111 Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 24, 2023

There are 9 speakers on the call.

Operator

Hello, everyone, and thank you for joining 111's conference call today. On the call today from the company are Doctor. Dong Yu, Co Founder and Executive Chairman Doctor. Jingli Lo, Co Founder, Chairman and CEO Doctor. Luke Chen, CEO of 111's major subsidiary and Doctor.

Operator

Harvey 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 presented 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 under the Safe Harbor Provisions Act. 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, risks, uncertainties and other factors, all of which could cause actual results to differ materially.

Operator

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 R and D and all comparisons refer to year over year comparisons unless otherwise stated. Please also refer to the earnings press release for detailed information and comparative financial performance on a year over year basis. With this, I will turn the call over to 111's CEO, Doctor.

Operator

Jingli Lo.

Speaker 1

Good evening and good morning. Thank you for joining our Q2 2023 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 encourage you to download the presentation along with the earnings report at ir.111.com.cn. I will begin by providing an overview of the macro environment followed by a review of our recent operational performance.

Speaker 1

Additionally, I will comment on our continued commitment to industrial digitization, driving revenue, fortifying upstream supply capabilities, enhancing operational efficiency and outlining our future strategies. Subsequently, our CFO, Mr. Luke Chen, will present a detailed analysis of our financial results, ensuring a thorough understanding of our organization's financial standing. Now let me start with the macro situation in our industry. In the Q2 of 2023, the pharmaceutical retail market faced some challenges.

Speaker 1

According to statistics, the Q2 sales of retail pharmacies in 2023 reached RMB225.13 billion, marking a decline of 6.82 percent compared to Q1 of 2023 and a year on year decrease of 7.52% compared to Q2 of 2022. Looking at the broader picture, although the total sales volume of Q2 was somewhat more conservative, we feel lucky to be in the right sector. Despite the economic challenges presenting tests to the pharmaceutical retail market, the industry remains optimistic about the future, hoping for a steady rebound in the coming quarters. Amid the sweeping changes and initiatives of 2023, it's evident that the government's policies remain staunchly supportive of the digital evolution and the rejuvenation of the health care and the pharmaceutical sectors. Specifically, the notice on further improving the integration of designated retail pharmacies into outpatient unified management issued by the National Medical Insurance Administration underscores a pivotal shift towards harnessing digital avenues to streamline the movement of prescription drugs.

Speaker 1

Moreover, the strategic guidance from the opinions on future deepening reform to promote the healthy development of the rural medical and health system jointly released by the General Office of the CPC Central Committee and the General Office of the State Council emphasizes a holistic vision. This vision is not just about strengthening rural healthcare, but also about leveraging digital innovation to enhance resource allocation and service delivery in these regions. The ambitions highlighted in the 14th 5 year plan, particularly the cultivation of large digital integrated pharmaceutical wholesale and retail enterprises with revenue in the 100 of billions of RMB further reiterate this commitment. Together, these policy initiatives underscore a future where digital transformation is central to the continuous progression and innovation of the industry. Despite the decline in our specific industry, I'm delighted to announce that 111 being a leading healthcare tech company in China has seen consistent expansion.

Speaker 1

The Q2 of 2023 represents our 20th straight quarter of year over year growth following our Concentrating on digital health offerings, 111 has seized the growing need for online medical service platforms catering to both individual customers and businesses. By harnessing our strong technological foundation and forming pivotal alliances, 111 has successfully bridged the gap between patients and the pharmacists, medical experts, drug manufacturers and other healthcare related services. Our upward growth trend underscores the significant impact of digital advancements in transforming healthcare provision and enhancing patient experiences throughout China. In the Q2 of 2023, the company adeptly navigated challenges registering RMB3.5 billion in revenues, a 14.5% year over year surge. It's also gratifying to share that our overall gross profit saw an 8.3% year over year growth, with the B2B sector's profit rising by 11.6% year over year.

Speaker 1

Regrettably, we have to absorb some of the excess inventory remaining from the height of the pandemic, which impacted our potential gross profit. Our B2B operations continue to be the primary contributor to our revenue enhancement. During Q2, the B2B sector's revenue hit RMB3.39 billion, which is a 15.5 percent year over year growth and the gross profit rose to RMB188.6 million, marking an 11.6% year over year upswing. In comparison, our total operating expenses stood at RMB249.3 million, a decrease from RMB271.7 million in the corresponding quarter of the previous year. When looked at as a percentage of net revenues, operating expenses dipped from 8.9% last year to 7.2% this year, highlighting our sustained growth in operational efficiency.

Speaker 1

Operational losses were RMB41.4 million, down from RMB79.8 million during the same period last year. Represented as a percentage of net revenue, operational losses shrank from 2.6% the previous year to 1.2% this year. Non GAAP loss from operations was RMB17.2 million compared to RMB52.8 million in the same quarter of last year. As a percentage of net revenues, non GAAP loss from operations decreased to 0.5% from 1.7% in the same quarter of last year. Our commitment remains to persevere in our journey towards comprehensive profitability.

