This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Hello, everyone, and thank you for joining 111's conference call today. On the call today from the company are Dr. Gang Yoo, co-founder and executive chairman, Mr. Jun-Ling Liu, co-founder, chairman and CEO, Mr. Luke Chen, CFO of 111's major subsidiary, Mr. Harvey Wang, COO, and Ms. Monica Moo, investor relations director. 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 at ir.111.com.cn. Before the conference call gets started, let me remind you that this call may contain forward-looking statements made under the safe harbour 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 CEO, Mr. Jianling Liu.
spk12: Good evening and good morning, everyone.
spk08: Thank you for joining our Q2 2022 earnings call. The information that we'll be discussing here is also provided in the slides that have been posted earlier today, the company's website. I would encourage you to download the presentation along with the earnings report at ir.111.com.ca. In today's call, I'll talk about the general economic situation and how the company rose to the challenge of meeting the impact of both the COVID pandemic and the economic uncertainties. Secondly, I will also provide some color on our strategies in the areas of building momentum for margin growth, improving operation efficiency, and strengthening supply chain capabilities. Then our CFO, Mr. Luke Chen, will walk you through our results. Although we have been in the COVID pandemic for three years, 2022 proved to be the most challenging year in China. The uncertainties in the international economic environment and the strict lockdown measures created significant challenges for many companies. As many of you are aware, COVID infections broke out in Shanghai in the spring and the pandemic subsequently worsened in quite a few cities in China. The Chinese government instituted lockdowns in numerous cities to curb the spread of the virus. And as a result, our Shanghai headquarters and several lab fulfillment centers were shut down. Our headquarters office had to be shut down for the first time in the second quarter, and no one was able to return to office. Simple matters like exchange of permits with customers and suppliers Talking contracts for normal business transactions became impossible. The overall supply chain was severely disrupted, and transportation and other logistics were tightly regulated in pandemic-hit areas. Logistics costs rose significantly. In many cities, our deliveries stuck in transit, and we also experienced a severe shortage of medicinal supplies as our suppliers were not able to replenish inventories as usual. This is the moment when companies are being truly tested. Despite the severe impact with pandemic, the company rose to the challenge. Through the team's tremendous effort, our company was appointed by the Shanghai government as a supply guarantee enterprise. and opened a special green channel which enabled our vehicles to deliver from Kunshan Fulfillment Center to Shanghai on a daily basis. We worked diligently and leveraged our online and offline digital platform capabilities to aid pandemic regions and continuously provided medicine and online medical services for patients nationwide. We have provided free online consultations for customers in over 370 cities and provided over 3,000 medicinal products covering more than 400 diseases during the lockdown period. Despite economic downturn and a material detrimental impact on the offline retail sector, our Q2 revenue reached 3.04 billion RMB, achieving slight growth under extremely difficult circumstances. However, our gross profit grew 43% year-over-year, reaching 192 million RMB. The gross profit margin rate of the company increased from 4.5% in Q2 2021 to 6.3% in Q2 2022. I had mentioned that we will be laser-focused on our margin growth and we could live around that. This achievement came from optimized product assortment and smart pricing, as well as improved team efficiency and technical capabilities. Our B2B business remains the key contributor of our revenue, which reached 2.9 billion RMB. Gross profit of our B2B segment rose to 169 million, of 55% year-over-year. Gross profit margin for our B2B segment rose to 5.8%, representing a growth rate of 53% year-over-year. Gross profit margin of our B2C segment rose to 22.5%, representing a growth rate of 11% year-over-year. We will continue reducing procurement costs as well as optimizing our product assortment and structure. I'm pleased to report the progress we have made on our private label initiative. Armed with its CRM big data and health management database, 111 cooperated with pharmaceutical manufacturers to build private label products, which include medicines, health supplements, medical devices, et cetera. So far, we have already developed three brands and targeting specific market segments. With our online and offline digital platform and nationwide distribution capabilities, these proprietary products will improve gross profit and improve downstream customer stickiness significantly. We were able to leverage our digital capabilities to deliver more value-adding services to our partners. The market continues to show strong demand for our diverse service solutions. Even during the pandemic, our service revenue reached 22 million RMB. Our operational efficiency is trending very nicely due to the improvement in business scale, team efficiency and technology advancement. The operating expense as percentage of net revenue decreased from 10.7% in Q2 2021 to 8.9% this quarter. The sales and marketing expenses were down to 3.3% from 4.4%. General and administrative expenses were down to 1.3% from 1.7%. And technology expenses were down to 1.1% from 