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spk06: Hey and thank you for standing by. Welcome to the first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you'll need to press star 1 on your telephone. Please be advised today's conference is being recorded and if you require any further assistance please press star 0. Now I'd like to hand the conference over to your first speaker today, Monica Mu, Investor Relations Director. Please go ahead.
spk05: Thank you, Operator. Hello, everyone, and thank you for joining us today. On the call today from 111 are Dr. Gong Yu, Co-Founder and Executive Chairman, Mr. Junming Liu, Co-Founder, Chairman, and CEO, Mr. Luke Chen, CFO of our major subsidiary, Mr. Harvey Wong, COO, and Ms. Monica Mu, Investor Relations Director. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The company's earnings press release was distributed earlier today. and together with our earnings presentation are available on the company's IR website at ir.111.com.cn. Before we get started, let me remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Delegation 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 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. Junming Liu.
spk00: Thank you for joining our first quarter 2022 earnings call. The information that we'll be discussing here is also provided in the slides that have been posted earlier today on the company's website. I would encourage you to download the presentation along with the earnings report at ir.111.com.cn. I will first speak briefly about the macro environment before covering our recent operational performance. and I will also provide some color on how we will continue to deliver revenue and margin growth, strengthen upstream supply capabilities, and improve operational efficiency, as well as our future strategies. Then Mr. Luke Chen will walk you through our financial results. As many of you are aware, the Chinese government instituted shutdowns of numerous cities to curb the spread of the COVID Omicron variant. Among those cities impacted, Shanghai was hit the most, where a majority of our staff is located. This has had a severe impact on China's economy. I'm pleased to report that despite these challenges, 111 nevertheless achieved growth while improving all of our operating metrics. Q1 2022 will mark our 15th consecutive quarter of Euro-VS growth since our IPO. Although majority of the residents of Shanghai can move freely with right-colored toes now, the aftermath of the COVID pandemic is still lingering. During this challenging period, one-on-one put on a tremendous fight. As the number of cases rose in several cities in China, local lockdowns were imposed. As a result, 111 had to shut down our East China Fulfillment Center, which is one of our key hubs. In addition, transportation and other logistics were strictly regulated in pandemic-hit areas. Many of our orders were stuck in transit due to various local policies in many cities, which significantly increased our fulfillment costs in the quarter. Because the overall supply chain was disrupted, we also experienced a severe shortage of medicine supplies as we were not able to replenish inventory. At the same time, pharmacies in many cities have suspended the sale of four types of drugs, i.e., antipyretics, antitussive drugs, antiviral drugs, and antibiotics. In the face of these challenges, 111 quickly set up a pandemic relief program with a virtual command center providing instructions on a constant basis. Our company and staff worked diligently and leveraged the strengths of 111's online and offline platform and the smart supply chain to aid Shanghai and other pandemic regions in the battle against COVID-19. and continuously provided medicine and medical services for patients nationwide. Despite the severe impact of the pandemic, the company rose to the challenge and achieved 2.98 billion RMB in revenues, an increase of 14.9% year-over-year, marking the 15th consecutive quarter of year-over-year growth since our IPO. I'm also pleased to report that our gross profit reached 192 million RMB representing a margin growth rate of 66.3% year-over-year, which was over four times of our revenue growth rate. Our B2B business remains the key driver of revenue growth. In Q1, B2B revenue reached 2.87 billion RMB representing a year-over-year increase of 17%. and the gross profit increased to 168 million RMB, an increase of 90.7% year-over-year, over five times the revenue growth rate. The hard-earned margin growth is the result of our consistent adherence to 111's customer-centric philosophy and our strong determination to create value for our customers. Faced with the lingering COVID pandemic and the remote work arrangements, we established an all-new SOP and a business continuity plan, which fully showcases our resilience and flexibility, as well as the emergency backup capability of our national intelligence supply chain. I'd like to take a few minutes to elaborate on our plans to continue to grow our margins. One, reduce procurement cost. Direct sourcing from pharmaceutical companies has been highly effective in lowering the cost of products. We now source from over 550 globally renowned and domestic pharmaceutical companies and we will continue to deepen our strategic relationship with our existing partners as well as securing new partnerships. This will provide us with a wide range of drug selection at lower cost. optimize our product assortment and structure. With an annual sales revenue of over 10 billion RMB, we're serving a vast market. We're in a position to balance our portfolio of products with very healthy margin. For example, we have increased the proportion of high-profit products and private label products. With the majority of retail pharmacies already in our network, We're very confident that we will be able to help our pharmaceutical partners in commercializing their products with high efficiency and gross margin. Three, enhance industrial internet capabilities. Our digital platform provides a comprehensive solution for pharmaceutical companies by integrating doctors, pharmacists, medical assistants, patients, and medical representatives onto our internet hospital. The service module also provides online remote consultation, e-prescription, patient education, patient support, and