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 Lu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of 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 website. 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 can 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. Please go ahead.

Good morning and good evening, everyone. Thank you for joining our third quarter 2024 earnings call. The information we will be discussing is also available in the slides posted earlier today on the Company's website. I encourage everyone to download the presentation as well as the earnings report from our Investor Relations website at ir.oneoneone.com.cn. China's challenging macroeconomic environment continues to have an impact on our entire industry, including both the upstream and downstream sectors. While challenges are inevitable, we still achieved a stellar performance maintaining operational profitability for three consecutive quarters. This achievement is primarily driven by our ongoing enhancements in operational efficiency, which have helped us to navigate the unfavorable environment. In today's call, I will provide an in-depth overview of the current market situation facing our industry as well as the long-term outlook and the opportunities ahead, along with our key financial highlights. I will also discuss how we are leveraging new technologies to strengthen operations, our supply side initiatives and our recent outlooks. Finally, I will outline our future growth strategy before handing over to our CFO, Mr. Luke Chen, who will provide a detailed analysis of our financial performance. First, on the macroeconomic side, in light of weak consumer sentiment, sales growth in retail goods has slowed in China. Our industry is also experiencing cautious household spending on healthcare. According to data from the National Bureau of Statistics, per capita healthcare expenditures growth rate declined 11.5% points from a year earlier for the first nine months. Additionally, our downstream pharmacies are facing ongoing healthcare reforms, including adjustments to individual medical accounts and the gradual implementation of coordinated outpatient benefits alongside increased the regulatory oversight. While these reforms are designed to drive long-term development of the industry, the short-term outlook remains challenging. An aggressive expansion of…

Thank you, Junling, and good morning or evening everyone. Moving to our financial performance. My prepared remarks will focus on a few key business and financial highlights. For details on our third quarter 2024 results, please refer to Slide 17 to 20 in Section 2 of our presentation. Again, all comparisons are year-over-year and all numbers are in RMB unless otherwise stated. Let's start with the third quarter results. Total net revenues were RMB3.6 billion remaining relatively flat compared to the same quarter of last year. Gross segment profit for the quarter grew 10.5% to RMB210.6 million. Total operating expenses for the quarter decreased 23.2% to RMB28.2 million. As a percentage of net revenues, total operating expenses for the quarter were down to 5.8% from 7.4%, as we continue to enhancing our operating leverage and optimize our operational efficiency. Specifically, fulfillment expenses remained steady at 2.8% of net revenues in line with the previous year. Sales and marketing expenses as a percentage of net revenue for the quarter were 2.1%, down from 2.6% in the same quarter of last year. General and administrative expenses accounted for 0.4% of net revenues, down from 1.3% in the same quarter of last year. Technology expenses amounted to 0.5% of net revenue, down from 0.7% in the same quarter of last year. As a result, income from operations were RMB2.4 million compared to a loss from operations of RMB18.4 million in the same quarter of last year. Non-GAAP income from operations was RMB7.1 million compared to non-GAAP loss from operations of RMB54 million in the same quarter of last year. Non-GAAP net loss attributable to ordinary shareholders was RMB12.4 million compared to RMB6.9 million in the same quarter of last year. As a percentage of net revenues, non-GAAP net loss attributable to ordinary shareholders…

Thank you. [Operator Instructions] Your first question comes from Jessie Lu with HSBC. Please go ahead.

Thank you for taking my question. This is Jessie from HSBC. First of all, I want to congratulations on delivering a very resilient result despite the challenging macro environment. I have two questions. The first one on OpEx. I noticed that for OpEx, as a percentage of revenue, is around 5.8% to 6% over the past three quarters. I was wondering going forward, is there room for this ratio to further come down and what measures you will plan to do to drive that further improvement in OpEx optimization? The second question is on GP margin. Despite overall revenue has been flat year on year, we saw improvement for gross margin. Can you help us understand the factors driving this improvement? Thank you.

