our business objective for the quarter was very clear is to turn to profit and achieve positive operating cash flow. So we have been very careful to improve our working capital, specifically our accounts payable turnover days and our inventory turnover days. If you compare our accounts receivable balance and inventory balance between June 30 and March end, you will see clearly that we made improvements. Additionally, we also introduced the supply chain finance from third party to our customers, mainly our pharmacy customers. So they are using third-party financing to make payments to us for purchase of drugs. Now this creates a win-win situation. A win for the pharmacy which is they get financing to make purchase of the necessary drugs, the win for this third-party finance institution is they get customers and the win for us is also we get a payment immediately when they do the purchase. Now moving forward, we will continue to pay particular attention on the other working capital items, specifically the inventories, the turnovers, the accounts receivable turnovers, as well as accounts payable turnovers. And we are quite confident that we will continue to see positive operating cash flow and overall cash flow in the coming quarters.

Okay. Let me -- Jessie, let me take the Kunpeng project question. Let me share how we started this project. So basically, we optimize our allocation of our products across all our fulfillment centers. We have now 13 fulfillment centers in the nation. And thus, we have to put the right products in the right fulfillment centers to both get closer to customers, at the same time to minimize the transportation or the fulfillment cost. So by doing that, we have to try and ship products from warehouse to warehouse. So we started by doing the transshipments among our warehouses, five major warehouses. And we found that the transshipment costs we -- in the past, we rely on third-party logistics. We found that cost was high and damage rate was very high, thus we set our own routes for the transshipment. And we found that the cost reduced significantly, at the same time, the damage rate reduced by 55%. And thus we expect our own routes among our major hub fulfillment centers and started service to our clients. And now we already serve more than 70 clients with RMB 200 million in scale and we believe that that business model will continue and will serve more and more customers. And now we save customers about 15% cost.

Thank you.

Your next question comes from Robert Sassoon with Water Tower Research.

Hi, thanks for taking my questions. I have three actually, if I may. Let me start with the first question. Could you provide some more details on 111's plans for building new fulfillment centers in the second half of the year? How many new centers do you plan to add and where will they be located?

Okay. Robert, you want me to take your question first, okay, the fulfillment centers?

Yes, sure.

Okay. And currently, we have already launched 11 fulfillment centers across the country. And as you mentioned about our future plan, especially in the second of the year, actually in the next quarters, we will expedite our process of setting up those fulfillment centers through -- but through a very new model, that is instead of building up the fulfillment center by first-party model, we will work with local partners to set up JV fulfillment center and also franchise fulfillment center. So far, besides the 11th -- besides the 11th FC we already have, there are seven new ones already in a preopening process, like warehouse decoration, stock training and system testing even already in the inbound logistics process. This 7th fulfillment center located in various provinces, including Guangdong, Shandong, Hebei, Xinjiang, Hubei, Hunan and Chongqing, targets to open, I think, from September to probably November, December yes, in the next three, four months, this 7th fulfillment center will be opened. And besides these 7, which already almost ready for launch, there are more new fulfillment centers in our pipeline. Most of them are in Northeast or Southwest of China. And we believe with the setup of these fulfillment standards, we will be able to provide a much better selection, better price and also add SLA to our customers across the country, especially in the sub-tier cities. Robert, I hope I answered your question.

Yes, thank you for those details. My second question is strengthening partnerships is one of the company's key growth strategies. So could you share some updates on new partnerships with pharmaceutical companies?

Yes. We have already set up a direct sourcing relationship with more than 400 pharmaceutical companies, which brings a very rapid growth of our central purchase business. But I think your question is more than that, besides the simple buyer and seller model, we are building a full process to help lease pharmaceutical companies on their digital marketing capability. For example, we launched an ecosystem we call it Telescope. And this Telescope allows for prices, visualization of distribution status across a network of more than 20,000 pharmacies, those endpoints nationwide. Besides those distribution status, it also visualize the dynamic consumer and sales data and also the sales price, which those pharmaceutical companies would be very interested. And even although the market penetration analysis spanning 34 provinces and 600-plus cities, which also provides a Y-o-Y or M-o-M, week-over-week and even day-over-day overview of those sales data chains. So with Telescope and other digital tools, we are confident to further strengthen our strategic partnership with pharmaceutical companies on the transformation from traditional multi-tiered distribution to a digital marketing model.

Thank you. And I have a final question. Obviously, digital technology is at the core of your business model. So can you discuss the progress you've made in digital technology in the second quarter and also particularly focused on the application of AI technology in your platform?

