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 of 111's 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. The company's earnings press release was distributed earlier today, and together with the earnings presentation, are available on the company's IR website at ir.111.com.cn. 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 RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year-over-year basis. With that, I will turn the call over to 111's CEO, Mr. Junling Liu.

Good evening and good morning everyone. Thank you for joining our Q2, 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 @ ir.111.com.cn. In today's call, I will talk about the general economic situation and how the company rose to the challenge of meeting the impact of both the COVID pandemic and the economic uncertainties. Secondly, I will also provide some color on our strategies in the areas of building momentum for margin growth, improving operational efficiency, and strengthening of supply chain capabilities. Then our CFO, Mr. Luke Chen will walk you through our results. Although we have been in the COVID pandemic for three years, 2022 proved to be the most challenging year in China. The uncertainties in the international economic environment and the strict lockdown measures created significant challenges for many companies. As many of you are aware, COVID infections broke out in Shanghai in the spring and the pandemic subsequently cities in China. The Chinese government instituted lockdowns in numerous cities to prevent the spread of the pandemic. And as a result, our Shanghai headquarters and several of our fulfillment centers were shut. Our headquarter office had to be shut down for in the second quarter and no one was able to return to office. Simple matters like permits with customers and suppliers talking contracts for normal business transactions became impossible. The overall supply chain was severely disrupted and the transportation and other logistics were tightly regulated in pandemic hit areas. Logistics cost arose significantly. In many cities, our deliveries got stuck in transit, and we also experienced a severe shortage of medicinal supplies as our suppliers…

Thank you, Junling and good morning or evening everyone. Moving to the financials, my prepared remarks will focus on a few key business and the financial highlights. You can refer to the details of the second quarter 2022 results from slides 13 to 16, section two of our presentation. Again, all comparisons are year-over-year and all numbers are in RMB unless otherwise stated. Let's start with the second quarter results. Second quarter had been extremely difficult for our business due to COVID lockdowns in Shanghai and many other cities. Our head office in Shanghai had to be closed and operations in our regional fulfillment centers had been significantly disrupted for two full months. Despite all the challenges from pandemic lockdown, and thanks to our team efforts, we have managed to keep our revenue stable by continued to fast grow our gross profit and margin. Total net revenues for the quarter grew 0.4% to RMB3.04 billion and the total gross profit for the quarter grew at 43% to RMB192 million and gross margin improved from 4.5% to 6.3%. B2B segment was the major contributor for the total gross profit and margin improvement. B2B segment revenue grew at 1.3% to RMB2.9 billion while gross segment profit for B2B segment increased by 55% with gross segment margin up from 3.8% to 5.8%. This was attributable to our optimization of selection portfolio and competitive pricing. We had also focused ourselves on high margin products and launched private label products with much better margin. Our B2C segment revenue was negatively impacted by the lockdowns, which decreased 20% to RMB103 million with gross segment margin improved from 20.2% to 22.5%. Total operating expenses for the quarter were down 16% to RMB272 million. As a percentage of net revenue, total operating expenses for the quarter was down…

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

Okay, thank you. Thank you for taking my questions and congratulations on the company progress. While I have three questions actually, and the first one is, how did your company achieve growth for both revenue and gross profit in the second quarter, especially amid such terrible circumstances such as COVID epidemic and the economic uncertainties? And my second question is, what specific challenges did the company experience from the economic and COVID pandemic in the second quarter and how will these challenges affect the company in the second half of 2022? And the last question is about the strategy. Could you please elaborate on the company's strategies going forward? Thank you.

Thank you, Xipeng. Let me just address your questions. And so first of all, in our last quarter it was extremely difficult for majority, for the three months, our head office was under lockdown and even after the lockdown was over and our staff gradually returned to office starting from second week of June, still no one from our head office can travel out of Shanghai to conduct the badly needed business. And also the supply chain was disrupted pretty badly as quite a number of cities experiencing outbreak of COVID. Many of our orders got stuck in transit causing tremendous problems in our customer experience and also a lot of customer frustration. Some of our fulfillment centers were shut down and even the inventory replenishment became extremely difficult. And in the meantime, our pharmacy customers were also under tough challenges as you know, they were not allowed to sell fever and the cough related medicines. And, there were four type of medicines that they were not allowed to sell, which account for a substantial amount of their business. And as a result, we were not able to sell those drugs to them either. Just under those difficult conditions, our team proved its true color. Given the extraordinary circumstances, we established a virtual command center with all the functional leaders dialing in every day to make decisions to deal with all kinds of issues popped up. And then they all have their own daily meetings and with their respective teams. I was deeply moved by the dedication our team members demonstrated during that tough period. And I'll give you an example, as you may know, once you leave your residential estate, it will be extremely difficult to re-enter as every estate is so strict on the inbound traffic. At that…

Yes, sure. It's very clear and helpful and thanks for the sharing. Thanks.

