111, Inc.

Hello, everyone, and thank you for joining 111's conference call today. On the call today from the company are Dr. Gong Yu, co-founder and executive chairman, Dr. Dingli Luo, co-founder, chairman, and CEO, Dr. Luke Chen, CEO of 111's major subsidiary, and Dr. Harvey Wang, COO. 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 presented are available on the company's IR website. Before the conference call gets started, let me remind you that this call may contain forward-looking statements under the Safe Harbor Provisions Act. 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 referrals 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 obligations to update any forward-looking statements. As a result of new information, future events otherwise accept as required under applicable law. Please note that all members' R&D 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 this, I will turn the call over to 111 CEO, Dr. Ding Li Luo.

Good evening and good morning.

Thank you for joining our second quarter 2023 earnings call. The information that we'll be discussing here is also provided in the slides that have been posted earlier today on the company's website. I encourage you to download the presentation along with the earnings report at ir.111.com.cn. I will begin by providing an overview of the macro environment followed by a review of our recent operational performance. Additionally, I will comment on our continued commitment to industrial digitization, driving revenue, fortifying upstream supply capabilities, enhancing operational efficiency, and outlining our future strategies. Subsequently, our CFO, Mr. Luke Chen, will present a detailed analysis of our financial results, ensuring a thorough understanding of our organization's financial standing. Now let me start with the macro situation in our industry. In the second quarter of 2023, the pharmaceutical retail market faced some challenges. According to statistics, the Q2 sales of retail pharmacies in 2023 reached 225.13 billion RMB, marking a decline of 6.82% compared to Q1 of 2023, and a year-on-year decrease of 7.52% compared to Q2 of 2022. Looking at the broader picture, although the total sales volume of Q2 was somewhat more conservative, we feel lucky to be in the right sector. Despite the economic challenges presenting tests to the pharmaceutical retail market, the industry remains optimistic about the future, hoping for a steady rebound in the coming quarters. Amid the sweeping changes and initiatives of 2023, it's evident that the government's policies remain staunchly supportive of the digital evolution and the rejuvenation of the healthcare and the pharmaceutical sectors. Specifically, the notice on further improving the integration of designated retail pharmacies into outpatient unified management issued by the National Medical Insurance Administration, underscores a pivotal shift towards harnessing digital avenues to streamline the movement of prescription drugs. Moreover, The strategic guidance from the opinions on future deepening reform to promote the healthy development of the rural medical and the health system jointly released by the General Office of the CPC Central Committee and the General Office of the State Council emphasizes a holistic vision. This vision is not just about strengthening rural healthcare, but also about leveraging digital innovation to enhance resource allocation and service delivery in these regions. The ambitions highlighted in the 14th five-year plan, particularly the cultivation of large digital integrated pharmaceutical wholesale and retail enterprises with revenue in the hundreds of billions of RMB, further reiterate this commitment. Together, these policy initiatives underscore a future where digital transformation is central to the continuous progression and innovation of the industry. Despite the decline in our specific industry, I'm delighted to announce that 111, being a leading healthcare tech company in China, has seen consistent expansion. The second quarter of 2023 represents our 20th straight quarter of year-over-year growth following our appeal. Concentrating on digital health offerings, 111 has seized the growing need for online medical service platforms, catering to both individual customers and businesses. By harnessing our strong technological foundation and forming pivotal alliances, 111 has successfully bridged the gap between patients and pharmacists, medical experts, drug manufacturers, and other healthcare-related services. Our upward growth trend underscores the significant impact of digital advancements in transforming healthcare provision and enhancing patient experiences throughout China. In the second quarter of 2023, the company adeptly navigated challenges, registering 3.5 billion RMB in revenues, a 14.5% year-over-year surge. It's also gratifying to share that our overall gross profits saw an 8.3% year-over-year growth, with the B2B sector's profit rising by 11.6% year-over-year. Regrettably, We had to absorb some of the excess inventory remaining from the height of the pandemic, which impacted our potential gross profit. Our B2B operations continue to be the primary contributor to our revenue enhancement. During Q2, the B2B sector's revenue hit 3.39 billion RMB, which is a 15.5% year-over-year growth, and the gross profit rose to 188.6 million RMB, marking an 11.6% year-over-year upswing. In comparison, our total operating expenses stood at 249.3 million RMB, a decrease from 271.7 million RMB in the corresponding quarter of the previous year. When looked at as a percentage of net revenues, operating expenses dipped from 8.9% last year to 7.2% this year, highlighting our sustained growth in operational efficiency. Operational losses were 41.4 million RMB down from 79.8 million RMB during the same period last year. Represented