Okay. Thank you, Robert. Technology has always been our core confidence and we have made a significant investment in it. And we also have achieved quite some progress in various parts. Junling mentioned to you a few, and let me just discuss in a little bit more detail. The first one is about the bidding system. So we have a merchant platform to allow merchants to bid on the platform, but we provide an automated bidding by giving them the price index for intelligent pricing, allowing them to optimize their total mix of sales versus profit. We found that through this bidding system that the total conversion rate has improved from -- starting with 27%, 28%, now reached historical high of 32%. That's quite significant. And we also use various optimization modeling algorithms for optimize our supply chain. Junling mentioned that we optimize the picking path. We optimize the order mixing for replenishment, shelving and the replenishment and we have reduced the cost of picking by 15% and replenishment costs decreased by 11%. And Also, let me mention about the AI technology, how we apply it. A year ago, we launched data services on Shanghai Data Exchange, but that data was for -- medical data for medicine. And we have extended that technology to non-pharmaceutical products. One is for medical device database, the other is for health, supply database, that we use AI technology heavily in that algorithm for matching products for increasing the accuracy. In fact, we increased the matching rate and accuracy by 50%. Hope that answers your question.

Yes. Thank you very much. That's a lot of details. So I'll jump back on the line.

Your next question comes from [Mike O'Neal] an Individual Investor.

I have two questions. First is how many new patents do you secure recently, how many patents does your company currently have in total? The second question is how many private label products does your company have on shelf and will you focus on accelerating your private label business this year. Could you please provide more detail on how the company plans to achieve this? Thank you.

Yes. Let me answer about the patent question. So Junling mentioned that last quarter alone, we acquired about four patents. And now we have a total of 28 patents. And this actually answers the question, partly what Robert asked for. Several of these questions -- of these patents all relate to application of AI technology. For example, first, we use voice recognition, combined with large language models to improve our voice services, for our customer service and for our sales training. So that's one patent. Also we have a patent for photo-based drug retrieval basically take picture on the needs of the boxes, immediately there, the system will recognize what medicine it is. So that uses quite some AI technology and through a large databases, our big data.

And Michael for your second question regarding the private label. Currently by now, there are about 200 private label SKUs registered and launched in 111. And we have couple of brands Guan Zhao is for our chain store customers. Huang RongYao it's a royal honor is for our individual store and [indiscernible] is for battery supplement. In this product in the past year have been well accepted by our pharmacy customers. And they are now well sold in various pharmacy across the country, including very, very remote areas like Xi Jin or Shenyang Province. They are more and more SKU in our pipeline, including OTC, RX, battery supplements and also medical devices. As we all know, for those [indiscernible] private label product has been a very important margin contributor and also revenue contributor of their sales and which we can find in our financial reports. But for our customers, which are mainly small or medium transfer or even individual stores, they don't have the capability to establish their own brands. So our brand like Guan Zhao become a very attractive solution for them to differentiate with their competitors and also to differentiate with those big KA transfer. So to conclude, these private label products bring sustainable profit to 111 and they also bring a sustainable profit to our pharmacy customers. And literally may also help us build up a long-term relationship with those customers because those are exclusive. We will continue our investment in this area, as I mentioned, we are seeing more and more products in OTC, RX and even Chinese medicine. Thank you.

In closing, on behalf of 111's 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 111s in Shanghai, China, please let the company now. Thank you for joining us on the call today. This concludes the call.

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 together with the earnings presentation are available on the company's IR website. Before the conference call gets started, let me remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which would cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 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.

