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, Mr. Jun-Ling Liu, co-founder, chairman, and CEO, Mr. Luke Chen, CFO, and 111's major subsidiary, and Mr. Harvey Wong, 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 presentation 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 made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions. and relate to events that involve known and unknown risks, uncertainties, and other factors, all of which would cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. Please note that all numbers are in RMB, and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year-over-year basis. With that, I will turn the call over to 111's CEO, Mr. Jun Ling Liu.

Good morning and good evening.

Thank you for joining our third quarter 2023 earnings call. Information we will be discussing is also available in the slides that were posted earlier today on the company's website. And I encourage you to download the presentation as well as the earnings report from our investor relations website at ir.111.com.cn. I will start by offering an overview of the broader economy landscape, followed by a comprehensive examination of our recent operational achievements. Furthermore, I will discuss our ongoing dedication to advancing industrial digitization, boosting revenue, strengthening our upstream supply capabilities, improving operational efficiency, and outlining our future strategic direction. Afterwards, our chief financial officer, Mr. Luke Chen, will deliver an in-depth analysis of our financial results, ensuring a comprehensive understanding of our company's financial health. Now, let me start with the macro situation in our industry. While the hospital distribution market in China experienced a modest year-on-year contraction of 2% to 5% in 2022, the out-of-hospital pharmaceutical distribution market has witnessed a striking and a continuous upsurge. A detailed analysis by Frost and Sullivan highlights this robust growth, revealing an escalation from 371.6 billion yuan in 2018 to a remarkable 639.7 billion yuan by 2022. marking a compound annual growth rate of 14.5%. This impressive expression is not merely a short-term phenomenon, but is projected to maintain its momentum. Forecasts suggest the market will soar to an estimated 1 trillion yuan by 2027, sustaining a vigorous CAGR of 9.6%, This exponential growth indicates a paradigm shift in China's healthcare market dynamics, with the out-of-hospital sector poised to command almost half of the healthcare market share by 2026. Its contribution amounting to nearly 50% is set to become a cornerstone in shaping the overall healthcare landscape in China. reflecting a significant shift in consumer preferences and healthcare delivery model. However, in the third quarter of 2023, the pharmaceutical industry in the out-of-hospital market faced challenges. According to Sano Health, total sales revenue in the retail pharmacy market declined compared to last year, primarily attributed to a decline in sales volume First of all, in the third quarter, there was more competition among retail pharmacies as they expanded due to relaxed spacing restrictions, which led to a drop in the number of orders per store. Second, and more importantly, the gradual resolution of existing inventory issues for four categories of pharmaceuticals, namely fever reducing, cough suppressing, Antiviral and antibiotics medications has led up to slow inventory digestion. These inventory challenges had built up over time, especially due to the backdrop of the pandemic at the end of the previous year that led to concentrated consumer buying behavior in late 2022. Additionally, the impact of external factors such as global supply chain disruptions and the Anti-Corruption Act continued to influence the pharmaceutical sector, underscoring the importance of agility and preparedness in the industry. Despite the challenges in the macroeconomy as well as retail pharmacy business, we have managed to deliver net revenue growth of 9.5% year-over-year, reaching 3.7 billion yuan. This represents the 21st consecutive quarter of the year-over-year progression for 111 since our NASDAQ IPO. Our gross segment profit faced a temporary challenge due to our contracted efforts to digest the inventory of anti-COVID-related medicines, resulting in a modest 5.6% decrease compared to the same period last year. However, our continued efforts to enhance operational efficiency have yielded promising results, as evidenced by the reduction in total operating expenses as a percentage of net revenues to 7.4% this quarter, compared to 8.4% in the same quarter of the previous year. More specifically, as 111's business continues to expand and our technological capabilities advance, our operational efficiency remains on a positive trajectory. Notably, as revenues have risen, we have achieved a reduction in the proportion of sales and marketing expenses, which now account for 2.6% this quarter compared to 3.2% in the corresponding quarter of the previous year. Furthermore, The general and administrative costs relative to net revenues have decreased to 1.3% this quarter, down from 1.4% during the same period last year. Additionally, our technology-related expenses have decreased to 0.7% this quarter, down