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111, Inc.

Q32022

12/1/2022

speaker
Operator

Hello everyone and thank you for joining 111's conference call today. On the call from the company are Dr. Gan Yu, co-founder and executive chairman, Mr. Jun Ling Leo, co-founder, chairman and CEO, Mr. Luke Chen, CFO of 111's major subsidiary, Mr. Henry Wang, COO and Ms. Monica Mu, 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. Together with the earnings presentation are available on the website at edge.media.com forward slash MMC forward slash P forward slash KPNS WEVM. Before the conference call gets started, let me remind you all 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 the 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 comparator's financial performance on the year-over-year basis. With that, I will turn the call over to 111 CEO, Mr. John Ling Leo.

speaker
Gan Yu

Good morning and good evening. Thank you for joining our Q3 2022 earnings call. What we'll be discussing here is also provided in the slides posted earlier today on the company's website. I encourage you to download the presentation along with the earnings report at ir.111.com.cn. In today's call, I will add some color to some of the latest regulatory development in the healthcare industry and the latest development in COVID policies and how the company rose to the challenges and opportunities. I'll also cover our strategies for building growth momentum, improving operational efficiency, and strengthening supply chain capabilities. Then Mr. Luke Chen will walk you through our financial results. COVID zero restriction policies in China continue to create tremendous challenges to our business in Q3. More and more cities are experiencing the rising numbers of infected people and consequently the number of cities that had to lock down increased significantly. The supply chain in general was severely disrupted and the transportation and other logistics were tightly regulated in epidemic heat areas. Our biggest challenge was to deliver the goods to our customers and replenish stock in time. I'm proud to report that our team truly stood out in dealing with those unprecedented challenges. They literally had to move mountains to fulfill badly needed medicine for our customers and patients. Our online and offline digital platform proved to be highly effective in dealing with the pandemic. We spared no efforts in meeting patients' demands in epidemic cities for medical consultation and drugs. We have provided free online consultations for customers in over 370 cities and provided over 3,000 medicinal products covering more than 400 diseases in the last few months. Since the beginning of the COVID-19 pandemic, our online hospital, OneClinic, has been offering free online medical consultation services. Recently, we also provided government-approved dedicated delivery fleet for medical products for some provinces hit by the pandemic. Even with the approval, the fleet had to overcome cross-provincial logistic challenges due to different control policies to deliver drugs to patients staying in mobile field hospitals, quarantine hotels, and other facilities. The last few weeks saw the number of infected people in quite a few provinces is rising sharply and the lockdown followed. A few of our fulfillment centers are under lockdown right now, which is very disruptive to our business. We believe that COVID-19 will continue to create challenges to us in the near future, but I have very strong faith in our team and believe we will be able to serve customers with our utmost effort as we have done in the last few quarters. Please allow me to take a moment to brief you the latest regulatory developments. As you know, China just finished its 20th National Congress of the Communist Party in October. One of the very important themes is its focus on construction of a healthy China, which includes enhancing management of major chronic diseases and boosting preliminary disease control capabilities and improving treatment and health management. Opening remarks from the 20th National Party Congress provided us a broad direction on where China's healthcare industry may be heading over the next few years. The following initiatives will create great regulatory tailwinds for the industry. One, encouraging innovation. The government is supportive of domestic innovation with the intention to bring in newer and better therapies to China and the world. The initiative will provide a better environment to allow China to act as a global innovation hub in the space of innovation drugs. This will mean that there will be more opportunities for 111 to launch and commercialize new drugs with its integrated digital platform. Two, strengthening infrastructure for preventative chronic and infectious diseases. Importance of early diagnosis, early treatment, and early rehabilitation was stressed from the remarks. The government pledged an increase in funding for routine health screening, chronic disease management, infectious disease control, and mental disease treatment. We anticipate the digital technologies can play a key role in the areas of disease prevention, chronic disease management, and the containment of infectious diseases. Three, revitalizing TCM or traditional Chinese medicine. In recent years, the government has set TCM as a strategic priority and has issued plenty of supportive policies including relatively less price cut compared to other types of drugs in the government-run VBP, where many drugs had to drop prices sharply, not to mention encouraging modernization and the practicing of TCM. Significant efforts have also been made to promote the standardization of RxTCM granules, which should improve safety and efficacy as market penetration increases. The policy is already having an effect in the market, as we have seen a gradual pickup in our sales of TCM. Four, focusing more on youth and elderly care. With the birth rate falling for the fifth year in a row in 2021, the government implemented policies to boost the birth rate, such as the third child policy, tax deductions, longer maternity leave, enhanced medical insurance, housing subsidies, and additional financial support for the third child. I'm happy to report that some of our private label products are specifically targeting infants and children. As we broaden our portfolio, we should have a range of products for youth and elderly. In addition, the State Council announced 20 prevention and control measures to further optimize the COVID-19 response. under which China will roll out and implement precise, reasonable, and efficient epidemic control measures for public needs. Although it's early days and there have been various implementation approaches in different provinces and cities, and even obvious deviation from the announced control measures are taking place, we see this as a very positive move. In fact, yesterday, We saw media quoting senior officials that with the decreasing toxicity of the Omicron variant, the increasing vaccination rate, and the accumulating experience of outbreak control and prevention, China's pandemic containment faces new stage and mission. This potentially indicates an adjustment of the current COVID measures. One of the major capital cities, Guangzhou, was saying yesterday that the city has adjusted the designation of risk levels and the pandemic containment measures to a varying extent in all its 11 districts. We very much welcome the new development in the fight against COVID-19 and look forward to the time when the pandemic is behind China where business can operate as usual. Despite the economic downturn and material adverse impact on the offline retail sector in general in the third quarter, we managed moderate growth in revenue and a solid growth in gross margin. Our net revenue for third quarter increased by 0.1% year-over-year to 3.3 billion RMB, while our gross segment profit increased by 22% year-over-year Our efforts to improve our margin profile continued to deliver positive results during the quarter. Our overall growth segment margin as a percentage of net revenues improved to 6% from 5% in the same quarter of last year. Given the circumstances, this hard-earned margin growth is quite an accomplishment. 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 growth, which reached 3.25 billion RMB. The gross profit of our B2B segment rose to 180 million RMB, an increase of 27% year-over-year. B2B segment margin improved to 5.5% from 4.4% in the same quarter of last year. We also improved B2C segment margin to 22.4% from 19.7% in the same quarter last year. We will continue reducing procurement costs as well as optimizing our product assortment and structure. We were able to leverage our digital capabilities to deliver more value-added services to our partners. The market continues to show strong demand for our diverse service offerings. Our value-added services include marketplace vendor services, digital marketing, supply chain management, online medical consultation, e-prescription services, patient education, drug commercialization tools, etc. Even during the pandemic, our service revenue reached 32.57 million RMB, representing a growth of 34% over the same quarter of last year. 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 pharmaceutical companies. In addition, we continue to enhance our operational efficiency, and as a result, total operating expenses as a percentage of net revenues decreased to 8.4% in this quarter from 10.2% in the same quarter last year. Sales and marketing expenses were down to 3.2% from 3.9%. General and administrative expenses were down to 1.4% from 1.6%. And technology expenses were down to 0.9% from 1.7% in the same quarter last year. We expect this momentum to continue as we scale while we continue to focus on delivering superior services to our customers. Although the current macroeconomic 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 was narrowed to 1.5% of net revenues as compared to 4.1% in the same quarter last year. We're getting closer and closer to profitability. We're also pleased to see that our operating cash flow and overall cash flow were in the black for the quarter, which is a major milestone of our business. As of Q2 2022, 101's virtual pharmacy network reached approximately 413,000 pharmacies, covering more than 70% of the total number of pharmacies in China. As of September, Our cold chain service has deployed in over 270 cities, over 80% of which can complete orders within 48 hours. This capability has provided convenience for rural consumers in particular. In order to continuously improve gross profits, we have carried out a platinum product program. At present, more than 400 pharmaceutical companies and over 1,000 SKUs have become part of this program. The revenue of B2B high-margin products in this quarter has increased by 15% year-on-year, and a contributed 0.9% increase to the overall B2B gross profit. I'm pleased to update the progress we have made on our private label initiative. As our network of pharmacies continues to grow and it's time, we should introduce some private label products. Not only will this help our pharmacy customers to improve their gross margin, but this helps with our own margin as well. We partnered with some pharmaceutical manufacturers to build a suite of products, which include medicines, health supplements, medical devices, et cetera. So far, we have already developed three brands which are and over 90 SKUs launched already in production schedule, targeting specific market segments. Although this part of the business is still at its infant stage and no conclusions can be drawn yet, we believe these proprietary products will significantly increase our gross profit and enhance downstream customer stickiness. As we deepen our relationship with upstream pharmaceutical companies, we were able to help them to improve their digital marketing efficiency and drug commercialization efforts. Now let me provide a couple of examples. Since the recent launch in China by AbbVie of its innovative drug, eutatinib, which successfully completed clinical trials in China and abroad, and is China's only approved targeted oral drug for atomic dermatitis for teenagers. We actively participated in the launch of the medicine, leveraging our patient management platform. We now offer full life cycle, closed loop services for the drug, covering online plus offline consultation, and a post diagnosis consultation and a refill service, which effectively help patients control disease progression. In addition, will help patients improve medication compliance and effectively reduce growth heart rates. We also provided full-time caring medical professionals to respond to patients' questions online in a timely manner. Within the span of one month, we have served patients in 16 provinces. Also in November, Hua Medicine rolled out dalsacliatin, a first-in-class who are Coconus Activator in China, providing type 2 diabetes patients with a new treatment option. We're the strategic partner in its national rollout of the drug. Leveraging our advantages in the smart supply chain capabilities and digital platform, we were able to assist our medicine in its launch of the drug across all channels. We have also enhanced the accessibility of the new drug through reservation registration by medical professionals and a full lifecycle patient management, thus providing more patients with convenience to access new therapeutic treatments. The launch was so successful that inventory was depleted so fast that Hua Medicine is scrambling to increase its capacity of manufacturing to cope with the supply shortage. Looking ahead, we will continue to pursue the enormous market opportunities from the digital transformation of the healthcare market in China, which given the country's vast population, provides us with opportunity to connect millions of people in lower tier cities via our direct B2C platform and our broad network of pharmacies. In order to bridge the gap in consumer access, we will focus on strengthening every facet of our S2B2C model and advancing our strategic plan to expedite business expansion. On the infrastructure side, we'll keep improving the AI and data processing capability of our technology, upping its power to handle higher volumes with greater predictive ability Our technology platform today can access point-of-sales data of over 10,000 pharmacies for those SKUs we're commercializing. We believe this network of pharmacies and the number of SKUs we'll commercialize will grow at a fast pace in the near future. With this, we will be able to provide retail pharmacies greater control and cost efficiency to drive their store sales growth and at the same time further deepen the share of wallet among our existing retail pharmacy customers. The platform's enhanced capability will also allow us to virtually deploy more digital modules and features which will connect more upstream supplies and result in better sales and margins for our pharmacy customers. On the supply side, the services we provide to pharmaceutical companies in support of their commercialization effort help deepen our relationships with them, allowing us to source an even wider selection of medications and health-related products for our pharmacy customers and benefit end consumers. These commercialization services also represent a major growth opportunity for us. Globally and in China, medical innovations have been happening at an unprecedented rate. As more and more new medications and devices come onto the market, competition becomes increasingly intense. 111's support during a product launch can improve a company's market position and increase the likelihood of a successful launch. Ultimately, our integrated online and offline platform is a win-win for all. As we help to transform the healthcare system for the better, We believe that there are significant opportunities for us in the age of industrial internet to expedite the digital transformation of healthcare system in China. We will work relentlessly to strengthen this model and pursue growth opportunities post COVID-19. Operationally, our priorities will be delivering revenue and margin growth, strengthening supply network, and the reduced procurement cost continuing to improve operational efficiency, optimizing fulfillment costs, and broadening our service offerings. We have come a long way since our IPO in 2018. From a new kid in the block four years ago, we have now established ourselves as one of the major players in the digital healthcare service industry. As we continue to expand the coverage of pharmacies and broadening our drug suppliers network, plus our advanced digital capabilities, the supply chain infrastructure, were uniquely positioned to create value for all our partners in the value chain. 111 was certified by the Chinese Ministry of Science and Technology as a national high-tech enterprise again. We were also recently awarded the prize of National E-Commerce Demonstration Enterprise by the China Ministry of Commerce. Our remote consultation and chronic disease prescription refill service platform has also been selected as a case study in digital solutions for epidemic control and production resumption by the Shanghai Putong New Area Science and Technology Commission. We're very proud that our efforts have earned us such distinction and are committed to continuous innovation and implementation. Moreover, We have received critical acclaim from local governments, hospital specialists, and the patients for our online hospital services, and the continuous support for Tibetans living in Gansu City, Sichuan Province, for heart disease control. All the ESG efforts carry our core values, and we will firmly fulfill our social responsibilities as we have done in the past. We wish to thank all the investors who have supported us all along, I will now hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