the refill services. These features enable us to provide customized omni-channel digital marketing solutions for pharmaceutical companies. The market continues to show strong demand for our diverse portfolio of service solutions. Our service revenue achieved 29 million RMB increased approximately 70% year-over-year. As a result, non-GAAP loss from operation as a percentage of net revenues decreased to 2.4% from 5.2% in the same quarter of last year. Although the current environment, including having to operate under COVID restrictions, has brought quite a few challenges for our business, We're still committed to executing our strategy to continue to grow our revenue and gross margin. Our goal remains firm to reach quarterly breakeven at non-GAAP operating income level in 2022. Now let me spend a moment to talk about our achievements on the supply side. Through continuous optimization of product assortment, in gross profit improvement, supply chain efficiency enhancement, and the comprehensive digital capability boosting, 111 has deepened the partnership with upstream pharmaceutical partners, as well as strengthened the relationship with downstream pharmacy customers. In addition, as our business continues to expand, and as we position ourselves as an effective commercialization partner, we will continue to offer value-added services to pharmacies and other business partners. At present, we assist hundreds of pharmaceutical companies and thousands of distributors in drug commercialization, digital marketing, and marketing sites. For example, our One Health virtual franchise model enables over 10,000 small to medium-sized pharmacies to provide superior products and services to their customers. All the participating pharmacies can use our platform to better manage their product selection, procurement, and inventory management, as well as accessing our distribution tools through our digital SaaS services, including smart sourcing, digital marketing, O2O, and CRM. This CRM initiative has assisted over 10,000 pharmacies in delivering improved medical services and personalized marketing to over 6.5 million consumers. Operating efficiency remains a continuous focus in our strategic imperatives. With growing scale of business and enhanced technological capabilities, 111's operational efficiency continues to improve. During our weekly business reviews, We go through many metrics to ensure that as an organization, we must deliver improved operating efficiency on a continuous basis. Each metric has a team as the owner who will be responsible for the goals we set. As a result, we're glad to see that revenue and gross margin have both increased, whereas as a percentage of net revenue, the sales and marketing expenses in Q1 was down to 3.9% from 4.7%. And general and administrative expense was down to 1.6% from 2%. And the technology expenses was down to 1.3% from 1.9% in the same quarter last year. The total amount of sales and marketing expense, general and administrative expense, and technology expense year-over-year has been reduced by 6.2%, 7.9%, and 21.5% respectively. 111 has been certified by the Chinese Ministry of Science and Technology as a national high-tech enterprise. and designated as a specialized high-end and a new technology enterprise of Shanghai by the Shanghai Municipal Commission of Economy and Information in 2021. We're very proud that our efforts have earned us such distinction, and we're committed to continuous innovation and improvement. To further reduce G&A costs, We focus on implementing our strategy, flattening our organizational structure, and improving the network efficiency of our employees through multiple operational tools. It is also worth noticing that we have developed several innovative marketing schemes which have yielded positive results. These include, one, building standard promotional workflows where differentiated resources are earmarked for different levels of marketing activities, thus improving efficiency and increasing ROI to over 40% year-over-year. Two, establishing tiered user-specific operational mechanisms. We use targeted operational strategies for users at different levels to boost customer retention, customer activity, and ATV, which stands for average transaction value. Three, developing innovative social-based marketing, including group buy promotion, game-based coupon grabbing, lotteries, et cetera. I would also like to brief you on 111's ESG efforts during the pandemic. As a PPE and everyday healthcare product provider in Shanghai, we have played a key role in ongoing COVID fight We were appointed by the Shanghai government as supply guarantee enterprise. Many pharmacies and medical institutions struggled with supply chain issues over the past few months. And we have stepped in and filled this supply gap. We have over 100,000 different types of medicine available for sale on our platform. And during the shutdown period, we collected purchase orders via proprietary 111 purchase channel. and a special personnel were assigned to process them through the company's pandemic relief program, thus accelerating the handling process and ensuring the fastest delivery possible. In addition, patients with chronic diseases often find it time consuming and inconvenient to fill their prescriptions. So we again step in to help solve this problem by offering medication registration and other services and ensuring that specialized personnel are available to follow up with any urgent request for medicine. I'm very proud of the work that our government relations team did during the challenging time. Through their efforts, we managed to open a special grain channel which enables our vehicle shipping supplies to Shanghai from our Kunshan Fulfillment Center on a daily basis, which proves to be so essential for many chronical patients. We received so many letters from customers praising our services, which further proves the social value we deliver to our communities. Our One Clinic online hospital platform has launched a free virtual clinical services program where doctors can provide online consultation, prescription renewal, and other services to the public. By offering a free and a convenient place for doctors and patients to connect, our online prescription orders have increased by 20%. 