111, Inc. (NASDAQ:YI) Q3 2023 Earnings Call Transcript

111, Inc. (NASDAQ:YI) Q3 2023 Earnings Call Transcript November 30, 2023

Operator: Hello, everyone, and thank you for joining 111’s Conference Call today. On the call today from the company are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO and 111’s Major Subsidiary; and Mr. Haihui 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 Web site. 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 RMBand all comparisons refer to year-over-year comparisons unless otherwise stated. Please also refer to the earnings press release with 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. Junling Liu.

Junling Liu: Good morning, and good evening. Thank you for joining our third quarter 2023 earnings call. Information we’ll be discussing is also available in the slides that were posted earlier today on the company’s Web site, and I encourage you to download the presentation as well as the earnings report from our Investor Relations Web site at ir.111.com.cn. I will start by offering an overview of the broader economic 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 continuous upsurge. A detailed analysis by Frost & Sullivan highlights this robust growth, revealing an escalation from ¥371.6 billion in 2018 to a remarkable ¥639.7 billion by 2022, marking the compound annual growth rate and 14.5%. This impressive expression is not merely a short-term phenomenon that is projected to maintain its momentum.

Forecasts suggest the market will soar to an estimated ¥1 trillion 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 SinoHealth, 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 relapsed 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 macro economy as well as retail pharmacy business, we have managed to deliver net revenue growth of 9.5% year-over-year, reaching ¥3.7 billion. This represents the 21st consecutive quarter of year-over-year progression for 111 since our NASDAQ IPO. Our gross segment profit faced a temporary challenge due to our concerted 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. Meanwhile, 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 remains 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 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 digitization 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 convoluted multilayer structure riddled with inefficiencies and numerous drawbacks. And 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 with industrial supply chain, streamlining processes and eliminating unnecessary intermediaries. Furthermore, transaction automation has revolutionized the way business is conducted, enhancing efficiency and reducing average.

Intelligence service driven by data driven insights and artificial intelligence is empowering stakeholders with personalized and efficient solutions. The fundamental driver of our business growth lies in the establishment of a positive feedback group 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.

Thus 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 in the regions like spot 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 has given rise to a comprehensive platform that serves as a game changer in the realm of category and pricing management, fostering closer collaboration between pharmaceutical companies and the retailers. Within this cutting edge ecosystem, our pharmaceutical enterprise services introduced 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 [JBP] 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 broadband catalog, we continuously update our understanding of customer demand by leveraging both company and industry data.

We greatly — this greatly enhances our assortment decisions, giving priority to top demanded goods and tailoring offerings originally to meet unique demands. Furthermore, our smart sales initiative empowered by the Eagle Eye tool enhanced customer engagement and transform marketing efforts for increased efficiency. In parallel, we empower and optimize pharmacy operations by analyzing customer segments, providing private domain service guidance for B2B2C success, implementing a smart sourcing system, offering cloud prescription services, deploying the pharmacy operation analysis spot 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, we have done 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 and 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 intelligent 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 111’s digitization strategy on the scoring our unwavering commitment to innovation and growth. Meanwhile, on August 8, the Ministry of Commerce of China announced on its official website, the listed 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 11, we’ve honored to have our case on leveraging digitization for pharmaceutical full channel commercialization selected for the 2023 supply chain management services and a 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 upgrade our own digital capabilities, improving efficiency and service levels while breaking down inflammation 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 health care integrated service platform.

We have seamlessly integrated online and off-line services to create an ecosystem connecting hospitals, pharmaceutical companies, pharmacies, patients, doctors and more offering end-to-end services covering medicine plus health care payments with our core technological capabilities, industry-leading integrated online and off-line intelligent supply chain platforms and multichannel 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 3 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 the 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 the responsiveness of our pharmacy operations, ensuring that patients receive the right medications when they meet 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 patent pertains to a low-code platform development method and system. In the context of pharmaceutical distribution and the retail business, this technology can significantly simplify allocation and 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 promise 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 health care industry. They are not only a testament to our commitment to delivering enhanced services to patients and to health care providers, but also highlights our dedication to staying at the forefront of technological advancement in the field. These systems will play a pivotal role in improving the overall health care 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 was 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 continued to addressing health care 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 a strengthening of our supplier relations across the organization. Building on the success of our recent established in-house advisory department from the previous quarter, we’re 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 the 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 concerted efforts, we’re delighted to announce that this quarter, we have consistently met and often exceeded customer expectations, implemented sustainable pricing models and maintain adapt resource management across the organization.