1.7% in the same quarter last year. The total amount of sales and marketing, general and administrative, and technology expenses have been reduced by 24%, 25%, and 36%, respectively. Although the current environment has resulted in challenges to our business, we're still committed to executing our strategy to continue to grow our revenue and gross margin. I'm pleased to report that our non-GAAP loss from operations as a percentage of net revenues decreased from 4.9% in Q2 2021 to 1.7% this quarter. This brings us another step closer to profitability. As of Q2 2022, 111's virtual pharmacy network reached approximately 410,000 pharmacies, covering about 70% of the total in China. As we deepened our relationship with upstream pharmaceutical companies, 111 has also strengthened its relationship with downstream pharmacy customers. As a result, we were able to help those pharmaceutical companies to improve their drug commercialization efforts and digital marketing decisions. This quarter, we have also seen that our pharmaceutical cold chain logistic capability improving rapidly. As of July, our cold chain service is deployed in over 270 cities, over 80% of which orders can be completed within 48 hours. This capability has provided convenience for rural users in particular. We always believe that innovation is the most important driver for growth, and our efforts are rewarded with encouraging results. One Health is a digital franchise model that effectively connects pharmaceutical companies with pharmacies and patients in order to empower small to mid-sized pharmacy chains. One Health provides those small and medium chains with more product selection while also improving their business decision-making optimization by availing drug sale information and smart chain support. One Health also helps its members to leverage data to optimize assortment and better customer relationship management. Through digital franchising, One Health has so far helped more than 11,000 pharmacies through AI technology, big data analysis technology, and SaaS services such as CRM, O2O, et cetera. This digital service made our S2B2C business model powerful, which already covers over 67 million consumers and has opened up the digital marketing link for upstream pharmaceutical companies. One Health members monthly average revenue per user and the customer satisfaction metrics have been significantly increased over the past few quarters. Meanwhile, the average gross profit contribution by One Health members was 1.6x that of . Cloud Promotion is an innovative S2B2C management platform which connects pharmaceutical companies with pharmacists, pharmacy managers, pharmacists, sales personnel, and consumers by facilitating the assignment of specific tasks from pharmaceutical companies to pharmacies. These tasks include training, taking exams, product display, promotion, patient education, et cetera, for pharmacy managers, pharmacists, and sales personnel. This platform enables pharmaceutical companies to precisely target sales channels and implement customized pharmacists and a sales personnel training. At present, dozens of pharmaceutical companies, over 7,000 pharmacies, and close to 10,000 pharmacists and sales personnel have joined this platform. As a national high-tech enterprise certified by the Chinese Ministry of Science and Technology, and a specialized high-end new technology Shanghai enterprise, Selected by the Shanghai Municipal Commission of Economy and Information, 111 has proactively responded to the call for the three creations, i.e., innovation, invention, and creativity, and the four news, i.e., new technology, new industry, new business format, and new model, and are constantly devoted itself to scientific and technological innovation. Since its establishment, 111 has pursued continuous technological innovation advancement. In July this year, we won the 2021 to 2022 China Pharmaceutical Retail Leader Award with our innovative business model and the leading digital technology capabilities. As the national health digitization drive gathers pace and the state provides more support for the development of platform businesses, we will continue to invest in research development, aiming to achieve continuous incremental improvements for our business. I would also like to brief you on 111's ESG efforts during the pandemic. As a supply guarantee enterprise in Shanghai, we have proactively provided a timely boost to the ongoing fight against the pandemic. We collect purchase orders via proprietary purchasing channels and assign the special personnel to process them, thus ensuring timely delivery to patients. One clinic, 111's online hospital, launched free online service since the pandemic began and provided free online consultations, free prescription renewal for chronic disease sufferers, and other medical services to the public. The company has proactively organized donations and offered anti-pandemic PPEs for the enterprises resuming work and production. All the ESG efforts carry our core values, and we will firmly fulfill our social responsibilities as we have done in the past. We will make unremitting efforts to pursue core growth opportunities, further consolidate and enhance our leading position, and to bolster our competitiveness in the medical service industry. Driven by digital technology, we will continue to deepen the digital transformation of the healthcare industry and upgrade platform services so that patients at large could gain access to high quality medical services and drug purchasing services. 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 investors who have supported us all along. I will now hand the call to Mr. Luke Chen to walk through our financial results. Thanks.