speaker
Luke Chen

Thank you, Trinh Linh, 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 third quarter 2022 results from slide 11 to 14 in section two of our presentation. Again, our comparisons are year over year and our numbers are in RMB unless otherwise stated. Let's start with the third quarter results. Third quarter had been very challenging for our business due to negative impact from COVID lockdowns in many cities and the province. We have tried our very best to work with local governments as well as largest companies to fulfill our customer patient orders as these medicines are badly needed. Total net revenues for the quarter grew 0.1% to $3.35 billion, and the total gross profit for the quarter grew at 22% to $202 million, and the gross margin improved from 5% to 6%. B2B segment was the major contributor for total gross profit and margin improvement. B2B segment revenue grew at 0.8% to $3.25 billion, while gross segment profit for B2B increased by 27%, with gross segment margin up from 4.4% to 5.5%. This was attributable to our optimization of selection portfolio and competitive pricing. We had also focused ourselves on higher margin products and launched private label product with much better margin. Our B2C segment revenue decreased 20% to $100 million, with gross segment margin improved from 19.7% to 22.4%. Total operating expenses for the quarter were down 17% to $283 million, As a percentage of net revenue, total operating expenses for the quarter were down to 8.4% from 10.2%, which reflected continuous improvement in our operation efficiency. Fulfillment expenses as a percentage of net revenue for the quarter was around 3%. Comparable to the same quarter last year, sales and marketing expenses were 108 million, representing a decrease of 18% year over year. As a percentage of net revenue, sales and marketing expenses for the quarter was 3.2%, down from 3.9% in the same quarter of last year. We believe this trend will continue as we further build up our scale and improve our sales team efficiency. General and administrative expenses were 46 million, representing a decrease of 13% year-over-year, As a percentage of net revenues, G&A expenses accounted for 1.4%, down from 1.6% in the same quarter of last year, which was attributable to our continuous optimization of our supporting functions. Technology expenses accounted for 0.9% of net revenue, down from 1.7% in the same quarter of last year. We completed major tech development programs and we believe that the current standing reflects the appropriate amount of our investment in technology. As a result, net gap loss from operations narrowed to $48.7 million compared to $135.9 million in the same quarter of last year. As a percentage of net revenues, net gap loss from operations decreased to 1.5% in the quarter from 4.1% in the same quarter of last year. Then gap net loss attributable to ordinary shareholders was 64.9 million compared to 213 million in the same quarter of last year. As a percentage on net revenues, then gap net loss attributed to ordinary shareholders decreased to 1.9% in the quarter from 6.4% in the same quarter of last year. As you can see, we are improving our financial performance quarter by quarter and we're getting very closer to profitability. We are also very pleased to report that we have achieved positive operating cash flow and overall cash flow for the quarter. Please refer to slide 15 to 19 of the appendix section for selected financial statements and a quick note of On our cash position as of September 30, 2022, we had cash and cash equivalents, receipt of cash, and short-term investment of IMB $866 million. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

speaker
Operator

Thank you. If you wish to ask a question, the link is on your telephone . and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Cassie Chen with CICC. Please go ahead.