Good morning, and good evening, everyone, and thank you for joining our First Quarter 2024 Earnings Call. The information we'll be discussing here is also available in the slides posted earlier today on the company's website, and I encourage you to download the presentation, as well as the earnings report from our Investor Relations website at ir.111.com.cn. For the first quarter of 2024, we are thrilled to kick off the year with solid performance. Notably, we turned to quarterly operational profitability for the first time after years of dedicated effort towards long-term resilient growth with strategic operational requirements. In this call, I'll provide an overview of the macro environment, highlighting exciting opportunities ahead that will follow the financial highlights and updates on our ongoing technology empowerment as well as the supply-side efforts. Finally, I will delve into our future growth strategy before our Chief Financial Officer, Mr. Luke Chen presents a thorough analysis of our financial performance. Looking into the micro environment for our industry, the national anti-corruption campaign in the healthcare sector that began in late 2023 is continuing this year. Recent developments indicate a deepening of this campaign, with regulatory and ethics enforcement efforts targeting the entire industry chain. The industry anticipates that stricter scrutiny on ethical practices is becoming a longer process that will foster transparency and integrity in healthcare transactions, particularly in hospital procurement, which will ultimately promote healthy industry competition and development. As a result, more drug sales are expected to transition to retail pharmacies that are more accessible and transparent compared to the hospital system. This transition is encouraged by the state, and is poised to benefit us as we specialize in the outside hospital pharmaceutical market, where we expect huge potential and prospects. Considering current economic and capital market conditions, entry barriers for new startups in this growing industry are formidable, especially when we add in the healthcare industry's high regulatory standards and requirements. We are, however, strategically positioned to adopt a market-oriented approach for the outside hospital pharmaceutical market. We aim to empower the entire industry chain through a business model that emphasizes superior operational efficiency and customer satisfaction. Our goal is to capture greater market share in this thriving sector by offering a comprehensive, cost-efficient product range with unparalleled focus on customer experience. To achieve this, we've introduced various mechanisms, including enabling first-party teams to deepen relationships with pharmaceutical companies and incentivizing merchants to offer competitive price products on our digital platform. Combined with advanced technology, these mechanisms drive robust traffic, operational efficiency and high sales volumes. By utilizing leading edge technology, rich data insights and innovative service models, we're strengthening 111's value proposition to both upstream and downstream customers. Also of note is the digital transformation over the entire value chain in the healthcare industry. As we are in a leadership position in this digital revolution, we are committed to reshaping the healthcare industry's value chain through our fully digitized operating system. By empowering the upstream and downstream segments with highly efficient digital solutions, we're driving continuous operating cost reductions, our high-quality digital technology facilities, effective sales, procurement and operations management, including customer demand analysis, product inventory management and warehouse allocation. In the first quarter, we continued to generate positive strides in digitalization, which I'll discuss further later on. Excitingly, our company achieved a qualitative change and operational efficiency after years of development. In the first quarter, we realized income from operations for the first time, validating the efficacy of our growth strategies and business model. Our income from operations reached RMB 3.7 million during the period, compared with a loss from operations of RMB 21.7 million a year ago. Non-GAAP income from operations even more than tripled to a record high of RMB 8.9 million. The achievements are particularly significant, considering a slight 4.6% year-over-year decrease in the first quarter revenue. This fall was attributed to a higher baseline set in the first quarter of 2023 during the peak of the pandemic, which led to increased market demand for health-related products and medications. However, the market has since stabilized and normalized. The profitability largely stems from ongoing improvements in operational efficiency, driven by continuous enhancements across pretty much all business functions. Our total operating expenses for the first quarter accounted for 5.8% of net revenue, down 120 basis points from the previous year. Specifically, we've achieved noteworthy reductions in various expense categories. We've managed to cut fulfillment expenses to 2.5% of net revenues this quarter, down from 2.8% in the same quarter last year, reflecting a decrease in fulfillment costs by 13.8%. Our general and administrative expenses have fallen to 0.5% of net revenues from 1.1% a year ago. Technology expenses were 0.5% of net revenues as well, down from 0.7% a year earlier. Selling expenses have slipped as a percentage of net revenues to 2.3% in this quarter from 2.4% in the previous year. Excluding share-based compensation, our operating expenses as a percentage of net revenues have decreased 60 basis points to 5.7%. Additionally, our operating cash flow also turned positive. Our operational efficiency was achieved through strategic investments in infrastructure and staffing, as we continue focusing on key areas for long term and sustainable growth. The digital capability we have built over the years is at a very sophisticated level to deliver value and quality performance to end customers, allowing us to reduce technology and staffing expenses. Our ambition has always been to become the most efficient healthcare e-commerce operator in the industry. With our relatively small scale and current revenue level, we have already demonstrated our exceptionally high operational efficiency, which even surpasses that of large traditional players. This makes us very proud, and we will continue this effort towards setting an industry benchmark for efficiency as our goal while sustaining profitability. When we grow in scale and refine our operations, operating costs are likely to further grow, contributing to higher efficiency. Our effort in this area will be relentless, as we firmly believe this is going to be our competitive advantage and we are not afraid of any competition. Next, let's delve into operational accomplishments over the quarter, which was marked by continuous progress in technology empowerment. These advancements not only bolster our operational efficiency, but also pave the way for enhanced returns in the future, a testament of our commitment to innovation and excellence. We're seeing the initial benefit of transitioning from a product intermediary to becoming a tech-powered healthcare platform. Through the digitization of various business models such as the JBP and marketplace, coupled with the introduction of joint venture and franchise warehouses as well as a self-built logistics network to connect upstream and downstream customers, we have propelled 111 into a new platform that's widely recognized by both upstream and downstream partners. The shift has effectively ramped up cash flow, slashed inventory turnover and enriched partnerships. This has fostered a synergistic ecosystem with shared knowledge, resources and capabilities that drive improved growth and success. Our AI improvement initiatives have already yielded positive results in our operations. By utilizing AI large language models and advanced algorithms to optimize low-price strategies and traffic allocation mechanisms, our order conversion rate saw encouraging improvements. These results highlight the success of our technology team's efforts in AI application development. One major challenge we faced was data cleaning due to the lack of common standards in the industry and the multiple names a single drug can have across different companies and regions. AI proved to be invaluable in automating this labor-intensive task, enabling us to contribute industry data to the Shanghai Data Exchange. We're also impressed by the impact of 111 Health, our AI powered tool developed by our tech team. It effectively addresses both internal and external customer issues, reducing the need for additional staff and cutting expenses. Although it is still early days, we anticipate further AI applications will continue to streamline our operations and drive innovation. Additionally, we continued digital empowerment for merchants with the launch of