Speaker 1

Allow me a brief pause to highlight the strides we've taken in our operations. The Q2 has been marked by our emphasis on further digitization and enhancement of management, paving the way for even greater returns on this investment in the future. In June, 111 and Tencent have entered into a strategic partnership to enhance the accessibility of online pharmaceutical services. 111 signed a strategic cooperation agreement with Tencent Health. Both parties will collaborate and jointly explore in the areas of pharmacy digital services, pharmaceutical digital marketing and online medical intelligent services aiming to jointly establish a pharmaceutical plus Internet digital upgrade industry paradigm.

Speaker 1

According to the cooperation agreement, Tencent will leverage its technological advantages in cloud computing, big data, artificial intelligence and its profound reach and connection abilities in the consumer Internet sector to assist the 111 in the digital construction and upgrades of smart pharmacy retail, data centers and intelligent pharmaceutical sales software. At the same time, we will jointly explore new digital scenarios in pharmaceutical sales, integration of smart pharmaceutical sales software and solutions improve the pharmaceutical sales efficiency and aid pharmaceutical companies in their digital transformation. This is a significant step forward in 111's digitization strategy. Motorola, in July, 111 was listed on the Shanghai Data Exchange, accelerating the transformation of the pharmaceutical industry. 111 is among the earliest domestic enterprises to enter the digital healthcare industry.

Speaker 1

Currently, on the Shanghai Data Exchange, it has completed the listing of its 111 Information Brain series of products, which can play a role in drug flow tracking. In drug flow tracking, e commerce drop initial information entry and compliance determination for e commerce Pharmaceuticals. Form 11's master data in the pharmaceutical industry includes more than 720,000 main product data and 1,200,000 main company data covering 99.6% of the pharmaceutical market. At present, the 111 Information Brain Series products listed on the Shanghai Data Exchange already cover its pharmaceutical master data. 111 will make full use of the data accumulated internally and collected externally to build its AI model in the pharmaceutical industry, continuously enhancing the value and application capabilities of the data.

Speaker 1

111 plans to continue listing more data products on the data exchange to meet the industry's continuous development and innovation needs, empowering the digital transformation over the entire pharmaceutical industry through the Shanghai Data Exchange. We established a more digitized collaboration with drug supplies within its ecosystem and empower the transformation of pharmaceutical supply, 111 has launched a significant data supply chain product In July, during the 13th anniversary celebration of 111, the digital linkage went together 111 Digital Supply Chain Summit was held in Shanghai. 111 will continue to refine its digital supply chain management system, strengthen its technological advantage and the strategic focus of 111 supply chain upgrade is to create a digital supply chain driven by digital technology, synchronizing the entire chain and the linking upstream and downstream collaborations. Through the integration of multiple modules such as supply, procurement, storage, distribution and sales with the aid of digital product modules like the wheel of wind and fire and the Kunpang, 111 aims to facilitate the effective data and information flow. We will forge strong collaborations with the pharmaceutical companies, industry partners and the pharmacists to provide seamless care for our customers.

Speaker 1

In a remarkable testament to 111's advanced digital capabilities, the Ministry of Commerce has bestowed upon the company's title of E Commerce Demonstration Enterprise. This accolade is not a common distinction. Only 132 enterprises across the nation have been graced with this recognition. The announcement made this quarter speaks volumes about 111's competence and its emerging prominence in the e commerce arena. Parallel to this noteworthy achievement, 111 has intensified its bonds with upstream pharmaceutical partners.

Speaker 1

This deepened alliance is more than mere collaboration. It's an evolution of mutual understanding that is reshaping the contours of the pharmaceutical digital space. This concerted effort crystallizes 111's commitment to amplifying its all encompassing digital expertise, ensuring that it maintains at the forefront of technological evolution in the sector. This quarter witnessed the initial launch of additional groundbreaking drugs on our digital platform, building on our prior achievements with esteemed partners such as Hua Medicine and Sanofi. YuanDa Zhongomu introduced the 2 state of the art asthma medications, Yin Zhuan and Yin Mingran, exclusively on 111's digital platform.

Speaker 1

These products are not just new entries. The etomize global pioneering combined formulations dedicated to advancing asthma treatment. Induran is currently the only approved triple inhalation formulation for asthma patients in China, filling the therapeutic gap. With their availability on our online platform, these two drugs can rapidly reach the outpatient market, undeniably offering considerable convenience and superior treatment options for China's vast asthma patient population. As our business continues to expand and as we position ourselves as an effective commercialization partner, we will continue to offer value added services to pharmaceutical companies.