as a percentage of net revenue, operational losses shrank from 2.6% the previous year to 1.2% this year. Non-GAAP loss from operations was 17.2 million RMB compared to 52.8 million RMB in the same quarter of last year. As a percentage of net revenues, non-GAAP loss from operations decreased to 0.5% from 1.7% in the same quarter of last year. Our commitment remains to persevere in our journey towards comprehensive profitability. Allow me a brief pause to highlight the strides we've taken in our operations. The second quarter has been marked by our emphasis on further digitization and enhancement of management, paving the way for even greater returns on this investment in the future. In June, 111 and Tencent have entered into a strategic partnership to enhance the accessibility of online pharmaceutical services sign a strategic cooperation agreement with Tencent Health. Both parties will collaborate and jointly explore in the areas of pharmacy digital services, pharmaceutical digital marketing, and online medical intelligence services, aiming to jointly establish a pharmaceutical plus internet digital upgrade industry paradigm. According to the cooperation agreement, Tencent will leverage its technological advantages in cloud computing, big data, artificial intelligence, and its profound reach and connection abilities in the consumer internet sector to assist 111 in the digital construction and upgrades of smart pharmacy retail, data centers, and intelligent pharmaceutical sales software. At the same time, we will jointly explore new digital scenarios in pharmaceutical sales, integration of smart pharmaceutical sales software services and solutions, improve the pharmaceutical sales efficiency, and aid pharmaceutical companies in their digital transformation. This is a significant step forward in 111's digitization strategy. Moreover, in July, 111 was listed on the Shanghai Data Exchange, accelerating the transformation of the pharmaceutical industry. 111 is among the earliest domestic enterprises to enter the digital healthcare industry. Currently, on the Shanghai Data Exchange, it has completed the listing of its 111 information brain series of products, which can play a role in drug flow trafficking, In drug flow tracking, e-commerce drop initial information entry and compliance determination for e-commerce pharmaceuticals. 111's master data in the pharmaceutical industry includes more than 720,000 main product data and 1.2 million main company data, covering 99.6% of the pharmaceutical market. At present, the 111 information brain series products listed on the Shanghai data exchange already cover its pharmaceutical master data. 111 will make full use of the data accumulated internally and collected externally to build its AI model in the pharmaceutical industry, continuously enhancing the value and application capabilities of the data. 111 plans to continue listing more data products on the data exchange to meet the industry's continuous development and innovation needs, empowering the digital transformation of the entire pharmaceutical industry through the Shanghai Data Exchange. To establish a more digitized Keep collaboration with drug supplies within its ecosystem and empower the transformation of pharmaceutical supply, 111 has launched a significant data supply chain product. In July, during the 13th anniversary celebration of 111, the digital linkage went together. 111 Digital Supply Chain Summit was held in Shanghai. 111 will continue to refine its digital supply chain management system strengthen its technological advantage, and the strategic focus of one-on-one supply chain upgrade is to create a digital supply chain driven by digital technology synchronizing the entire chain and the linking upstream and downstream collaborations. Through the integration of multiple modules such as supply, procurement, storage, distribution, and the sales with the aid of digital product modules, Like the Wheel of Wind and Fire and the Kunpeng, 111 aims to facilitate the effective data and information flow. We will forge strong collaborations with the pharmaceutical companies, industry partners, and the pharmacists to provide seamless care for our customers. In a remarkable testament to 111's advanced digital capabilities, the Ministry of Commerce has bestowed upon the company's title of e-commerce demonstration enterprise. This accolade is not a common distinction. Only 132 enterprises across the nation have been graced with this recognition. The announcement made this quarter speaks volumes about 111's competence and its emerging prominence in the e-commerce arena. Parallel to this noteworthy achievement, 111 has intensified its bonds with upstream pharmaceutical partners. This deepened alliance is more than mere collaboration. It's an evolution of mutual understanding that is reshaping the contours of the pharmaceutical digital space. This concerted effort crystallizes 111's commitment so amplifying its all-encompassing digital expertise, ensuring that it maintains at the forefront of technological evolution in the sector. This quarter witnessed the initial launch of additional groundbreaking drugs on our digital platform, building on our prior achievements with esteemed partners such as Hua Medicine and Sanofi. Yuanda Jiangnomu, introduced the two state-of-the-art asthma medications, Yin Zhuo Ran and Yin Ming Ran, exclusively on 1.1.1's digital platform. These products are not just new entries. They atomize global pioneering combined formulations dedicated to advancing asthma treatment. Yin Zhuo Ran is Currently, they only approved a triple inhalation formulation for asthma patients in China, filling a therapeutic gap. With their availability on our online platform, these two drugs can rapidly reach the outpatient market, undeniably offering considerable convenience and superior treatment options for China's vast asthma patient population. 