from 0.9% in the same period last year. Through optimization, our fulfillment costs were reduced from 3% to 2.8% relative to net revenues as well. This positive trend reflects our commitment to prudent financial management and sets a solid foundation for our future growth. As a result, It's important to note that our operational loss as a percentage of net revenues improved to 2.2% compared to 2.4% in the corresponding quarter of the prior year, and our non-GAAP operational loss remained stable at 1.5% of net revenues, consistent with the performance in the third quarter of the previous year, underscoring our commitment to efficient management and our ability to maintain healthy operational margins. Please allow me in a moment to underscore the progress we've achieved in our operations during the third quarter. This period has been characterized by our continued focus on advancing digitalization and improving our management processes, laying the groundwork for even more substantial returns on this strategic investment in the times ahead. As you may know, the previous pharmaceutical industry was plagued by a complex and cumulatively multi-layer structure riddled with inefficiencies and numerous drawbacks. However, in this era of digitization, our innovative approach is ushering in a transformative change. Through our cutting-edge data direct linkage and the digital empowerment initiatives, pharmaceutical companies, pharmacies, and consumers alike are reaping significant benefits such as better pricing, better operational efficiencies, and a better visibility and a mutual understanding. This paradigm shift has brought about the much needed de-intermediation of the industrial supply chain, streamlining processes, and eliminating unnecessary intermediaries. Furthermore, Transaction automation has revolutionized the way business is conducted, enhancing efficiency and reducing errors. Intelligent service driven by data-driven insights and artificial intelligence is empowering stakeholders with personalized and efficient solutions. The fundamental driver of business growth lies in the establishment of a positive feedback loop that seamlessly integrates technology into our supply chain, demand, and operations. Our success is rooted in the ability to harness the power of technology to enhance our demand services, ensuring that we can efficiently meet customer needs and preferences. Simultaneously, We leverage technology to optimize our supply services, ensuring a timely and cost-effective delivery of goods and services. The synergy between these aspects of our business is further amplified by technology-driven operational upgrades, enabling us to operate with precision and agility. First, in our pursuit of operational excellence, We have harnessed the power of technology to elevate our end-to-end supply chain digitization efforts, resulting in enhanced decision quality and operational efficiency. Through a full digital management system, we've achieved comprehensive real-time data management, ensuring 24-hour access to critical insights. Our multi-section and a multi-angle automatic BI analysis of business information further empowers us to make data-driven decisions swiftly. Our PIS, which is the Intelligent Pricing System, utilizes big data models for automatic price adjustments, streamlining processes, and improving accuracy. Additionally, our smart supply chain features innovations like stock relocation systems, intelligent purchasing inquiries, and the logistics track optimization, collectively transforming our supply chain operations and driving efficiency gains across the board. Second, our commitment to technological innovation given rise to a comprehensive platform that serves as a game changer in the realm of category and the pricing management, fostering closer collaboration between pharmaceutical companies and the retailers. Within this cutting edge ecosystem, our pharmaceutical enterprise services introduce a transformative approach to data analysis. Our telescope product allows for the precise visualization of distribution statuses across a network of over 20,000 endpoints nationwide. It offers insightful market penetration analytics spanning 34 provinces and 600 plus cities, while also providing a clear year-long overview of sales data trends. Complementing this Our GBP merchant services are a testament to operational efficiency. The ultimate transaction processes significantly reducing stock to shelf times from hours to mere minutes and streamlining replenishment efforts in the same fashion. In addition, our MP merchant services empower retailers with invaluable tools for success. Sales visualization is made accessible to merchants who can query data thousands of times daily via mobile terminals, enabling them to make data-driven decisions efficiently. In essence, the comprehensive platform redefines how pharmaceutical companies and the retailers interact and operate, offering a dynamic and technology-driven solution that enhances efficiency and transparency throughout the supply chain. Third, our strategic integration of technology and demand analysis places a strong emphasis on a significant upgrade of demand volume. Through intelligent demand analysis exemplified by the dynamic World One catalog, we