Speaker 1

Meanwhile, on our B2B platform, through our partnerships with downstream pharmacies, we kept delivering digital value to upstream pharmaceutical companies with our newly developed digital tool, Telescope. Intelliscope kept serving as a lens for pharmaceutical companies, allowing them to gain a more direct and comprehensive view of their drug sales and pricing dynamics real time. By leveraging advanced data analytics and market insights, Telescope enables those companies to analyze sales patterns, identify pricing opportunities and make data driven decisions to optimize their strategies. With Telescope, pharmaceutical companies can assess the performance of their products in real time, identify market trends and adjust their marketing campaigns accordingly. This invaluable tool not only provides a clear understanding of the market landscape, but also assists in forecasting demand, refining pricing strategies and ultimately maximizing sales and profitability.

Speaker 1

On the other hand, we remain dedicated to digitally enabling downstream pharmacists by providing all encompassing support for their operational needs. Our tailored solutions extend beyond provide affordable medical products and quality services. They are designed to optimize workflows and boost operational effectiveness. By tapping into our extensive network and forging robust partnerships, we secure competitive rates and beneficial terms with providers ensuring pharmacies benefit from cost savings. Moreover, through advanced technologies like automated ordering platforms and a streamlined logistics, we guarantee prompt deliveries while helping pharmacies cut down on their operational costs.

Speaker 1

By offering cost effective products and efficient services, we enable pharmacies to deliver value to their customers and maintain their competitiveness in the market. Particularly, at the end of Q2, our One Health virtual franchise model kept enabling around 20,000 small to mid sized pharmacies provide superior products and services to their customers. All participating pharmacies can use our platform to better manage their product selection, procurement and inventory management, as well as accessing our distribution tools through our digital SaaS services, including smart sourcing, digital marketing, O2O and CRM. Thirdly, we consistently prioritize enhancing our operational efficiency within our strategic planning. As 111's business scales up and our technological advancements flourish, our operational efficiency continues its encouraging trajectory.

Speaker 1

It's heartening to note that with rising revenues, the proportion of sales and marketing expenses have seen a decline, accounting for 2.6% this quarter as opposed to 3.3% in the same quarter of the prior year. General and administrative costs in relation to net revenues stood at 1.1% this quarter, down from 1.3% in the same period last year. Additionally, our technology related expenses stood at 0.7% this quarter, down from 1.1% in the same period last year. We've taken deliberate steps to boost management efficiency in 111. 1st and foremost, our approach to human resource management has been very prudent, ensuring optimal workforce distribution and utilizing technology to automate specific functions.

Speaker 1

In our next move, we refined our standard operating procedures and simplified managerial processes boosting overall productivity. Furthermore, a heightened emphasis on robust corporate governance has led to an ingrained ethos of responsibility and openness throughout our team. Finally, we've channeled significant resources into tech based solutions like state of the art analytics, robotic process automation and innovative digital platforms. Through these strategic measures, our objective is clear to elevate efficiency, curtail expenses and consistently provide superior value to all our stakeholders. To further improve operational efficiency, we will keep on focusing on implementing our strategy, flattening our organizational structure and improving work efficiency of our employees through multiple operational tools.

Speaker 1

In the rail logistics, we've witnessed a marked reduction in our fulfillment expenses, primarily attributed to the enhancements in our proprietary warehouse operations and the collaborations with joint venture storage facilities. Through significant investment in both infrastructure and technology, we've honed our supply chain mechanisms, resulting in heightened operational efficiency. Such advancements have enabled us to expedite and refine product deliveries to our customers, currently driving down our fulfillment costs to 2.7% from the previous 2.9% relative to net revenue, Maintaining optimal customer satisfaction and a competitive edge remains at the forefront of our agenda and will persist in nurturing these strategic undertakings. For yet another quarter, we've diligently adhered to our guiding tenants of value creation, customer centricity and fortifying our supplier foundation throughout the organization. Our recently instituted in house advisory department has once again proven its worth by championing strategic advancements across various need analysis, the facilitated fine tuning of our product portfolio to resonate more precisely with market inclinations.

Speaker 1

By

Speaker 2

keeping a

Speaker 1

vigilant eye on evolving market dynamics and capitalizing on real time customer feedback, we've managed to recalibrate our pricing, ensuring both competitiveness and enhanced profit margins. Furthermore, this department has been instrumental in finessing our internal resource distribution, refining procedural workflows and boosting overall operational efficiency. Through these concerted endeavors, we are elated to report that we have not only met, but often exceeded customer anticipations, forged the sensible pricing models and ensured and adapt stewardship of resources across the board. Now let me spend a moment to talk about our future growth initiatives. 1, continue to expand selection for our customers by leveraging our partners' stock.

