Good day and thank you for standing by. Welcome to the First Quarter 2022 Earnings Conference Call. At this time all participants are in the listen-only mode. After the speakers’ presentation there will be a question-and-answer session. Please be advised today's conference is being recorded. And now I'd like to hand the conference over to your first speaker today Monica Mu, Investor Relations Director. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. On the call today from 111 are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of our Major Subsidiary; Mr. Harvey Wangg, COO; and Ms. 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 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 the current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which would cause actual results to differ materially. For more information about these risks, please refer to the company’s filings with the SEC. 111 does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis. With that, I will turn the call over to our CEO, Mr. Junling Liu.

Thank you for joining our first quarter 2022 earnings call. The information that we'll be discussing here is also provided in the slides that have been posted earlier today on the company’s website. I would encourage you to download the presentation along with the earnings report at IR.111.com.cn. I will first speak briefly about the macro environment before covering our recent operational performance and I will also provide some color on how we will continue to deliver revenue and margin growth, strengthen upstream supply capabilities, and improve operational efficiency, as well as our future strategies. Now, Mr. Luke Chen will walk you through our financial results. As many of you are aware, the Chinese government instituted shutdown of numerous cities to curb the spread of the COVID Omicron variant. Among those cities impacted, Shanghai was hit the most where a majority of our staff is located. This has had a severe impact on China's economy. I'm pleased to report that despite these challenges on III, nevertheless achieved growth and while improving all of our operating metrics. Q1 2022 will mark our 15th consecutive quarter of year-over-year growth since our IPO. Although majority of the residents of Shanghai can move freely with , the aftermath of the COVID pandemic is still lingering. During this challenging period, 111 put on a tremendous fight. As the number of cases rose in several cities in China, local lockdowns were imposed. As a result, 111 had to shut down our East China fulfillment center, which is one of our key hubs. In addition, transportation and other logistics were strictly regulated in pandemic hit areas. Many of our orders were stuck in transit due to various local policies in many cities, which significantly increased our fulfillment costs in the quarter. Because the overall supply chain was…

Thank you, Junling, and good morning or good 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 first quarter 2022 results from Slide 16 to 18 in Section 2 of our presentation. Again, our comparisons are year-over-year and all numbers are in RMB unless otherwise stated. Despite all the challenges from pandemic lockdown in many cities across the country during the quarter, we have continued to grow our top line and gross profit. Total net revenues for the quarter grew 15% to RMB2.98 billion. We are pleased to report that our gross segment profit for the quarter grew at 66%, which is over 4x the growth rate of the revenue. Top line growth for the quarter was mainly attributable to our B2B segment revenue, growth at 17% to RMB2.87 billion. The gross segment profit for B2B segment has increased by 91% with gross segment margin up from 3.6% to 5.9%, which reflected our ability to steadily expand our business scale, while rapidly improving our margin. Our B2C segment revenue decreased 21% to 130 million with gross segment margin improved from 19.4% to 21.6%. Total operating expenses for the quarter were up 2% to 295 million. As a percentage of net revenues, total operating expenses for the quarter was down to 9.9% from 11.1% as we continued to enhance our operating leverage and optimize our operational efficiency. Fulfillment expenses as a percentage of net revenue for the quarter was 3.2% up from 2.6% in the same quarter of last year. The increase was mainly attributable to our investment to expand the capacity of our fulfillment centers to support the future growth. The pandemic locked in various part of the country also temporarily caused…

Thank you. Your first question comes from the line of from Xipeng Feng from CICC. Please go ahead.

Okay. Thank you for taking my questions and congratulations on the company progress. Well, I have three questions and the first one is, what is the impact of recent policies regarding internet healthcare on your company? And my second question is, I see B2B segment is rapidly and what's the reason and how will you maintain the growth momentum? Any my last question is, could you please elaborate on the company's strategies going forward? Thank you.

Thank you, Xipeng. Let me take your first question. I think I have two points to make. So, first of all, if you look at the Healthy China 2030 and the 14th five-year plan, where the government has elevated the health of the country, of its citizens to a level of the national strategy. And there are lots of tailwind for us and we're very excited about. We spoke about this the previous few quarters, and I didn't elaborate in so much of a detail on today's call, but we see digitization and the investment in the healthcare industry will provide a lot of tailwinds for us. And I guess your question is more geared towards the recent consultation paper where the regulatory bodies are coming out of detailed measures to make sure the industry is going to be compliant to many new rules. I'm assuming right. We believe this is good for the development of the industry and some companies might be impacted negatively, but the measures like no AI involvement in the doctors' consultation, and users will have to upload their health record and the previous diagnosis, etcetera. I would say that 111 has always been very strict with our own compliance and the majority of our business is actually from B2B side, which is not impacted. And even for the B2C business, we want to make sure that we set a very high standard for compliance. And overall, we see a lot more positives than negatives. And the policies of late are very good for us. And we really should take advantage and leverage the tailwind to grow our business.