merchant side mobile tools. These tools provide digital features such as merchant mobile reports, business compasses and sales management, enabling our partners to access real-time business performance anytime, anywhere. We already saw a daily average usage rate of over 70% for these innovative features, which is very encouraging for further innovations. Furthermore, we can also use our intelligence system to match the most optimal carriers, which cuts costs and enhances delivery efficiency. For every single order, before it goes out for delivery, our system can make real-time decisions on which carrier to use based on logistics info collected, as well as volume and date. Every single order is selected by the system and assigned to a carrier, with the order automatically allocated to the most suitable warehouse for delivery. Diving deeper into our supply-side efforts, we empower our assortment team through our broadband intelligent data platform by analyzing the best-selling categories and products. With big data and sales forecasting algorithms, combined with online and offline transaction data and industry data, as of Q1 2024, the broadband catalog included a total of [ 6,567 ] new products, contributing to approximately RMB 460 million GMV cumulatively, while reducing the group's top product out of stock rate to 2.8% from 5.2%. Moreover, in a move to optimize operations and add value to the supply side, we launched a new delivery and transit model to streamline logistics not only for us but also for merchants. We've established the Kunpeng Pharmaceutical Logistics Network to provide professional logistics service. Our Kunpeng project optimizes internal cost reduction, with 20% lower distribution costs compared to traditional logistics. Secondly, it empowers the external supply chain. Previously, each merchant had to send their product samples to various warehouses individually. Now, they can consolidate their shipment to one warehouse first, and then our system will intelligently distribute them to the respective locations. This makes a major improvement in efficiency, as well as provides a service to merchants, which we can charge for separately. Merchants using this service can save costs, and their damage rates resulting from transportation can fall as much as 60%. With the support of the Kunpeng project, strengthened the business negotiations and our intelligent selection of the most optimal carriers, logistics expenses dropped. This together with lower delivery costs, less warehouse labor costs and generated from enhanced work efficiency and decreased warehousing expenses, primarily led to a 14% year-over-year reduction in fulfillment costs to RMB 89 million in the first quarter. Meanwhile, the company has innovated its supply chain model by unveiling joint venture warehouses. The new model is poised to revolutionize our expansion strategy, slashing investment timelines and capital expenditures while accelerating nationwide coverage. Previously, we invested in and built our own warehouses, which may take at least 2 years to see profitable operations. The new model allows us to partner with strategic warehouse owners to achieve growth and reduce intensive CapEx expenditure by leveraging partners' existing assets and our proprietary digital system. We've also garnered significant accolades and a new patent, all demonstrating valued recognition from government agencies and professional institutions for our business practices, operational performance and dedicated innovations. This affirm our pioneering role in digital commerce transformation. Notably, we were honored as 2023 Shanghai Industrial Internet Demonstration Platform by the Shanghai Municipal Commission of the Economy and Informatization, solidifying our position as a digital service platform for the pharmaceutical industry chain. This recognition elevates our commitment to digitization, enhancing service capabilities and driving technological innovation. We earned the prestigious title of 2023 to 2024 Shanghai E-commerce Demonstration Enterprise from the Shanghai Municipal Commission of Commerce, showcasing our pivotal role in advancing high-quality e-commerce in the city. In April, we secured a new patent for our voice service enhancement system, expanding our technology portfolio to 24 patents. This reaffirms our ongoing commitment to innovation, enabling more intelligent responses to customer inquiries and maintaining our technological leadership in the industry. Next, I'm going to discuss our strategies for future growth, revenue, margin and profit. We remain committed to delivering efficient, cost effective, one-stop shopping experiences that meet customer needs and secure our competitive edge. Utilizing data analytics and market research, we can anticipate customer preferences, ensuring our offerings align with demand, while prioritizing low pricing through advanced digital capabilities. This commitment ensures exceptional value without compromising quality, fostering long-term loyalty and recognition from customers. Another core strategy is to deepen our partnerships with pharmaceutical companies. By closely collaborating with these partners, we aim to better serve the needs of our customers with a diversified medicine portfolio and drive mutual growth. We've made significant strides in this area and we'll continue to do so, particularly by leveraging our digital marketing network to promote sales, especially in lower tier cities. Our extensive digital marketing network provides us with a powerful platform to showcase the product of our pharmaceutical partners. Through targeted campaigns and promotions, we'll be able to increase brand visibility and drive sales in previously underserved markets. This benefits not only our partners, but also enhances our position as a leading e-commerce platform in the pharmaceutical sector. Amid the evolving market situation, our private label business demonstrates impressive results. It's revenues surged 89% from the previous year in the first quarter, while gross profit rose 55% with a gross margin of 29%. This line of business, currently encompassing 3 distinct brands, enables us to offer a diversified product portfolio that significantly contributes to our gross margin. Additionally, it strengthens our brand equity and enhances customer trust. Moreover, we will accelerate our investment in the JBP platform, which has been attracting an increasing number of partners, which substantially increased our product range. The growth trajectory of this model is particularly exciting, as it indicates the growing value proposition of our innovative business model and its ability to draw interest from a diverse range of stakeholders. Looking ahead, our efforts for the JBP platform will include enhancing its features and functionalities to address the needs of our partners, as well as expanding its reach to a wider partner base. We believe that JBP will continue to be a key driver of our growth and the competitiveness in the years to come. In addition to driving top line growth, we're also focused on optimizing our operating costs to improve efficiency and profitability. We will step up our efforts to advance several initiatives implemented for achieving this goal. For example, we aim to onboard half of our merchant partners onto our new delivery and transit model, with the used upgraded warehouse network to enhance inventory management and fulfillment capabilities, thereby reducing lead times and improving customer satisfaction. Additionally, we are adopting AI sales representatives to automate and optimize the sales process, driving higher platform traffic and conversion rates while reducing operational costs. Operational efficiency is central to our strategy, and we will continue investing in advanced technologies to streamline processes, reduce waste, boost productivity and ultimately solidify our leading position in the marketplace. An important aspect of our technology investment is AI innovations and digitization. Many parts of our operations are embedded in AI, and we fully embrace digital transformation across our business to drive operational efficiency, customer engagement and product innovation, unlocking future growth opportunities. It is important to note that digitization is vital to our vision for the future. With 100% digital operating system internally, we have achieved industry-leading operational efficiency. This performance has not only enhanced our bottom line, but also positioned us as a catalyst for transformation across the entire value chain, granting both upstream and downstream customers access to our technological ecosystem and expertise. By doing so, we're not just improving our own processes, we are revolutionizing the way our industry operates and reshaping the traditional value chain. We are confident in our ability to remain at the forefront of this digitalization and how it will empower us in higher revenue and profit levels. With that, I'll hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