speaker
Cassie Chen

Hi, this is Cassie from CICC. Thank you for taking my question and congratulations on your progress. I have two questions in total. The first one is that looking forward, I'm wondering what will be the company's operational focus. And the second one is that I found the gross margin of the B2B business continuously increased. And I'm very appreciative you can share with us the key factors behind the rising and how to evaluate its sustainability. Thank you.

speaker
spk32

Yeah, Jimmy, are you going to take the first question? Sorry, I was on mute.

speaker
Gan Yu

I apologize, Kathy. So thank you for your question. I'll answer the first question. So looking ahead, you know, if we look at our priorities, I would say the following. So we're going to focus on the offline growth. So we're going to focus on the supply network. We're going to reduce procurement cost and we will focus on improving operational efficiency and in terms of sales and marketing, the logistics, the GNA, et cetera. And we also want to grow the services. And the last point I want to make is that we're going to continue to really invest in innovation. There's a lot we can do with the asset we have built so far and we're going to continue to exploit our technology capabilities to deliver value for both the upstream and downstream customers. Thank you.

speaker
Kathy

Yes, this is Javi. I want to take your second question regarding the B2B margin. Yes, you are right. Our B2B gross profit increased 27% year-over-year. And this improvement came from our continued effort to reduce our procurement cost, as Junling just mentioned, and through either our direct sourcing from pharmaceutical companies, et cetera, and also our efforts to optimize our product assortment and our cost structure. Regarding your question of this sustainability, as we can expect, the overall economy and environment get better. We will further tighten our partnership with pharmaceutical companies and we will get more rooms to promote our digital marketing capability. So I believe the B2B profit, the gross profit improvement trend will continue. Thank you, Cathy.

speaker
Operator

Thank you. Your next question comes from Lauren Cai with HSBC. Please go ahead.

speaker
Lauren Cai

Hi. Thanks, Benjamin, for taking my question. Congratulations on your solid results, especially your positive operating cash flow. This brings me to my first question about cost control. Can management share more details on what's been done to contain costs? And can these measures or this trend sustain going forward? when macro environment turns better and we may need to increase investment to gain more growth. And for my second question, I want to ask about your outlook for next year with China gradually easing COVID control measures. How would it impact our business? Thank you.

speaker
Kathy

Yes, Lauren. I'll take your first question regarding the cost control. It is very encouraging to see that as a result of our continuous efforts, we are seeing we enhance our operational efficiency and our total operating expenses have decreased to 8.4% from 10.2% of Q3 last year. And this is actually from every single element we are doing our best. Our sales and marketing expenses decreased from 3.9% to 3.2%. And our technology expenses and also our G&A decreased from 1.7% and 1.6% to 0.9% and 1.4% respectively. When the overall environment is getting better, definitely that will be even better news for us. When the overall economy and environment are getting better, we definitely expect this momentum to continue. At that time, the demand of our customers will be released and increased. With our volume growth, and we will definitely see scale.

speaker
Gan Yu

Thank you. Yeah, Lauren, let me just answer your second question about it. You know, we're all anticipating that the COVID zero policies will be behind us, will relax, and we saw some encouraging developments recently, but that's still, you know, unknown because different, Provinces have different implementation approaches. And, you know, as we speak, some of our warehouses are still under lockdown. And we cannot ship goods out. We cannot replenish inventory. So, you know, there is also the latest developments, you know, starting from today that, you know, a lot of those drugs were not allowed to sell online anymore, especially those, you know, Rx drugs. and also every customer has to register its real name. There's going to be a verification process. Fortunately for us, we're more focused on the B2B and that's the majority of our business, so the impact to us is a lot smaller than the rest of the other guys in the industry. So, you know, we all hope that, you know, this is the first step to a, you know, post-COVID restriction kind of containment measure. And, you know, of course, if we look at a broad picture, we are in a multi-trillion dollar market. You know, to quote some numbers in 2021, last year, the market is 8 trillion yuan. And it is widely anticipated that by 2030, this market is going to hit $16 trillion. That is more than $2 trillion. And I said a few things early on in my speech that there is a lot of tailwinds for us as well. And I think the biggest tailwind is really the transformation of digital digitization in the industry and we already playing a major role continue to play any more important role in the future and in terms of expectation I'm going to expect a very good quality growth for the company both the top line you know you know in the past few years we have focused more on the revenue growth. And obviously, we needed that. We needed that scale. We needed the customer to know us, to experience the services we deliver to them. But in the future, I would like to see, in addition to the top line growth, we also want to see a better margin growth and also the improvement in the bottom line. I hope that answers your question, Lauren.

speaker
Lauren

Yeah, thanks. That's very helpful. Thank you.

speaker
Operator

Thank you. Your next question comes from Zoe Bain with Citi. Please go ahead.

speaker
Zoe Bain

Good evening, management. This is Zoe from Citi. I have one question here. May I ask what's the update of your potential privatization?

speaker
Zoe

Sorry, the potential...

speaker
Luke Chen

Let me answer Zoe's question on this one. The process is still ongoing. And as we discussed, the company has formed a special committee to work on the proposal. And the special committee has recruited the legal and financial advisors. So the company will make public relevant information regarding the privatization as advised by special committee. So now it's within the hands of the special committee and we will disclose when we advise by them according to SEC rules.

speaker
Zoe

That's the latest.

speaker
spk17

Sure. Okay, sure. Thank you very much.

speaker
Operator

Thank you. Your next question comes from Gerald Hastings, who is a private investor. Please go ahead.

speaker
Gerald Hastings

Hello. Congratulations on your performance this quarter. I'm gratified to see that the operating cash flow and overall cash flow were in the black for the quarter, which I believe is a major milestone for your company. How do you plan to continue this trend going forward?

speaker
Luke Chen

Yeah, we are pleased to see the positive operating cash flow and overall cash flow for the quarter. Now, it may be attributed to our efforts to continuously reduce the operation loss, as well as we continue to improve our working capital efficiency. Our average accounts payable is about 45 days. and our inventory average turnover is like 25 days. So that gives us a good operating cash flow. Now we have very strong confidence when we continue to leverage our scale, to build up scale, and improve our margin, and getting closer to operating profitability, so the overall cash flow will continue to be positive. And we have quite a confidence on that.

speaker
Gerald Hastings

If you don't mind, may I ask a second question? How will your company achieve double-digit revenue and gross profit growth, especially in light of the COVID situation and possibly third-quarter economic uncertainties?