Yes, I'm an individual investor Fergus Macpherson. Congratulations on performance last quarter. I have also three questions, if you don't mind. The first is, have you made any progress on the supply side upgrade? The second is, have you made any progress on technological innovation or development? And lastly, what is the status of the company's cash reserves? Thanks.

I can answer the first two questions. I didn't hear the last one.

It's cash reserve.

Oh, cash reserve. Okay, Luke, you answer the last one. Yes, we have made a lot of progress in Smart, in Smart Supply Chain as well in technology. Let me answer the two questions separately. In terms of supply chain, our Smart Supply Chain, we made progress in both systems and in our infrastructure. For example we launched our cloud B2B program about two and a half years ago. We didn't have a coach and coverage. Starting from the beginning of this year we launched coach and coverage. This allowed us to deliver a lot of the new and innovative drugs to customers in remote areas. Right now, our coach and coverage can fulfill to 270 some cities and it provides tremendous convenience to our patients. So that's one. Second is about innovative idea for the franchising fulfillment center program. Okay? We through our own experience, we know that it's so difficult, takes long time to build this fulfillment center. It takes effort in searching for the site and getting CFDA approval and build the internal processes essentially. A usually fulfillment center takes more than a year to launch. So we have a new innovative idea to have partners using our partner fulfillment centers we call franchising fulfillment center. So we had this idea beginning of this year and by now we already assigned 11 fulfillment centers, eight of them are already in operations. These cloud fulfillment centers can be treated as our fully deployed fulfillment center. They are closer to customers so that they can shorten the delivery time and they also have a lower fulfillment cost, so really a tremendous help to us. And plus, we can have a much, much larger coverage. Last example is about the inside our fulfillment center, we try to reduce our operational…

Yes. On the company's cash reserve, as we disclosed as of June end 2022, we had cash and cash equivalents, restricted cash, and short term investment about RMB886 million. And you can also tell from our cash flow statements, the net cash outflow in the first half of this year is significantly lower than the first half year, last year. And we believe this trend will continue as we further lower our operation loss and getting closer to profitable. We believe our current cash reserves are sufficient to support our daily operation. I hope we answered your questions.

Yes, that's very thorough. Thanks.

Thank you.

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

Hi, thank you management. Good evening and good morning. This is Zoe from Citi. Thank you for taking my questions. I have two questions. The first is we saw a strong improvement in the gross margin in the second quarter. What are the reasons behind it and what level of gross margins you expect in near to long term? The second one is, could you give us more color margin product program? Thank you.

Thank you, Zoe. I think I'll take your first part of the question and then maybe my team can actually help out with the follow up question with a little more detail. Yes, we made a strategy to focus on margin delivery and in last few quarters we worked extremely hard on our product structure optimization, which is the main driver for better margin. And of course another driver is to reduce our procurement costs. We invested pretty heavily into our supply team and we negotiated pretty hard with our upstream suppliers. With our technological capability, we're getting better and better on our PIS system. If you are not familiar with that, that stands for Pricing Intelligence System. So what we do is, we use algorithms. We keep testing price elasticity, and we arrive at an optimized pricing for certain cohorts of SKUs. So this is really instrumental in helping us improving our margin and also project and image that you know, our selections has very competitive pricing. And also, our product mix included the so-called gold label products, which means high margin products, which maybe high return, I can elaborate on. The revenue for this category of products is not very high, but the margin contribution is very, very pleasing. And the last point I would like to make is that finally our private label has been launched. It's early stage, but we are very excited by the potential for this line of business. So far, we have created three brands. They are . The reason why we have those brands differently is we want to target our different market segments. So though, to conclude and I believe this is very sustainable, the second part of your question, and we should anticipate that our margin growth will continue to grow faster than revenue in the foreseeable future.

Okay. Second question, for the second question regarding high margin products, actually, as Junling just mentioned, this is actually with our SaaS based digital marketing tools and our various platforms, like One Health, like cloud promotion platform that to promote those new products or special products from pharmaceutical companies. And margin is normally about 20% and average about 23%, 24%. And these products not only high margin products of, one, but also which is even more important, also those are high margin products for pharmacies. So this has been a transformation for our 111 sales teams to promote those high margin products. And we are pleased to see, we have successfully those rules and the transformation as we can see in quarter-by-quarter and the high margin product sales are increasing revenue. Thank you, Zoe.

Thank you, management. Look forward to your future development. Thanks again.

Thank you. This is from the line of Lauren Kai from HSBC. Please go ahead.