Speaker 1

We dedicate our commitment to elevate and refine our supply chain model As we navigate the multifaceted pharmaceutical landscape, our primary focus is to harmonize our 1st party business, JBP business and the marketplace business seamlessly. Among these, our JBP business stands out as one of our priorities this year. We recognize its pivotal role in streamlining pharmaceutical distributions and forging solid partnerships, Hence, we're investing resources and efforts into optimizing its operations, ensuring that it not only complements our other business segments, but also emerge as a beacon of operational excellence and efficiency. Through these endeavors, 111 aims to provide the best selection and the best one stop shopping experience in the industry to pharmacy customers 2, tailor our 1st party product range to align with customer preferences. Our unwavering commitment is to improve the customer journey by refining our product lineup based on their preferences.

Speaker 1

By harnessing information from various avenues such as client feedback, industry studies and advanced data analytics, we constantly fine tune our product selection. Growing from this rich pool of insights, we ensure that our first party inventory caters to the varied needs of our customers. This strategy not only allows us to provide purchasing solutions, but also ensures we continue to strengthen direct sourcing relationships with upstream manufacturers. 3, cost down on procurement. Acquiring directly from pharmaceutical firms has significantly slashed our product expenses.

Speaker 1

We've established connections with over 500 esteemed global and local pharmaceutical entities, and our goal is to reinforce our ties with these current associates while also fostering new collaborations. And currently, we've implemented numerous benchmarks to propel our procurement team towards enhanced cost saving initiatives. This strategy ensures that we have a diverse medication assortment at a more affordable cost. 4, enhancing smart pricing strategy. Being a prominent digital healthcare platform, particularly in the B2B segment, we are committed to enhancing our market spending through refined pricing methodologies backed by intelligent systems.

Speaker 1

Using cutting edge algorithms and deep data analytics, we carefully assess market trends, competitors' pricing structures, customer preferences and other crucial parameters to set the most strategically viable price points for our offerings. This method ensures we cater to both our customers' affordability needs and our businesses' profitability goals. With integration of this smart pricing mechanism, we aspire to expand our market footprint, attract fresh customers, retain our loyal base and solidify our reputation as a reliable and economically competitive player in the pharmaceutical domain 5, elevate efficiency through intelligent supply chain management. We're deeply committed to continuous refining our supply chain to guarantee seamless procurement, warehousing and distribution processes. By forging robust collaborations with pharmaceutical firms, we directly obtain premium products, allowing us to make the supply chain more fluid and reduce potential holdups.

Speaker 1

Our specialized continuity of supply team is devoted to enhancing procurement strategies, adjusting resources as required and ensuring stock levels are adeptly maintained to fulfill demands while preserving product integrity. Through these initiatives, our goal is to boost operational effectiveness, diminish expenses and offer unparalleled service quality to our customers. 6, unwavering focus on enhancing operational efficiency. We are unwavering in our pursuit of operational excellence and are adopting focused strategies to manifest this vision. By strategically integrating technology, we are reshaping our workforce dynamics, ensuring efficiency without compromising on output.

Speaker 1

Simultaneously, we are deeply involved in dialogue with external vendors, especially those in logistics to procure the most favorable terms, thereby refining our supply chain and curtailing overheads. Equally paramount is our emphasis on honing management acumen and decision making capabilities given their direct influence on operational powers. With a meticulous approach in these domains, we are poised to substantially curtail operational costs, paving the way for enduring growth and prosperity. 7, pledging to digital transformation. Our dedication to digital innovation remains steady given its potential for long term rewards.

Speaker 1

Through the integration of the digital solutions, we are able to refine our methodologies, boost operational efficiency and foster avenues for groundbreaking initiatives. By channeling resources towards research and development, we maintain our edge in the ever evolving tax fair, propelling innovations that cater to our customers' dynamic requirements. As we elevate our focus on digital strategies and cultivate an ethos of continuous evolution, we solidify our stance as a nimble competitive entity poised for continuous advancements in the rapidly shifting healthcare domain. In conclusion, while we will face challenges and successes, 111 remains dedicated to leading the way in the healthcare sector, championing transformative initiatives and ensuring excellence in service delivery in the ever changing environment. We wish to thank all the investors who have supported us.

Speaker 1

Now, I will hand the call to Mr. Luke Chen to walk through our financial results. Thank you.

Speaker 3

Thank you, Qingy, 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 Q2 of 2023 results from Slide 18 to 21 in Section 2 of our presentation. Again, all comparisons are year over year and all numbers are in RMB unless otherwise stated. Our top line and the gross segment profit in 2nd quarter continued to grow.

Speaker 3

Total net revenues for the quarter grew 14% to $3,500,000,000 and the gross segment profit for the quarter grew 8% to $208,000,000 dollars Top line growth for the quarter was mainly attributed to our B2B segment revenue growth at 15% to 3,400,000,000 dollars The gross segment profit for B2B segment has increased by 12% with gross segment margin at 5.6%. Our B2C segment revenue decreased 13% to $88,800,000 with gross segment margin at 21.8%. Total operating expenses for the quarter decreased 8% to 249,300,000 dollars As a percentage of net revenue, total operating expenses for the quarter were down to 7.2% from 8.9% as we continue to enhance our operating leverage and optimize our operation efficiency. Fulfillment expenses as a percentage of net revenues for the quarter was down to 2.7% from 2.9% 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 3.3% in the same quarter of last year.