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 pharmaceutical companies. Meanwhile, on our B2B platform, through our partnerships with downstream pharmacies, we kept delivering digital value to upstream pharmaceutical companies with our newly developed digital tool, Telescope. And Telescope kept serving as a lens for pharmaceutical companies, allowing them to gain a more direct and a comprehensive view of their drug sales and pricing dynamics real time. By leveraging advanced data analytics and market insights, Telescope enables those companies to analyze sales patterns, identify pricing opportunities, and make data-driven decisions to optimize their strategies. With Telescope, pharmaceutical companies can assess the performance of their products in real time, identify market trends, and adjust their marketing campaigns accordingly. This invaluable tool not only provides a clearer understanding of the market landscape, but also assists in forecasting demand, refining pricing strategies, and ultimately maximizing sales and profitability. On the other hand, We remain dedicated to digitally enabling downstream pharmacies by providing all-encompassing support for their operational needs. Our tailored solutions extend beyond providing affordable medical products and quality services. They are designed to optimize workflows and boost operational effectiveness. By tapping into our extensive network and affording robust partnerships, we secure competitive rates and beneficial terms with providers, ensuring pharmacists benefit from cost savings. Moreover, through advanced technologies like automated ordering platforms and streamlined logistics, we guarantee prompt deliveries while helping pharmacists cut down on their operational costs. By offering cost-effective products and efficient services, we enable pharmacies to deliver value to their customers and maintain their competitiveness in the market. Particularly, by the end of second quarter, our One Health virtual franchise model kept enabling around 20,000 small to mid-sized pharmacies provide superior products and services to their customers. All participating pharmacies can use our platform to better manage their product selection, procurement, and inventory management, as well as accessing our distribution tools through our digital SaaS services, including smart sourcing, digital marketing, O2O, and CRM. Thirdly, we consistently prioritize enhancing our operational efficiency within our strategic planning. As 111's business scales up, and our technological advancements flourish, our operational efficiency continues its encouraging trajectory. It's heartening to note that with rising revenues, the proportion of sales and marketing expenses have seen a decline, accounting for 2.6% this quarter as opposed to 3.3% in the same quarter the prior year. General and administrative costs in relation to net revenues stood at 1.1% this quarter, down from 1.3% in the same period last year. Additionally, our technology-related expenses stood at 0.7% this quarter, down from 1.1% in the same period last year. We've taken deliberate steps to boost management efficiency in 111. First and foremost, our approach to human resource management has been very prudent, ensuring optimal workforce distribution and utilizing technology to automate specific functions. In our next move, we've refined our standard operating procedures and simplified managerial processes, boosting overall productivity. Furthermore, a heightened emphasis on robust corporate governance has led to an ingrained ethos of responsibility and openness throughout our team. Finally, we've channeled significant resources into tech-based solutions like state-of-the-art analytics, robotic process automation, and innovative digital platforms. Through these strategic measures, our objective is clear to elevate efficiency, curtail expenses, and consistently provide superior value to all our stakeholders. To further improve operational efficiency, we will keep on focusing on implementing our strategy, flattening our organizational structure, and improving work efficiency of our employees through multiple operational tools. In the realm of logistics, We've witnessed a marked reduction in our fulfillment expenses, primarily attributed to the enhancements in our proprietary warehouse operations and collaborations with joint venture storage facilities. Through significant investment in both infrastructure and technology, we've honed our supply chain mechanisms, resulting in heightened operational efficiency. Such advancements have enabled us to expedite and refine product deliveries to our customers, currently driving down our fulfillment costs to 2.7% from the previous 2.9% relative to net revenue. Maintaining optimal customer satisfaction and a competitive edge remains at the forefront of our agenda and will persist in nurturing these strategic undertakings. For yet another quarter, we've diligently adhered to our guiding tenets of value creation, customer centricity, and fortifying our supplier foundation throughout the organization. Our recently instituted in-house advisory department has once again proven its worth by championing strategic advancements across various sectors. By delving deep into our customer needs analysis the facilitated fine-tuning of our product portfolio to resonate more precisely with market inclinations. By keeping a vigilant eye on evolving market dynamics and capitalizing on real-time customer feedback, we've managed to recalibrate our pricing, ensuring both competitiveness and enhanced profit margins. Furthermore, this department has been instrumental in finessing our internal resource distribution, refining procedural workflows, and boosting overall operational efficiency. Through these concerted