spk11: Thank you, Junli. And good morning or evening, everyone. Moving to the financials. My prepared remarks were focused on a few key business and financial highlights. You can refer to the details of the second quarter 2022 results from slide 13 to 16, 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 second quarter results. Second quarter had been extremely difficult. for our business due to COVID lockdowns in Shanghai and many other cities. Our head office in Shanghai had to be closed and operations in our regional fulfillment centers had been significantly disrupted for two full months. Despite all the challenges from pandemic lockdown and thanks to all the team efforts, we have managed to keep our revenues stable while continue to fast grow our gross profit and margin. Total net revenues for the quarter grew 0.4% to $3.04 billion, and the total gross profit for the quarter grew at 43% to $192 million, and the gross margin improved from 4.5% to 6.3%. B2B segment was the major contributor for the total gross profit and margin improvement. B2B segment revenue grew at 1.3% to $2.9 billion, while gross margin Gross segment profit for B2B segment increased by 55%, with gross segment margin up from 3.8% to 5.8%. This was attributable to our optimization of selection portfolio and competitive pricing. We had also focused ourselves on high margin products and launched private label products with much better margins. Our B2C segment revenue was negatively impacted by the lockdowns, which decreased 20% to $103 million, with gross segment margin improved from 20.2% to 22.5%. Total operating expenses for the quarter were down 16% to $272 million. As a percentage of net revenue, total operating expenses for the quarter were down to 8.9% from 10.7%, which reflected continuous improvement in our operation efficiency. Fulfillment expenses as a percentage of net revenue for the quarter was 2.9%, up from 2.8% in the same quarter of last year. The increase was mainly attributable to additional logistic costs incurred as a result of pandemic lockdown. Sales and marketing expenses as a percentage of net revenue for the quarter was 3.3%, down from 4.4% in the same quarter of last year. We continued to leverage our sales automation tools to enhance the sales effectiveness and streamline the operation in the quarter. General and administrative expenses as the percentage of net revenues accounted for 1.3%, down from 1.7% in the same quarter of last year, which was attributable to our continuous optimization of our supporting functions. Technology expenses accounted for 1.1% of net revenue, down from 1.7% in the same quarter of last year. We completed major tech development programs last year, and I believe that our current spending reflected the appropriate amount of investment in technology. As a result, the gap loss from operations narrowed to IMB 52.8 million, compared to IMB 147.9 million loss in the same quarter of last year. As a percentage of net revenues, NENGAP loss from operations decreased to 1.7% in the quarter from 4.9% in the same quarter of last year. NENGAP net loss attributable to the honorary shareholders was IMB 68.3 million compared to IMB 18 million loss in the same quarter of last year. As a percentage of net revenue, the net loss attributable to ordinary shareholders decreased to 2.2% in the quarter from 3.9% 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 full confidence that we have the right strategy and the right team to steadily expand our revenue and gross segment profit. Please refer to slide 17 to 20 of the appendix section for selected financial statements. A quick note on our cash position as of June 30, 2022, we had cash and cash equivalent, restricted cash, and short-term investment of IMV 885.6 million. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.