Jessie, first of all, thank you for the questions. With regards to the question about OpEx, the short answer is, yes. We will continue to reduce the expenditure in operating our business, and we will see more and more impressive OpEx numbers, because from day one of the Company, our philosophy has always been to leverage technology to reshape the value chain of the industry and we want to be the leader in operational efficiency. So, how do we do that? We believe that we have already become the leader in operational efficiency in the industry, and we remain committed to continuing our effort in all aspects of our operations. Our optimization across all of the business segments is core in our management's daily work, and we review those metrics on a weekly basis, we call it WBR. And of course, technology is essential in containing OpEx and we benefited big time in the past and no doubt it's going to continue to play an even bigger role in the future. In the meantime, we will constantly optimize our organization and we'll do smart staffing. We believe a lot of those expenses coming from people, and if we could deploy those resources carefully and intelligently, we can achieve our savings. And of course, innovation in all aspects of our business is completely key. I laid out some examples, especially in our supply chain to give you an illustration. That's going to help us to stay competitive. In the past, we only relied on building those fulfillment centers first party ourselves. And obviously, nowadays, we have joint venture fulfillment centers. We also now have franchise fulfillment centers where the upfront capital outlay all paid by our partners, whereas we can service partner within our customers even better to produce a better customer experience. And with regards to your question as to margin improvement, obviously, there are a few things we are doing and we will continue to do. First of all is, the assortment management. We have an internal tool, we call it, the [Borguan]. So, [Borguan] really constantly engage customers' needs and ensure that our assortment is constantly optimized dynamically. With that, the assortment management is taken care of. Of course, the other thing we do is the category management. Once again, this is very important in our margin growth. You'll notice that our margin is growing faster than the revenue. And obviously, there are money-losing categories and there are also money-making categories. It's a fine act in balancing the two. We have to really minimize the money-losing categories and maximize the money-making categories. The other thing, of course, is really important is to manage our upstream suppliers. Our first party team worked really hard to find ways to get better views from the pharmaceutical companies. We're going to make more investments in this area to have better coverage, especially those medium to small farmers from whom we can get better deals. I hope those answer your questions, Jessie.

Yes, very clear. Thank you very much.

Your next question comes from Alvin Miao, a Private Investor. Please go ahead.

Hello. Thank you for taking my questions. It's a wonderful quarter. Actually, I have three questions. The first is with three consecutive quarters of operating profits, does the Company anticipate achieving operating profit for the entire year? The second is supply chain management has always been a key focus for your company. What improvements and efficiency enhancement were made in Q3? And the last question is could you provide more insights into how the Company managed to achieve positive operating cash flow for three consecutive quarters?

Thank you. Alvin, I'll take your first question. That's a great question about, it's going to achieve profitability for the whole year. Yes. So, we are quite optimistic in achieving operational profitability for the whole year. Thank you for that. I'll leave your next question to Haihui.

Yes. Regarding the supply chain management, you are right. It has always been our key focus. And we actually, we emphasize industry benchmarks in our supply chain management. And we continue innovating in sourcing in warehousing and like order fulfillment and the entire supply chain. So, in the past quarter, in Q3, our order fulfillment cost continued to decrease. It dropped from RMB101.6 million of last Q3 to RMB 99.98 million of last Q3. So, there is a net ceiling of RMB1.62 million. And our year-to-date fulfillment cost as a percentage of our revenue also decreased from 2.76% to 2.62%. So, in logistics, we have achieved some of the following progress. The first is our Kunpeng logistics network. We scaled up the chain shipment network and also extended last mile delivery services. So, in this part in this year, our delivery cost has been reduced from 1.35% to 1.31%. And secondly, our labor and packaging cost in our warehouse also has been optimized by our -- by streamlining our operational process. And this part, our labor cost reduction in this year from 0.7% in terms of total revenue to 0.68%. And also, our warehousing cost, for example, we just relocated our South China warehouse. Our warehousing cost, we see a decrease from 0.71% to 0.63%. So, it’s a reduction by 11.3%. And number two, we are actually we are expanding this Kunpeng network to provide professional logistics services, not only to our internal customer, but also to our external customer. So, in Q3, we established this network for our five major fulfillment centers, we call it our National Fulfillment Center, in East, Central, South, North and Southwest China. And we plan to establish this national network with added first mile and last mile services to our upstream and downstream customers to ensure an end-to-end control over with our entire supply chain. Lastly, in Q3, we completed our just as I mentioned, our Guangdong new South China fulfillment center relocation. We expect to have a remarkable cost reduction with this relocation. And also, we are expanding our franchise fulfillment center model nationwide. In Q3, we opened a new facility in Wuhan and Guangzhou, reaching a total of six new model fulfillment centers in operation in Q3. And we expect to have more and more this new fulfillment center in this new model in Q4 and also early next year. Thank you.