Thank you, Junling, and good morning or evening, everyone. Moving to the financials. My prepared remarks will focus on a few key business and financial highlights. For details on our first quarter 2024 results, please refer to Slides 16 to 19 in Section 2 of our presentation. Again, our comparisons are year-over-year and all numbers are in RMB, unless otherwise stated. Let's start with the first quarter results. Considering the sudden sales surge during the pandemic in Q1 last year, we managed to maintain our net revenue base for the quarter, which decreased 4.6% to RMB 3.5 billion. Gross segment profit for the quarter amounted to RMB 208.5 million, while gross segment margin was 5.9% for the quarter. Total operating expenses for the quarter decreased 20.6% to RMB 204.8 million. As a percentage of net revenue, total operating expenses for the quarter were down to 5.8% from 7%, as we continue to enhance our operating leverage and optimize our operational efficiency. Fulfillment expenses as a percentage of net revenue for the quarter were down to 2.5% from 2.8% in the same quarter of last year. Selling and marketing expenses as a percentage of net revenue for the quarter was 2.3%, down from 2.4% in the same quarter of last year. General and administrative expenses as a percentage of net revenue accounted for 0.5% down from 1.1% in the same quarter of last year. Technology expenses accounted for 0.5% of net revenue, down from 0.7% in the same quarter of last year. As a result, income from operations was RMB 3.7 million compared to loss from operations of RMB 21.7 million in the same quarter of last year. Non-GAAP income from operations was RMB 8.9 million compared to RMB 2.5 million in the same quarter of last year. As a percentage of net revenues, non-GAAP income from operations accounted for 0.3% in the quarter as compared to 0.1% in the same quarter of last year. Non-GAAP net loss attributable to ordinary shareholders was RMB 8.6 million compared to RMB 7.6 million in the same quarter of last year. As a percentage of net revenues, non-GAAP net loss attributable to ordinary shareholders accounted for 0.2% in the quarter, which was same as last year. As you can see, we are improving our financial performance quarter-by-quarter and have achieved operating income on a quarterly basis for the first half. Please refer to Slides 20 to 24 of the appendix section for selected financial statements. A quick note, our cash position as of March 31, 2024, we had cash and cash equivalents, restricted cash and short-term investment of RMB 627.3 million, and we were pleased to report that we have achieved positive operating cash flow during the quarter. As of the date of this earnings release, the company had a total outstanding amount of RMB 1.1 billion, which has been included in the balance of redeemable non-controlling interests and accrued expenses and other liabilities, owed to a group of investors of 1 Pharmacy Technology pursuant to their equity investment made in 2020 as previously disclosed. As of the date of this earnings release, we have received redemption requests from certain of such investors for a total redemption amount of RMB 0.2 billion in accordance with the terms of their initial investments in 1 Pharmacy Technology. Furthermore, we have entered into written agreements and/or commitment letters with investors are representing the majority of the total carrying amount for the rescheduled redemption payment. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

