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 Relocation 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 borrowing 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 -over-year comparisons, unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a -over-year basis. With that, I will turn the call over to 111 CEO, Mr. Zhenling 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 website at .c.n. 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 strategies before handing over to our CFO, Mr. Liu Chen, who will provide a detailed analysis of our financial performance. First, China's complex economic situation is impacting many industries, and the 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 developments indicate 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 blood tails and prescriptions to retail pharmacies, which offer a more accessible and a transparent alternative to the traditional hospital system. This is a shift strongly encouraged by the state. Given our expertise in the -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 industrial 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 environment management, and warehouse allocation. The meaningful progress we made earlier this year has persisted into Q2, underscoring our ongoing success in digitization. As aforementioned, 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-GAP income from operations was 8.5 million RMB compared with non-GAP 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 .6% of net revenues during the quarter, down from .7% a year earlier, reflecting a decrease in fulfillment costs by 7.3%. Our general and administrative expenses fell to .5% of net revenues from .9% a year ago. Salmon expenses decreased to .3% as a percentage of net revenues from .6% in the previous year. Technology expenses were .5% of net revenues as well, down from .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 stands 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 allow 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 are 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 marketing 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 from 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 novel 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 the value proposition of low costs, but also enhanced procurement efficiency. Notably, with our digital investment promotion platform and the Billing Upstate 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 along some loyalty, which are crucial for sustainable growth. Second, 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 picking parts by 15%, further boosting outcome efficiency. Additionally, the implementation of the digital logistics network for last mile delivery has cut distribution costs by over 5%, underscoring our commitment to operational excellence. Third, our application of AI in product matching has significantly elevated the accuracy and efficiency 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 have 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 are pleased to announce the acquisition of four new patents, bringing our total to 28. Among these is the invention patent for a method 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 grateful patent for an adaptive anti-crawler method and a system based on information categories. This technology boasts 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 drug 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 continued to strengthen the supply side during the second quarter. First, our trans-sigment model, QWMP, has streamlined logistics and reduced transportation costs, delivering robust progress. By consolidating segments to one warehouse before intelligent distribution, we significantly improved efficiency and lowered internal distribution costs. This also adds value to the external supply chain, showcasing our commitment to leveraging digital technology to empower the sector. Additionally, QWMP'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 very good network across five major fulfillment centers, East China, Central China, South China, North China, and the South-West China, through a trunk-plus branch delivery model. This is paving the way for a national QWMP pharmaceutical logistics network, ensuring efficient last mile delivery in supply-thin areas with full control of the supply chain. QWMP 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. QWMP 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 delivery 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 QWMP 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% -over-year reduction in fulfillment costs to 8 million RMB in the second quarter. Moreover, to support future growth and advance our strategy for the nationwide quantum 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 Wulongbuchi, 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 Syriam Pharmaceutical to enhance nationwide drug accessibility and distribution. Particularly for Syriam's flagship products like Syriam folic acid tablets, the partnership based on our existing collaboration since 2017, utilizing big data, digital marketing, and cloud services to help Syriam's medications and pregnancy-related products reach a broader market more efficiently. Second, during a recent visit to AP COPE 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 diversified network by focusing on products with distinctive features such as exclusivity, long-term commitments, traditional Chinese medicine, and insurance coverage. This initiative highlights -on-One'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 a 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 the foundation for sustained long-term growth. As we drive higher sales volumes and optimize our product offerings, we receive a positive impact on our overall profitability. Another growth engine is our private label business, which generates pleasing results. Given by increasing demand from customers, its revenue has increased to 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 JDP 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 sinful to our strategy, and we are 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 have 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 will hand the call to Mr. Luke Chang 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 slide 17 to 20 in section 2 of our presentation. Again, our comparisons are year over year, and all numbers are in IMB and less otherwise stated. Let's start with the second quarter results. Total net revenues were IMB 3.4 billion and the cross-segment profit was IMB 207.6 million, relatively flat compared to the same quarter last year. Total operating expenses for the quarter decreased .1% to 204.3 million. As a percentage of net revenue, total operating expenses for the quarter was down to 6% down .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 are down to .6% from .7% in the same quarter of last year. Still, for the marketing expenses, as a percentage of net revenue for the quarter was 2.3%, down from .6% in the same quarter of last year. General and administrative expenses accounted for .5% of net revenues, down from .1% in the same quarter of last year. Technology expenses amounted to .5% of net revenue, down from .7% in the same quarter of last year. As a result, income from operations was IMB 3.3 million compared to loss from operations of IMB 41.4 million in the same quarter of last year. And the NGEP income from operations was IMB 8.5 million compared to NGEP loss from operations of IMB 7.2 million in the same quarter of last year. NGEP net loss attributable to other shareholders was IMB 8.8 million compared to IMB 43 million in the same quarter of last year. As a percentage of net revenue, NGEP net loss attributable to other shareholders decreased to .3% in the quarter from .9% in the same quarter of last year. As you can see, we are improving our financial performance quarter by quarter and maintain the 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 the short-term investment of IMB 615.5 million. And we are pleased to report positive average cash flow for two consecutive quarters. As of the date of this early release, the company had a total outstanding amount of IMB 1.1 billion, which has been included in the balance of the redeemable and controlling interest and the accrued expenses and other current liabilities, according to a group of investors of Worm 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 press from certain of such investors for total redemption amount of 0.2 billion in accordance with the terms of their initial investment in Worm Pharmacy Technology. Furthermore, the company has entered into written agreements and our commitment letters with the investors representing the majority of the total recurring amount. We will continue negotiating with these investors to form up the pay redemption request. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Zai Peng Feng with CICC.