Yes. On the cash flow. As you can see, we have achieved GAAP and non-GAAP operating profit for the three quarters, which means that we are no longer burning cash for this business. Instead, we are creating positive cash flows at the operating level for three consecutive quarters. We think we are doing the right thing in terms of working capital control. We have been very focused on improving the turnover dates for inventory and accounts receivable. And we also introduced the third-party supply chain finance to many of our pharmacy customers, and we have also improved the turnover date of accounts receivable. There are still rooms for further improvements and we are confident that we can do better job in the coming quarters. Yes, I hope we I think we answered your questions.

Thank you. Your next question comes from Robert Sassoon with Water Tower Research. Please go ahead.

Hi. Thanks for taking my questions. I have a few of them. So let me start with this one. Based on the current market environment, how would you assess the Company’s performance in the third quarter? What are your expectations for the market environment in the coming quarters? And how do you think those expectations would impact on the development of the Company's B2B and B2C businesses? Let me start with that. I have a few other questions after that.

Thanks, Robert. I'll take this question. First of all, we're pretty proud of the solid performance given the macro situation in China as it's pretty widely known. Both of our upstream and downstream customers are under tremendous pressure. The anti-corruption in the hospitals and also the campaign against Medicare fraud in the pharmacies area will create short term pains, but we are quite optimistic that the industry will be more transparent long-term buyers. And we are quite optimistic about the future business. I'll give you a few reasons. First of all, with China's demographics, especially the aging population, the Medicare needs will definitely go up. And if we look at the big picture, healthcare expenditure in China is about 7%-ish, and whereas in the United States, it's about 20%. There is a huge headroom for the market to grow. And the other point I want to make is that the short-term economic challenge will force both the upstream and downstream customers to be more efficient. And our digital capabilities will really enable us to create more value for both our upstream and downstream customers. I'll stop at that.

Thank you very much for that answer those answers. I have a couple of other questions more on the technical side. What could you actually highlight the progress and achievements that your company has made in the digital capabilities and the IT technology that you've been implementing in the third quarter?

Yes.

And the second -- sorry, I just want to follow up the second question that I had to ask on that one is can you outline the Company's expansion plans in terms of product offerings and partnerships within the supply chain ecosystem?

Okay. Robert, thank you. I will take these two questions. First one, regarding our digital capability and also IT technology, actually, it's not only in the last quarter, actually from day one, we have continued to invest in our system development, our models and also data applications and also always able to build our core competitiveness in our digitalization, also achieving quite a number of results, especially in the past quarter. First, through our JBP platform and the very new inventory sharing technology, we link our upstream suppliers' inventory to form a unified and integrated stock. As a result, we have added in 32,000 new SKUs and as well as they are related to stock volume to further improve our supply capabilities. And the second achievement is in this big data side. For Chinese herbal medicine, we have trained and applied as a leaflet model for specification recognition. For those herbal medicines, it's pretty complicated. So based on these specifications, we developed an AI model that has improved its accuracy from 77% to 98.2% through multiple iterations. Additionally, the accuracy in content matching for the herbal medicine has increased from 43% to 96%. And our upstream and downstream customers, so Chinese government is a big part of their business. So -- and also a headache for everyone. So, with this new technology, we believe we're really helping the entire supply chain to improve our accuracy and efficiency. And regarding the expansion plan, in terms of product offerings and the supply chain side. Actually, for product offerings and our supply chain ecosystem, we started from as Junling just mentioned introduced, we started from a third-party model, which offers a good customer experience. But actually, years later, we realized that it will be -- it would be very efficient to expand our selection offering with a single first-party model along as we can imagine. But you have to do everything. You have to no matter if it's upstream or downstream, you have to do it alone. So, we innovatively reduced our supply chain. Besides our third-party model, currently, we mostly deal with our corporate with our upstream pharmaceutical company. We also set up a JBP model for partnership with distribution companies. And now through the new JBP platform and this whole new inventory sharing technology, we have organically linked upstream merchant industry to form our own integrated stock. So, this is one very important part of our expansion plan in terms of product offerings and also enrich our product selection of additional, I just mentioned, 23,000 new SKUs in a very short period of time. It is just in the past one more month. So, we will imply this technology across the country. And I believe our product offerings will be improved to a new level in the coming quarters with opening of more franchise or joint venture fulfillment center with this JBP platform and with this new inventory sharing technology. Thank you, Robert. Hope I answered your questions.

Yes. That's great. I'll jump back into the queue.

Thank you. That concludes the question-and-answer session. 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 Shanghai, China, please let the Company know. Thank you for joining us today. This concludes the call.