Speaker 3

General and administrative expenses as a percentage of net revenues accounted for 1.1%, down from 1.3% in the same quarter of last year. Technology expenses accounted for 0.7% of net revenue, down from 1.1% in the same quarter last year. As a result, non GAAP loss from operations narrowed to $17,200,000 compared to $52,800,000 in the same quarter of last year. As a percentage of net revenue, net GAAP loss from operations decreased to 0.5% in the quarter from 1.7% in the same quarter of last year. Non GAAP net loss attributable to ordinary shareholders was RMB33 1,000,000 compared to RMB68.3 million in the same quarter of last year.

Speaker 3

As a percentage of net revenues, non GAAP net loss attributable to ordinary shareholders decreased to 0.9% in the quarter from 2.2% in the same quarter of last year. Please refer to Slide 22 to 26 of the appendix section for selected financial statements. And a quick note our cash position as of June 30, 2023, we had cash and cash equivalents, restricted cash and short term investment of RMB735.8 million. As previously disclosed, if our key subsidiary 1 Pharmacy Technologies proposed listing on Star Market were not competed before June 30, 2023, certain PRC investors will be entitled to require us to redeem all or part of their equity for an amount up to $1,085,000,000 As of today, certain investors have agreed not to exercise their rights before June 30, 2024 to redeem their investments, which totaled RMB728 1,000,000 and 3 investors have decided to exercise their right to redeem their investment totaling RMB 127,000,000. We are also proactively working with the remaining such

Speaker 4

a

Speaker 3

redemption will affect our business and the prospectus as such redemption will affect our business and the prospectus as we expected to have sufficient capital resource to fulfill such redemption obligations. This concludes our proposed remarks. Thank you. Operator, we are now ready to begin the Q and A session.

Operator

Thank Our first question today comes from Shai Pang Seng with CICC. Please go ahead.

Speaker 5

Hi, this is Shai Pang from CICC. Thank you for taking my questions and congratulations on the company progress. Well, I have two questions actually. My first question is about policy. There have been many changes in the downstream industry recently, such as national unified medical insurance coverage on retailing pharmacies.

Speaker 5

So what kind of impact does this policy have on the industry and 111? And this is my first question. Thanks.

Speaker 1

Hi, Sifeng. Thank you for the question. So obviously you noticed and we noticed there is suddenly a pretty big change in our general population's medical insurance. So for those people who do not understand the Chinese Medicare system, So anybody's Medicare system is divided into 2 accounts. 1 account is called the personal account and the other account is called the unified account.

Speaker 1

And the recent change in the policies that used to be majority of the money is deposited into the personal account and now it's reversed. Majority of the money in the account has been distributed to the unified account, which means customers are not able to spend at their own discretion as before. Our understanding of the implications is such that first of all, more and more pharmacists will be included in the group of pharmacists that can provide reimbursement services to customers and those numbers will grow. We anticipate that majority of the pharmacists will be entitled to provide the reimbursement services to their customers. And number 2, the consumers' personal account is reduced.

Speaker 1

So their ticket size will be somewhat reduced. This will also impact the pharmacy. Those are the negative impacts to pharmacies and to a certain degree to us. But we actually take this as a tremendous opportunity because what this will do is to drive a lot of traffic to pharmacies and because more and more pharmacists will be joining the group that can do the reimbursement services. And therefore, they need to purchase more drugs, they need to purchase more medicines.

Speaker 1

Furthermore, they have the opportunity to upsell their product and services. So this clearly is going to drive those pharmacies to enrich their offerings. They will have to introduce more categories and more services. So our understanding from the government is that there is a clear trend that the government is intending to separate consultation from drug sales, which was the fundamental problem of the Chinese healthcare system. And it is not easy reform as we understand, but we are very encouraged to see the government's determination to head towards this direction, which will be great news for the pharmacy sector and not necessarily the best news for the hospitals.

Speaker 1

I hope that answers your question, Sipan.

Speaker 5

Okay. Thanks for the sharing. And my last question is about financials. As we noticed, the operating expense ratio of 111 has been decreasing. And I just wonder what is the main reason behind this trend?

Speaker 5

And will that continue to decrease in the future? Or what's the breakeven point of the company? Thanks.

Speaker 1

That's a great question, Sipang. And obviously, what drives the operating expenditure is just a few buckets in a few areas, right. So what we've done in the past is we focused on revenue and margin growth. And once the revenue is bigger, obviously, as a percentage of expenses, they were going to go down. And the other thing we did is really we were relentlessly driving operational efficiency.