For your second question regarding B2B, I think B2B has been on a more and more healthy growth path. Despite the pandemic impact, we delivered 91% year-over-year growth on B2B gross margin. And our next step, going forward, firstly, we will continue to upgrade our supply chain. That is to its leverage, the direct and strategic partnership with more and more international and domestic pharmaceutical partners to bring in more and more selection with lower and lower cost to our downstream pharmacy on clinic customers. Secondly, we will enhance our digital marketing platform to help those pharmaceutical companies to commercialize their new products to pharmacies, clinic, and eventually to the patients and consumers. So, our B2B business is becoming a platform to effectively link pharmaceutical companies, link their products with pharmacies and clinics and with the end customers. According to IQVIA's latest report, the volume of China pharmacy and retail exceed RMB200 billion in the past 12 months. So, it's a big, big market. We believe we have enough room to further expand our business volume with a much healthy margin. And for the third question, I think…

Let me take to the third question about strategy. I think we spoke about our three-step strategy in the past. I may refresh the memories of some of the friends on the call or some of the new friends who are joining the call for the first time. So, the first step we wanted to build the infrastructure and the ecosystem. That's why we built the B2C module, the Internet hospital module, and the B2B module. And the second step with the infrastructure and ecosystem, we wanted to build scale, which we achieved in a very short period of time. We kept on growing the business in three digits. and the last year, we achieved over in sales. With the scale, of course, Naturally, the third step is to grow margin and become profitable. So, in the immediate future and we will continue to focus on growing our revenue and margin and strengthen our capabilities on the supply side and improve our operational efficiency. With that, we will get into profitability. We're in a multi-trillion yen industry. Our overall goal is, of course, leverage technology to transform this industry and become a key player in this industry. Of course, in order to get there, we want to be laser focused in getting the business profitable in the near-term. Thank you, Xipeng. I hope we answered your questions.

Okay. That's very clear, and congratulations again on the company progress. Thanks.

Thank you.

Thank you.

Thank you. Your next question is from the line of Jessie Lu from HSBC. Please go ahead.

Thank you. Can you hear me?

Yes.

Great. Thank you so much for taking my question. and congratulations on the great results, despite the challenging environment. Two questions, if I may. The first one is that I think as the industry is growing, we do notice more players in the space for both C2B and D2C, can you – how about more about the competitive landscape for now and your competitive advantages? The second question is regarding the financials. It's very encouraging to see the narrowing net loss. And you mentioned the company will continue to work on margin achieve quarterly breakeven. Can you elaborate a bit more on how do you propose to achieve this and in which OpEx line, were we expecting more cost savings? Thank you.

Thank you, Jessie. I will take your first question. If you look at our competition, it mainly comes from the following categories. The traditional distributors, the state-owned and some of the newcomers were copying our model. And of course, the big vertical healthcare B2C players. We position ourselves very differently from the traditional players. Our strength is in the fact that we want to use technology to drive efficiency and we believe that digitization is the future. So, as far as the traditional – we have 14,000 distributors in our space and we'll have some of the giant state-owned distributors. We very much doubt that those traditional players can match our capabilities. Even for the newcomers who are copying our model, I think we have something very, very unique. Looking over all players in this space, no one is attempting to get through to the consumers for the B2B players. And no one has the full capability of servicing the – pretty much all the key stakeholders in this industry. If you look at the pharmaceutical companies, if you look at to the doctors, if you look at the pharmacies, if you look at the pharmacists, medical reps and the consumers. So, our ecosystem is built to really service all those key stakeholders. And obviously, this is where we see our biggest differentiation. You may have heard of some of the new B2B players. Obviously, their focus is still doing a better distribution, but our positioning is from the very beginning is to really use our supply chain network to get to the pharmacies, and then through the pharmacies, to get to the consumers. So in other words, we enable the businesses to better service the consumers. This was never done before and we have made very exciting progress. And I'm looking forward to share the future progress in future earnings calls. So, I would say that we have built out the best ecosystem to position 111 for the future. I'll leave your question as that and maybe, Luke, you want to take the second question for Jessie.

Sure. Yes. There are two major reasons that led to significant narrowing of the non-GAAP loss in this quarter. First, we gross profit and margin. Our gross profit has increased 66% and gross margin improved from 4.5% to 6.5%. Second, our continuous efforts to improve operation efficiency. So, why we grow our top line at 15%, our spending on sales and marketing expenses, general and administrative expenses, as well as technology expenses have been reduced by 6.2%, 7.9%, and 21.5%, respectively. Now, Junling has mentioned in his CEO script just now that we will keep that momentum to continue to grow a healthy and a profitable business while invest smartly in our spending. In short, we will focus on three key areas: reduce procurement cost so that we can continue to improve our margin profile, optimize our product assortment and structure so that we will be able to sell those high margin and highly needed drugs to the customers. Third, to enhance our industry Internet capabilities to further improve our operating efficiency. So, with all that, we were very confident that we will continue the momentum and to reach the breakeven point at and GAAP operating income level this year.

