Good day and thank you for standing by. Welcome to the 111, Inc. Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Stephen Kilmer. Please go ahead.

Thank you, operator. Hello, everyone. Thank you for joining us today for 111's Third Quarter 2021 Conference Call. On the call today from 111 are Dr. Gang Yu, Co-Founder and Chief Executive -- sorry, and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of our Major Subsidiary; Mr. Harvey Wangg, COO; Tiffany ZhuGe, SVP of Investor Relations and Business Development; Carter Hung, Finance Director; and Monica Mu, Investor Relations Director. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The Company's earnings Press Release was distributed earlier today and together with our earnings presentation are available on the Company's IR website at ir.111.com.cn. Before we get started, let me remind you that this call may contain forward-looking statements 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 could 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 statement as a result of new information, future events or otherwise, except as required 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 our earnings press release for detailed information of our comparative financial performance on a year-over-year basis. With that, I'll now turn the call over to our CEO, Junling Liu.

Good morning, and good evening, everyone. Thank you for joining our 2021 third quarter earnings call. Before delving into performance, I would like to talk briefly about the regulatory environment. Next, I'll give a short summary of our business. For those who are new to our story, I will then cover our recent operational performance before handing the call over to Luke to discuss the financials. We will conclude our prepared remarks with guidance for Q4 2021, after which we will open up the call for Q&A. We believe that current policies will continue to provide tailwinds to the health care industry and to our company. In 2016, President Xi announced the Healthy China 2030 initiative that emphasized public health as a precondition to future economic and social development. This initiative is based on four core principles. First, put health care at the forefront of national development strategy; second, encourage innovation; third, develop new methods of care to focus on both prevention and the cure and the combined Chinese and Western medicine; and fourth, ensure that rural areas of the country are given equal access to health care. In the latest five-year e-commerce development plan, the Ministry of Commerce has once again reinforced the importance of health care as a national priority and provided a blueprint for the future of China's health care industry, including telehealth services such as virtual registration, online consultation and patient care management. In addition, the government is encouraging the integration of online and off-line channels as well as the development of B2B platforms with solutions that help solve the pain point of the health care industry. We're well positioned in the health care industry as our platforms are in alignment with the blueprint for the future of China's health care system. In addition, recently proposed…

Thank you, Jimmy. Moving to the financial section on Slide 18 you can see the details of the third quarter 2021 results from Slide 19 to 21 of our presentation. I would like to highlight a few key business and financial metrics and our focus on year-over-year comparisons. All numbers are in RMB unless otherwise stated. Total net revenues for the quarter grew 41.6% to RMB3.35 billion, which was within the range of our guidance. We already had two consecutive quarters with quarterly net revenues exceeding $3 billion mark, which will place us into $10 billion revenue clubs this year. Our B2B segment revenue grew 46.3% to RMB3.2 billion, reaching a new record high for segment revenue in the quarter. Our B2C segment revenue was down 22.9% to $124 million year-over-year. We expect this downward trend will be reversed as we launched several initiatives to accelerate the growth of this segment. Our B2B gross margin was 4.4%, up from 2.6%, while our B2C gross margin remained stable at around 20%. The improvement in gross margin of our B2B segment reflects our ability to continuously improve the margin while maintaining substantial top line growth. Overall, our gross profit grew by 80.46% to $166.1 million, and the combined gross margin was 5%, up from 3.8% a year ago. Total operating expenses for the quarter were up 61% to $341.4 million. As a percentage of net revenue, total operating expenses for Q3 2021 accounted for 10.2% compared to 9% in the same quarter last year. Fulfillment expenses as a percentage of net revenue for the quarter was 3%, up from 2.5% in the same quarter last year. This was mainly attributable to costs associated with upgrading and expanding our existing facility to support our growth. As these expanded facilities reached full capacity, we…

Your first question comes from the line of Xipeng Feng of CICC. Please ask your question.

This is Xipeng from CICC, and thank you for taking my question, and congratulations on the Company progress.

Your voice is very low. We cannot hear you clearly.

Sorry for that. Can you hear me now?

Much better. Yes.