Speaker 1

And your question is, will this continue? Absolutely, it will continue. Not only will it continue, I believe it will even get better. And as to breakeven point, our current projection is that once our revenue can hit RMB20 1,000,000,000 and our margin stays at 6%, we should be a very profitable business.

Operator

Thank you.

Speaker 5

Okay. That's very clear and helpful. Thanks for the sharing and congratulations again on the company's progress.

Speaker 1

Thank you, Sipan.

Operator

The next question comes from Jesse Lee with HSBC. Please go ahead.

Speaker 6

Thank you for taking my question and congratulations on a very solid quarter. So I have two questions. The first question is actually regarding competitive landscape. As management has mentioned, because of the recent regulatory changes, we have seen more emphasis on the out of hospital channel, including the pharmacies. But at the same time, we do see a lot of the players mentioned they want to enter into this specific sector.

Speaker 6

So I want to get your thoughts on the revolving competitive landscape for the sector going forward. And in terms of competitive landscape, sorry, advantage, what competitive advantage does 111 has compared with other players in the market? Thank you.

Speaker 1

Yes. So, obviously, any attract to business will attract a lot of competitors here in China. It's an extremely competitive market, but we feel pretty good about where we are. If you look around the competitive landscape, I think our biggest competitor will have to be those traditional players because they take majority of the share over the past few decades. And but our advantage is very, very clear.

Speaker 1

We are a digital player and furthermore we actually cover our end customers. We are not simply a distributor. And our digital capabilities would certainly give us the edge, especially when it comes to operational efficiency. As you can tell, our size in this industry is not that big yet. But we even at this size, we already operate at a pretty efficient way, 6.3% of total OpEx at the current rate and we believe by 20,000,000,000 by 20,000,000,000 size, we should be operate in the 5 or even sub 5 range of OpEx.

Speaker 1

And there are newcomers and we believe there will be even more newcomers and we are very fortunate to enter this space over 10 years ago. We've already established ourselves as the leading digital player. And even with the reasonable sized competitors and I think we do a far better job than anybody in the industry when it comes to the small to medium chain pharmacies. So that's our bread and butter. And moving forward, of course, we will continue to invest in our digital capabilities and we believe digital capabilities can drive really operational efficiency.

Speaker 1

And if we compare to new competitors, old competitors, even potential future competitors, our clear competitive advantage is going to be our operational efficiency. Thank you.

Speaker 6

Thank you. That is all very clear. Actually my second question is also on the digital capability. I noticed you have started a partnership with Tencent. And at the same time, you mentioned you will be making full use of the medical data and to develop your own AI large language model.

Speaker 6

Just wonder if management can share more color in this sense. Will you be self developing or also work with Tencent? And what kind of product can we looking for? Thank you.

Speaker 4

Okay. Thank you, Jessie. Let me take the question. First of all, the partnership with Tencent is in very sound progress. Several projects have been defined and been carried out by both teams.

Speaker 4

And certainly, the merit, the value of the partnership is very clear. We have very complementary strength. Tencent has very strong digital technology and computing power and we have all we offer the application platform, all the scenarios and use cases and also we have the customer base. So certainly these are very complementary strength and we certainly hope to create value together. And in these projects, basically we'll leverage Tencent technology strength in cloud computing, big data and artificial AI you mentioned, as well as the expertise in consumer Internet services.

Speaker 4

Basically, we will try to support the digitization and upgrade our smart pharmacy retail data center and pharmaceutical sales software. We also use very advanced technologies such as digital trimming, cloud rendering, to create pumps to hold digital showcases and management cost it for 111. As for AI applications, certainly these were used a lot of AI technology in the background and we're not going to develop large language models. We are focused on specific applications in the healthcare industry.

Speaker 6

I see. That's very clear. Thank you so much for your answer and congratulations again on the solid results. Thank you.

Speaker 3

Thanks, Jason.

Operator

The next question comes from Steven Lin, an individual investor. Please go ahead.

Speaker 3

Thank you, management team for the presentation. I have two questions. First, could you please talk more about Quentin, Hotwell and the TENSCOPE's application and the impact? 2nd, how should I think about 111's top line growth in the next few quarters? And what are the key drivers?

Speaker 3

Thank you.

Speaker 4

Javier, I'll take the first one, Harvey will take the second one. So let me talk about the few products, digital products you mentioned like, you mentioned the hardware, telescope, etcetera, okay. These are all digital products we developed to serve our customers, okay. For example, telescope is a SaaS service to pharmaceutical companies. Basically, it's used to help them monitor the entire supply chain, make the supply chain completely transparent, include their product flow through various distribution retail channels in various regions.