spk06: Thank you. If you would like to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. Once again, it's star 1 1 to ask a question. Please stand by while we compile the Q&A roster. Thank you. We'll now take our first question. Please stand by. First question comes from the line of Xipeng Feng from CICC. Please go ahead, your line is open.
spk13: Okay, thank you. Thank you for taking my questions and congratulations on the company progress. Well, I have three questions actually. And the first one is, how did your company achieve growth? for both revenue and gross profit in the second quarter, especially amid such terrible circumstances such as COVID epidemic and economic uncertainties? And my second question is, what specific challenges did the company experience from the economic and COVID pandemic in the second quarter? And how will these challenges affect the company in the second half of 2022. And the last question is about the strategy. Could you please elaborate on the company's strategies going forward? Thank you.
spk08: Thank you, Xipeng. Let me just address your questions. So first of all, last quarter was extremely difficult for majority for the three months, our head office was under lockdown. And even after the lockdown was over and our staff gradually returned to office starting from second week of June, still no one from our head office can travel out of Shanghai to conduct the badly needed business. And also the supply chain was disrupted pretty badly. It's quite a number of cities experiencing outbreak of COVID. Many of our orders got stuck in transit, causing tremendous problems in our customer experience and also a lot of customer frustration. Some of our fulfillment centers were shut down and even the inventory replenishment became extremely difficult. And in the meantime, our pharmacy customers were also under tough challenges as they were not allowed to sell fever and cough-related medicines. There are four types of medicines that they are not allowed to sell, which account for a substantial amount of their business. And as a result, we were not able to sell those drugs to them either. Just under these difficult conditions, our team proved its true color. Given the extraordinary circumstances, we established a virtual command center with all the functional leaders dialing in every day to make decisions to deal with all kinds of issues popped up. And then they all have their own, you know, daily meetings. And, you know, with their respective teams. I was deeply moved by the dedication our team members demonstrated during that tough period. And to give you an example, as you may know, once you leave your residential estate, it'll be extremely difficult to re-enter as every estate is so strict on the inbound traffic. At that time, many customers placed orders online and they need to get the riders to collect those medicines from one of our collection centers. So some of our staff use their own personal vehicle to dispatch some of the orders to customers who live afar. And as we understand, once they leave their home, they couldn't return home for many days. So end of the day, I think it's the team's spirit and our execution capability that contributed to the business results. We're very pleased with the result given the extremely difficult circumstances. With your second question about the impact and also you know how we're going to deal with it in the second you know third and fourth quarter um I mean it is quite obvious the pandemic created negative impact to our revenue and margin and and therefore the overall business the cost of the conducting business also increased significantly you know imagine the orders stuck in transit you know extra vehicles we had to hire And even though some of the warehouses were under lockdown, we had to continue to pay our employees. And the pandemic is not over yet. Although we're able to work in the office now in Shanghai, many cities right now in China are going through what Shanghai went through. As we speak right now, we have thousands of orders stuck in transit right now due to the lockdowns in many cities. including some of the major logistical hubs. We anticipate Q3 and Q4 will remain very, very challenging for our business. The overall economic situation is not as encouraging as we would like it to be. This will add extra challenge to our business. But as we have done in Q1, we will continue to operate with great vigilance and do the best we can With regards to your third question, Xipeng, future strategy, we always had a three-step strategy. Our first step is to build the infrastructure and the ecosystem. As you all knew, we started from a B2C business, and then we had the internet hospital with one clinic. And then we also had the B2B business. You know, with that, we actually completed a, you know, close the loop online, offline, and B2C to B2B, B2B to C model. With that infrastructure, we were able to scale. As one can understand or one can appreciate in the Chinese market, scale matters a lot. And without scale, nobody takes you seriously. So we aggressively pursued the volume of the business over the last few years. And we had an objective to really take on 50% of the 500 or so pharmacist market. And today, as you can tell, we already covered about 70% of the overall market. And with that scale, obviously, we're in a much better position. you know either to deal with upstream suppliers or downstream pharmacy customers and of course our stage three of the strategy is to pursue profitability as we have demonstrated the last few quarters every single quarter we're making substantial progress you know we are a firm believer you know if we look at the bigger picture level We wanted to use digital technology to transform this healthcare industry. And we're the firm believer that technology will be the key driver. Also, technology will be the area that can give us the edge. So we will be pursuing both top line and bottom line growth. And we believe that technology will be the best tool to give us that edge. And, you know, this is at least a trillion-dollar market, and there is a lot we can do. You know, of course, we want to establish, you know, our leadership position in servicing the pharmacies first and then pursue other goals. So, Xipeng, I thank you for the question. I hope I answered your questions.