Thank you. Very clear. Congratulations again.

Thank you, Jessie.

Thank you. Your next question is from the line of Zoe Bian from Citi. Please go ahead.

Hi. This Zoe from Citi. Thank you, management for taking my question. I have two questions. The first is, what's the impact of pandemic on your business operation in the second quarter this year and especially on your top line? And will the pandemic affect your quarterly operating profit breakeven target this year? My second question is, what's your current cash balance and how long can you support your business if there is no new financing? Thank you.

Yes. Thank you, Zoe. The impact of the pandemic, it is still lingering. I have to go and get my PCR test pretty much every second day because wherever we go, we need to produce those new codes and many restaurants are still not open, some of the pharmacies are still having a tremendous time, tremendous hard time selling the necessary drugs, which are quintessential for their business. Like they're not able to sell the full types of drugs. They have to be off-the-shelf, which I spoke early on. Those antibiotics, those anti-fever and so on. The lockdowns and logistic restrictions will disrupt the supply chain and it will raise fulfillment cost. Some of the colleagues, some of the compounds are still once you find a positive case, the employees still cannot come to work and that whole compound will have to be locked down. And also even today getting into the final months of this quarter, majority of our stuff are located in Shanghai, we still cannot travel because wherever we travel, we need to be quarantined for 7 to 14 days, local cities will have different policies. They imposed all those very strict travel policies. And that's going to impact the business as well, but we as a company prove to be able to excel on extremely difficult times as we did in Q1, and we helped many chronical patients with critical drug supply, and, , during the lockdown, there is only one disease, that is COVID, every other disease is all discounted as healthy, and – which is really bad news for some of the chronical patients. And they proved to be true, but we did it. We managed to work through extremely difficult situations to really get the drug supply to many of the chronical patients. And in addition to that, we also delivered both revenue and margin growth for our business. And I think the best thing out of this lockdown for us is that we established a fairly robust system to deal with future situations of this nature, and a whole set of SOP is in place. Not only this, we also have a standard package, which we're ready to take it to any city with potential lockdowns so their citizens can easily deal with the drug supply under similar situations. And we're pretty confident that in Q2, although the business was impacted negatively, we can still deliver both the top line and the margin growth. And as of now, we are pretty firm. We want to stick to our plan to breakeven at an operating level this year. Thank you, Zoe.

Yes. On the cash position, at March-end, we have cash and cash equivalents, restricted cash, and short-term investment over 900 million. We only incurred RMB10 million cash outflow in the first quarter. If you look at our abbreviated cash flow statement, our accounts payable date is about 45 days and our inventory days average at 25 days, which give us around 20 days operating cash inflow. In addition, we have secured working capital financing from several major bankers. We believe that our cash reserve is sufficient to support our business expansion. Zoe? Hope we answered your question?

Yes, yes. Thank you very much. That's very clear.

Thank you.

Thank you. Your next question is from the line of .

Hello. Congratulations on your performance, the Covid situation notwithstanding. I have three questions, if I may. The first question is that given the gross profit growth, having outpaced revenue growth by over fourfold, what are the key factors behind your continued increase in revenue and gross profit and whether this is sustainable? So, that's my first question. The second question is, what are the key factors you find increased in delivery costs this quarter? And lastly, in light of your company's relatively large investment in technology and the continued emphasis by your management team on improving efficiency through technology, I noticed that Q1 saw declining investment ratio in technology, could you elaborate on the reason behind this and what your plans are for technology investments down the line? Thank you.