Speaker 4

Their end customer profile behavior as well as image returns and repurchase rates, such as all those data are made transparent to Fangzhou Companies. These are used to facilitate their decisions in production, in new product development and channel allocation. You also mentioned Kunpong and Hubwell. These are services to our JVP and the marketplace partners. They are used to assist them in more efficient procurement and logistics.

Speaker 4

By leveraging these services, we have seen remarkable growth of GMV for these partners, much higher than our overall growth, like more than 40% higher for these partners. So in turn, they help us to reach our selection and price competitiveness. So it's a win win.

Speaker 2

And regarding your second question on the growth and also the growth drivers. I think first from industry wide, as Jingling just mentioned, the government strategy of separation of drug sales from the hospital's medical treatment is going on, including recently, as you may be aware, there is also a nationwide anti corruption in our medical area. So the execution of the government strategy of separation definitely is very favorable to us as the separation of the drug sales from hospitals, meaning it will go to the retail market. And the drug sales in hospital is we are talking about a RMB1.2 trillion business. So the overall Pharmaceutical Retail will get benefits, including us.

Speaker 2

And also internally, 1st, we will continue to upgrade our supply chain. We will establish further strengthen our direct strategy partnership with more and more international and domestic partners to bring more selection with lower and lower cost to our downstream customers. Secondly, we will enhance our digital marketing platform to help pharmaceutical companies to commercialize their new products to pharmacies, clinics and eventually to both patients and customers. So in my view, our B2B business is becoming a platform to effectively link pharmaceutical companies with pharmacies, clinics and with the end users. Last year, the volume of China Pharmacy Retail has exceeded RMB600 1,000,000,000.

Speaker 2

And as I mentioned just now, more and more moving out from hospitals. So it's a very, very big market. And we believe we have enough room to further expand our business volume with a healthy margin. Thank you.

Speaker 3

Okay. It's very clear. Appreciate your answers.

Operator

The next question comes from Francis Young with VSV Capital. Please go ahead.

Speaker 7

Hi, this is Francis from VSV Capital. Congrats again on a great quarter. I've got two questions. The first one is, what kind of assistance and impact does the company's digital capabilities have on the industry? The second one, what will be the company's operational focus going forward?

Speaker 7

Thank you.

Speaker 4

Thank you, Francis. So let me take the first question. We define ourselves as the digital enabler in the healthcare industry. We have invested heavily in the digitization of the industry in the areas of supply chain, patient education, medicine availability, patient reach and health management. We set our mission to leverage our digital technology to effectively link patients with the healthcare services and we are on target, on track to realize that.

Speaker 4

Junying, his report mentioned the listing of our 111 information brain on the Shanghai Data Exchange. That's a perfect example. So our master data in the pharmaceutical industry includes more than 720,000 main product data, 1,200,000 company data, covering 99.6% of the whole Fangtou market. So this data will play a very important role in drug flow tracking, drug initial information entry and the compliance for e commerce pharmaceuticals.

Speaker 1

And I'll answer Francis' second question with the operating focus. I would in a very simple language, it would be 2 areas. 1 is to grow revenue and margin and 2 is to really drive operational efficiency. If I could elaborate a little bit, how do we grow? As I spoke in my script, obviously, we're going to use JVP to enrich our selections.

Speaker 1

And for our 1st party products, we want to get a much better alignment with customers' preferences. Internally, we have built up an intelligent system called Boguan, which collects information from our own internal daily operations and also the intelligence comes from our salespeople on the ground and also from industry wide sources. And that would ensure that we can have a much better assortment, much concise and precise assortment for our customers. Therefore, with that, we can provide a one stop shop experience for our customers. And in terms of growing margin, of course, I spoke about our intelligence pricing system.

Speaker 1

Of course, in the past, we always use human to do the pricing. And now we're shifting majority of the pricing into machines, let the machine to learn and we feed the machine with all the necessary data and let the machine make the right choice. And if it is wrong, they can learn and readjust. And the other thing I mentioned about driving margin is to really doing cost down. Of course, we're solidifying our supplier base and our procurement team has a very clear specific task on reducing the procurement cost pretty much across the board.

Speaker 1

And we have internal meetings on a regular basis, at least weekly to look into those numbers. When it comes to drive operational efficiency, of course, we have only literally 3 buckets of expenses. 1 is fulfillment, the other one is sales and marketing and the last one is G and A. Obviously, I spoke a lot about fulfillment and we have really proven the effectiveness of our measures and our fulfillment costs came down to 2.7% versus 2.9%. And obviously, when it comes sales and marketing, we're doing a fantastic job there, very, very noticeable change and the G and A as well.

Speaker 1

So essentially what we're doing is to really invest in technology. We use technology to become much, much more efficient. Once we can operate with sub-six and sub-five operational expenditures, we're already the industry's best. If you look across the board, I don't see anybody can operate at our rate of operating expenditure today. And we're not going to stop there.