That's fine. Okay. I have two questions actually. And my first question is about the policy. As you may notice, the National Health Commission of China has just released a draft document detailing the regulations for online medical services. So could you please share some more colors on the impact of this policy or document both to the industry or to the Company? And my second question is as the B2B segment has delivered a strong growth in the past several quarters. So what's the reason behind it? And will the B2B segment maintain the growth momentum in the future?

Thank you, Xipeng, for the question. I'll take on the first question about the policy. I spent a little time in my speech talking about policy. I had some keywords like Healthy China 2030, health has become a national priority and other keywords include online plus offline and the recent MOFCOM policy clearly stated supporting B2B Internet players and the integration of digitization of finance of logistics, warehouses, et cetera. And I think overall, those policies are all tailwinds and it's all very good for the industry and also very good for 111. And I noticed you're referring to the latest consultation paper. It's not a policy yet. And our interpretation, and it's not a final policy, it's -- at the moment, we're still guessing how the final document is going to be. But as a first read, and obviously, it is going to be very clear that digitization is the future. And Internet is going to play a key role in the overall health care industry. However, there has to be a strict compliance. And that kind of sealed the position of digitization in the industry. And we actually embrace that policy change. And I think with the much more stricter compliance, they are cause for innovative solutions, and 111 is very well positioned in that space, not to even talk about, we have always had a very high standard when it comes to compliance.

Yes, Xipeng, I will take the question regarding B2B and B2B revenue has reached $3.2 billion in Q3 of 2021. Furthermore, which is even more important is that between margin growth rate is much faster than our revenue growth rate. I think which is -- the margin growth rate is 3.15 times of our revenue growth rates. So we are very excited to see our coal business. This is a B2B business. It's getting more and more healthy. We will continue to strengthen our competence on our B2C model especially on the S side, as we are creating value for our upstream and downstream partners and customers, we are offering more services to these customers and partners. So, we are getting more services revenue from this customer and partners, which you can see in our financial report. So, our S to B2C model it's getting robust. We are confident that we will maintain a fast revenue growth rate. And meanwhile, with margin growth rate even faster than our revenue growth. Thank you.

Okay. That's very clear. And congratulations again on the Company progress. Thanks.

Thanks, Xipeng.

Your next question comes from the line of Zoe Bian of Citi. Please ask your question.

Management, this is Zoe Bian from Citi, and congrats on the strong growth of 111 again this quarter and thank you for taking my question. I have three questions. The first is for the collaboration with pharmaceutical companies. Can you share any updates on the number of pharmas you work with and any new forms of collaboration? Could you give us a few examples of digital marketing and relative treatment? The second is, can you share more updates on the One Health member program? How do you differentiate your services to the members versus other pharmacies? And the third one is when do you expect to breakeven?

Let me take the first question. You might notice that we increased our sourcing relationship with pharmaceutical companies to over 400. This is very important to us, very remarkable. This means that we're accelerating our sourcing upgrade our sourcing to the origin. For direct stores from three companies, you reduce all middle layers, only reduce our procurement costs, also improved the availability of our products. We're also forming various we call specialized internet hospital with pharmaceutical company. We have partnerships with Eli Lilly, Novartis, Pfizer, Bayer, Biogen many. We started this initiative only for last March, and now we have more than six specialized hospitals. Let's take the recent announcement we made for the partnership with a company with Chugai Pharma in Japan. This is -- 111 is the first e-commerce company in China are the so-called omni-channel commercialization relationship with Chugai Pharma. This partnership will allow cardiovascular patients to community access education materials regarding their diseases, their treatment options, effective disease management tools. We also improved patient quality of life, use cars and provide doctors with additional tools that manage better help patients. So, we have formed various partnerships with the different pharmaceutical companies aside from the short-term relationship.

Okay, I'll address the 1 Health program, appreciate that question. And I think before I answer that 1 Health program, let's look at the marketplace. Today, in the pharmacy space, we have about 580,000 stores across the country. There are a few very big players. And if we look at all those big chains, they are all very centralized in terms of the organization, i.e., they have firm control of all those pharmacies that build their own chains, et cetera. 111 is trying to build a new model with a federation. So with our model, we're going to have a lot more stores joining our platform. With digital franchising, the smaller guys can enjoy the same benefits like the big guys in terms of procurement, in terms of access to good assortment, in terms of access to systems and to digital technology, et cetera. Now if you look at the programs we have made today, we have already covered more than 28 provinces. And there are more than 300 medium to small chains joining us, and we have 11,000 stores. Obviously, our objective is to have more and more stores joining us. And because this is a federation model, there is very little barrier. And what we have been to do is to continue to leverage our digital technology to help those pharmacies to improve their competitiveness especially when it comes to the systems, the procurement, and also managing their assortment and the prices, et cetera. We are looking forward to providing more updates in future quarters.

