Hello everyone, this is Robert Sassoon, Senior Analyst at Water Tower Research, and I have the pleasure of hosting once again Junling Liu, CEO and Co-founder of a leading Chinese pharmaceutical B2B supply chain operator, 111, Inc. 111 trades on the Nasdaq and the ticker YI, and 111's Safe Harbor Statements can be found in the company's filings with the SEC. Without further ado, let me welcome Junling, and thank you for joining us again today. Absolutely, always a pleasure, Robert. Before we actually look at how 2025 is shaping up as we approach the end of the first quarter, let's take a step back and look at the performance in 2024, which you reported last week. Now, on the one hand, 111's results highlighted a challenging environment affecting the pharmacy sector in 2024, as well as the broader healthcare market in China, and that resulted in a near 4% drop in your revenues last year over 2023. The good news, however, is that despite these headwinds, the company still managed to deliver its first annual operational profit, a year of positive operating cash flow. Junling, let's unpack this for our viewers. Starting with the revenue side, can you highlight the factors in 2024 that impacted your operations, and then explain how you still managed to deliver operational profitability and positive cash flow for the first time since the launch of your B2B business in 2017? Absolutely. First of all, I'm very proud of the financial results we delivered. We achieved a major milestone in the company's development. For the very first time, we achieved operating profit, both at non-GAAP and the GAAP level. We delivered over RMB 260 million positive cash flow. We substantially improved our operational efficiency, and our bottom line improved almost CNY 350 million at the GAAP level. And, mind you, we achieved all of the above under very unfavorable circumstances. 2024 was a highly challenging year for China's healthcare and pharmacy sectors. The consumer behavior became much more cautious due to the macroeconomic pressures, and the retail pharmacy sales declined, according to Zhongkang data. The reforms around the medical insurance and outpatient benefit also disrupted operations at the pharmacy level. Many of the listed pharmacy chains reported substantial deterioration of profit. Obviously, we were operating in a very different economic environment in 2024. I must say that I'm extremely proud of our team. Looking back, I myself am even surprised by how much we have accomplished and how the team focused on executing the strategy of delivering the broadest selection and offering very competitive prices. The financial results were achieved through disciplined cost control, AI-driven operational improvements, and supply chain digitization. We reduced the total operating expense by 31% year-over-year and improved our operating expense ratio to just 5.6% of revenue. These improvements highlighted our resilience and the efficiency of our tech-driven model. Thank you for that answer. According to the reports I have read, 2025 has shown some signs of improvement in the first two months of the year, with retail sales up 4% year-on-year. Are you seeing any of this positivity in the sector that you are specifically servicing, or at least green shoots that tell you that 2025 will see a resumption of revenue growth for 111? Adding on to that question, you mentioned the pressure on independent retail pharmacies from the ongoing health reforms that are occurring now. Those reforms will ultimately create a stronger pharmacy network in China as pharmacies transition to clean, transparent, and efficient business models to survive. Are you seeing this transition start to happen, and how long do you think it will take before 111 will actually start to benefit from these reforms from a growth perspective? Yeah, we've seen some positive development in recent months at the macro level, but we don't know how much this will translate into improved pharmacy-level performance yet. For a start, we saw that the government is encouraging the on-time payment to pharmacies from the Healthcare Security Administration. This will greatly help the cash flow position for the cash-strapped pharmacies, and hopefully will translate into better business outcomes. We're looking forward to seeing the implementation. The other phenomenon we saw is that the net number of pharmacies is actually declining for the very first time since we entered the space. We see new pharmacies open and existing pharmacies close shops all the time. In the past, we witnessed a rapid number of pharmacies emerged in the market, and the number just kept going up and up. It's the very first time we saw a shrinking number in 2024. Now the country has about 700,000 pharmacies, and we're already servicing 500,000. The shrinking number suggests that the small and independent pharmacies will find it harder and harder to survive, given its lack of economies of scale and the lack of capital to invest in digital operations of the business. We don't believe the country needs 700,000 pharmacies, and that is really too many, I think. Perhaps 500,000 is a more reasonable number, and the super majority should be regional chains. That is precisely our sweet spot. It is far easier to service chains than small and independent ones economically. The other thing I want to point out is that while the healthcare reform did introduce short-term pressure and have impacted our business negatively, they are necessary and constructive. We absolutely want to operate in a transparent environment where efficiency can play a bigger role. Just to follow up on that question, you mentioned that the pharmacy sector is actually, you're talking about the independent pharmacy sector, I assume that is shrinking. Are they actually the new ones that are opening up that are replacing the older ones that are closing down? Are they actually more inclined to embrace innovation? It depends on if they are a chain pharmacy that is opening new stores or just new independent ones. What we have seen is that more and more independent