111, Inc.

Luke Chen, CFO of 111's major subsidiary, and Mr. 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 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 unknown and unknown risks and 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 filing with the set 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 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 that, I will turn the call over to 111 CEO, Mr. Junling Liu.

Good morning and good evening, everyone. Thank you for joining our second quarter 2024 earnings call. The information we will be discussing is also available in the slides posted earlier today on the company's website. I encourage you to download the presentation as well as the earnings report from our investor relations website at ir.111.com.cn. As for our performance in the quarter, we're pleased to report that we achieved operational profitability for the second consecutive quarter, which was driven by our ongoing improvement in operational efficiency that overrode challenges in the macroeconomic environment. In today's call, I will discuss the current macro environment, highlight the opportunities ahead, and present our key financial achievements. I will also cover how we are leveraging new technologies to enhance operations, recent patent milestones, and our efforts on the supply side. Finally, I will outline our future growth strategy before handing over to our CFO, Mr. Luke Chen, who will provide a detailed analysis of our financial performance. First, China's complex economic situation is impacting many industries, and healthcare is not immune. The challenging environment is prompting industry stakeholders to explore innovative models for retail development. Despite volatile conditions, there are positive trends in the healthcare industry that present valuable opportunities. The national anti-corruption campaign in the healthcare sector initiated in mid-2023 is intensifying this year. Recent development indicates a broader and more comprehensive approach with regulatory and ethical oversight now targeting the entire industry chain. We anticipate that this rigorous scrutiny will evolve into a long-term process for greater transparency and integrity in healthcare transactions, particularly in hospital procurement. The key outcome of this campaign is the acceleration of transitioning drug sales and prescriptions to retail pharmacies, which offer a more accessible and transparent alternative to the traditional hospital system. This is the shift strongly encouraged by the state Given our expertise in the out-of-hospital pharmaceutical market, we are well positioned to capitalize on the significant growth opportunities this shift brings over the long term, along with the expected continued expansion of retail pharmacy stores across China. By offering a comprehensive and cost-efficient product range coupled with an unwavering commitment to customer experience, we aim to boost market share in this sector where challenges and opportunities coexist. In parallel, the digital transformation of the healthcare value chain is continuing to gain momentum. The progress is supported by strong initiatives for the industry's high-quality development. In June, China's State Council issued key tasks for deepening medical and health system reform in 2024. The focus is on integrated development and governance of medical insurance, healthcare, and pharmaceuticals while highlighting the critical role of information technology and digitization in driving these reforms. As a leader in this digital revolution, we are dedicated to transforming the industry through our fully digitized operating system. By providing both the upstream and downstream customers with advanced digital technologies, we enable them to further cut operating costs and increase efficiency. Our cutting-edge digital solutions enhance every aspect of operations, from sales and procurement to customer demand analysis, product and employee management, and warehouse allocations. The meaningful progress we made earlier this year have persisted into Q2, underscoring our ongoing success in digitization. As Paul mentioned, even with these macroeconomic challenges, we generated profit from operations for two consecutive quarters, reflecting the effectiveness of our growth strategies and business model. In the second quarter, our income from operations reached 3.3 million RMB compared with the loss from operations of 41.4 million RMB a year ago. Non-GAAP income from operations was 8.5 million RMB compared with non-GAAP loss from operations of 17.2 million RMB in the same quarter of last year. The profitability is primarily driven by ongoing improvements in operational efficiency supported by consistent enhancements across nearly all business functions. In the second quarter, total operating expenses accounted for 6% of net revenues, a decrease of 120 basis points from the previous year. Specifically, we've made significant reductions in various expense categories. We've managed to cut fulfillment expenses to 2.6% of net revenues during the quarter, down from 2.7% a year earlier, reflecting a decrease in fulfillment costs by 7.3%. Our general and administrative expenses fell to 0.5% of net revenues from 1.1% a year ago, Selling expenses decreased to 2.3% as