speaker
Gan Yu

Yeah, maybe let me try to answer that question. First of all, you mentioned about this overall environment. It is the COVID-19, the COVID zero policy does cause a lot of disruption to our business. Our fulfillment centers cannot operate as usual and we couldn't really replenish inventory. And some of the fulfillment centers were locked down and we were not able to deliver orders out. And there are many orders get stuck in transit because you don't know which city was locked down. And some of the cities actually are logistical hubs. And I think under such circumstances, it really proves the quality of our team. And it's extraordinary. First of all, we established a emergency response committee and this committee reports to the management of the logistic problems and all the necessary measures that need to be taken. And if there are decisions that need to be made in the daily meeting with the management, for instance, some of the majority of the workers stay in the dormitory near the warehouse and some of the dormitories get locked down. And then under such situations, we need to quickly figure out how we can do our best to keep the operation going. So in the end, we made a decision that all our office people went to the warehouse to help with the sorting, to help with packaging, and really try to deliver the orders out and also you know our GR team is excellent you know they managed to you know work with various governments to you know get a special delivery fleet permit and you know we'll have to work with different provincial governments to make sure that the goods can really cross provinces you know under the extraordinary circumstances, we still delivered 22% margin growth. This is also related to our strategy. What we did was we optimized our assortment, we optimized our pricing, and we reduced the procurement cost, and we also used our technology to really provide a whole selection, a whole rich selection of products at a very competitive pricing. And, you know, the pandemic is still pretty serious right now. And we still anticipate, you know, a lot of negative impact. It's going to be, you know, assumed. But, you know, we have every confidence that we will overcome all those challenges and we'll continue to deliver growth in the future. Thank you, Gerald.

speaker
Gerald Hastings

Thank you for your answer, and I do look forward to your report next quarter with great anticipation. So good luck going forward. Thank you.

speaker
Operator

Thank you. Your next question comes from Felix Yang, who is a private investor. Please go ahead.

speaker
Felix Yang

Thank you for the chance to raise questions. First of all, congratulations to you all for the 17th continuous growth quarterly I have two questions regarding the technology R&D progress and also the private label products. First, I would like to know, is there any progress in technology R&D in the past season? And what future advances will there be? And second, it's about private label products. I know it's a good way to raise the margin. What will there be for the next quarter and the coming year?

speaker
Tom Craig

Thanks, Phoenix. Let me take the first question regarding our technology. We are continuously making very significant resource investment in technology and in innovation. As you know that we set our mission as applying digital technology to seamlessly connect patients with medical services. So you can see that everything is through digital technology. And Ginny also mentioned that we'll build various systems to, for example, build a smart sourcing system to manage our assortment. We'll build a Hawkeye system to improve efficiency of our field teams. And also build very sophisticated supply chain management systems based on the optimization models and algorithms. All of those help us to speed up our inventory turn, improve our supply chain efficiency, and reduce our fulfillment cost. As you can see, the results are illustrated through our margin improvement. This has also been exemplified by the Various recognitions, some nationally, some locally. Can you mention that we are certified by the Chinese Ministry of Science and Technology as a national high-tech enterprise? Also, we were awarded the prize of National E-commerce Demonstration Enterprise by China Ministry of Commerce. So these are national recognitions, which are very significant. Also, we have some recognitions or distinctions by the local government, Shanghai government, and the Pudong government. We feel very proud of all of those recognitions and the effort we have put in.

speaker
Kathy

Thank you. Regarding your second question of OEM, yeah, actually this is really exciting. Today, we have launched about nine SKUs of our private label products. All of these nine SKUs have been well accepted by our customers, especially those small and medium trends or individual B2B stores. So actually, in China, in those big trend stores, Private label products have contributed about 10% to 20% of their GMB and about 30% to 40% of their margin. Well, our B2B customers, those individual stores, those small chains, they are not able to have their own brand as their volume is there. There are also many, many opportunities for this market. When we launch our offers, our private labels will help them compete with those big ones in the market. There are already about 100 private labels SKUs in our pipeline. Some are in production, etc. So we expect to see a fast increasing of volume in this project in the coming quarters. Felix, I hope I answered your question.

speaker
spk29

Thank you.

speaker
Operator

Thank you. Thank you. Your next question comes from Tom Craig with Patience Stone Investment. Please go ahead.

speaker
Tom Craig

Thank you. This is Tom Craig from Patience Stone. And congratulations on your performance in the third quarter. I have three questions. The first one is, what services did the company provide to patients in COVID regions? And second one is, what are the reasons behind contracting non-GAAP net rolls from operation as percentage of net revenue? Can this be sustained? And third one is, what is the status of the company's cash reserves? Thank you.

speaker
Tom Craig

Hi, Tom. Let me answer your first question. You know, it's hard. It's very hard to provide services for the COVID-impacted regions. We have made tremendous efforts in conquering all those difficulties. As we speak now, you know, five of our seven fulfillment centers are under severe impact, lockdowns or other impacts right now. So, you know, Our headquarters office here is locked down for almost 80 days. So it was hard. And every single day we have thousands of orders blocked somewhere on the route to customers. Every single day. So what we did since the first day of the pandemic, we formed an emergency response center. And we have daily calls to resolve problems on the fly. And we launched a free consultation, online consultation for the patients in those pandemic-impact regions. And Ginny mentioned that we cover customers for more than 370 cities and more than 400 different types of diseases. Also, we work with the government to get special licenses. For example, we get some local government to give us dedicated direct leads for medical products for some provinces. We also build very robust and dedicated transportation networks to deal with daily disruptions caused by the COVID pandemic. The network consists of hubs, both partnered with our platform vendors, our marketplace vendors. Every link will have multiple options, so that if one link is broken due to some reason, we can immediately transfer to the second. So through all those ways, we're able to, you know, certainly not at 100% as we hope to, but we can handle a large volume, a large percentage of our business through the pandemic.

speaker
Kathy

And Tom, regarding the second question about net loss, Yes, we are seeing the contracting of our net loss from operation as a percentage of our net revenue. And this is, of course, the both part, what is the improvement of our gross profit. As I just mentioned, about 27% improvement on our gross profit year over year. And this is one hand. On the other hand, And also we reduced our operating expenses, which is 8.4% from 10.2% of the same quarter last year. So the improvement came from the procurement source upgrade and our product assortment, the optimization of our product assortment, and also We launched various tools, for example, our new PIS, our smart pricing tools. So all of this has contributed to the reduction of expenditure. So moving forward, of course, we definitely will sustain the trend. We will continue our efforts on both sides. And also, we expect to see a further improvement in the near future on our net loss and our profitability. Thank you.

speaker
Luke Chen

On the cash position, we have disclosed at our early release that as of September end, we have total cash, including restricted cash and short-term investment amounting to IMV 860 million. As we just shared with you that we have reported a positive operating overall cash flow for the quarter and we believe the trend will continue. So we have strong confidence that this position, cash position, is sufficient to support our future operation as well as our growth.

speaker
spk24

Tom, I hope we answered all your questions.

speaker
Tom Craig

Thank you for your answer. I hope you have a great work partner.

speaker
Operator

Thank you.

speaker
spk00

Thank you.

speaker
Operator

Thank you. There are no further questions at this time. 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 111s in Shanghai, China, please let the company know. Thank you for joining us today. The call has concluded. you Thank you. Thank you.

speaker
spk11

Thank you. you you Thank you. you

speaker
Operator

Hello everyone and thank you for joining 111's conference call today. On the call from the company are Dr. Gan Yu, co-founder and executive chairman, Mr. Jun Ling Leo, co-founder, chairman and CEO, Mr. Luke Chen, CFO of 111's major subsidiary, Mr. Henry Wang, COO and Ms. Monica Mu, 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. Together with the earnings presentation are available on the website at edge.media.com forward slash MMC forward slash P forward slash KPNS WEVM. Before the conference call gets started, let me remind you all 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 the 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 comparator's financial performance on the year-over-year basis. With that, I will turn the call over to 111 CEO, Mr. John Ling Leo.