[Operator Instructions] Your first question comes from [ Edwin Zhou ], Individual Investor.

This is Edwin Zhou. I would like to extend my congratulations on outstanding results achieved this quarter. The impressive performance is a clear testament to the collaborative efforts and strategic initiatives taken by the company. I have 2 questions. The first is that I have observed a significant double-digit sequential decrease in the SG&A expense and IT expense this quarter. What is the potential for further reduction in operating expenses? The second one is, has the company initiated any new attempts in IT technology such as AI-related projects? Could you elaborate on any critical application?

Yes. Let me just answer the first question with regards to the reduction in SG&A and the IT expenses. Obviously, we have been pursuing the goal to be the most efficient operator in our industry. So with the current resources in hand, we feel that we absolutely can continue to scale our business. When we grow in scale, let's say, when we cross the RMB 20 billion threshold, we're very confident we can operate between 45% range, which means a lot to our business. So this quarter, with RMB 3.5 billion in revenue, we are already operating at 5.7%. And obviously, mind you, we have a lot of potential to grow our gross margin over time as we gain upper hand in the market and, of course, our ability to deliver profit will stand out in the industry. So fundamentally, our competitive edge will depend on our operational efficiency and we're going to pursue this relentlessly. And we're confident that when we grow in scale and when we further refine and streamline our operations, we're confident that the overall operational efficiency will continue to improve.

Let me take the second question, Edwin. You ask about what advancement the company has made in technology and especially related to AI. Let me just mention a few. First of all, as you can see that, we made some initial success in transitioning to platform business. Our platform total GMV reached over 70%. And certainly, we have made several progress in several fronts since the launch of JBP. And we have speed up our warehousing development through joint venture and franchising warehouses. And also we established the Kunpeng logistics services to upstream and downstream partners. All these are -- all these need strong support from IT. And a lot of the new warehouses use our systems and we provide these services through SaaS. Second, we use the large language models through an algorithm to improve our traffic allocation as well as conversion. So, we have, through this process, also improved cross-selling. And you can see that our conversion rate has significantly improved. Also, we have launched various supply chain finance services. Certainly, we have lots of partners. The banks and financial institutions provide the services, but we have to do the optimal matching for our customers, how to match them to the best service and the best providers. And that's also done through our technology and our data service. And Junling just mentioned that we established, called Bo Guan data platform. Such a platform uses not only our internal data, online data, but also offline data to our customers and the industry data. And through this process, we have introduced this data help us to introduce over 6,000 new products. And these products gave us much higher margin rate and the sales rate. So, let me just mention this view that's enabled through IT and AI technology.

I'm looking forward to witness continued success and even greater achievements in next quarter.

The next question is from [ Victor Yang ], Individual Investor.

This is Victor Yang. I'm an Individual Investor. First of all, congratulations to Gang, Junling, Luke and the whole staff of 111 on the impressive performance. I have 2 questions. First is in achieving operating profitability and net profits this quarter. Can you give more details on the strategic initiatives and operational changes that lead to this milestone? And what are you expecting for the rest of the year? Will you at last keep this pace of being profitable? This is the first question. And the second question is about the supply chain cost. We have noticed a significant reduction in costs in 111 supply chain. Can you explain what measures and actions the company has taken to achieve this result?

Yes. So when it comes to achieving profitability as an Internet company, it is a real major milestone. Companies in this space have to spend lots of capital and resources to build up their infrastructure and systems. Our strategy has always been clear. Our first step is to build infrastructure and secondly, we have to build scale. And thirdly, we're going to achieve profitability. So that in our previous years, ECU scripts and earnings calls, we have elaborated on that strategy and we actually delivered. So the fundamental driver to achieve the profitability comes from really operational efficiency by leveraging our digital technology. Of course, our goal is to be the most efficient operator in our industry and we are well on our way. When it comes to the future, we feel very confident to sustain our profitability. With the foundation I built, the trend of drug sales outside of the hospital space and the focus on value delivering to our customers, we feel very excited by the opportunities lying ahead of us.

Okay. That looks very promising.

Let me take the question on supply chain. You can see that last quarter, even last couple of years, supply chain efficiency improvement has been a highlight at the very core of our business. We are very proud of it. As you know, that supply chain contains many components, including the sourcing, the warehousing, the storage, the warehouse operations, the packaging, the delivery, handling downstream returns, also our own RTVs. So, all these are very important parts of the supply chain. So, we have made progress in all these aspects. First of all, Junling mentioned about sourcing. We go more and more direct to source from the pharmaceutical companies. And then about warehousing, not only we, through process improvement, not only improve our own warehouse costs, but also through joint venture and franchising warehouse, we speed up our Class B expansion. Also, we had new negotiations that reduces our rental costs as well as packaging cost. Regarding the delivery cost, we have made several improvements. One is that we have a system that chooses the best optimal assignment of the delivery of each package to the best logistics service providers. Also, we established the so-called Kunpeng logistics service. So, this service started by serving our internal needs by trans shipping goods from all our fulfillment centers, as you know that we have a total of 11 FCs, fulfillment centers, which is already a large -- very large volume. And we stretched all those routes that not only reduced our internal transshipment cost by 20%, but drastically reduced the damage cost. That damage cost reduced by 60%. So, then we extended that service to our partners, all the JBP partners and all the pharmaceutical companies. We enable them to just ship from one fulfillment center. We make all the distribution, and we start to expand that line because that line has truckload capacity as well as lower cost, much, much lower damage cost. So, that helps us in the delivery cost. Also, as you know, since our damage is reduced, that also help us in reducing the RTVs. So, all these together help us to reduce the total fulfillment cost by a very remarkable amount. We feel that we are becoming the most efficient operator in the industry. Thank you.