spk02: Yeah, sure. It's very clear and helpful. And thanks for the sharing. Thanks.
spk06: Thank you. We'll now take our next question. Please stand by. Next question is from the line of Fergus Pearson from Oktava. Please go ahead.
spk07: Yes, I'm an individual investor. Fergus Pearson, congratulations on performance last quarter. I have also three questions, if you don't mind. The first is have you made any progress on the supply side upgrade? The second is have you made any progress on technological innovation or development? And lastly, what is the status of the company's cash reserves? Thanks.
spk10: I can answer the first two questions. I didn't hear the last one. It's cash reserve. Oh, cash reserve. Okay. I'll look at the last one. Yes, we have made a lot of progress in our smart supply chain as well in technology. Let me answer the two questions separately. In terms of supply chain, our smart supply chain, we... made progress in both systems and in our infrastructure. For example, we launched our Cloud GTP program about two and a half years ago, but we didn't have co-chain coverage. Starting from the beginning of this year, we launched co-chain coverage. This allowed us to deliver a lot of new and innovative drugs to customers in remote areas. Right now our coaching coverage can fulfill to 270 some cities and we provide tremendous convenience to our patients. So that's one. Second is about innovative ideal for the franchising fulfillment center program. Through our own experience, we know that it's so difficult. It takes a long time to build . It takes effort in searching for the site and getting CFDA approval and build the internal processes, et cetera. Usually, a fulfillment center takes more than a year to launch. So we have a new innovative idea to have partners using our partner fulfillment centers. We call franchising fulfillment center. So we had this idea beginning of this year, and by now we already assigned 11 fulfillment centers. Eight of them are already in operation. These Cloud Fulfillment Centers can be treated as our forward deployed Fulfillment Center. They are closer to customers so that they can shorten the delivery time and they also have a lower fulfillment cost, so really tremendous help to us. Plus, we can have a much, much larger coverage. Last example is about the inside our fulfillment center. We try to reduce our operational cost. One idea is to separate the bulk sales from unit sales. So a lot of cutting boxes, we treat them as one SKU directly shipped to our B customers. And by separating the bulk from the units, we lowered our fulfillment cost, especially picking and packaging costs by almost 20 percent. So these are the improvements in our smart supply chain. Regarding to our technology, as you know that we continue to invest in our technology development. Junyi mentioned that we are recognized by Chinese Ministry of Science and Technology as a specialized high-end new technology enterprise. And also, we received the award, China Pharmaceutical Retail Leader Award. These awards are for, especially based on our digital technology capabilities. And also, we built this patient lifetime management platform, which connects patients with doctors, pharmacists, and medical assistance. Through usage of these platforms, patients gain tremendous convenience for accessing doctors' medication and disease education. Let's take diabetes patient management as an example. The DOT, duration of treatment, is a very severe measure for adherence of your patient medical adherence, that index has been improved by more than 30%. And also, we provide a lot of tools both for our marketplace vendors, help them improve product availability, timely fulfillment, and wholesale customer services. And the marketplace CPO has dropped from 8% down now to 4.5%. So this helps us to improve our customer experience tremendously. So through the few examples, I hope I can demonstrate that our investment in our smart supply chain and in technology has been achieving fruits.