speaker
Gan Yu

Good morning and good evening. Thank you for joining our Q3 2022 earnings call. What we'll be discussing here is also provided in the slides posted earlier today on the company's website. I encourage you to download the presentation along with the earnings report at ir.111.com.cn. In today's call, I will add some color to some of the latest regulatory development in the healthcare industry and the latest development in COVID policies and how the company rose to the challenges and opportunities. I'll also cover our strategies for building growth momentum, improving operational efficiency, and strengthening supply chain capabilities. Then Mr. Luke Chen will walk you through our financial results.

speaker
Operator

Hello everyone and thank you for joining 111's conference call today. On the call from the company are Dr. Gan Yu, co-founder and executive chairman, Mr. Jun Ling Leo, co-founder, chairman and CEO, Mr. Luke Chen, CFO of 111's major subsidiary, Mr. Henry Wang, COO and Ms. Monica Mu, 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. Together with the earnings presentation are available on the website at edge.media.com forward slash MMC forward slash P forward slash KPNSWEVM. Before the conference call gets started, let me remind you all 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 the 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 comparator's financial performance on the year-over-year basis. With that, I will turn the call over to 111 CEO, Mr. John Ling Leo.

speaker
Gan Yu

Good morning and good evening. Thank you for joining our Q3 2022 earnings call. What we'll be discussing here is also provided in the slides posted earlier today on the company's website. I encourage you to download the presentation along with the earnings report at ir.111.com.cn. In today's call, I will add some color to some of the latest regulatory development in the healthcare industry and the latest development in COVID policies and how the company rose to the challenges and opportunities. I'll also cover our strategies for building growth momentum, improving operational efficiency, and strengthening supply chain capabilities. Then Mr. Luke Chen will walk you through our financial results. COVID zero restriction policies in China continue to create tremendous challenges to our business in Q3. More and more cities are experiencing the rising numbers of infected people and consequently the number of cities that had to lock down increased significantly. The supply chain in general was severely disrupted and the transportation and other logistics were tightly regulated in epidemic heat areas. Our biggest challenge was to deliver the goods to our customers and replenish stock in time. I'm proud to report that our team truly stood out in dealing with those unprecedented challenges. They literally had to move mountains to fulfill badly needed medicine for our customers and patients. Our online and offline digital platform proved to be highly effective in dealing with the pandemic. We spared no efforts in meeting patients' demands in epidemic cities for medical consultation and drugs. We have provided free online consultations for customers in over 370 cities and provided over 3,000 medicinal products covering more than 400 diseases in the last few months. Since the beginning of the COVID-19 pandemic, our online hospital, OneClinic, has been offering free online medical consultation services. Recently, we also provided government-approved dedicated delivery fleet for medical products for some provinces hit by the pandemic. Even with the approval, the fleet had to overcome cross-provincial logistic challenges due to different control policies to deliver drugs to patients staying in mobile field hospitals, quarantine hotels, and other facilities. The last few weeks saw the number of infected people in quite a few provinces is rising sharply and the lockdown followed. A few of our fulfillment centers are under lockdown right now, which is very disruptive to our business. We believe that COVID-19 will continue to create challenges to us in the near future, but I have very strong faith in our team and believe we will be able to serve customers with our utmost effort as we have done in the last few quarters. Please allow me to take a moment to brief you the latest regulatory developments. As you know, China just finished its 20th National Congress of the Communist Party in October. One of the very important themes is its focus on construction of a healthy China, which includes enhancing management of major chronic diseases and boosting preliminary disease control capabilities and improving treatment and health management. Opening remarks from the 20th National Party Congress provided us a broad direction on where China's healthcare industry may be heading over the next few years. The following initiatives will create great regulatory tailwinds for the industry. One, encouraging innovation. The government is supportive of domestic innovation with the intention to bring in newer and better therapies to China and the world. The initiative will provide a better environment to allow China to act as a global innovation hub in the space of innovation drugs. This will mean that there will be more opportunities for 111 to launch and commercialize new drugs with its integrated digital platform. Two, strengthening infrastructure for preventative chronic and infectious diseases. Importance of early diagnosis, early treatment, and early rehabilitation was stressed from the remarks. The government pledged an increase in funding for routine health screening, chronic disease management, infectious disease control, and mental disease treatment. We anticipate the digital technologies can play a key role in the areas of disease prevention, chronic disease management, and the containment of infectious diseases. Three, revitalizing TCM, or traditional Chinese medicine. In recent years, the government has set TCM as a strategic priority and has issued plenty of supportive policies including relatively less price cut compared to other types of drugs in the government-run VBP, where many drugs had to drop prices sharply, not to mention encouraging modernization and the practicing of TCM. Significant efforts have also been made to promote the standardization of RxTCM granules, which should improve safety and efficacy as market penetration increases. The policy is already having an effect in the market, as we have seen a gradual pickup in our sales of TCM. Four, focusing more on youth and elderly care. With the birth rate falling for the fifth year in a row in 2021, the government implemented policies to boost the birth rate, such as the third child policy, tax deductions, longer maternity leave, enhanced medical insurance, housing subsidies, and additional financial support for the third child. I'm happy to report that some of our private label products are specifically targeting infants and children. As we broaden our portfolio, we should have a range of products for youth and elderly. In addition, the State Council announced 20 prevention and control measures to further optimize the COVID-19 response. under which China will roll out and implement precise, reasonable, and efficient epidemic control measures for public needs. Although it's early days and there have been various implementation approaches in different provinces and cities, and even obvious deviation from the announced control measures are taking place, we see this as a very positive move. In fact, yesterday, We saw media quoting senior officials that with the decreasing toxicity of the Omicron variant, the increasing vaccination rate, and the accumulating experience of outbreak control and prevention, China's pandemic containment faces new stage and mission. This potentially indicates an adjustment of the current COVID measures. One of the major capital cities, Guangzhou, was saying yesterday that the city has adjusted the designation of risk levels and the pandemic containment measures to a varying extent in all its 11 districts. We very much welcome the new development in the fight against COVID-19 and look forward to the time when the pandemic is behind China where business can operate as usual. Despite the economic downturn and material adverse impact on the offline retail sector in general in the third quarter, we managed moderate growth in revenue and a solid growth in gross margin. Our net revenue for third quarter increased by 0.1% year-over-year to 3.3 billion RMB, while our gross segment profit increased by 22% year-over-year. Our efforts to improve our margin profile continued to deliver positive results during the quarter. Our overall growth segment margin as a percentage of net revenues improved to 6% from 5% in the same quarter of last year. Given the circumstances, this hard-earned margin growth is quite an accomplishment. 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 growth, which reached 3.25 billion RMB. The gross profit of our B2B segment rose to 180 million RMB, an increase of 27% year-over-year. B2B segment margin improved to 5.5% from 4.4% in the same quarter of last year. We also improved B2C segment margin to 22.4% from 19.7% in the same quarter last year. We will continue reducing procurement costs as well as optimizing our product assortment and structure. We were able to leverage our digital capabilities to deliver more value-added services to our partners. The market continues to show strong demand for our diverse service offerings. Our value-added services include marketplace vendor services, digital marketing, supply chain management, online medical consultation, e-prescription services, patient education, drug commercialization tools, etc. Even during the pandemic, our service revenue reached 32.57 million RMB, representing a growth of 34% over the same quarter of last year. 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 pharmaceutical companies. In addition, we continue to enhance our operational efficiency, and as a result, total operating expenses as a percentage of net revenues decreased to 8.4% in this quarter from 10.2% in the same quarter last year. Sales and marketing expenses were down to 3.2% from 3.9%. General and administrative expenses were down to 1.4% from 1.6%. And technology expenses were down to 0.9% from 1.7% in the same quarter last year. We expect this momentum to continue as we scale while we continue to focus on delivering superior services to our customers. Although the current macroeconomic 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 was narrowed to 1.5% of net revenues as compared to 4.1% in the same quarter last year. We're getting closer and closer to profitability. We're also pleased to see that our operating cash flow and overall cash flow were in the black for the quarter, which is a major milestone of our business. As of Q2 2022, 101's virtual pharmacy network reached approximately 413,000 pharmacies, covering more than 70% of the total number of pharmacies in China. As of September, our cold chain service has deployed in over 270 cities, over 80% of which can complete orders within 48 hours. This capability has provided convenience for rural consumers in particular. In order to continuously improve gross profits, we have carried out a platinum product program. At present, more than 400 pharmaceutical companies and over 1,000 SKUs have become part of this program. The revenue of B2B high-margin products in this quarter has increased by 15% year-on-year, and a contributed 0.9% increase to the overall B2B gross profit. I'm pleased to update the progress we have made on our private label initiative. As our network of pharmacies continues to grow and it's time, we should introduce some private label products. Not only will this help our pharmacy customers to improve their gross margin, but this helps with our own margin as well. We partnered with some pharmaceutical manufacturers to build a suite of products, which include medicines, health supplements, medical devices, et cetera. So far, we have already developed three brands which are and over 90 SKUs launched or already in production schedule, targeting specific market segments. Although this part of the business is still at its infant stage and no conclusions can be drawn yet, we believe these proprietary products will significantly increase our gross profit and enhance downstream customer stickiness. As we deepened our relationship with upstream pharmaceutical companies, we were able to help them to improve their digital marketing efficiency and drug commercialization efforts. Now let me provide a couple of examples. Since the recent launch in China by AbbVie of its innovative drug, eutatinib, which successfully completed clinical trials in China and abroad, and is China's only approved targeted oral drug for atomic dermatitis for teenagers. We actively participated in the launch of the medicine, leveraging our patient management platform. We now offer full life cycle, closed loop services for the drug, covering online plus offline consultation, and a post diagnosis consultation and a refill service, which effectively help patients control disease progression. In addition, will help patients improve medication compliance and effectively reduce dropout rates. We also provided full-time caring medical professionals to respond to patients' questions online in a timely manner. Within the span of one month, we have served patients in 16 provinces. Also in November, Hua Medicine rolled out dalsacliatin, a first-in-class will coccanus activator in China, providing type 2 diabetes patients with a new treatment option. We're the strategic partner in its national rollout of the drug. Leveraging our advantages in the smart supply chain capabilities and digital platform, we were able to assist our medicine in its launch of the drug across all channels. We have also enhanced the accessibility of the new drug through reservation registration by medical professionals and a full lifecycle patient management, thus providing more patients with convenience to access new therapeutic treatments. The launch was so successful that inventory was depleted so fast that Hua Medicine is scrambling to increase its capacity of manufacturing to cope with the supply shortage. Looking ahead, we will continue to pursue the enormous market opportunities from the digital transformation of the healthcare market in China, which given the country's vast population, provides us with opportunity to connect millions of people in lower tier cities via our direct B2C platform and our broad network of pharmacies. In order to bridge the gap in consumer access, we will focus on strengthening every facet of our S2B2C model and advancing our strategic plan to expedite business expansion. On the infrastructure side, we'll keep improving the AI and data processing capability of our technology, upping its power to handle higher volumes with greater predictive ability Our technology platform today can access point of sales data of over 10,000 pharmacies for those SKUs we're commercializing. We believe this network of pharmacies and the number of SKUs we'll commercialize will grow at a fast pace in the near future. With this, we will be able to provide retail pharmacies greater control and cost efficiency to drive their store sales growth and at the same time further deepen the share of wallet among our existing retail pharmacy customers. The platform's enhanced capability will also allow us to virtually deploy more digital modules and features which will connect more upstream supplies and result in better sales and margins for our pharmacy customers. On the supply side, the services we provide to pharmaceutical companies in support of their commercialization effort help deepen our relationships with them, allowing us to source an even wider selection of medications and health-related products for our pharmacy customers and benefit end consumers. These commercialization services also represent a major growth opportunity for us. Globally and in China, medical innovations have been happening at an unprecedented rate. As more and more new medications and devices come onto the market, competition becomes increasingly intense. 111's support during a product launch can improve a company's market position and increase the likelihood of a successful launch. Ultimately, our integrated online and offline platform is a win-win for all. As we help to transform the healthcare system for the better, We believe that there are significant opportunities for us in the age of industrial internet to expedite the digital transformation of healthcare system in China. We will work relentlessly to strengthen this model and pursue growth opportunities post-COVID-19. Operationally, our priorities will be delivering revenue and margin growth, strengthening supply network, and the reduced procurement cost continuing to improve operational efficiency, optimizing fulfillment costs, and broadening our service offerings. We have come a long way since our IPO in 2018. From a new kid in the block four years ago, we have now established ourselves as one of the major players in the digital healthcare service industry. As we continue to expand the coverage of pharmacies and broadening our drug suppliers network, plus our advanced digital capabilities, the supply chain infrastructure, were uniquely positioned to create value for all our partners in the value chain. 111 was certified by the Chinese Ministry of Science and Technology as a national high-tech enterprise again. We were also recently awarded the prize of National E-Commerce Demonstration Enterprise by the China Ministry of Commerce. Our remote consultation and chronic disease prescription refill service platform has also been selected as a case study in digital solutions for epidemic control and production resumption by the Shanghai Putong New Area Science and Technology Commission. We're very proud that our efforts have earned us such distinction and are committed to continuous innovation and implementation. Moreover, We have received critical acclaim from local governments, hospital specialists, and the patients for our online hospital services, and the continuous support for Tibetans living in Gansu City, Sichuan Province, for heart disease control. All the ESG efforts carry our core values, and we will firmly fulfill our social responsibilities as we have done in the past. We wish to thank all the investors who have supported us all along, I will now hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