a percentage of net revenues from 2.6% in the previous year. Technology expenses were 0.5% of net revenues as well, down from 0.7% a year ago. Excluding share-based compensation, operating expenses as a percentage of net revenues dropped 70 basis points to 5.8%. Additionally, our operating cash flow remained positive for the second consecutive quarter. Our operational efficiency stems from strategic investment in infrastructure and optimal staffing allocation with a focus on key areas that drive long-term sustainable growth. Over the years, We've developed highly sophisticated digital capabilities that allows us to deliver exceptional value and performance to our customers while significantly reducing both technology and staffing expenses. We have always aimed to become the most efficient healthcare e-commerce operator in the industry. Despite our relatively small revenue, we've already achieved a level of operational efficiency that can compete against some of the more established players. We're committed to setting an industry benchmark for efficiency while maintaining and improving profitability. As we grow and refine our operations, we expect further reductions in operating costs, driving even higher efficiency. Our commitment to this goal is unwavering, as we believe it will be a key competitive advantage and help us to build a unique business mode. We can also invest those savings on increased efficiency into other strategic areas, such as innovation, market expansion, and customer engagement to support future growth. Next, let's move to how we adopted mobile technology approaches to drive significant improvements across various operational factors. Continuous technology advancement is a cornerstone of our strategy, enabling us to build a more resilient, efficient, and customer-centric business poised for greater returns in the future in the evolving healthcare e-commerce industry. First, we developed merchant bidding tools and an automated operating system and integrated a price index driven by big data to deliver intelligent merchant pricing. This has not only reinforced Bon11's value proposition of low costs, but also enhanced procurement efficiency. Notably, with our digital investment promotion platform and the billing subsidy campaign as the core operational strategies, the procurement conversion rate has risen to a historical high of over 32%. This has significantly improved customer satisfaction and long-term loyalty, which are crucial for sustainable growth. Our supply chain fulfillment has seen remarkable improvements in cost reduction and efficiency management through technology-driven enhancements. The optimization of algorithms has led to a notable 11% increase in overall efficiency in warehouse shelving and replenishment, and the strategic adjustments in automatic grouping have reduced the picking parts by 15%. Further boosting outbound efficiency Additionally, the implementation of a digital logistics network for last mile delivery has cut distribution costs by over 5%, underscoring our commitment to operational excellence. Our application of AI in product matching has significantly elevated the accuracy and efficiency of our offering, not only in pharmaceutical products, but also in medical devices and health supplement products. The creation of comprehensive databases and the development of sophisticated entity recognition and similarity models have doubled the matching rate. We're dedicated to consistently and continuously advance and upgrade our technological capabilities, which position us as an industry leader in operational efficiency, cost reduction, and customer satisfaction. We're pleased to announce the acquisition of four new patents, bringing our total to 28. Among these is the invention patent for Amethyx, for pricing human resource demand and personnel scheduling system, which offers accurate predictions and intelligent scheduling, significantly enhancing HR management efficiency and supporting informed decision making. Additionally, we secured a breakthrough patent for an adaptive anti-crawler method and a system based on information categories This technology boosts our data protection efforts, reducing the risk of breaches, lowering operational costs, and improving overall efficiency through automated countermeasures. We also obtained two more invention patents. a dark retrieval method, and a system based on principal component spectral angular distance, and a system for enhancing client load balancing based on URL grouping granularity. These digital technology innovations further improve our operational efficiency, reinforcing our pursuit of quality and growth. Collectively, these patents not only safeguard our intellectual property, but also enhance our market competitiveness, providing robust technical support for our long-term growth and driving the digital transformation of the pharmaceutical industry. Furthermore, we continue to strengthen the supply side during the second quarter. Our transshipment model, Kunpeng, had streamlined logistics and reduced transportation costs, delivering robust progress. By consolidating shipments to one warehouse before intelligent distribution, we significantly improved efficiency and lowered internal distribution costs. It also adds value to the external