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

The next question is from [ James Bonsor ], Individual Investor.

This is James Bonsor, an Individual Investor. I would like to congratulate the company on achieving impressive results this quarter first. It's evident a lot of hard work and persistence has gone into this. And I have 2 questions as well, if I may. Firstly, you mentioned China's anti-corruption healthcare campaign is expected to boost the retail pharmaceutical market. How does the company plan to capitalize on this to increase market share? And what specific competitive strengths does the company possess in this growing industry? And then secondly, 111 is known for leveraging digitalization, both upstream and downstream in the healthcare sector. Are there any forthcoming plans or measures aimed at further enhancing online engagement for both in the upcoming quarters?

Yes. Thank you, James. I'm glad you noticed the anti-corruption campaign in the healthcare sector in China. Obviously, we absolutely want to grab this golden opportunity to grow our market share. And today, our scale is still relatively small compared to some of the well-established players, especially those traditional players. However, we have already built up our core competency, which is our operational efficiency. We don't have the resources and access to free capital or pretty much close to free like some of the state owned enterprises. What we rely on is really our ability to operate this business with the utmost efficiency. The competitive advantage will enable us to offer the widest selection at very competitive prices and over time customers will recognize this value and buy more and more from us. Hence, our market share and wallet share will grow. And I believe that our internal 100% digital operating system has proven its value when it comes to operational efficiency and we are in a position to really enable both their upstream and downstream customers. And as the nation is pushing digitization, this competitive advantage is going to really create momentum to our business.

Let me talk about the enabling business we have launched and what we are planning to do. Junling mentioned that we provide a lot of tools for our partners as we are moving towards a platform business. We launched a lot of mobile tools for merchants and they can, through these tools, they can see daily reports, they are in campus and manage their sales. They can see their product flow. They can see the profile of the customers and prices of their products sold and so on. All those important metrics can be seen and revised through the platform, and we are going to launch many more new digital tools for our partners. That's one. Second, I mentioned about Kunpeng Logistics Network. Right now, we have more than like 30 or so routes and we are definitely expanding those routes since we see the huge demand from our partners. We can also see a very remarkable cost reduction as well as damage reductions, and those are welcomed by our partners. So, we're definitely expanding those. We also go through very regular training and communication activities to improve the overall supply chain, responsiveness and efficiency.

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

The next question is from [ Kieran Wong ], Private Investor.

This is Kieran Wong from Hong Kong. I'm an Individual Investor. Congratulations on the big progress in this quarter. I have 2 questions. First question, the private label business at the company has shown rapid growth. Do you envision this becoming one of the primary growth drivers in the coming years? And what strategies are in place to develop this business further throughout 2024? Second question is, have you made any strategic adjustments post-COVID to strengthen revenue streams? Are these adjustments expected to have an impact in the upcoming quarters?

Okay. I will take the question regarding private label, and I think Junling will take the second question. And for private label, we already have a couple of private label registered. We have [ 1 Drug ] meaning care that is for our transport customers. And also we have another brand called Huangjia yongyou zhe. Direct translation will be royal owner. This is for our individual store customer. And also we have [indiscernible], that is for battery supplement and also some others like for medical device, et cetera. As Junling just mentioned, in last quarter, our private label products kept very strong momentum and grew 89%, close to 90% Y-o-Y. Most of these private label products have been very well accepted by our pharmacy customers. And currently, I think they are now sold in various pharmacies across the country, including in very remote areas like in Xinjiang, in Xizhang, et cetera. There are more and more SKUs in our pipeline. Yes, we will keep our investment in this private label, including OTCs, including [ ICE ], medical device, battery supplements, et cetera. And why we put so much effort on this private label? I think, as you know, private label products have been a very key margin contributor and also revenue contribution of those top chain stores, which has been disclosed. You can find this detail in the financial reports. As our customers are one-on-one customers, those pharmacies, they are basically small media chain or even individual stores. They don't have such a capability to build up their own brand. Our Guangzhou, our Guangzhou Yihao has become a very attractive solution for these pharmacy customers because they also need those products to compete with those top chain stores. And to conclude, these private label products bring us sustainable profit, bring sustainable profit to 111. They also bring sustainable profit to our pharmacy customers. They are not only high margin for us, also high margin for our customers. And literally, they also help us build out a long-term relationship with those customers. Because if they want to buy those Guangzhou or Guangzhou Yihao, they can only come to 111. So, we will continue our investment in this area. Thank you.