ones, because other sectors are under even bigger pressure, they perhaps believe that this sector has got money to make. They just get a new pharmacy open, but they realize that they are very, very cash-strapped and technology poor. In order to compete against the chains, they are in no favorite position there. That is why the number is actually shrinking. There are more pharmacies that are closing shops than new ones get opened. I think if I see the number correctly, we had somewhat 40,000 shrink in the number of pharmacies. Have any of those pharmacies been in your universe? Oh, of course, yes. We do not want to see the shrinking number. We want to see more and more pharmacies. Actually, those pharmacies that are closing shops, they are mostly independent ones. Whereas we are actually servicing the majority of our customers, we spot it is actually in the chains, especially in the small and medium chains. Okay, great. Okay, so you've done an excellent job thus far driving operational efficiency. How far do you think you can take that strategy? What is your target for the OPEX ratio in 2025? What are going to be the main drivers to achieve the goal, Junling, that you talk about about how the deployment of AI tools will impact here? Yeah, I'm glad you mentioned about the AI tools. First of all, we're targeting to bring our operating expenses ratio to below 5.3% in 2025. Hopefully, we can hit that target to continue our trajectory from last year. Of course, AI is at the heart of this strategy. We have integrated AI across our supply chain, our inventory forecasting, digital marketing, and fulfillment networks. For example, our AI-powered Bo Guan catalog helped improve forecast accuracy from 71% to 82% and introduced over 6,500 new products in 2024. This translated into better customer satisfaction and an 18% increase in ARPU during peak campaigns. AI not only reduces cost, it also enhances agility, responsiveness, and the revenue per user. It is a dual engine for efficiency and growth. We also see that AI can really transform the way we conduct business. We're implementing new interfaces with customers and new underlying technology structure and a whole bunch of things. I just cannot imagine what the business is like when our new customer interfaces will come into being and our new underlying technology structure is implemented and AI is being used by all our employees. I must say that we live in the most exciting times. I really want to see that we're able to leverage AI to shape the future of the industry rather than just to react to new trends. All right, thank you for that. Now can you talk about the expansion of your fulfillment footprint? You added seven in the fourth quarter of last year. How many in total do you have now, and how many of these additions in the last quarter are franchise models? What do you assess will be the impact of these fulfillment centers to your revenue-generated capacity and/or to your gross margin? Are there plans for further expansion in 2025? Right. We added seven new fulfillment centers in Q4 2024, bringing our total to 18 across China. These centers are part of our franchise-based Quanpao Network, a model that allows us to scale rapidly and cost-effectively using a digital backbone. Those centers will help us build an even broader range of products, some of which will serve regional needs with faster delivery time. Customers can really rely on a super platform to complete a one-stop shopping journey. The expansion on the supply side does not really cost us any CAPEX. It is a decentralized, light, and fast way for us to increase our ability to better serve our customer needs. We plan to add at least 15 more centers in 2025, which will further enhance our national reach and boost gross margin through logistics savings and strong demand fulfillment. Great. Very good. I know we've touched upon some of these in the previous questions, but can you summarize for us your main priorities and target milestones for 2025? Yeah, our top priorities for 2025, I would say, are threefold. First of all, we want to scale our supply chain by expanding franchise fulfillment centers, just like what I spoke about, and to strengthen our GPO partnerships. Secondly, we want to grow revenue through smarter demand generation, including flash sales, mid-tier customer expansion, and brand collaborations like the Number One Summit. Thirdly, we want to deepen the AI integration across operations to unlock further efficiency gains and elevate the customer experience. We're also focused on driving profit scalability, improving ARPU, and leveraging our Quanpao Network to increase both cost savings and service capabilities. Under those sort of circumstances, you believe that profitability is sustainable? Yeah, I certainly hope so. Okay, just a final question here. There was a little segment that probably a lot of people missed about your redeemable shares. Can you give us an update on the status of those? Yeah, we're very grateful that our shareholders have been extremely supportive, and we continue to explore ways to align with long-term shareholder interests. While I cannot really comment on specifics at this moment, I can assure you, Robert, that we're actively evaluating all strategic options and will update to the market at the appropriate time. There was an interesting piece that I saw in your report that said 97% of the redeemable shares have now been rescheduled. Actually, it should be 99.7%, yeah. Really? Okay. That sounds like it's a positive feature. Indeed, yes. Okay. I think we'll leave it at that. If you have any more questions for Junling, please send them to me, and I'll be sure to pass them on. For analysis of the company, please refer to our open access website at www.watertowerresearch.com. The views expressed in this fireside chat may not necessarily reflect the views of Water Tower Research and are provided for informational purposes only. Once again, I'd like to thank you, Junling, for your participation, and I'd like to thank everyone for joining us in this fireside chat, and have a great day.