supply chain, showcasing our commitment to leveraging digital technology to empower the sector. Additionally, Kun Peng's approach is particularly cost-effective for penetrating remote regions of China, and we now offer this service to merchants for a separate fee. In the second quarter, we established a vertical network across five major fulfillment centers, East China, Central China, South China, North China, and the Southwest China through a trunk plus branch delivery model. This is paving the way for a national component pharmaceutical logistics network, ensuring efficient last mile delivery in supply dense areas with full control of the supply chain Hunteng now operates 20 trunk transportation routes and first mile warehousing services, servicing 72 external clients, up 105% from 37 in Q1. The network supports a business scale of over 200 million RMB and has achieved total cost savings of 2.95 million RMB to date. Kunpeng is transitioning from a cost center to a profit center, enabling external supply chains by providing professional pharmaceutical logistics and distribution services to upstream and downstream partners. This has helped clients reduce costs by over 15%. It also addresses industry pain points like mixed cargo handling, high damage rates, and inefficient acceptance processes with a 55% reduction in delivered damage rates. This improves our service quality and enhances our customer engagement, solidifying our role as a key enabler in the pharmaceutical supply chain. With the expansion of the compound logistics network and the last mile delivery services, delivery expenses decreased. Combined with reduced warehouse labor, packaging material costs from improved efficiency, and the lower warehousing expenses, this resulted in a 7% year-over-year reduction in fulfillment costs to 8 to 8 million RMB in the second quarter. Moreover, to support future growth and advance our strategy for the nationwide compound logistics network, we plan to add two more JV fulfillment centers in the third quarter, bringing the total to 13. This expansion includes a second center in Wuhan and a new center in Urumqi, a city in the northwest. We expect the expansion of our fulfillment centers will enhance our logistics network, improve service across diverse regions, reduce delivery times, and increase overall efficiency. Our supply-set efforts are also demonstrated in our expanded cooperation. First, in the second quarter, we entered into a strategic direct supply partnership with Comprehensive Pharmaceutical Enterprise Beijing Syrian Pharmaceutical to enhance nationwide drug accessibility and distribution, particularly for Syrian flagship products like Syrian folic acid tablets The partnership based on our existing collaboration since 2017, utilizing big data, digital marketing, and cloud services to help SoLian's medications and pregnancy-related products reach a broader market more efficiently. Second, during a recent visit to APIC Hope Pharmaceutical Co., the company engaged in discussions with several pharmaceutical firms regarding various partnership opportunities. This resulted in the formation of an alliance named One Summit. The objective of this alliance is to foster innovative collaboration and address market challenges through joint efforts. The partnership aims to build a comprehensive, high-level, and a diversified network by focusing on products with distinctive features such as exclusivity, long-term commitments, traditional Chinese medicine, and insurance coverage. This initiative highlights 111's commitment to expanding its partnership network on a broader scale. Finally, let me dive into our strategies for growth in revenue, margin, and profit. Our core strategy is to provide highly efficient, cost-effective, one-stop shopping experience that addresses customer needs and solidifies our competitive position. By harnessing data analytics and market research, we can fine-tune our product portfolio to match customers' preferences while prioritizing low prices through intelligent digital tools. Additionally, we will continue to strengthen our partnership network with pharmaceutical companies. By expanding cooperation, we plan to broaden our extensive medicine offerings on our digital technology-empowered platform, driving shared growth through enhanced sales, especially in lower-tier cities. Our digital marketing network plays a pivotal role in this strategy, providing a robust platform to highlight our partners' products. Through focused marketing initiatives, we will enhance brand awareness and penetrate previously underserved markets. This strategic expansion of our partnership network not only benefits our pharmaceutical partners, but also strengthens our position as a leading e-commerce platform in the pharmaceutical sector, which is a foundation for sustained long-term growth. As we drive higher sales volumes and optimize our product offerings, we will see a positive impact on our overall profitability. Another growth engine is our product label business, which generates pleasing results. Given by increasing demand from customers, its revenue advanced 35% from the previous year in the first half. This line of business, featuring three brands, offers customers a diverse range of products, whereas the company enjoys a