111, Inc.

Good day and thank you for standing by. Welcome to the 111 Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Ms. Monica Liu. Please go ahead.

Thank you, Operator. Hello, everyone, and thank you for joining us today for 111 Second Quarter 2021 Conference Call. On the call today from 111 are Dr. Gong Yu, co-founder and executive chairman, Mr. Junling Liu, co-founder, chairman, and CEO, Mr. Luke Chen, CFO of our major subsidiary, Mr. Harvey Warren, COO, Ms. Tiffany Zhuge, SVP of Investor Relations and Business Development, Ms. Monica Mu, Investor Relations Director, and Mr. Alex Liu, Finance Director. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The company's earnings price release was distributed earlier today and together with our earnings presentation are available on the company's IR website at ir.111.com.cn. Before we get started, let me remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions, 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 this risk, 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 comparison unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis. With that, I will turn the call over to our CEO, Mr. Jinglin Liu.

Good morning and good evening, everyone. Thank you for joining our 2021 second quarter earnings call. For the benefit of those who are new to the 111 story, I would like to take a moment to summarize our business. I'll also cover our recent operational performance before handing the call over to Luke to discuss the financials. We will include our prepared remarks with guidance for Q3 2021, after which we will open up the call for Q&A. From the very beginning, 111 has been on a mission to transform and advance the healthcare services industry in China through technology by connecting patients with medicines and the medical services. We have already achieved significant progress in this mission over the past decade with the establishment of three innovative technology platforms. One pharmacy, which is currently one of the largest online retail pharmacies in China, and was also one of the first entities to receive an online pharmacy license. One clinic, which provides consumers with a myriad of cost-effective healthcare services. and One Medicine Marketplace, a one-stop shop for pharmacists in China to source medicines from a wide array of pharmaceutical companies. We curated a powerful ecosystem underpinned by leading-edge technology that focuses on the customers first, while benefiting all parties in the healthcare space, patients, pharmaceutical companies, pharmacists, and doctors. Patients benefit from greater access to medication with increased options, including newly approved medicines, faster than ever before. Doctors benefit by being able to prescribe drugs that aren't bound to just one hospital system, thus expanding their range of treatment options and leading to higher success rates. Pharmacies benefit by leveraging our scale to provide better pricing and a wider selection to more customers. Pharmaceutical companies benefit through expanded access to doctors and the patients with less geographical friction and the ability to sell products through multiple channels without relying exclusively on hospitals for sales. 111 benefits too by being able to acquire products at lower costs and offer revenue generating services to pharmacies and pharmaceutical companies. We are well positioned in the healthcare industry within an evolving regulatory environment in China designed to ensure integrity, data security and innovation as we enter the fourth industrial revolution in this dynamic market. We are confident that these changes will provide all companies, including 111, a more equitable environment to deliver value to our customers and shareholders while supporting the government's desire to reduce the cost of healthcare, which is aligned with our investment in the platform aimed at reducing cost by leveraging technology. Before we get into business performance, I would like to briefly talk about the current regulatory environment. During the last few weeks, various news outlets have reported over 40 instances where the Chinese government charged companies with violations ranging from antitrust to breaches of data security. On the surface, these actions might be perceived to have short-term risk and uncertainty. but we believe that these policies will help spur innovation in the long term by curbing anti-competitive practices and leveling the playing field. These changes will provide all companies, including 111, a more equitable environment to conduct business. Delving further into the details of the policies, it is our understanding that the government's intent is to address the following. One, anti-monopoly concerns of one company becoming too dominant in the industry. Two, anti-competitive business practices such as requiring merchants to sell exclusively on a single company's platform. Three, practices that stifle innovation by preventing smaller and regional players from competing with large conglomerates. Four, Vast amounts of sensitive data being collected without oversight or a uniform set of governing standards. Five, income inequality. And lastly, six, the growing cost of healthcare. The only category that pertains to 111 is the last one, concerning the government's desire to reduce the cost of healthcare, which also aligns with our goals. We believe that everyone deserves access to affordable healthcare, which is why we have developed a platform aimed at reducing costs by leveraging technology. Our suite of enterprise solutions provides small and medium-sized businesses with the technology and tools to improve and expand their businesses. Our nationwide footprint also provides access to quality healthcare services that were previously unavailable to consumers in smaller and rural cities. Although 111 has already grown significantly since our IPO in 2018, vast opportunities for growth remain. Thus, we welcome policies aimed at containing unfair practices and allowing all companies an equal opportunity to compete. As such, we view the recent regulatory actions as a tailwind rather than the headwind for 111. Moving on to recent performance, we continue to achieve exceptional results with net revenue in the second quarter increasing 87% year-over-year to 3 billion RMB, marking the 12th consecutive quarter of year-over-year growth since our IPO. Our B2B segment continues to deliver excellent growth, accounting for 2.9 billion RMB of total revenue, up 99% year-over-year. Further, in support of our objective to diversify our revenue stream, we have seen growing demand for 111's service offerings, which include marketplace vendor services, online medical consultations, cloud and e-prescription services, digital marketing, supply chain management, and others. We're pleased to report that overall service revenue grew 125% year-over-year, with B2B service revenues totaling RMB 16 million, representing a 397% year-over-year increase. Non-GAAP net loss attributable to ordinary shareholders as a percentage of net revenues decreased from 4.9% in the second quarter of 2020 to 3.9% in this