Hi, this is Shifan from CICC. Thank you for taking my question and congratulations on the company progress. Well, I have two questions about financials. The first one is, I see that the OPEX ratio in the second quarter decreased compared to that of the second quarter in 2023. So what's your guidance on the expenses ratio in the long run? And my last question is, well, we noticed that the company achieved operating profits in the second quarter. So I just wonder what's the drivers behind the results and what's your guidance for net profit of the year?

Thanks. Mr. Peng, good to see you on the call. Thank you for the questions. So let me address the first question first with regards to the OPEX. Perhaps let me start with how we run the lean operation. First of all, we have an in-house developed operating system which comprises dozens and dozens of other systems. It's 100% digital. At any given time and anywhere, the management can access real-time operations, you know, either it's a sales in various regions or different types of customers, categories of products, allocation of tasks to sales team, fulfillment operations, etc. The whole operation is transparent and with real-time data available, we can make decisions and adjustments faster. With continuous optimization of operations, we achieved an operational efficiency that can match some of the well-established designs in the industry. And mind you, you know, compared to those big guys with the sales of hundreds of billions, and our revenue was still relatively small at 15 billion last year, you know, with a bigger pipeline, we can further scale down our operational expenditure. We are very confident in that. Our estimate is that, you know, if we can run sales at a scale of 20 billion or more, we should be able to operate under 5%. With regards to your second question, you know, how we grow into profitability, it's really, you know, like what I said, you know, first of all, operational efficiency is our core competence. And our principle is to provide customers with the richest selection, with competitive tasks and good services. You know, obviously, you know, moving into the future, we will continue to invest to build a bigger supply base to ensure that our product assortment meets customers' needs. And of course, one of the cost strategies this year is that we're going to relentlessly pursue competitive prices. This will drive customer loyalty. This will drive more and more customers. This will really increase our output. You know, coupled with the operational efficiency, we're really in a good position to achieve our goal and to sustain profitability, at least for 2024, if the market conditions remain the same. Thank

you. Okay, that's very clear and thanks for the sharing.

So our next question comes from Zoe Bien, Good City.

Thank you, Amanda, for taking my question. This is Zoe from Good City. And I have three questions. The first is given that the offline pharmacy has operating pressure this year. I want to know in case the overall customer demand is increasing, how will we increase the penetration rate into the pharmacy clients? And the second question is, if your current strategy is still trying to improve profitability instead of the revenue growth. And the third question is how the retail price, sorry, the retail drug price comparison policies affect -on-one operations? Thank you.

Right. So Zoe, hi. Mine was not very clear. If I heard you correctly, let me just repeat the question first. Like you were saying that the offline pharmacies are under pressure and how we can improve our penetration rate. Second question is profit, the biggest priority for the company. And the third is how do we deal with the price comparisons from pharmacies, the procurement team?

Yes.

Okay. So with that being the questions, let me just address them one by one. First of all, you know, we anticipate that in the short term our end customers will experience some challenges and it will be hard to maintain the same store sales as in the past. However, this presents a great opportunity for -on-one to help those pharmacies to overcome the challenges. We indeed, our priority for 2024 will be focusing on profitability. In the meantime, we are optimizing our selection to ensure that our offerings can meet our customers' demand. You know, a lot of efforts have been made on the supply side and we made a tremendous progress on providing the richest selection for our customers to make it a one-stop shop. We believe that shopping experience is crucial, especially for the small to medium chains. And this way we can continue to grow our wallet share. As for the price comparisons, we have always anticipated the fact that more and more customers are going to multiple platforms to compare prices before they place the order. This year we've made low prices as the overarching strategy operationally. We always believe that the way to win the market in the marketplace is to offer the greatest selection with low prices. Let me also add, you know, although the industry is under pressure, if you look around, this is one of the broad industries. As more and more stores are opened, the recent data shows that the overall number of pharmacies has reached 700,000. You know, last year it was still in the 500-some space, right? This suggests that we're in the right industry. With more stores open up, you know, we have more opportunities to service them. And with the recent anti-corruption campaign going on, we also anticipate that the growth from the hospital drug sales will peak and more and more medicines will be sold through online and offline pharmacies in the long term. And that's where 111 is well positioned to take advantage of. Thank you.