Kieran, let me just take on the question about the adjustments post-COVID. Obviously, COVID-generated demand is not really sustainable. Our sales went through the roof during the peak of the pandemic, but we always assumed that the market will normalize fast. And as I spoke earlier, our mindset has always been to have the assortment that really needs customer needs. And I spoke about having Bo Guan as our guide for assortment management. So, Bo Guan is really the tool we use to constantly seek feedback from customers, what they really need. And our objective is to offer the widest selection at a competitive price, including the private label products. So, we should really anticipate that we will be adding more and more categories and there should be more and more revenue sources in the future. Thank you.

The next question is from [ Nick Duan ] from [ Virtue Capital ].

This is Nick from Virtue Capital. And I have two questions. My first one is about Hong Kong IPO. So the Chinese authority has been encouraging domestic companies to go public in Hong Kong. I'm wondering if the company has been considering a dual-listing in Hong Kong. And my second question is about our cash burn rate. Specifically, can you talk about our current cash status versus our redemption expectation? And what measures are we going to take to improve our cash status?

Yes. Nick, yes, We are actually open to all listing options, including domestic stock change and as well as the Hong Kong Stock Exchange. So, we will evaluate the options, which will be most suitable for the growth of the company as well as the benefits of our shareholders. Of course, secondary listing or primary listing in Hong Kong is an option into consideration. And we will make the appropriate disclosure regarding any listing initiatives according to SEC rules. Regarding your second question on the cash position and the cash position improvement, as we just disclosed, as of March end 2024, we have cash and cash equivalents and we see cash and short-term investment of RMB 600 million -- around RMB 630 million. And we have achieved positive cash -- operating cash flow for the quarter. Now, you have noticed that we are turning to profit from quarter this year and we are no longer burning cash. And we believe our cash at hand are sufficient to support our business expansion. Junling mentioned we are improving our operation efficiency. We want to be the most efficient operator in this industry. It's also related to our working capital management. We have very high working efficiency in working capital management. If you look at our accounts payable date around 45 days, our inventory turnover is around 25 days and our accounts receivable is around 10 days. That gives us positive cash flow. So, we will continue to monitor very closely our working capital, including the initiative to better utilization of supply chain finance, so that we will create actual cash at hand. In terms of redemption, we have also disclosed that we are in the process of negotiating with investors on the rearrangement of those redemptions. As a matter of fact, we have already entered into written agreements or commitment letters with investors to rearrange the redemption schedule, which is already representing the majority of the total recurring amount. Nick, hope I answered your 2 questions.

The next question is from [ Jack Wang ] from Water Tower Research.

This is Jack with Water Tower Research. Congrats on the solid results. It's really interesting to see that 111 has innovated the joint venture warehouse model. So my first question is, how will this model support the company's growth? And are there plans to establish additional warehouses under this model in 2024? And my second question is that we see that your operational expenses are just below 6% of revenues. So, do you believe this figure is already the lowest within the industry? Or would there be opportunities to further enhance operational efficiency? Or is your goal just maintaining this level going forward? Any color you can share on that would be great.

Jack, regarding the joint venture of this warehouse -- I'll take this question. Yes. Besides our first-party managed warehouse, we set up warehouse local operations standard by a joint venture model with our -- in certain province with local partners. And this province is including like [ Guangzhou ], Yunan and Inner Mongolia, et cetera. So our JV partner, they are basically a local leader in pharmaceutical business. They have run this business 10 years or 20 years, even 30 years locally. And they have actual capacities in warehouse. And they already have their logistics network to cover local customer demand. And all these capabilities can help us better serve our customers. You can imagine if by using the traditional first-party model, if we want to set up those warehouses in those remote provinces, it will take very long time. So with help from our partner, we set up a JV warehousing model, which provide a local sourcing and also a faster delivery lead time and also a very low damaging -- and also damage rate has been reduced compared to a long distance shipment. So with the launch of this JV warehouse, we are seeing business growth in these remote provinces. And in 2024, we do have plans to expand this model. And actually, our Xinjiang joint venture is already in a setup process.

So, Jack, I've just realized we run out of time, so I'll make my answer fast. So 6% -- less than 6%, it is the best in the industry from our internal research and intelligence, I believe it is. And I also want you to keep some references like we are still relatively small compared to some of the established players. The biggest player in the industry has a revenue of RMB 700 billion. And last year we only did RMB 15 billion. And the value of one shipment from the traditional guys to the hospitals is probably a few hundred thousands at least. And our shipment, sometimes it runs as low as RMB 300. And to give you that comparison, to illustrate how efficient our operation is, as I said earlier, that we definitely still have room to continue to optimize, staying at the status quo is never in our culture. Thank you.

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