Yes. So it's Luke. Let me answer your third question on the breakeven time line. I think all our investors are sales are looking at us when we go in to make profit. And I believe we are now in a much clearer position to project that with the scale we built up and the margin improvement. We expect to be profitable in 12 months' time. And our confidence level of achieving this target is pretty high. So you look at our margin now it's like 5%, and it will continue to grow to 6% even 7% and even higher. So with that, together with the scale we built up, and we're introducing more higher-margin product into our portfolio. Of course, we'll continue to build a lean organization and optimize our investments. So we think this gain profitable is very close in the quarter and in the near future.

Thanks a lot, management. We're looking forward to the business development in the future. Thanks again.

Thank you, Zoe.

Your next question comes from the line of . Please ask your question.

Kudos to you for your performance in the quarter. I have four questions, if you don't mind. The first question is that I see that your company has continued to strengthen the technology capabilities. So in what areas do you envisage your various entry? Second question, regarding your revenue from services rising rapidly. To what factors can this be attributed? And how will you maintain such growth momentum? A third question is regarding the market sectors you're seeking to enter. Clearly, what are their sizes? And what's the outlook as it relates to these market sectors. And the final question is I'd like to ask about the status on your star market IPO cost.

Okay. I think, gang, can you address the first question about the technology front.

Let me address the service revenue part. I didn't hear the first question. Let me adjust the service revenue. As we were happy to see that our service increased rightly the continuity increase. And the increase of the term revenue reflects the value creation by our platform and by our technology capabilities, many come from the following areas, I think may see. First is service fee for marketplace sellers on our -- the three platforms: 1 Pharmacy, 1 Clinic, 1 Medicine, okay? The second part is service for our enabling services to pharmacies such as SaaS-based service, CRM, e-prescription services and others. The third part is the services for our enabling services to come companies, such as we mentioned about digital marketing, patient education, patient management, all those services. And the fourth part is the supply chain services for ecosystem relationship. We have several very important projects such management will supply to our ecosystem partners. Go ahead, Junling.

Okay. So I'll cover the first question and the third question. So with regards to the technology investment we have made. And obviously, it was 155% increase compared same period of last year. This is an area, which we believe we can establish a competitive advantage. So, our technology is really structured in a way to address the challenges that are faced by like pharma companies like pharmacies in terms of supply chain and to doctors and to patients. So we believe that investment in this area will give us the necessary advantage. I'll give you an example in our One Health program. We have a pretty big team in terms of technology to really code every day. And today, we have already digitally connected over -- or close to 3 million consumers. And those consumers have various disease path, and they have a very -- we have a very clear profile and we have digital tools to interact with them. In the past, those pharmacies were never in that position. So we believe the continued investment in this area will yield good results. And if you look at what we have achieved so far, we've already brought 19 patents in the areas of particular health, big data analytics and in our supply chain. We have more than 30 proprietary systems to really power our back-end operations. When it comes to your question two, the size of the market, based on our intelligence today, they -- the farmer market is about RMB2 trillion. And by 2030, the startup hospital channel alone is going to account for more than RMB2 trillion. So we anticipate this is going to be one of the most attractive markets in the world. So with the aging population in the world, so this is going to be the space we're going to play in. We already laid a very solid foundation to position 111 as one of the key players in this space. And we define our space as the out-of-hospital care. So from a patient's perspective, they can actually to have a holistic care if they actually step out of the hospital, let's say, even if they are from a rural lower-tier city, even if they left home -- if they left the hospital, they go home, we're still in a position to help them. So we actually love the pharmacy space, given the coverage we have had, this is a clear advantage we have managed to build. So I am of the opinion that we're able to really redefine the supply-demand relationship with our platform. And obviously, there are many other initiatives. We have put in place so far. There's nothing material as yet, but I'm looking forward to providing updates moving forward in due course.