Your next question comes from Jesse Liu with HSBC.

Thank you for taking my question. This is Jesse from HSBC. And congratulations on another solid quarter. I have a couple of questions. The first one is on financials. We saw that the net cash generated by operating activity was nearly $100 million in this quarter. So can you help us understand the key factors that help you contribute to this? The second question is on your Kunpeng logistic model. We saw that not only it helps the company to reduce costs and improve efficiency, it also empowers the industry chain. Can management share more color and update on the development of this system? Thank you.

Hi, Jeff. You can see a little bit. Let me answer your first question. Yes, our business objective for the quarter was very clear, is to turn to profit and achieve positive operating cash flow. So we have been very careful to improve our working capitals, specifically our accounts payable turnover dates and our inventory turnover dates. If you compare our accounts receivable balance and inventory balance between June 30 and March end, you will see clearly that we made improvements. Additionally, we also introduced the supply chain finance from Sotapati to our customers, mainly our pharmacy customers. So they are using Sotapati financing to make payments to us for purchase of drugs. Now this creates a win-win situation. A win for the pharmacy, which they get financing to make purchase of the message of drugs. A win for the Sotapati finance institution, they get customers. A win for us is also we get payment immediately when they do the purchase. Moving forward, we will all continue to pay particular attention on all the working capital items, specifically the human trades, the turnovers, accounts receivable turnovers, as well as accounts payable turnovers. And we are quite confident that we will continue to see positive operating cash flow and overall cash flow in the coming quarters. Okay, Jesse, let me take the Quinn Pong project question. Let me share how we started this project. So basically, we optimize our allocation of our products across all our fulfillment centers. We have now 13 fulfillment centers in the nation. And that's why we have to put the right product in the right fulfillment centers to both get closer to the customers and save time to minimize the transportation or the fulfillment cost. So by doing that, we have to transship products from warehouse to warehouse. So we started by doing the transshipment among our hub warehouses, five major warehouses. And we found that the transshipment costs, in the past we rely on third party logistics. We found that cost was high and the damage rate was very high. Then we stepped our own route for the transshipment. And we found that the cost reduced significantly. At the same time, the damage rate reduced by 55 percent. And that we stepped our own route among our major hub fulfillment centers. And started service to our clients. And now we already serve more than 70 clients with 200 million in scale. And we believe that that business model will continue and serve more and more customers. And now we save customers about 15 percent of the cost.

Thank you. Your next question comes from Robert Sassoon with Water Tower Research.

Hi. Thanks for taking my questions. I have three actually, if I may. Let me start with the first question. Could you provide some more details on 111's plans for building new fulfillment centers in the second half of the year? How many centers do you plan to add and where will they be located?

Okay, Robert. You want me to take your question first? The fulfillment centers?

Yeah, sure.

Currently we have already launched 11 fulfillment centers across the country. And as you mentioned about our future plans actually in the second half of the year. Actually in the next quarter we will expedite our process of setting up those fulfillment centers. But through a very new model. That is instead of building up the fulfillment center by first-party model. We will work with local partners to set up JD fulfillment centers and also franchise fulfillment centers. So far, besides the 11th FC you already have, there are seven new ones already in a pre-opening process. Like warehouse decoration, stop training, system testing, even already in the inbound logistics process. These seven fulfillment centers are located in various provinces including Guangdong, Shandong, Hebei, Xinjiang, Hubei, Hunan and Chongqing. They target to open I think from September to probably November, December. In the next three, four months these seven fulfillment centers will be open. And besides these seven which are already almost ready for launch. There are more new fulfillment centers in our pipeline. Most of them are in northeast or southwest of China. We believe that the set up of these fulfillment centers will be able to provide a much better selection, a better price and also add SLA to our customers across the country especially in the sub-tier cities. Robert, I hope I answered your question.

Yeah, thank you for those details. My second question is, Strengthening Partnerships is one of the company's key growth strategies. So could you share some updates on new partnerships with pharmaceutical companies?