spk11: Yeah, on the company's cash reserve, as we just told, as of June end of 2022, we had cash and cash equivalents, restricted cash, and a short-term investment about IMB $886 million. And you can also tell from our cash flow statement, the net cash outflow in the first half year this year is significantly lower than the first half year last year. And we believe this trend will continue as we further lower our operation loss and getting closer to profitable. We believe our current cash reserves are sufficient to support our daily operation.
spk12: I hope we answered your questions. Yes, that's very thorough. Thank you.
spk06: Thank you. Thank you. We'll now take our next question. Please stand by. Next question is from the line of Zoe Bian from Citi. Please go ahead.
spk05: Hi. Thank you, management. Good evening and good morning. This is Zoe from Citi. Thank you for taking my question. I have two questions. The first is we saw a strong improvement in the gross margin in second quarter. What are the reasons behind it, and what level of gross margin is expected in mid to long term? The second one is, could you give us more color in the gross margin product program? Thank you.
spk08: Thank you, Zoe. I think I'll take the first part of the question, and then maybe my team can actually help out with the follow-up question with a little more detail. We made a strategy to focus on margin delivery, and in the last few quarters, we worked extremely hard on our product structure optimization, which is a main driver for better margin. And of course, another driver is to reduce our procurement costs. We invested pretty heavily into our supply team. and then negotiate it pretty hard with our upstream suppliers. With our technological capability, we're getting better and better on our PIS system. If you are not familiar with that, that stands for pricing intelligence system. So what we do is we use algorithms, we keep testing price elasticity, And we arrived at an optimized pricing for certain cohort of SKUs. So this is really instrumental in helping us improving our margin and also project an image that our selections had very competitive pricing. And also, our product mix included the so-called gold label products, which means high margin products, which maybe Harvey can elaborate on. The revenue for this category of products is not very high, but the margin contribution is very, very pleasing. And the last point I would like to make is that, you know, finally our private label has been launched. It's early stage, but we're very excited by the potential for this line of business. So far we have created, you know, three brands. They are Guan Zhao, they are Sun Bukang, and the Huang Jia Diao. You know, the reason why we have those brands differently is we want to target different market segments. So, Zoe, to conclude, and I believe this is very sustainable, you know, the second part of your question, and we should anticipate that our margin growth will continue to grow faster than revenue in the foreseeable future.
spk12: Zoe, second question.
spk09: For the second question regarding the high-margin product, actually, as Jingling just mentioned, this is actually with our SaaS-based digital marketing tools and our various platforms like One Health, like cloud promotion platform to promote those new products or special products from pharmaceutical companies. and margin is normally about 20% and average about 23-24%. And these products not only high margin products of 1.1 but also which is even more important also those are high margin products for pharmacies. So this has been a transformation for our one-on-one sales team to promote those high-margin products. And we are pleased to see, you know, we have successfully gone through the transformation. As we can see in quarter by quarter, the high-margin product sales are increasing rapidly.
spk12: Thank you, Joy. Thank you, management.
spk05: Look forward to your future development. Thanks again.
spk06: Thank you. We'll now take our next question. Please stand by. This is from the line of Lauren Cai from HSBC. Please go ahead.
spk01: Hi. Thanks, management, for taking my questions. And congrats on your solid results. I have two questions about your new initiative. The first one is on your One Health program. Can you share with us how does the program improve active users in general? What's your future plans for the program? Do you have targets for how many pharmacies to cover in the future? And my second question is, can you talk a bit more about your future plans for the cloud promotion program? What are the feedbacks from the pharma companies and pharmacies So far, what's their satisfaction level with the new service? Thanks.
spk09: Thank you. Actually, these two questions are all about our new initiative. For One Health, One Health is becoming the first in the industry with the S2P2C model. And our virtual franchise model enables over 10,000 small or medium-sized pharmacy chains provide superior products and services to their customers so for our next step of the one health actually currently I'm right now in one tomorrow we will have a one health members summit in for those members from central China on our next step of this program that is to set up a closer connection to and all our marketing on this all of our members and marketing about those exclusive skus and also about our private label like huangzhou huangzhou is designed for one health members which are basically all those are very high margin ones so we can expect the margin percentage of this program is going to increase. And for the next initiative, that is a cloud promotion program. And this is actually a SaaS-based platform connecting pharmaceutical companies with pharmacists in those pharmacies.