Yes. Let me answer the question on the status of the star market IPO. The domestic IPO preparation is still in progress. Based on our internal assessment, actually, we are meeting all the requirements. However, there are new rules coming out by the stock market and we are evaluating. We're very optimistic about the China market to be further over now. There's news that the China stock market will adopt those retribution system versus approval system maybe next year, and we believe we should get ready for that. So we will keep The Street informed or posted according to the SEC rules.

Your last question comes from the line of Jessie Lu of HSBC.

Thank you for taking my question. This is Jesse from HSBC on behalf of Charlene. I have three questions, if I may. The first question is follow up on the gross margin of your B2B segment. We saw a very good improvement from last quarter. And you just mentioned that the margin can grow from 5% to 7% or even higher. I'm wondering if we think in a longer time here, say, in 10 years, how high would be the B2B segment margin could achieve? And my second question is on your fulfillment capacity because I think it has been growing at a faster rate than previously guided in your Q2 results, which is very impressive. So I was wondering in terms of time line and your target, what is your end goal for these fulfillment capacity enhancement? And when will you finish and in terms of fulfillment centers, will you be building more and will be the CapEx expectation on that. And last but not least, the question is on your pharmacy clients because you mentioned you're already connected to 75% of overall pharmacies in China. So can you share with us your strategy in terms of for the enhancing relationship with existing pharmacies and then how to reach out to the other 35% pharmacies.

Okay. Jessie, I will take the first question regarding B2B margin. So we are excited to see in Q3, our B2B margin is year-over-year growth has reached 145%, which is the 3.15x faster than our revenue growth, which means our B2B business is getting more and more healthy. And the margin improvement B2B comes from following actions. First is introduction of more high-margin products. Internally, we call them gold-label products. And secondly, we are seeing a more effective use of our price intelligence system, the PIS system to optimize our pricing. And as Dr. Gang you just mentioned, we have more direct sourcing over 400-plus pharmaceutical companies, and we're upgrading our sourcing towards the source. And last, we are seeing improvement at our continuous improvement on our supply chain efficiency. Talking about next step, with the loss of the foreign phases of our S2 B2C, we are creating more value for our upstream and downstream partners and customers. So we are confident that there will be enough room for us to further improve margin. We definitely -- we can see even margin growth rate in the next quarters should be faster than our revenue growth rate. And our B2B business should be getting more and more healthy.

Let me take the fulfillment center capacity issue, a question. In the past, we have observed that the fulfillment capacity has been a very important bottleneck of our growth. So we are -- as you have seen, that we have expanded our capacity and the throughput during the past year. And we believe that the optimized supply chain and is responding back-end systems from our core confidence. So you certainly ensure our first-rate experience, quality of the products we offer and the rapid turn of our inventory and positive cash flow. We believe these are all very, very important. So the fulfillment center capacity throughput is very critical part of our supply chain. So the lack of it will directly impact our operations in our growth. So we are continuing to optimize and automate our supply chain, while expanding capacity. Not only expanding our capacity to our fulfillment centers, we are also using -- we're also creating new business models. In the future, we'll announce that some new business models where you use the capacities of our partners. And these all different new initiatives will help us to gain not only capacity, but also raise the barrier of entry.

Jessie, I want to take on the third question, I appreciate it. That's a great question, by the way. When it comes to the pharmacy customers, obviously, the first few years, we made it an operational imperative to really cover as many pharmacies as possible until we get to the 50% market coverage. And obviously, we have successfully implemented that -- achieved that mission and now, we cover approximately 65% over the market with 370,000 pharmacies also. So that is really mission accomplished. And moving forward, that will not be our first priority anymore. Instead, we will be continuing to really grow our loyalty, grow our share of wallet. And of course, we're going to continue to add more customers, sign up pharmacists that we have been servicing. We just spoke about the 1 Health. That is an example, one of the initiatives we offered to bring in value-added services to those pharmacies who are already on our platform. And of course, we still welcome new customers to join in the future. Thank you.

Thank you. That is very clear. Looking forward to hearing from you in the next quarter.

As there are no further questions, I'd now like to turn the call back over to Mr. Stephen Kilmer for closing remarks.

Thank you, operator. In closing, on behalf of the entire 111 management team, we would 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 China, please let us know. Thank you for joining us today. This concludes the call.

You may now disconnect your lines. Thank you.