111, Inc.

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.

Good evening and good morning, everyone.

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.