Now let me spend a moment to talk about our future growth initiatives: one, grow JBP business segment to significantly increase selection and enhance customer experience. Next quarter, we will continue to allocate resources to strengthen our JBP 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 JBP model enables us to take full control of logistics, ensuring a superior customer experience compared to the MP 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. And two, we 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 demands, ensuring that we can efficiently meet the specific demands of our customers and strengthen our partnerships with pharmaceutical manufacturers and a 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, JBP and marketplace segment 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 upgrade. 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 products for customers, ensuring that they save money while enjoying a right 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 demand are fulfilled with the best supply. By embracing AI-driven solutions, we’re taking significant strides to both 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 JBP 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, 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 are 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 prioritized the refinement of management skills and decision-making capabilities, recognizing their direct impact on operational prowess. By meticulously addressing these areas we are positioned to significantly reduce operational costs, opening the path to sustained growth and prosperity. Six, 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 their agile and responsive to market dynamics. This restructuring will evolve — will involve optimizing our staff distribution, leveraging the right talent in the right roads and fostering a culture of innovation and adaptability.

By embracing these changes, 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. Seven, 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 times, 111 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. 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. Thank you.

Luke Chen: Thank you, Junling, and good morning, or evening, everyone. Moving to the financials. My prepared remarks will focus on a few key business and financial highlights. You can refer to the details of the third quarter 2023 results from Slide 22 to 25 in Section 2 of our presentation. Again, our comparisons are year-over-year and all numbers are in RMBunless otherwise stated. Despite the challenges in the macro economy as well as the retail pharmacy business, our total net revenues for the quarter grew 9.5% to RMB3.7 billion, which was mainly attributed to our B2B segment growth — revenue growth at 10.1%. As we made efforts to digest the inventory of corporate-related medicines, gross segment profit for the quarter decreased 5.6% to RMB190.6 million.

Gross segment margin was down from 6% to 5.2% for the quarter. We have been consistently improving our operational efficiency and have gained positive results. Our total operating expenses for the quarter decreased 4.1% to RMB271 million. As a percentage of net revenue, total operating expenses in the quarter was down to 7.4% from 8.4%. Procurement expenses as a percentage of net revenue for the quarter were down to 2.8% from 3% in the same quarter of last year. Sales and marketing expenses as a percentage of net revenue for the quarter was 2.6%, down from 3.2% in the same quarter of last year. General and administrative expenses as a percentage of net revenues accounted for 1.3%, down from 1.4% in the same quarter of last year. Technology expenses accounted for 0.7% of net revenue, down from 0.9% in the same quarter of last year.

As a result, non-GAAP loss from operations was RMB54 million compared to RMB48.7 million in the same quarter of last year. As a percentage of net revenues, non-GAAP loss from operations accounted for 1.5% in the quarter, which was same as last year. Non-GAAP net loss attributable to ordinary shareholders was RMB66.9 million compared to RMB64.9 million in the same quarter of last year. As a percentage of net revenue, non-GAAP net loss attributable to ordinary shareholders decreased to 1.8% in the quarter from 1.9% in the same quarter of last year. Please refer to Slide 26 to 30 of the appendix section for selected financial statements. And a quick note on our cash position as of September 30, 2023, we had cash and cash equivalents, restricted cash and short-term investments of RMB876.6 million.