Okay. , I will take your first question regarding the margin, and second question, regarding the fulfillment, logistics cost. And for the first question, our strategy towards healthy business model has been working very well. And we are seeing significant improvement on both our product margin, as well as services margin. And there are couple of initiatives going on these two areas. Firstly, as Junling just mentioned, we are reducing our procurement costs. from pharmaceutical companies has been highly effective in lowering our product cost. Currently, we direct source from over 550 global and domestic pharmaceutical companies and we will continue to deepen our strategic relationship with these partners, as well as we will secure new partnerships. Such relationships provide us with a wide range of product at much lower cost. And the second level, we can further improve the margin is through optimization of product assortment and structure. Currently, we are at annual sales revenue of over RMB10 billion and with our over 400,000 pharmacies in our B2B platform, we are in a position to balance our portfolio of products low margin products, which by together with very healthy margin for us. And we have now about 5,000 SKUs with very good margin, including our private label products and those new products of pharmaceutical companies. And we are very confident that we will be able to help our pharmaceutical partners in commercializing their products with high efficiency and high margin. On the services revenue and services margin part, our digital platform provides a comprehensive solution for pharmaceutical companies by integrating doctors, pharmacists, medical assistance, patients and medical representatives onto our Internet hospital. The service module also provides online remote consultation and provide e-prescription, patient-to-patient and also patient support, and refill services. And these features enable us to provide customized omni-channel digital marketing solutions for our pharmaceutical partners. The market continues to show strong demand for our diverse portfolio of services solutions. We are seeing a 70% year-over-year growth on our services revenue, which helped 111 to improve our overall profit. And for your second question regarding the logistics cost, yes, it's a very good catch. Yes, there is a minor increase on our fulfillment cost in this quarter to 3.2% of total revenue. And in last year, we have increased our budget on logistics network to better serve our customers, including, we expand our warehouse space to support the business volume growth, but as we just mentioned during the pandemic, our business growth slowed down because of the lockdown, etcetera. So, percentage of revenue follows fixed fulfillment cost like warehouse increased. On the other hand, because of the lockdown and traffic control in Shanghai and many other cities in China, traditional logistics network was sometimes suspended. And some of these network is even suspended until today. So, we have to use much more expensive way as interim solution, which also creates additional cost on our in-bound and outbound logistics.

Okay. , let me take the third question. I asked about technology, our investment and so certainly, we are true believers for technology. And in the past, we have seen that technology has created value from the several major aspects. It help us improve our sales and operational efficiency. It help us make sound business decisions based on more accurate data – accurate and real time data, as well as based on those optimization models and the systems. It help us make better decisions on of our selection, pricing, supplier choice of various products. Yes. It also helped us improve our customer experience through precision marketing and the customer services. So these are values help us create for us and we are going to continuously invest in technology, but at the same time, we know that we have to improve the efficiency for our technology development. Our total investment in – percentage in technology investment is much higher than industry average. So, at the same time, we started to improve our development efficiency and this helped us reduce our technology total investment percentage. Okay. Hope that answers your question. ?

Yes. Yes, thank you. Very clear. And again, congrats on your performance this quarter.

Thank you.

Thank you. Your next question is from the line of . Please go ahead.

Hello. This is from and congratulations on the strong performance in the first quarter of this year. I have three questions. The first one actually was a little bit covered by previously Mr. Harvey’s answer is, how has the company continued to grow its service related income? And if you have anything to add, and do you have plans to more monetizable products? That's my first question. And I would wait for your first answer before I ask the second question. Thank you.

Thank you, . Let me take that question. So, we are so happy to see that our service revenue started continuously to grow. And as you can see from all the different types of services we provide; it can be classified into several categories based on the user type. For example, we have a marketplace – market vendor services. So, those are for our partners for the marketplace vendors or sellers. We have online medication consultation services. Those are for patients or directly for consumers. And we also provide e-prescription service, supply chain service, etcetera. Those are for the pharmacies. And we also have like digital marketing, patient education, drug commercialization tools. Those are for the functional companies. As you can see that we are providing many types of services and all these types are growing steadily. And so, we will continuously improve or increase our service revenue. For example, we're going to recruit more marketplace sellers and the service providers to our marketplace. We're going to develop more digital technology and database services to serve both pharmaceutical companies and the pharmacies, at the same time, we have built a lot of systems internally for our internal use, but many of them are very valuable and really liked by our customers. So, we are transforming more of our internal build tools into SaaS services to enable our partners. Some of them are in the development process. Okay. Hope that answers your question.

Thank you. It's pretty clear. My second question is, what value is One Health program intended to generate, and what progress is being made? Thank you.

Yes, regarding One Health, One Health is becoming a first in the industry with S2B2C model. And our virtual franchise model enables over 10,000 small pharmacy or medium sized pharmacy provide superior products and services to their customers. All participating pharmacies can use our platform to better manage their product selection and manage their procurement and inventory management, as well as accessing our distribution tools through our digital staff services, including smart sourcing, digital marketing, O2O, and online stores and CIN. In this year, we expect more and more pharmacies to join our One Health program. Thank you.

No, that's very remarkable. And my last question is, what is the status of your domestic public listing? Thank you.

Yes, we are still in the process of preparing for the domestic listing for key subsidiaries in China. And we are also evaluating options for both Shanghai Stock Exchange and . Of course, we will update the market when it's appropriate according to SEC rules. Thank you, .

Okay. Thank you. Thank you for the information and looking forward to that. Congrats again for the strong performance. Thank you.

Thank you.

Thank you.

Thank you.

Thank you. And there were no further questions at this time, so I’ll hand back to Monica for closing remarks.

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

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.