endeavors, we're elated to report that we have not only met but often exceeded customer anticipations, forged the sensible pricing models, and ensured an adept stewardship of resources across the board. Now let me spend a moment to talk about future growth initiatives. One, continue to expand selection for our customers by leveraging our partners' stock. We dedicate our commitment to elevate and refine our supply chain model. As we navigate the multifaceted pharmaceutical landscape, our primary focus is to harmonize our first-party business JVP business, and the marketplace business seamlessly. Among these, our JVP business stands out as one of our priorities this year. We recognize its pivotal role in streamlining pharmaceutical distributions and affording solid partnerships since we're investing resources and efforts into optimizing its operations, inferring that it not only complements our other business segments, but also emerged as a beacon of operational excellence and efficiency. Through these endeavors, 111 aims to provide the best selection and the best one-stop shopping experience in the industry to pharmacy customers. tailor our first-party product range to align with customer preferences. Our unwavering commitment is to improve the customer journey by refining our product lineup based on their preferences. By harnessing information from various avenues such as client feedback, industry studies, and advanced data analytics, we constantly fine-tune our product selection. Drawing from this rich pool of insights, we ensure that our first-party inventory caters to the varied needs of our customers. This strategy not only allows us to provide purchasing solutions, but also ensures we continue to strengthen direct sourcing relationships with upstream manufacturers. Three, cost down on procurement. Acquiring directly from pharmaceutical firms has significantly slashed our product expenses. We've established connections with over 500 esteemed global and local pharmaceutical entities, and our goal is to reinforce our ties with these current associates while also fostering new collaborations. And currently, we've implemented numerous benchmarks to propel our procurement team towards enhanced cost-saving initiatives. This strategy ensures that we have a diverse medication assortment at a more affordable cost. Four, enhancing smart pricing strategy. Being a prominent digital healthcare platform, particularly in the B2B segment, we are committed to enhancing our market standing through refined pricing methodologies backed by intelligent systems. Using cutting-edge algorithms and deep data analytics, we carefully assess market trends, competitors' pricing structures, customer preferences, and other crucial parameters to set the most strategically viable price points for our offerings. This method ensures we cater to both our customers' affordability needs and our businesses' profitability goals. With integration of this smart pricing mechanism, We aspire to expand our market footprint, attract fresh customers, retain our loyal base, and solidify our reputation as a reliable and economically competitive player in the pharmaceutical domain. Five, elevate efficiency through intelligent supply chain management. We're deeply committed to continuous refining our supply chain to guarantee seamless procurement, warehousing, and distribution processes. By forging robust collaborations with pharmaceutical firms, we directly obtain premium products, allowing us to make the supply chain more fluid and reduce potential holdups. Our specialized continuity of supply team is devoted to enhancing procurement strategies, adjusting resources as required, and ensuring stock levels are aptly maintained to fulfill demand while preserving product integrity. Through these initiatives, our goal is to boost operational effectiveness, diminish expenses, and offer unparalleled service quality to our customers. Six, unwavering focus on enhancing operational efficiency. We're unwavering in our pursuit of operational excellence and are adopting focused strategies to manifest this vision. By strategically integrating technology, we are reshaping our workforce dynamics, ensuring efficiency without compromising on output. Simultaneously, We are deeply involved in dialogue with external vendors, especially those in logistics, to procure the most favorable terms, thereby refining our supply chain and curtailing overheads. Equally paramount is our emphasis on honing management acumen and decision-making capabilities, given their direct influence on operational powers. With a meticulous approach in these domains, we are poised to substantially curtail operational costs, paving the way for enduring growth and prosperity. Seven, pledging to digital transformation. Our dedication to digital innovation remains steady, given its potential for long-term rewards. Through the integration of the digital solutions, we're able to refine our methodologies boost operational efficiency, and foster avenues for groundbreaking initiatives. By channeling resources towards research and development, we maintain our edge in the ever-evolving tech sphere, propelling innovations that cater to our customers' dynamic requirements. As we elevate our focus on digital strategies and cultivate an ethos of continuous evolution we solidify our stance as a nimble, competitive entity poised for continuous advancements in the rapidly shifting healthcare domain. In conclusion, while we have faced challenges and successes, 111 remains dedicated to leading the way in the healthcare sector, championing transformative initiatives and ensuring excellence in service delivery in the ever-changing environment. We wish to thank all the investors who have supported us. Now we'll hand the call to Mr. Luke Chen to walk through our financial results. Thank you.