At the date of this earnings release, we have a total outstanding amount of RMB1.1 billion, which has been included in the balance of redeemable non-controlling interest and accrued expenses and other current liabilities owned to a group of investors of 1 Pharmacy Technology pursuant to the equity investment made in 2020, as previously disclosed. As of the date of this earnings release, we have received a redemption request from certain of such investors for a total reduction amount of RMB0.2 billion in accordance with the terms of their initial investment in 1 Pharmacy Technology. We are currently in the process of negotiating with these investors and other relevant stakeholders regarding the repayment and our restructuring of such redemption obligations.

This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

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Q&A Session

Operator: [Operator Instructions] The first question today comes from Xipeng Feng with CIBC.

Xipeng Feng: Congratulations on the company’s progress. Well, I have two questions actually. And my first question is about [indiscernible]. As we noticed, the operating expense ratio of 111 has been decreasing. So what is the main reason behind this trend? And will that continue to decrease in the future? And my second question is about business. Just as you mentioned before, would you please discuss a little bit more about the progress has been made recently in the company’s investment in technology. And that’s my question, thanks.

Luke Chen: I’ll take your first one regarding the operating expenses. And in the previous year, we have been continuously putting our efforts to enhance our operational efficiency, and as we just announced, the overall operating expenses has been reduced to 7.4% this quarter compared to 8.4% in Q3 last year. So within the key — the key components of the operating expenses, the sales and marketing has been reduced to 2.6% this quarter compared to 3.2% of last Q3, and our G&A has decreased to 1.3% from 1.4%. Our technology-related expenses has decreased to 0.7%, down from 0.9% of last Q3. And furthermore, our fulfillment cost has reduced from 3.0% to 2.8%. So you can see this — the important element of operating efficiency and reduction of the costs occur in all functions across our organization.

And we believe with the increase of our sales volume and also the implementation of new AI technology in our daily operations, but we will continue to see reductions on all areas in our operating.

Junling Liu: Let me take the second question about technology investments, okay? I would say that our technology — investment in technology has achieved a remarkable progress lately. Let me demonstrate this through a few data points. One that our company has been awarded the 13th China Data Management Excellence Award. The second is that our company has been honored with the title of the best data innovation benchmark, the second China Data Elements Annual Awards. We were awarded specifically in the field of medical industry master data applications. Our opinion — has mentioned that we have recently acquired 3 new patents. And we also have made progress in AI applications. For example, 80% of our both internal and external customer service inquiries are handled by AI algorithms.

They are powered by internal non-space and by utilization of the open AI platform, enabling efficient and GVT-based IT customer support services. I hope this answers the question about technology investment.

Xipeng Feng: That’s very clear and helpful. And thanks for sharing and congratulations again on the company’s progress. Thank you.

Operator: The next question comes from Kevin Tom, an individual investor.

Unidentified Analyst: My question is how did the company maintain a 21st consecutive quarter of Y-o-Y growth since NASDAQ IPO and will this growth continue especially [Technical Difficulty] achieved in the last quarter of the previous year? Thank you.

Junling Liu: I think there are a few things we did right to achieve consecutive 21 quarters of year-over-year growth. I think first of all, the culture of the company is always focusing on customer experience. Our decision-making is always centered around customer experience. Some of the projects when we assess, we’ll need to figure out what kind of improvement that’s going to bring to customer experience. And secondly, we have always had a strategy to, first of all, building infrastructure and the secondly dividend scale. And with the infrastructure and scale we’ll be able to achieve profitability. And obviously, that’s yielding results. And the other contributing factor to the continuous growth is really our technology. As I mentioned, we were awarded another 3 patents last quarter.

That says a lot about our continuous focus. And I remind you, when we first IPO-ed back in 2018, back then, our revenue was less than RMB1 billion. It was RMB900 million something. And of course, this year or last year, we achieved RMB13.5 billion, and this year we anticipate in the neighborhood of RMB15 billion. So we have absolutely come a long way, and we look forward to really reporting even better results in future quarters. Thank you, Kevin.

Operator: The next question comes from Tom Craig with Cornerstone Investment.