spk12: And eventually, with the end
spk09: user or patient. We just launched in only a few months. And we have currently about 10,000 pharmacists and assistants in the pharmacy registered in this platform. And we also have a number of pharmaceutical companies who are participating in this program. So we are expecting the cloud promotion program become a very good digital marketing tool and also a platform to connecting pharmaceutical companies with the end user or with the patient.
spk12: Thank you. Thank you. Thank you for your answers.
spk06: Thank you. We'll now take our next question. Please stand by. Next question is from the line of Steve Lu. Please go ahead.
spk04: Thank you for picking my question. I have two questions. The first one is, what is the reason behind contracting non-GAAP loss from operation as percentage of net revenue? How is this sustainable? The second one is, what is the supply guarantee and price? How does it apply to 111's medical service during the epidemic? Thank you.
spk11: Thank you, Steve. Let me answer your first question. Yes, our net gap operating loss for the quarter is 1.7% of net revenue, which is significantly improved if you compare to 4.9% loss in the same quarter last year. If you zoom in, you will see that the improvement was contributed by, first of all, the gross margin improvement. which is 6.3% this quarter versus 4.5% in the same quarter of last year. And also, the total operating tax reduction contributed the rest. Just now, and Harvey are talking about our plan on the revenue and the margin expansion. If you look at our OPEX, you will see that in Q2, we have made great efforts to optimize our organization structure, streamline our operation process, and make full utilization of automated digital tools to improve operation effectiveness and efficiency. And as a result, all the expensive line items, such as selling marketing expenses, decreased by 24%. The G&A expense is down by 25%. And we also take a conservative approach on our IMD spending. And so we believe that we will be able to keep this spending level in the rest of the year while continue to grow top line and across profit. So overall, we are optimistic, positive that we will continue the trend. to narrow the loss until profitable?
spk08: Junyi, you want to answer this? I want to touch upon the supply guarantee enterprise. And Steve, thank you for that question. I guess it's not a concept that everybody's familiar with. And as you can imagine, during the lockdown, all the logistics were suspended with the exception of government-approved companies. which can deliver essential goods such as food to residential compounds to keep the citizens fed. And those companies are classified as supply guarantee companies. They've given special permits onto the road. Initially, they were only companies which can deliver food and water, which is the most essential for survival. And our GR team proved this value. They approached relevant authorities repeatedly, as you can imagine how chaotic it can be when the city just got locked down initially, and the system was literally in shock. And eventually, it made sense to the authorities that in addition to food and water, many chronic patients will need drugs to survive. So they granted us the permit. But unfortunately, our fulfillment center is in Kunshan, which is a neighboring province. And we had to go through a similar process in Kunshan, which was governed by different decision makers. To put the long story short, we got it sorted and eventually made it work, and both the you know government you know give us the green light and our vehicles were able to transport medicine to Shanghai on a daily basis and to deliver the badly needed drugs to our consumers and as far as we knew we were the only online company in Shanghai who were able to deliver this service to consumers And what we did exactly was we set up four collection centers across Shanghai, two in Puxi and two in Kudong, and the drugs will be delivered from our fulfillment center to those collection centers where our people will have to work pretty hard to sort all the drugs out based on different suburbs and so on. And then the customers can get their riders to collect those orders. As I said before, Some customers were simply not able to get those riders because they live a little further away and some of our staff will have to use their own vehicle and leave their residential compound to deliver those drugs to consumers. We're very proud of the fact that our customers can receive such services, receive so many letters from customers and are calling that really life-saving services. Thank you, Steve. I hope that answers your question.
spk03: Yes, thank you for answering my question. This information is very useful.
spk08: Thank you.
spk06: Thank you. And that was the final question. 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 us today's call. This concludes the call.
Disclaimer