111 has also proactively organized donation initiatives for Shanghai nursing homes and other organizations. We have provided pharmacies free access to our O2O platform and have recruited volunteer careers to deliver drugs in hard hit areas. Finally, we offer PPEs and other related supplies for companies where employees have returned to the office. 111 is an enterprise committed to the health of Shanghai residents, and our ESG efforts are vested with our core values. We will firmly fulfill our social responsibilities as we have always done in the past. On the China's 14th anniversary, Five-year plans for national economic and social development, digital economy has been elevated to a vital position and expected to enter a period of rapid expansion through 2025. Digitizing the healthcare industry has been our goal since our inception. We see this as a tremendous opportunity to leverage digital technology and reconstruct the value chain in the healthcare industry. To achieve this, we have built a world-class technology platform that is already transforming China's healthcare industry. We have built an industry-leading smart supply chain platform that is uniquely tailored to optimize our F2B2C business model, and an unrivaled national sales network providing comprehensive coverage, and a sophisticated multi-channel digital platform that serves numerous unmet needs in this massive market. This has made us an attractive commercialization partner as evidenced by our growing number of partnerships with pharmaceutical companies. Our infrastructure was designed to serve many players in the healthcare industry. Pharmaceutical companies, pharmacists, doctors, and consumers. We have created the largest virtual pharmacy network in China with about 400,000 pharmacies and have strategic partnerships with over 550 globally renowned and domestic pharmaceutical companies. We feel very proud of the ecosystem we have built to date as it will enable us to scale our business to the next level. Looking forward, we will continue our efforts to improve and expand our business and further consolidate and enhance our leading position and competitiveness in this medical service industry. We already play a key role in digitizing and transforming the healthcare industry and provide the public access to convenient and high-quality medical products and services. We strive to deliver high-quality and sustainable growth and to create market value for our shareholders while recognizing our responsibility to our community and to the environment. By consolidating our strength in supply chain and technology, we will help our upstream and downstream partners press ahead with digital transformation that will improve their businesses as well as enhance the interaction with their customers. Our goal is to ultimately achieve profitability as soon as possible and to create value for our shareholders and society at large. We wish to thank all the investors who have supported us. Now we'll hand the call to Mr. Luke Chen to walk through our financial results. Thank you.
spk01: Thank you, Jimmy. And good morning or evening, everyone. Moving to the financials, my prepared remarks will focus on a few key business and financial highlights. You can refer to the details of the first quarter 2022 results from slide 16 to 18 in section two of our presentation. Again, all comparisons are year over year and all numbers are in RMB unless otherwise stated. Despite all the challenges from pandemic lockdown in many cities across the country during the quarter, we have continued to grow our top line and gross profit. Total net revenues for the quarter grew 15 percent to $2.98 billion. We are pleased to report that our gross segment profit for the quarter grew at 66 percent, which is over four times the growth rate of the revenue. Top line growth for the quarter was mainly attributable to our B2B segment revenue. growth at 17% to $2.87 billion. The growth segment profit for B2B segment has increased by 91% with growth second margin up from 3.6% to 5.9%, which reflected our ability to steadily expand our business scale while rapidly improving our margin. Our B2C segment revenue decreased 21% to $113 million, with growth segment margin improved from 19.4% to 21.6%. Total operating expenses for the quarter were up 2% to $295 million. As a percentage of net revenues, total operating expenses for the quarter was down to 9.9% from 11.1%, as we continue to enhance our operating leverage and optimize our operational efficiency. Fulfillment expenses as a percentage of net revenue for the quarter was 3.2%, up from 2.6% in the same quarter of last year. The increase was mainly attributable to our investment to expand the capacity of our fulfillment centers to support the future growth. The pandemic lockdown in various parts of the country also temporarily caused an increase in delivery costs. Sales and marketing expenses as a percentage of net revenue for the quarter was 3.9%, down from 4.7% in the same quarter of last year. General and administrative expenses as a percentage of net revenue accounted for 1.6%, down from 2% in the same quarter of last year. Technology expenses accounted for 1.3% of net revenue down from 1.9% in the same quarter of last year. As a result, NINGAP loss from operations narrowed to IMB 72.4 million compared to 135.9 million in the same quarter of last year. As a percentage of net revenues, NINGAP loss from operations decreased to 2.4% in the quarter from 5.2% in the same quarter of last year. The gap net loss attributable to ordinary shareholders was IMB 80.6 million compared to 109.3 million in the same quarter of last year. As a percentage of net revenues, the gap net loss attributable to ordinary shareholders decreased to 2.7% in the quarter from 4.2% in the same quarter of last year. As you can see, we are improving our financial performance quarter by quarter, and we are very close to profitability. We have strong confidence that we'll be reaching break-even point at quarterly and gap operating level this year. Please refer to slide 19 to 23 of the appendix section for selected financial statements. A quick note. our cash position as of March 31st, 2022, we had cash and cash equivalents, residual cash and short-term investment of RMB 901.4 million. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.