Tom Craig: Congratulations for your last quarter performance. I have two questions. The first is after factor when adjusting and normalizing the backlog of inventory in the market, how 111, Inc. navigate market environment that is both promising in the long term, but increasingly competitive, specifically was traffic mergers will the company take to enhance the breadth and depth of correlation with the upstream and downstream customers. And my second question is, what are the key drivers behind the decrease in gross segment profit this quarter? And how 111 adjust these issues? Thank you.

Junling Liu: Tom, I think, as you mentioned, there is a huge backlog across the whole industry because of the COVID-related medicine and the whole industry suffered in the second quarter and the third quarter. And we are very pleased to report that we have normalized our inventory. And obviously, moving forward, you mentioned about competition. Our view has always been, whether you lock it or not, the competition will always be there. So we’re not as well embrace it. So we should take a very positive view, competition should be good for us because that’s going to force us to really focus on customer experience, focusing on the value creation. As I mentioned in my script, I think let me just highlight that we will be really focusing on the expansion of our JBP business and the first-party business on the supply side.

This will mean that we’re going to have a strategy of both a centralized approach and a decentralized approach. So by way of being centralized, that means we’re going to have dedicated teams focusing on the big pharmaceutical companies where we need to build really direct sourcing, where we really need to source high-margin products and also really securing supply and better pricing. So we have made tremendous progress over the years, and we’re going to continue to focus on that. So this is the centralized approach. And the other approach to complement that is decentralized. That means we’re going to really leverage the market forces, especially our JBP partners. Those commercial vendors can place their inventory into our fulfillment incentives, and then we can deliver to our downstream pharmacy customers by having them really contributing to really the selection experience for our customers downstream by purely doing first-party centralized, it’s going to take a much longer time, and it’s going to be very cost costly.

And by leveraging those vendors, it’s going to be much faster and much more cost effective. And we’re going to have a wider selection for our downstream customers to choose from. So we’re going to have separate teams focusing on those different business metrics. And we believe that by focusing on both the centralized and decentralized approaches, it’s going to bring really great benefits. We have already seen that. And Q3, we had the backlog cleared. We feel pretty light, and I really look forward to reporting Q4 results to our investors, including you Tom. Thank you.

Luke Chen: Tom, regarding your second question of the gross profit. Yes, the retail pharmacy of the past Q3 declined in entire China. So the very important reason is, as just Junling mentioned the existing inventory issue, which was sold during the second half of COVID restrictions several months ago. And for example, a lot of family, including myself, will have [Indiscernible] [quite some], for example, like [indiscernible] and some Chinese [Indiscernible] [investments] like [Indiscernible] at home and which are going to be expired. And this inventory issue is across the countries, which leads to a decline in an entire pharmacy retail market. But despite all these challenges, we have managed to deliver a 9.5% year-over-year revenue growth.

The issue of our gross [segment] profit actually is a temporary challenge. And regarding the inventory, which we had managed to resolve this anti-COVID related lessons. So it’s a temporary problem. We have already resolved the inventory issue. So going forward, we will still go back to our strategy towards a much more healthy business and first to reduce our procurement costs through our direct sourcing from those pharmaceutical companies and also secondary to optimize our product assortment and structure and also to further utilize our strength, our digital technology and to promote our digital platform as well as our cloud services to all our upstream and downstream customers. All this strategy will bring us a much more healthy business and also I believe we are going to see a better margin performance moving forward.

Thank you.

Operator: The next question comes from [Jada Wu] with Arbor Group Capital.

Unidentified Analyst: This is [Indiscernible] [Jada Wu from Arbor Group Capital]. Congratulations on your success last quarter. And my following question will revolve around the company’s future outlook. First, please talk about the company’s thoughts and layout in the field of artificial intelligence? And second, what will be the company’s operational focus going forward? Thank you.

Junling Liu: Let me see if I can address your question around artificial intelligence. And I think in my script and also Dr. Luke just mentioned, there are a few things we are doing right. So first of all, in terms of customer services, we are adopting a lot of these AI elements, and we’re making a very good progress in that space. Secondly, when it comes to pricing, we have the intelligent pricing system and the AI plays a huge role. But I want to talk about a very bold approach and we have an internal project that is underway, and we’re already having very encouraging results. As you can tell, since the launch of the ChatGPT AI has swept the whole industry. And a lot of — there are more than 200 large language models that’s been built in China.