continuously update our understanding of customer demand by leveraging both company and industry data. This greatly enhances our assortment decisions, giving priority to top-demand goods and tailoring offerings regionally to meet unique demands. Furthermore, our smart sales initiative, empowered by the Eagle Eye tool, enhanced customer engagement and transformed marketing efforts for increased efficiency. In parallel, We empower and optimize pharmacy operations by analyzing customer segments, providing private domain service guidance for B2B to see success, implementing a smart sourcing system, offering cloud prescription services, deploying the pharmacy operation analysis board, and leveraging pharmacy CRM, among other innovations. This holistic approach not only identifies pharmacy needs with precision, but also equips pharmacy operations with the tools needed to thrive in a dynamic market landscape. Through our unwavering commitment to innovation and the successful implementation of the aforementioned initiatives, will have garnered widespread recognition cooperation opportunities and received prestigious awards from industry authorities and organizations. To name a few, the strategic partnership formed between Tencent and us in June has set the stage for a robust collaboration aimed at enhancing accessibility of online pharmaceutical services. As a result of this collaboration, Significant infrastructure work was carried out during the third quarter, laying a solid foundation for a more streamlined and efficient operation. This strategic cooperation agreement, sealed with Tencent Health, spans areas such as pharmacy digital services, pharmaceutical digital marketing, and online medical intelligence services, with the overarching objective of establishing a pharmaceutical plus internet digital upgrade industry paradigm. Leveraging Tencent's technological prowess in cloud computing, big data, artificial intelligence, and its extensive reach in the consumer internet sector, this partnership is instrumental in bolstering 111's digital infrastructure and smart pharmacy retail capabilities. We anticipate that as we enter the fourth quarter, tangible outcomes from this partnership, including improved pharmaceutical sales efficiency and substantial support for pharmaceutical companies in their digital transformation journey. This strategic move represents a pivotal step forward for 011's digitization strategy, underscoring our unwavering commitment to innovation and growth. Meanwhile, on August 8th, the Ministry of Commerce of China announced on its official website a list of e-commerce demonstration enterprises, among which 111 Inc. was included. This time, a total of 132 enterprises nationwide were selected, and only 13 enterprises from Shanghai, including 111 Inc., were honored with this recognition. On August 11th, We were honored to have our case on leveraging digitization for pharmaceutical full-channel commercialization selected for the 2023 Supply Chain Management Services and Manufacturing Integration category within the Fourth China Industrial Product Online Trading Festival. 111 has tailored digital solutions for full-channel pharmaceutical commercialization for our pharmaceutical firms. Through services like warehousing, marketing, distribution, after-sales support, and patient management, we have enhanced the marketing accessibility of high-quality medicine products, benefiting a broader patient base. Currently, we've continued to upgrade our own digital capabilities, improving efficiency and service levels while breaking down information barriers across the pharmaceutical supply chain. By harnessing the power of digitization, we empower stakeholders throughout the pharmaceutical ecosystem, driving industry optimization, enhancement, and the creation of greater societal value. Also in August, 111 was recognized as one of the top 10 pharmaceutical retail e-commerce platforms in 2023 and received the prestigious CPEO Gold Award at the 16th China Pharmaceutical Ecology Conference. Over the years, Our dedicated work in the pharmaceutical and medical sectors has transformed us from a traditional e-commerce platform into a digital healthcare integrated service platform. We have seamlessly integrated online and offline services to create an ecosystem connecting hospitals, pharmaceutical companies, pharmacies, patients, doctors, and more, offering end-to-end services covering medicine plus healthcare payments With our core technological capabilities, industry-leading integrated online and offline intelligent supply chain platforms and multi-channel digital systems, we will empower stakeholders throughout the healthcare industry, create new value, provide patients with more convenient and high-quality healthcare products and services, and continuously enhance efficiency through supply chain optimization contributing to digital transformation and upgrading of the healthcare and the pharmaceutical industry. In September, our 111 technology team achieved a significant milestone by securing three patents, highlighting our commitment to innovation in the healthcare sector. The first patent pertains to a cutting-edge predictive system for pharmacy operations. This innovative system leverages advanced data