111, Inc. Q2 FY2023 earnings call

Macro Environment: The pharmaceutical retail market faced challenges in Q2 2023 with sales declining y-o-y, but government policies supported digital evolution in healthcare. ### Operational Performance: The company registered RMB3.5 billion in revenues, up 14.5% y-o-y, with overall gross profit up 8.3% y-o-y. Operating expenses decreased to RMB249.3 million, down 8% y-o-y, with operating expenses as a percentage of net revenue dropping to 7.2%. ### Strategic Partnerships: Partnered with Tencent to enhance online pharmaceutical services, and listed on the Shanghai Data Exchange to accelerate pharmaceutical industry transformation. ### Digital Initiatives: Launched digital supply chain products, and the 1 Health virtual franchise model enabled around 20,000 pharmacies. ### Operational Efficiency: Focused on flattening organizational structure, improving logistics fulfillment expenses, and using technology to boost efficiency.

In the second quarter of 2023, the company's total net revenues grew 14% to RMB3.5 billion. The B2B segment was the primary revenue contributor, with revenue reaching RMB3.39 billion, a 15.5% year-over-year growth, and gross profit of RMB188.6 million, up 11.6% y-o-y. The B2C segment had revenue of RMB88.8 million, a 13% year-over-year decrease, with a gross margin of 21.8%.

Future Growth: Continue to expand product selection, tailor first-party products to customer preferences, reduce procurement costs, enhance smart pricing, optimize supply chain, improve operational efficiency, and advance digital transformation. ### Breakeven Projection: Once revenue hits RMB20 billion with a 6% margin, the company expects to be profitable.

Certain investors may exercise redemption rights, but management believes sufficient capital resources exist to fulfill obligations and such redemption would not affect the business.

Q: What impact does the national unified medical insurance coverage policy have on the industry and 111?

A: Junling Liu stated the policy will drive traffic to pharmacies, more pharmacies will offer reimbursement services, but consumers' personal accounts are reduced. However, it's an opportunity for pharmacies to enrich offerings.

Q: What is the main reason for the decreasing operating expense ratio and will it continue?

A: Junling Liu said it's due to revenue growth and relentless drive for operational efficiency, and it will continue to improve.

Q: What is 111's competitive advantage in the sector?

A: Junling Liu mentioned 111 is a leading digital player with better operational efficiency, especially for small to medium-chain pharmacies.

Q: Details on partnership with Tencent and AI applications?

A: Luke Chen said the partnership with Tencent is progressing, leveraging Tencent's technology for pharmacy digitization, and AI is used in specific healthcare applications, not large language models.

Q: Thoughts on top-line growth in the next few quarters and key drivers?

A: Haihui Wang mentioned government strategy of separating drug sales from hospitals is favorable, and internal supply chain upgrades, digital marketing, and product assortment optimization are key drivers.

Q: Reasonable margin level in 3-5 years and how to achieve it?

A: Luke Chen said reducing procurement costs, product assortment optimization, digital platform services, and industry trends from medical separation will help achieve better margins.

Q: Cash flow situation in Q2 and current cash position?

A: Junling Liu said non-GAAP operating loss narrowed, working capital management is efficient, and cash and cash equivalents, etc., totaled RMB736 million as of June end.

Q: Plans for OEM products?

A: Haihui Wang said 111 has launched 133 private-label SKUs, with demand from customers for stable margins.

Q: Progress on privatization?

A: Junling Liu stated the privatization process is ongoing, with a special committee working with Bayer Group on the proposal.