And we don’t believe that building a large language model will fit into our business. But what we do have is the 12, 13 years accumulation of industry data. So each day, we have over 1 million queries on over 1 million SKU queries on our platform. And we have our first-party supply. We have our JBP supply. We have our marketplace supply. And obviously, for a single customer, to really find the best deal is a very challenging task. Let alone outside of our platform, they have to do this manually via phone call and so on. So what we are trying to do is instead of building a large language model, they would like to build a transformer, maybe a mini transformer. It doesn’t have to be a full-fledged transformer. We can leverage the established platforms, technology to really bring the best deals to our, let’s say, downstream customers when they have those queries.

And it’s not because we are so good at AI, it’s because it so happened that we have probably the best set of industry data and it would be foolish not to really utilizing all that to bring great results to our customers. So the significance of this project and implication is not only really focused on building a better demand and supply ecosystem, and we can be centered around that. What we’re really eyeing is the future. Let’s say, we have a traditional business we call that, let’s say, the traditional commerce. And then if we move on to e-commerce. But fundamentally, that is still the old commerce except that you bring those products onto the virtual shelf. But it’s still a one-way passive kind of commerce. The transaction is basically a runway traffic.

There’s nothing much you can do apart from exhibiting their prices. But with AI capabilities, especially if it is generative, we can actually have interactive dialogues with the customers. And especially when you have promotions, especially after you accumulated so much data about a particular customer, you know their assortment, you know the deficiencies, let’s say, in their assortment, you know the seasonal changes, what kind of products they need to, let’s say, build inventory to anticipate customers’ demand and so on. So when winter comes, you know cough and catching cold, influenza would be critical for pharmacies. And by proactively approaching customers with the precise information, we can bring tremendous value because it’s going to be interactive, we can absolutely transform the traditional commerce business to a, let’s say, from e-commerce, probably — I’m just trying to name it to find awkward to AI commerce, which used to be a one way non-interactive to a two way interactive commerce.

And it’s still very early stage. We cannot claim any early results. But we’re extremely excited in this area, and we will continue to explore. And hopefully, I can update you in the near future of the progress we’ll make. So I think, Haihui, would you talk about the second question.

Haihui Wang: I think the second question on the operational focus. And actually, our focus has actually remain unchanged. I think basically, I can conclude with two key message. One is the customer experience and second is our operational efficiency. So the customer experience by — and first of all, we will further enhance our program pool in just our CEO also mentioned in his script continues to update our customer database and enhance the assortment division and also giving direction to our supply organization on real-time customer demand. And also secondary, we are setting up an omnichannel supply for pool selection by our JBP, our marketplace and also platform management. And thirdly, on the customer experience, we are launching new technology including AI.

And for example, like our smart supply chain system to make sure a much better and delivery services to our — of our orders and to our customers. And on the operational efficient part, first of all, we will continue to promote our JBP model, also to automate the transaction process and also to reduce our partners, inventory cycle. And secondarily, we will better manage our marketplace model using the platform which consists of several thousands of vendors better serve our customers. And also we are launching the new so-called version of our price intelligence system, which also will help us to manage our price in real time and much more effectively. And I think — I hope I answered your question, [Jada].

Operator: The next question comes from [Kathy Lee with SCS Capital].

Unidentified Analyst: Congratulations on the growth, and I have two more concerns. First, what are the expected outcomes of the JBP business expansion? And how will it enhance customer experience and operational efficiency? Second, regarding to the supply chain management, what actions have been taken to improve its operational efficiency and what the results are expected from this improvement? Thank you.