analytics and machine learning techniques to forecast various aspects of pharmacy management, including inventory optimization, patient demand trends, and resource allocation. By harnessing the power of predictive analytics, we aim to enhance the efficiency and responsiveness of our pharmacy operations, ensuring that patients receive the right medications when they need them. The second patent is related to a system for estimating the advantages of specific pharmaceutical products. This system employs sophisticated algorithms to analyze a range of factors such as clinical efficacy, cost effectiveness, and patient outcomes to determine the superior attributes of certain medications. By accurately identifying high-value pharmaceuticals, we can better guide both healthcare professionals and patients toward making informed decisions regarding treatment options. Our third pattern pertains to a low-code platform development method and system. In the context of pharmaceutical distribution and retail business, this technology can significantly simplify allocation development processes, leading to improved operational efficiency and adaptability. It allows for the rapid creation of customized applications tailored to specific needs, enhancing various aspects of the pharmaceutical supply chain, including inventory management, order processing, and customer engagement. This innovation holds great promises for optimizing pharmaceutical distribution and retail operations, making them more agile and responsive to market dynamics and regulatory changes. These patents underscore our continuous efforts to drive innovation in the healthcare industry. They are not only a testament to our commitment to delivering enhanced services to patients and healthcare providers, but also highlight our dedication to staying at the forefront of technological advancement in the field. These systems will play a pivotal role in improving the overall healthcare experience for individuals and contribute to the broader transformation of the healthcare landscape. In October, With our profound understanding of digitization in the internet healthcare sector, we're honored to receive the 2023 China Digital Breakthrough Practice Award from the China Management Model 50 Plus Forum. This prestigious award recognizes our outstanding achievements in corporate digital transformation. The selection criteria prioritize long-term value, stakeholder interests, and continuous innovation across our business operations, internal management, and collaborative efforts along the industrial value chain. Through our digital capabilities, we have ensured nationwide access to essential medicines, empowered patients with knowledge about innovative drugs, reduced medication costs, improved cost-effectiveness for patients, and it continued to addressing healthcare accessibility and affordability challenges. To sum up, for Q3, we have remained steadfast in our commitment to the core principles of value creation, customer centricity, and the strengthening of our supplier relations across the organization. Building on the success of our recent Established in-house advisory department from the previous quarter were pleased to report even more significant strides in this quarter. This dedicated team has continued to drive strategic advancements across various sectors with a deep focus on customer needs analysis. Through their efforts, we have fine-tuned our product portfolio to align even more precisely with market trends and preferences. By diligently monitoring evolving market dynamics and leveraging real-time customer feedback, we have successfully recalibrated our pricing strategies. Moreover, the department's contributions extend to refining internal resource allocation, streamlining procedural workflows, and enhancing overall operational efficiency. As a result of these contrived efforts, we're delighted to announce that this quarter we'll have consistently met and often exceeded customer expectations, implemented sustainable pricing models, and maintained adept resource management across the organization. Now let me spend a moment to talk about our future growth initiatives. One, grow JVP business segment. to significantly increase selection and enhance customer experience. Next quarter, we will continue to allocate resources to strengthen our JVP business, which is the consignment model, as a cornerstone of operational excellence and efficiency. Through this approach, we aim to rapidly incentivize an increasing number of vendors to place their products within our warehouses resulting in a seamless alignment with customer demands. The JVP model enables us to take full control of the logistics, ensuring a superior customer experience compared to the NP model. We understand that precision is paramount and we will leverage market data and analytics to guide and refine our strategies continually. Moreover, our commitment extends to building a mutually beneficial ecosystem, fostering strong partnerships with both upstream vendors and downstream pharmacies. This collaborative approach will not only enhance our competitiveness, but also contribute to the overall growth and success of all stakeholders within our supply chain network. deepen strategic relations with upstream