healthy gross margin of 29%. This also raises our brand equity and builds customer trust. Moreover, we will expedite our investment in the JVP platform. This innovative model has been increasingly attracting new partners and significantly expanding our product lineup, highlighting its compelling value proposition and effectiveness in engaging various stakeholders by improving the platform. To better meet the needs of our partners and expanding its reach, we anticipate a broader and more diverse partner base, leading to increased product offerings and sales opportunities. As we continue to refine and scale the platform, we believe it will strengthen our competitive position and become a critical catalyst to long-term growth and profitability. Operational efficiency is central to our strategy, and we're committed to investing in cutting edge technologies to streamline processes, minimize waste, and elevate productivity. Our emphasis on AI innovations and digitization is crucial. By embedding AI and fully digitizing throughout our operations, we aim to generate even greater operational efficiency, enhance customer engagement, and foster new products and services. We are confident these efforts will cement our market leadership as well as stimulate our growth opportunities. Digitalization is important to our future and is driving our industry-leading operational efficiency. With our internal operating system being 100% digital, we've not only improved our financial performance, but also established us as a transformative force to reshape the entire industry. Our technological ecosystem extends beyond our operations, providing both upstream and downstream customers with access to our advanced digital tools and expertise. Looking ahead, we believe our continued focus on digitization will maintain our competitive edge and market leadership, enabling us to achieve higher revenue and profit levels. With that, I'll hand the call to Mr. Liu Cheng to walk through our financial results. Thank you.

Thank you, Julian, and good morning or evening, everyone. Moving to the financials. My prepared remarks will focus on a few key business and financial highlights. For details on our second quarter 2024 results, please refer to slides 17 to 20 in section two of our presentations. Again, our comparisons are year over year, and all numbers are in RMB unless otherwise stated. Let's start with the second quarter results. Total net revenues were RMB $3.4 billion and the gross segment profit was RMB $207.6 million, relatively flat compared to the same quarter last year. total operating expenses for the quarter decreased 18.1% to $204.3 million. As a percentage of net revenue, total operating expenses for the quarter was down to 6%, down 7.2% as we continue to enhance our operating leverage and optimize our operating efficiency. Specifically, For human expenses, as a percentage of net revenue for the quarter, we're down to 2.6%, from 2.7% in the same quarter of last year. Sales and marketing expenses, as a percentage of net revenue for the quarter, was 2.3%, down from 2.6% in the same quarter of last year. General and administrative expenses accounted for 0.5% of net revenues, down from 1.1% in the same quarter of last year. Technology expenses amounted to 0.5% of net revenue, down from 0.7% in the same quarter of last year. As a result, income from operations were IMB 3.3 million, compared to loss from operations of IMB 1.4 million in the same quarter of last year. income from operations was RMB 8.5 million compared to the gap loss from operations of RMB 7.2 million in the same quarter of last year. The gap net loss attributable to ordinary shareholders was RMB 8.8 million compared to RMB 33 million in the same quarter of last year. As the percentage net revenue and gap net loss attributable to other shareholders decreased to 0.3% in the quarter from 0.9% in the same quarter of last year. As you can see, we are improving our financial performance quarter by quarter and maintain operational profitability for the second consecutive quarter. Please refer to slide 21 to 25 of the appendix section for selected financial statements. A quick note on our cash position as of June 30, 2024, we had cash and cash equivalents. We received cash in short-term investment of only $615.5 million, and we are pleased to report positive operating cash flow for two consecutive quarters. As of the date of this early release, the company had a total outstanding amount of RMB 1.1 billion, which has been included in the balance of the redeemable non-controlling interest and accrued expenses and other current liabilities, owing to a group of investors of One Pharmacy Technology pursuant to their equity investment made in 2020 as previously disclosed. As of the date of this early release, We have received redemption requests from certain of such investors for total redemption amount of 0.2 billion in accordance with the terms of their initial investment in one pharmacy technology. Furthermore, the company has answered into written agreements and our commitment letters with investors, representing the majority, the total total amount. We're continuing the negotiating with these investors to firm up the payment redemption request. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.