quarter, which shows our continued progress towards profitability. Net loss for Q2 2021 was primarily attributed to an increase in R&D and technology expenses as these expenses are expected to grow at a slower pace going forward. In addition to growing our top line, we are laser-focused on growing our margins. Gross margin for our B2B segment grew 120% from Q2 2020, mainly from optimizing product categories, improving in our supply chain, and implementing fast tools to improve efficiency of various business processes. We expect this trend of margin growth outpacing revenue growth to continue as we keep making strides towards becoming profitable. Other key initiatives for improving gross margin include enhancing our supply chain infrastructure and expanding our partnerships with domestic and global pharmaceutical companies. In conjunction with our efforts to improve our margins, we also continue to make strides to improve internal operating efficiency. As a percentage of revenue, both selling and marketing expenses and the general and administrative expenses decreased sharply in this quarter. Additionally, we implemented an algorithm that enables deliveries of high velocity products, which has significantly improved the efficiency of each warehouse and the lower the labor costs. Although our operating expenses increased to 323 million RMB for the second quarter, up 82% year-over-year, these outlets were purposeful with a strong emphasis around investing and improving our proprietary technology in areas of digital health, big data analytics, and smart supply chain technology, as evidenced by the 18 patents we have secured in these areas. By doing so, 111 has laid a solid foundation for healthy long-term growth as we move towards our goal of transforming the healthcare landscape in China. It should also be noted that these operating expenses thresholds are expected to have peaked for 2021. We're also further developing our online and offline digital marketing capabilities with an emphasis on enabling our pharmaceutical partners to promote new and existing products. This includes our new digital marketing tool, Hawkeye and Turbo, that connects pharmaceutical companies with pharmacies and patients directly to promote high-margin special specification SKUs. We also leveraged the online marketing capabilities already developed for our B2C model to promote sales in our B2B model. Our proprietary marketing and education tools such as live telecast, e-courses, and online shows are designed to equip pharmacists with training to facilitate consumer education. Our robust smart supply chain has always been one of our core strengths. In the second quarter, we expanded the number of partnerships with domestic and global pharmaceutical companies, now totaling 381 direct sourcing partners, up 47% from 259 partners the year prior. By sourcing directly from More pharmaceutical companies such as Bayer, Eli Lilly, Novartis, Omron, and Sanofi, we have created a more efficient supply path leading to increased profits. Meanwhile, we continue to strengthen our supply chain infrastructure, including expanding our fulfillment capacity. Today, we have eight fulfillment centers strategically located to maximize efficiency. which enables us to deliver to customers in more than 890 cities within 24 hours. To meet the growing demand for our services, we plan to expand to approximately 243,000 square meters of fulfillment capacity towards the end of this financial year, more than doubling the amount of space we had at the start of the year. While this will increase our fulfillment cost in the short term, the investment will position us for future growth. We have also increased the market coverage of 111 to 65% while achieving a high average revenue per user. At the end of the second quarter of 2021, we covered 355,000 pharmacies in our network. which is up from 260,000 pharmacies one year ago. Moving forward, we do not anticipate that we will be adding pharmacies to our network at the same rate as we have in the past, given that we're already covering about two-thirds of the total market. However, we will focus our efforts on growing established relationships with our existing customers During the second quarter, purchases from existing customers comprised 95% of the total revenue, which demonstrates our customers' high level of loyalty and satisfaction. While our B2C segment is not yet achieving our desired expectations in the short term, It remains a core strategy given the overreaching market trends and our commitment to provide access to affordable healthcare products and services to patients nationwide, including innovative medication and therapies that would not be available otherwise. This includes upgrades to our OneClinic platform, which will have completed the build-out of a full medical product line. which includes a patient education portal, marketing tools, digital representatives, a doctor-patient management platform, and an internet hospital. There are currently over 20,000 doctors using our platform to connect with and provide online consultation services to patients nationwide. As some of you may be aware, there is a large disparity in access of healthcare across the country, and 111 is proud to play a part in bridging that gap. Our 111 drug commercialization platform has made solid progress in providing patients with innovative therapies, such as Eli Lilly's Trilicity, Pulse, and Vazenil, which treat diabetes, severe plaque psoriasis, and metastatic breast cancer, respectively, as well as Novartis' Consyntix, which treats plaque psoriasis, and Acenophis dupixent for the treatment of eczema. Finally, I'd like to provide an update on the exciting progress 111 has made around a new initiative that will further our growth strategy. We're excited to achieve the milestone in eclipsing 10,000 stores across China that have joined our recently launched digital franchise initiative, which we've branded as One Health Membership Rewards Program. This exclusive loyalty-driven program features an annual fee and allows members access to privileged benefits, including use of our centralized procurement and a suite of digital solutions. as well as educational materials to help these pharmacists manage and expand their businesses. We were delighted in the overwhelming response by our network of pharmacists, and we plan to build upon the early success of this program by offering a larger selection of products and expanding our service offerings. Beyond these highlights, we continue to strengthen our team provide innovative services, and capitalize on our technology-enabled infrastructure as our business grows. We're focused on not only growing our top line, but also improving our margins. We're confident that our leading position in the healthcare service sector, along with industry tailwinds, position 111 well for continued growth as we transform healthcare services in China and ultimately deliver excellent value to our shareholders. Finally, I would like to thank our shareholders for their continuing support. With that, I will hand the call to Luke to walk through our financial results. Thank you.