Speaker 1

We're going to continue to bring the expenditures down. Therefore, we cannot actually be a much more profitable company. Thank you, Francis.

Speaker 7

Thank you. Both answers are very clear and we look forward to hearing more.

Operator

The next question comes from Jada Wu of Arbor Growth Capital. Please go ahead.

Speaker 6

Hi, everyone. This is Jida Wu from Arbor Group Capital. And congratulations on the company's success and growth in Q2. Here, I've got 2 questions. The first question is, what is reasonable margin level in the next 3 to 5 years?

Speaker 6

How can we further expand margin? Thank you.

Speaker 2

Yes. Regarding margin, our strategy was more and more healthy business model, has been working well. And we are seeing a significant improvement on our product margin. And there are a couple of initiatives going on in this area. One is to reduce our procurement cost through direct sourcing from pharmaceutical companies.

Speaker 2

And we are now sourced from over 500 global or domestic, lots of big pharmaceutical companies. And we will continue to strengthen our partnership with them. And second one is the second lever is we can pull to improve margin is through our product assortment organization. Currently, with the annual sales revenue of over RMB 13,000,000,000, Also with the 400,000 pharmacies in our platform, we are now in a position to balance our portfolio of products. And bundle those high velocity, but low margin products together with healthy ones.

Speaker 2

And also, we are developing our OEM private label products. Those products, the margin percentage is as high as 30% to 40%. And the third one is our digitalization part, our digital platform, for example, the telescope, Junling just mentioned, provides a very comprehensive solution for pharmaceutical companies. And those services module help us to get more marketing dollars from those pharmaceutical companies. And last but not least, from industry wide, when I answered the previous question regarding growth, I talked about the revolution of our the government strategy on medical services, the separation of medical treatment with from the drug sales.

Speaker 2

These will bring actual sales to retail market from hospital. Well, I believe not only sales, but also it will bring more marketing functions to retail market, including patient education, DOT, etcetera. And these marketing functions will be a very good profit for 111 as we already have the very strong capability of digital marketing through our B2C, our B2B, our S2B2C model. Thank you.

Speaker 6

Thank you for your sharing. It's clear and helpful. And one more question. How was the cash flow situation in the Q2 for the company? And what is the current cash position?

Speaker 6

Thank you.

Speaker 3

Yes. On the cash position, first of all, we are very pleased to see that our non GAAP operating loss further narrowed for the quarter to 0.5 percent of net revenue. What does that mean? It means that we no longer need to burn cash to support our business. And if you look deeper, this is a game of good management on the working capitals and we believe we are doing a good job and operating with high efficiency.

Speaker 3

Our accounts payable date is around 42 to 45 days and our inventory date is about 25 to 30 days and our accounts receivable days is about 7 days, which give us like actual days of work capital inflow. While we further build up our business scale, we will be able to negotiate better trading terms with suppliers. As of June end, our cash and cash equivalents, restricted cash and short term investment amounted to RMB736 1,000,000 and we believe that we have sufficient cash reserve to support our business expansion. Thank you, Jada.

Speaker 6

Thanks for the answer. Best wishes for your further performance. Thank you.

Speaker 7

Thank you.

Operator

The next question comes from Ethan Liang with Iron Harbor Capital. Please go ahead.

Speaker 8

Hi, I'm Yifan Liang from Iron Harbor Capital. First of all, thank you for having me letting me have the Q and A session today. I have a few questions. First is, what are the company's plans for its OEM products in the future?

Speaker 2

Okay. OEM products, they are a couple of private label registers in 111. We have Guangzhou is for our chain store customers and also Huangjia, Long Yao is for our individual store customers. And also there are also some other battery supplements, etcetera. We call it LanMedia.

Speaker 2

And by Q2 this year, we already launched Hanzheng 33 private label SKUs. And also there are much more SKUs are in our have been in our pipeline. And most of these products have been well affected by our customers. And as you know, majority of our customer are individual stores or those small to medium chain stores. They don't have the capability to establish their own brand.

Speaker 2

However, those top players, those KA retail stores, every one of them has a very strong performance on their own private label. So that is a very strong demand from our customer, follows the private label. So HuangZhao, Huangyao, Lan Media has become a very attractive solution for them for a very stable market and a very stable margin. Thank you.

Speaker 8

Thank you for answering. And my next question is what is the current progress for the company's privatization?

Speaker 3

Yes, we understand the process of privatization is still ongoing. As you may be aware, on July 17, the company announced the expansion of the Bayer's group. So the special committee formed by 3 independent directors is now working with the Bayer group on the privatization proposal. As a public company, we will we shall make all necessary public announcement according to SEC disclosure rules. Thank you.

Speaker 8

Thank you. That's all questions I have today.

Operator

This concludes our question and answer session. 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 call today. This concludes the call.

Operator

You may now disconnect.

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Earnings Conference Call
111 Q2 2023
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