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.

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…

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…

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

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.

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.

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.

That's very clear and helpful. And thanks for sharing and congratulations again on the company's progress. Thank you.

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

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.

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.

The next question comes from Tom Craig with Cornerstone Investment.

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.

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.

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.

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

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.

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…

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].

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

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.

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.

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

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?

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.

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]?

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.

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?

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.

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

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

Thank you.

Thank you.

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.