pharmaceutical customers. We will keep strategically allocating our first party resources to sharpen our focus on critical areas that warrant dedicated attentions, such as direct sourcing from pharmaceutical companies and the sourcing of high margin products. By doing so, We aim to optimize our efforts and resources in these key domains, ensuring that we can efficiently meet the specific demands of our customers and strengthen our partnerships with pharmaceutical manufacturers and lower our procurement costs. This strategic approach allows us to further enhance the quality and variety of our offerings while maintaining a keen eye on cost effectiveness and profitability. Furthermore, this collaborative effort among our first-party resources, JVP, and the marketplace segments will complement each other synergistically, creating a comprehensive and a well-rounded approach to serve our customers effectively and efficiently. Three, AI-driven customer experience upgrades. We are committed to leveraging AI-driven platform models to deliver better outcomes for our end customers and drive business growth for all stakeholders. Through the implementation of advanced algorithms, our AI system is designed to identify the best bargains for customers, ensuring that they save money while enjoying a wide array of choices. Simultaneously, This technology has built-in self-learning capabilities and will continuously improve output for customers. This approach fosters a balanced ecosystem where customers benefit from cost savings, vendors gain increased visibility and business opportunities, and the overall demands are fulfilled with the best supply. By embracing AI-driven solutions, we're taking significant strides toward reshaping the supply and demand value chain for our industry. Four, employing AI tools for pricing. We are embracing AI as a pivotal tool to shape our pricing strategies for both first-party business and our JVP and MP partners to navigate our marketplace effectively. With the aid of AI algorithms, we can make data-driven decisions that ensure competitive pricing for our products and services. This technology allows us to fine-tune our procurement processes by identifying the most cost-effective sources and channels. Additionally, our AI-driven approach extends its benefit to our partners, assisting them in understanding and capitalizing on the dynamic traffic within our ecosystem while making informed pricing choices. By harnessing the power of AI, we're not only enhancing our own operations, but also equipping our partners with the tools they need to thrive in our marketplace. Five. Relentless commitment to enhancing operational efficiency. We're dedicated to achieving operational excellence through a strategic blend of technology integration and workforce optimization. Our ongoing dialogues with external vendors, particularly in logistics, aim to secure favorable terms that streamline our supply chain and reduce overhead costs. Additionally, we prioritize the refinement of management skills and decision-making capabilities, recognizing their direct impact on operational powers. By meticulously addressing these areas, we are positioned to significantly reduce operational costs, opening the path to sustained growth and prosperity. Sixth. Organizational optimization to drive better business results. We're embarking on a comprehensive organizational upgrade to better align ourselves with the evolving business landscape and the new challenges it presents. As part of this initiative, we're strategically restructuring our team to ensure they're agile and responsive to market dynamics. This restructuring will evolve will involve optimizing our staff distribution, leveraging the right talent in the right roles, and fostering a culture of innovation and adaptability. By embracing these challenges, we aim to create a more nimble and efficient organization that is well equipped to tackle the challenges of the future while delivering exceptional value to our customers and partners. pledging to digital transformation. Our unwavering commitment to digital transformation is poised to yield substantial dividends, particularly in the upcoming Q4. Through the seamless integration of digital solutions, we are refining our methodologies and enhancing operational efficiency, setting the stage for groundbreaking initiatives Our ongoing cooperation with Tencent is expected to bear fruits, contributing to our digital prowess. Furthermore, we anticipate obtaining another patent in Q4, further strengthening our position as an agile and competitive entity. As we intensify our focus on digital strategies and foster a culture of continuous innovation, we are well-positioned for sustained growth in the rapidly evolving healthcare landscape. In closing, despite the hurdles and triumphs, 119 remains steadfast in its commitment to spearheading advancements in the healthcare sector. We continue to champion transformative initiatives and uphold a commitment to excellence in service delivery within the dynamic landscape of our industry. and we extend our sincere gratitude to all the investors who have steadfastly supported us throughout our journey. We'll now pass the call to Mr. Luke Chen to provide a comprehensive overview of our financial results.