spk06: Thank you. As a reminder, if you would like to ask a question over the phone, you can press star and one on your keypad. And to cancel your request, you can press the hash key. Your first question comes from the line of Xi Peng Feng from CICC. Please go ahead.
spk03: Okay. Thank you for taking my questions and congratulations on the company program. Well, I have three questions. And the first one is, what is the impact of China's recent policies regarding internet healthcare on your company? And my second question is, I see B2B segment is developing rapidly, and what's the reason and how will you maintain the growth momentum? And my last question is, could you please elaborate on the company's strategies going forward? Thank you.
spk00: Thank you, Xipeng. Let me take your first question. I think I have two points to make. So first of all, if you look at the Healthy China 2030 and the 14th Five-Year Plan, where the government has elevated the health of the country, of its citizens, to a level of the national strategy. And there are lots of tailwinds for us, and we feel very excited about. We spoke about this in the previous few quarters, and I didn't elaborate in too much of a detail on today's call, but we see... digitization and the investment in the healthcare industry will provide a lot of tailwinds for us. And I guess your question is more geared towards the recent consultation paper where the regulatory bodies are coming out of detailed measures to make sure the industry is going to be compliant to many new rules, I'm assuming, right? We believe this is good for the development of an industry. Some companies might be impacted negatively by the measures like no AI involvement in the doctor's consultation. Users will have to upload their health record and the previous diagnosis, etc. I would say that 111 has always been very strict with our own compliance. And the majority of our business is actually from B2B side, which is not impacted. And even for the B2C business, we want to make sure that we set a very high standard for compliance. And overall, we see a lot more positives than negatives. And the policies we laid are very good for us. And we really should take advantage and leverage the tailwind to grow our business.
spk02: And for your second question regarding B2B, I think B2B has been on a more and more healthy growth path. Despite the pandemic impact, we deliver a 91% year-over-year growth on B2B growth margin. And our next step going forward Firstly, we will continue to upgrade our supply chain. That is to establish a direct and strategic partnership with more and more international and domestic pharmaceutical partners to bring in more and more selection with lower and lower cost to our downstream pharmacy or clinic customers. we will enhance our digital marketing platform to help those pharmaceutical companies to commercialize their new products to pharmacies, clinic, and eventually to the patients and consumers. So our B2B business is becoming a platform to effectively link pharmaceutical companies, link their products with pharmacies and clinics, and with the end customers. According to IQVIA's latest report, the volume of China pharmacy retail exceeded 200 billion RMB in the past 12 months. So it's a big, big market. We believe we have enough room to further expand our business volume with a much healthier margin.
spk00: Let me take the third question about strategy. I think we spoke about our three-step strategy in the past. I may refresh the memories of some of the friends on the call or some of the new friends who are joining the call for the first time. The first step, we wanted to build the infrastructure and the ecosystem. That's why we built the B2C module, the Internet Hospital module, and the B2B module. And the second step, with the infrastructure and the ecosystem, we wanted to build scale, which we achieved in a very short period of time. We kept on growing the business in three digits, and the last year we achieved over 12 billion yuan in sales. With the scale, of course, naturally, the third step is to grow margin and become profitable. So, in the immediate future, we will continue to focus on growing our revenue and margin and strengthen our capabilities on the supply side and improve our operational efficiency. With that, we will get into profitability. We're in a multi-trillion-yuan industry. Our overall goal is, of course, leverage technology to transform this industry and become a key player in this industry. Of course, in order to get there, we want to be laser-focused in getting the business profitable in the near term. Thank you, Xipeng. I hope I answered your questions.
spk03: Okay, that's very clear. Congratulations again on the content program. Thanks. Thank you.
spk06: Thank you. Your next question is from the line of Jessie Lu from HSBC. Please go ahead.
spk04: Thank you. Can you hear me?
spk05: Yes.
spk04: Great. Thank you so much for taking my question. And congratulations on the great results despite the challenging environment. Two questions, if I may. The first one is that I think as the industry is growing, we do notice more players in the space for both B2B and B2C. Can you help us understand it more about the competitive landscape for now and your competitive advantages? The second question is regarding the financials. It's very encouraging to see the narrowing net loss, and you mentioned the company will continue to
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