speaker
Luke Chen

Thank you, Trinh Linh, 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 third quarter 2022 results from slide 11 to 14 in section two of our presentation. Again, our comparisons are year over year and our numbers are in RMB unless otherwise stated. Let's start with the third quarter results. Third quarter had been very challenging for our business due to negative impact from COVID lockdowns in many cities and province. We have tried our very best to work with local governments as well as largest companies to fulfill our customer patient orders as these medicines are badly needed. Total net revenues for the quarter grew 0.1% to $3.35 billion, and the total gross profit for the quarter grew at 22% to $202 million, and the gross margin improved from 5% to 6%. B2B segment was the major contributor for total gross profit and margin improvement. B2B segment revenue grew at 0.8% to $3.25 billion, while gross segment profit for B2B increased by 27%, with gross segment margin up from 4.4% to 5.5%. This was attributable to our optimization of selection portfolio and competitive pricing. We had also focused ourselves on higher margin products and launched private label product with much better margin. Our B2C segment revenue decreased 20% to $100 million, with gross segment margin improved from 19.7% to 22.4%. Total operating expenses for the quarter were down 17% to $283 million, As a percentage of net revenue, total operating expenses for the quarter were down to 8.4% from 10.2%, which reflected continuous improvement in our operation efficiency. Fulfillment expenses as a percentage of net revenue for the quarter was around 3%. Comparable to the same quarter last year, sales and marketing expenses were $108 million, representing a decrease of 18% year-over-year. As a percentage of net revenue, sales and marketing expenses for the quarter was 3.2%, down from 3.9% in the same quarter of last year. We believe this trend will continue as we further build up our scale and improve our sales team efficiency. General and administrative expenses were 46 million, representing a decrease of 13% year over year. As a percentage of net revenues, G&A expenses accounted for 1.4%, down from 1.6% in the same quarter of last year, which was attributable to our continuous optimization of our supporting functions. Technology expenses accounted for 0.9% of net revenue, down from 1.7% in the same quarter of last year. We completed major tech development programs and we believe that the current standing reflects the appropriate amount of our investment in technology. As a result, net gap loss from operations narrowed to $48.7 million compared to $135.9 million in the same quarter of last year. As a percentage of net revenues, net gap loss from operations decreased to 1.5% in the quarter from 4.1% in the same quarter of last year. Then gap net loss attributable to ordinary shareholders was 64.9 million compared to 213 million in the same quarter of last year. As a percentage on net revenues, then gap net loss attributed to ordinary shareholders decreased to 1.9% in the quarter from 6.4% in the same quarter of last year. As you can see, we are improving our financial performance quarter by quarter and we're getting very closer to profitability. We are also very pleased to report that we have achieved positive operating cash flow and overall cash flow for the quarter. Please refer to slide 15 to 19 of the appendix section for selected financial statements and a quick note of On our cash position as of September 30, 2022, we had cash and cash equivalents, received cash and short-term investment of IMB $866 million. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