Gang Yu: First of all, we know that the JBP business model requires very tight relationship between us and our JBP partners, and it leverages the strength of both. So with such a strong tie, we enjoy much faster selection expansion, our fuller service coverage more effective use of our smart supply chain and less stock shortage. So all these will definitely enhance our customer experience. In addition, with the same selection, semi SKU will be offered by multiple JBP partners through competition, the price will be better for our customers. Regarding operational efficiency, will be improved by two fundamental things. One is that we’ll offer effective data-driven systems to our JV partners. They have a complete visibility and transparency of our supply chain.

Second, we have been continuously improve our forecasting systems, inventory management systems and PIS, price intelligence systems. All these will share the system functionalities with our partners. So regarding the supply chain management improvement, let me just use a few examples, okay? In warehousing, we started a GoPartner project. This project strengthened our supplier partnership for faster, more reliable inbound deliveries. It reached more than 50% reduction in inbound exception rates. We also have a warehouse capacity expansion, we also make more effective use of our existing capacity. So we have much better layouts and improved processes. So we improve our warehouse capacity by 6%, nearly doubled our SKU storage so that this also, in turn, reduced our rental cost.

Also, we have other projects for more efficient picking, packing, et cetera, okay? Let me mention a couple on the logistics part. So we integrated more than 20 delivery providers for more cost-effective timely delivery achieved year-to-date more than RMB7 million cost reduction in delivery. Also, we implemented a digital ordering process and the system. We have more than 400 suppliers participating, increasing our procurement team efficiency. So everyone can, in the procurement team associated came triple their efficiency that means a person demand 3x more SKUs than before. Also we have an inventory management system 2.0 upgrade, improve inventory monitoring, reduce product out-of-stock rate. Right now, our stock rate dropped to 2.6%. It used to be 5% or 6%, okay.

Let me just mention these few examples. Thank you, Kathy.

Operator: The next question comes from Ethan Ling from Iron Harbor Capital.

Ethan Ling: Hello, first of all, congratulations for your company growth. I have a few questions today. The first question is company’s plans for its OEM product in the future?

Gang Yu: The OEMs, all right, Ethan I will take this question. And a couple of OEM or we call it prime label registered in 111, and we have [Indiscernible] for our [chain] store customer [Indiscernible] with [loyal] growing for our individual store customers and also [Indiscernible] dietary supplements. And by Q3 this year, we already launched [Indiscernible] in 43 private label SKUs. And of course, there are much more SKUs already in our pipeline. Most of these products have been well affected by our downstream pharmacy customers. And as you may know, private label product has been a very important and key margin and revenue contributor of those top KA [chain] store. But for our customers, which are basically a small media size chain stores or individual customers, individual stores, they don’t have the luxury and capability to establish their own brand.

And our brand, 111 brand and [Indiscernible] becomes a very attractive solution for them to improve their own margins. I hope I answered your question.

Ethan Ling: And the next question is that I know the company started preparation since last season. What is the current progress of the company’s [privatization]?

Haihui Wang: Yes. Listen, yes, as you know, the company is undergoing the going private process to my knowledge, the process is still ongoing. The special committee consistent of three independent directors are still evaluating the proposal from the buyers group. And for sure, they will make relevant announcements according to SEC rules. As management, we will continue to focus on our business and better serve our customer.

Ethan Ling: And I have another question. How was the cash flow situation in the third quarter for the company, and what’s the current cash position?

Luke Chen: In terms of cash position, as of September end, we had cash and cash equivalents, restricted cash and short-term investments amounting to RMB877 million. So we are also very glad that our operating cash flow and overall cash flow for the quarter has been positive. But we have confidence that we will continue to operate with very high efficiency and as well to generate positive cash flow in the future quarters. Thank you.

Operator: There are no further questions at this time. I’ll hand the call back over to the company for closing remarks.

Junling Liu: Thank you all the investors. So this will conclude our call for Q3.

Luke Chen: Thank you.

Haihui Wang: Thank you.

Operator: In closing, on behalf of the entire 111 management team, we’d like to thank you for your interest and participation in today’s call. If you require any further information or have any interest in visiting 111 in Shanghai, China. Please let the company know. Thank you for joining us on the call today. This concludes the call.