Yeah, we have already set up a direct-sourcing relationship with more than 400 pharmaceutical companies which brings a very rapid growth of our central purchase business. But I think your question is more than that. Besides the simple buyer and seller model, we are doing a full process to help these pharmaceutical companies on their digital marketing capabilities. For example, we launched an ecosystem with KOKOI telescope. And this telescope allows for a crisis visualization of distribution status across a network of more than 20,000 pharmacies, those endpoints nationwide. Besides those distribution status, it also visualizes the dynamic consumer and sales status and also the sales price, which those pharmaceutical companies will be very interested in. And it even offers a market penetration analysis spanning 34 provinces and 600-plus cities, which also provides a YOY or MOM or -over-week and even -over-day overview of those sales data chains. So with Pelescope and other digital tools, we are confident to further strengthen our strategic partnership with pharmaceutical companies on the transformation from our traditional multi-tiered distribution to a digital marketing model. Thank you, Robert.

Thank you. And I have a final question. Obviously, digital technology is at the core of your business model. So could you discuss the progress you've made in digital technology in the second quarter and also particularly focus on the application of AI technology in your platform?

Okay. Thank you, Robert. So digital technology has always been our core confidence and we have made significant investments in it. And we also have achieved quite some progress in various problems. I can only mention to you a few, and let me just discuss in a little bit more detail. The first one is about the bidding system. So we have a merchant platform that allows merchants to bid on the platform. But we provide them an automated bidding by giving them the pricing index for intelligent pricing, allowing them to optimize their total

mixed

sales versus profit. We found that through this bidding system, the total conversion rate has improved from starting with 27%, 28%, now it reaches a historic high of 32%. That's quite significant. And we also use various optimization modeling algorithms to optimize our supply chain. Can you mention that we optimize the picking path, we optimize the order mixing for the refrenchment, shelving and refrenchment. We have reduced the cost of picking by 15% and the refrenchment cost decreased by 11%. Also let me mention about the AI technology, how we apply it. One year ago we launched data services on Shanghai data exchange. That data was for medical data, for medicine. We have extended that technology to multiple products. One is for medical device database, the other is for health supply database. We use the AI technology heavily in that algorithm for managing products, for increasing the accuracy. In fact, we increase the matching rate and accuracy by 50%. Hope that answers your question.

Thank you very much. That's great. A lot of details. So I'll jump back on the line.

Your next question comes from Michael now with an individual investor.

Thanks for sharing. I have two questions. First is how many new tenants do you secure recently? How many tenants does your company currently have in total? The second question is how many private labor products does your company have on the shelf? And will you focus on accelerating your private labor business this year? Could you please provide more detail on how the company plans to achieve this? Thank you.

Samuel answered about the patent question. So can you mention that last quarter alone we acquired about four patents. And now we have a total of 28 patents. And this actually answers the question partly what Robert asked before. Several of these questions, all of these patents, all relate to application AI technology. For example, we first use voice recognition combined with large language models to improve our voice services for customer service and for self-training. So that's one patent. Also we have a patent for photo-based drug retrieval. Basically it takes a picture of the boxes. The person will recognize what medicine it is. So that uses quite some AI technology and for large databases, our big data. And Michael, for your second question regarding the private label. Currently I know there are about 200 private label SKUs registered and launched in .1.1. And we have a couple of brands. And Huan Zhao is for our chains or customers. Huan Jia Rong Yao is for our individual store. And Lenny Deer is for battery supplement. These products in the past year have been well accepted by our pharmacy customers. And they are now well sold in various pharmacies across the country, including very, very remote areas like Shizhang or Xinjiang province. There are more and more SKUs in our pipeline, including OTC, Rx, battery supplement, and also medical devices. As we all know, for each chain store, those are the top-KAs. Private label products have been a very important margin contributor and also revenue contributor of their sales, which we can find in our financial reports. But for our customers, which are mainly small or medium chain stores or even individual stores, they don't have the capabilities to establish their own brand. So our brand like Huan Zhao or Huan Jia Rong Yao has become a very attractive solution for them to differentiate with their competitors and also to differentiate with those big-KAs chains stores. To conclude, these private label products bring sustainable profit to -on-one and they also bring sustainable profit to our pharmacy customers. And literally, they also help us build up a long-term relationship with those customers because those are exclusive. We will continue our investment in this area as mentioned. We are seeing more and more products in OTC, Rx, and even Chinese medicine. Thank you.

In closing, on behalf of the -on-one management team, we'd like to thank you for your interest and participation in today's call. If you require further information or have any interest in visiting -on-ones in Shanghai, China, please let the company know. Thank you for joining us on the call today. This concludes the call.