Hi, thanks management for taking my questions and congrats on your solid results. I have two questions about your new initiative. The first one is on your One Health program. Can you share with us, how does the program improve active users in general? What's your future plans for the program? Do you have targets for like how many pharmacies to cover in the future? And my second question is, can you talk a bit more about your future plans for the cloud promotion program? What are the feedbacks from the pharma companies and pharmacies so far? What's their satisfaction level with the new service? Thanks.

Yes, thank you. Actually these two questions are all about our new initiatives. For One Health, One Health is becoming the first in the industry with the S2B2C model and our virtual franchise model enable over 10,000, those small or medium sized pharmacy chains to provide superior products and services to their customers. So for our next step also One Health actually currently I'm right now in Wuhan tomorrow, we will have a One Health member summit in for those members from Central China. On our next step of this program, that is to set up a closer connection on our marketing on this, all of our members and marketing about those exclusive SKUs and also about our private label, like One Health is designed for One Health members, which basically all those are very high margin ones, so we can expect the margin percentage of this program is going to increase. And for the next initiative, that is cloud promotion program and this is actually a SaaS based platform, connecting pharmaceutical companies with pharmacists in those pharmacies, and eventually with the end user or patients. Owning, we just launched in only a few months, and we have about, currently about 10,000 pharmacists and assistance in the pharmacies register in this platform. And we also have a number of pharmaceutical companies who are participating in this program. So we are expecting the cloud promotion program to become a very good digital marketing tool and also a platform to connecting pharmaceutical companies with the end user and with the patients. Thank you.

Thank you. Thank you for your answers.

Thank you. Next question is from the line of Steve Lou. Please go ahead.

Thank you for taking my questions. I have two questions. The first one is, what are the reasons behind contracting non-GAAP loss from operation at percentage of net revenue? How is this sustainable? The second one is what is that supply guarantee and price? How does it apply to 111's medical service during the epidemic? Thank you.

Thank you, Steve. Let me answer your first question. Yes, our non-GAAP operating loss for the quarter is 1.7% of net revenue, which is significantly improved if you compared to 4.9% last -- in the same quarter of last year. If you zoom in, you will see that the improvement was contributed by first of all, the gross market improvement, which is 6.3% this quarter versus 4.5% in the second quarter of last year. And also the total operating -- reduction contributed the rest, but just now Junling and Harvey is talking about our plan on the revenue and the margin expansion, if you look at our OpEx, you will see that in Q2 we have made great efforts to optimize our organization structure, streamline our operation process, and make full utilization of automated digital tools to improve into operation effectiveness and efficiency. And as a result, all of the expensive line items, such as selling marketing expenses decreased by 24%, G&A expenses down by 25%. And we also take a conservative approach on our R&D spending. And so we would believe that we will be able to keep this spending level in the rest of the year, while continuing to grow our top line and gross profit. So overall we are optimistic, positive, that we will continue the trend to narrow the loss until profitable. Junling, you want to answer the technical…?

I'll touch upon the supply guarantee enterprise and Steve, thank you for that question. I guess that is not a concept that everybody is familiar with. And as you can imagine, during the lockdown, all the logistics were suspended with the exception of government approved companies, which you know, can deliver essential goods, such as food to residential compounds to keep the citizens fed. And those companies are classified as supply guarantee companies. They are given special permits onto the road. Initially there were only companies which can deliver food and water which is the most essential for survival. And our GR team proved its value. They approach relevant authorities repeatedly, as you can imagine how chaotic it can be when the city just got locked down initially and the system was literally in shock. And eventually it made sense to the authorities, that in addition to food and water many chronic patients will need drugs to survive. So they granted us the permit. But unfortunately, our fulfillment center is in Kunshan, which is neighboring province. And we had to go through similar process in Kunshan which was governed by different decision makers. To put the long story short, we got it sorted and eventually made it work and both governments gave us the green light. And our vehicles were able to transport medicine to Shanghai on a daily basis to deliver the badly needed drugs to our consumers. And as far as we knew, we were the only online company in Shanghai who were able to deliver this service to consumers. And what we did exactly was, we set up four collection centers across Shanghai and two in Puxi and two in Pudong, and the drugs will be delivered from our fulfillment center to those collection centers, where our people will have to work pretty hard to sort all the drugs out based on different suburbs and so on. And then the customers can get their riders to collect those orders. As I said before, some customers were simply not able to get those riders because they lived little further away and some of our staff will have to use their own vehicle and leave their residential compound to deliver those drugs to consumers. We're very proud of the fact that our customers can receive such services, received so many letters from customers and are calling that really life-saving services. Thank you, Steve. I hope that answers your question.

Yes. Thank you for answering my question. This information is very useful.

Thank you.

Thank you. And that was the final question. So 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 today's call. This concludes the call.