speaker
Operator

Thank you. If you wish to ask a question, you can ask one on your telephone . and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Cassie Chen with CICC. Please go ahead.

speaker
Cassie Chen

Hi, this is Cassie from CICC. Thank you for taking my question and congratulations on your progress. I have two questions in total. The first one is that looking forward, I'm wondering what will be the company's operational focus. And the second one is that I found the gross margin of the B2B business continuously increased. And I'm very appreciative you can share with us the key factors behind the rising and how you evaluate its sustainability.

speaker
spk32

Are you going to take the first question? Sorry, I was on mute.

speaker
Gan Yu

I apologize, Kathy. So thank you for your question. I'll answer the first question. So looking ahead, if we look at our operational priorities, I would say the following. So we're going to focus on the offline and offline growth. So we're going to focus on the supply network. We're going to reduce procurement cost and we will focus on improving operational efficiency and in terms of sales and marketing, the logistics, the GNA, et cetera. And we also want to grow the services. And the last point I want to make is that we're going to continue to really invest in innovation. There's a lot we can do with the asset we have built so far and we're going to continue to exploit our technology capabilities to deliver value for both the upstream and downstream customers. Thank you.

speaker
Kathy

This is Javi. I want to take your second question regarding the B2B margin. Yes, you are right. Our B2B gross profit increased 27% year-over-year. And this improvement came from our continued effort to reduce our procurement cost, as Junling just mentioned, and through either our direct sourcing from pharmaceutical companies, et cetera, and also our efforts to optimize our product assortment and our cost structure. Regarding your question of this sustainability, as we can expect, the overall economy and environment get better. We will further tighten our partnership with pharmaceutical companies, and we will get more rooms to promote our digital marketing capability. So I believe the B2B profit, the gross profit improvement trend will continue. Thank you, Cathy.

speaker
Operator

Thank you. Your next question comes from Lauren Cai with HSBC. Please go ahead.

speaker
Lauren Cai

Hi. Thanks, Benjamin, for taking my question. Congratulations on your solid results, especially your positive operating cash flow. This brings me to my first question about cost control. Can management share more details on what's been done to contain costs? And can these measures or this trend sustain going forward? when macro environment turns better and we may need to increase investment to gain more growth. And for my second question, I want to ask about your outlook for next year with China gradually easing COVID control measures. How would it impact our business? Thank you.

speaker
Kathy

Yes, Lauren. I will take your first question regarding the cost control. It is very encouraging to see that as a result of our continuous efforts, we are seeing we enhance our operational efficiency and our total operating expenses have decreased to 8.4% from 10.2% of Q3 last year. And this is actually from every single element we are doing our best. Our sales and marketing expenses decreased from 3.9% to 3.2%. And our technology expenses and also our G&A decreased from 1.7% and 1.6% to 0.9% and 1.4% respectively. When the overall environment is getting better, definitely that will be even better news for us. When the overall economy and environment are getting better, we definitely expect this momentum to continue. At that time, the demand of our customers will be released and increased. With our volume growth, and we will definitely see scale. Thank you.

speaker
Gan Yu

Yeah, Lauren, let me just answer your second question about it. You know, we're all anticipating that the COVID-zero policies will be behind us, will relax, and we saw some encouraging developments recently, but that's still, you know, unknown because different... Provinces have different implementation approaches. And as we speak, some of our warehouses are still under lockdown. And we cannot ship goods out. We cannot replenish inventory. So there is also the latest developments, starting from today, that a lot of those drugs were not allowed to sell online anymore, especially those RX drugs. and also every customer has to register its real name. There's going to be a verification process. Fortunately for us, we're more focused on the B2B and that's the majority of our business, so the impact to us is a lot smaller than the rest of the other guys in the industry. So, you know, we all hope that, you know, this is the first step to a, you know, post-COVID restriction kind of containment measure. And, you know, of course, if we look at a broad picture, we are in a multi-trillion dollar market. You know, to quote some numbers in 2021, last year, the market is 8 trillion yuan. And it is widely anticipated that by 2030, this market is going to hit $16 trillion. That is more than $2 trillion. And I said a few things early on in my speech that there is a lot of tailwinds for us as well. And I think the biggest tailwind is really the transformation of digital digitization in the industry and we already playing a major role and will continue to play any more important role in the future and in terms of expectation I'm going to expect a very good quality growth for the company both the top line you know In the past few years, we focused more on the revenue growth, and obviously we needed that. We needed that scale. We needed the customer to know us, to experience the services we deliver to them. But in the future, I would like to see, in addition to a top-line growth, we also want to see a better margin growth and also the improvement in the bottom line. I hope that answers your question, Lauren.

speaker
Lauren

Yeah, thanks. That's very helpful. Thank you.

speaker
Operator

Thank you. Your next question comes from Zoe Bain with Citi. Please go ahead.

speaker
Zoe Bain

Good evening, management. This is Zoe from Citi. I have one question here. May I ask what's the update of your potential privatization?

speaker
Zoe

Sorry, the potential... Privatization.

speaker
Luke Chen

Junyi, maybe let me answer Zoe's question on this one. The process is still ongoing, and as we discussed, the company has formed a special committee to work on the proposal, and the special committee has recruited the legal and financial advisors. So the company will make public relevant information regarding the privatization as advised by special committee. So now it's within the hands of the special committee and we will disclose when we advise by them according to SEC rules.

speaker
Zoe

That's the latest.

speaker
spk17

Sure. Okay, sure. Thank you very much.

speaker
Operator

Thank you. Your next question comes from Gerald Hastings, who is a private investor. Please go ahead.

speaker
Gerald Hastings

Hello. Congratulations on your performance this quarter. I'm gratified to see that the operating cash flow and overall cash flow were in the black for the quarter, which I believe is a major milestone for your company. How do you plan to continue this trend going forward?

speaker
Luke Chen

Yeah, we are pleased to see the positive operating cash flow and overall cash flow for the quarter. Now, it may be attributed to our efforts to continuously reduce the operation loss, as well as we continue to improve our working capital efficiency. Our average accounts payable is about 45 days. and our inventory average turnover is like 25 days. So that gives us a good operating cash flow. Now we have very strong confidence when we continue to leverage our scale, to build up scale, and improve our margin, and getting closer to operating profitability, so the overall cash flow will continue to be positive. And we have quite a confidence on that.

speaker
Gerald Hastings

If you don't mind, may I ask a second question? How will your company achieve double-digit revenue and gross profit growth, especially in light of the COVID situation and possibly third-quarter economic uncertainties?

speaker
Gan Yu

Yeah, maybe let me try to answer that question. First of all, you mentioned about this overall environment. It is the COVID-19, the COVID zero policy does cause a lot of disruption to our business. Our fulfillment centers cannot operate as usual and we couldn't really replenish inventory And some of the fulfillment centers were locked down and we were not able to deliver orders out. And there are many orders get stuck in transit because you don't know which city was locked down. And some of the cities actually are logistical hubs. And I think under such circumstances, it really proves the quality of our team. And it's extraordinary. First of all, we established a emergency response committee and this committee reports to the management of the logistic problems and all the necessary measures that need to be taken. And if there are decisions that need to be made in the daily meeting with the management, for instance, some of the majority of the workers stay in the dormitory near the warehouse and some of the dormitories get locked down. And then under such situations, we need to quickly figure out how we can do our best to keep the operation going. So in the end, we made a decision that all our office people went to the warehouse to help with the sorting, to help with packaging, and really try to deliver the orders out. And also our GR team is excellent. They manage to work with various governments to get a special delivery fleet permit. And we'll have to work with different provincial governments to make sure that the goods can really cross provinces. Under the extraordinary circumstances, we still delivered 22% margin growth. This is also related to our strategy, like what we did was we optimized our assortment, we optimized our pricing, and we reduced the procurement cost, and we also used our technology to really provide a whole selection, a whole rich selection of products at a very competitive pricing. And, you know, the pandemic is still pretty serious right now. And we still anticipate, you know, a lot of negative impact is going to be, you know, assumed. But, you know, we have every confidence that we will overcome all those challenges and we'll continue to deliver growth in the future. Thank you, Gerald.

speaker
Gerald Hastings

Thank you for your answer, and I do look forward to your report next quarter with great anticipation. So good luck going forward. Thank you.

speaker
Operator

Thank you. Your next question comes from Felix Yang, who is a private investor. Please go ahead.

speaker
Felix Yang

Thank you for the chance to raise questions. First of all, congratulations to you all for the 17th continuous growth quarterly I have two questions regarding the technology R&D progress and also the private label products. First, I would like to know, is there any progress in technology R&D in the past season? And what future advances will there be? And second, it's about private label products. I know it's a good way to raise the margin. What will there be for the next quarter and the coming year?

speaker
Tom Craig

Thanks, Phoenix. Let me take the first question regarding our technology. We are continuously making very significant resource investment in technology and in innovation. As you know that we set our mission as applying digital technology to seamlessly connect patients with medical services. So you can see that everything is through digital technology. And Jingjing also mentioned that we'll build various systems to, for example, build a smart sourcing system to manage our assortment. We'll build a Hawkeye system to improve efficiency of our field teams. And also build very sophisticated supply chain management systems based on the optimization models and algorithms. All of those help us to speed up our inventory turn, improve our supply chain efficiency, and reduce our fulfillment cost. As you can see, the results are illustrated through our margin improvement. This has also been exemplified by the various recognitions, some nationally, some locally. Can you mention that we are certified by the Chinese Ministry of Science and Technology as a national high-tech enterprise. Also, we were awarded the prize of National E-Commerce Demonstration Enterprise by China Ministry of Commerce. So these are national recognitions, which are very significant. Also, we have some recognitions or distinctions by the local government, Shanghai government, and the Pudong government. We feel very proud of all of those recognitions and the effort we have put in.

speaker
Kathy

Thank you. Regarding your second question of OEM, yeah, actually this is really exciting. Today, we have launched about nine SKUs of our private label products. All of these nine SKUs have been well accepted by our customers, especially those small and medium trends or individual B2B stores. So actually, in China, in those big trend stores, Private label products have contributed about 10% to 20% of their GMB and about 30% to 40% of their margin. Well, our B2B customers, those individual stores, those small chains, they are not able to have their own brand as their volume is there. There are also many, many opportunities for this market. When we launch our offers, our private labels will help them compete with those big ones in the market. There are already about 100 private labels SKUs in our pipeline. Some are in production, etc. So we expect to see a fast increasing a volume in this project in the coming quarters. Felix, I hope I answered your question.

speaker
spk29

Thank you.

speaker
Operator

Thank you. Thank you. Your next question comes from Tom Craig with Patience Stone Investment. Please go ahead.

speaker
Tom Craig

Thank you. This is Tom Craig from Patience Stone, and congratulations on your performance in the third quarter. I have three questions. The first one is, what services did the company provide to patients in COVID regions? And second one is, what are the reasons behind contracting non-GAAP net loss from operation as percentage of net revenue? Can this be sustained? And third one is, what is the status of the company's cash reserves? Thank you.

speaker
Tom Craig

Hi, Tom. Let me answer your first question. You know, it's hard. It's very hard to provide services for the COVID-impacted regions. We have made tremendous efforts in conquering all those difficulties. As we speak now, you know, five of our seven fulfillment centers are under severe impact, lockdowns or other impacts right now. So, you know, Our headquarters office here is locked down for almost 80 days. So it was hard. And every single day we have thousands of orders blocked somewhere on the route to customers. Every single day. So what we did since the first day of the pandemic, we formed an emergency response center. And we have daily calls to resolve problems on the fly. And we launched a free consultation, online consultation for all the patients in those pandemic impact regions. And Ginny mentioned that we cover customers for more than 370 cities and more than 400 different types of diseases. Also, we work with the government to get special licenses. For example, we get some local government to give us dedicated direct leads for medical products for some provinces. We also build very robust and dedicated transportation networks to deal with daily disruptions caused by the COVID pandemic. The network consists of the hubs, both partnering with our platform vendors, our marketplace vendors. Every link will have multiple options, so that if one link is broken due to some reason, we can immediately transfer to the second. So through all those ways, we're able to, you know, certainly not 100% as we hope to, but we can handle a large volume, a large percentage of our business through the pandemic.

speaker
Kathy

And Tom, regarding the second question about net loss, Yes, we are seeing the contracting of our net loss from operation as a percentage of our net revenue. And this is, of course, the both part. One is the improvement of our gross profit. As I just mentioned, about 27% improvement on our gross profit year over year. And this is one hand. On the other hand, And also we reduced our operating expenses, which is 8.4% from 10.2% of the same quarter last year. So the improvement came from the procurement source upgrade and our product assortment, the optimization of our product assortment, and also We launched various tools, for example, our new PIS, our smart pricing tools. So all of this has contributed to the reduction of expenditure. So moving forward, of course, we definitely will sustain the trend. We will continue our efforts on both sides. And also, we expect to see a further improvement in the near future quarter on our net loss and our profitability. Thank you.

speaker
Luke Chen

Yeah, on the cash position, we have just closed at our early release as of September end. We have total cash, including restricted cash and short-term investment amounting to IMB 860 million. As we just shared with you that we have reported a positive operating overall cash flow for the quarter and we believe the trend will continue. So we have strong confidence that this position, cash position, is sufficient to support our future operation as well as our growth.

speaker
spk24

Tom, I hope we answered all your questions.

speaker
Tom Craig

Thank you for your answer. I hope you have a great work partner.

speaker
Operator

Thank you.

speaker
spk00

Thank you.

speaker
Operator

Thank you. There are no further questions at this time. 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 111s in Shanghai, China, please let the company know. Thank you for joining us today. The call has concluded.

Disclaimer

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.

Q3YI 2022

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