111, Inc. Q3 FY2023 earnings call

• Macroeconomic context: The out of hospital pharmaceutical distribution market in China has been growing, but faced challenges in Q3 2023 due to factors like retail pharmacy competition and inventory digestion. - Operational achievements: Managed to deliver net revenue growth, improved operational efficiency with reduced operating expenses as a percentage of net revenue. - Technology initiatives: Secured 3 patents in Q3, made progress in AI applications with 80% of customer service inquiries handled by AI algorithms, and had strategic partnerships like with Tencent. - Awards: Received recognitions such as the 2023 China Digital Breakthrough Practice Award, being listed as an e-commerce demonstration enterprise, etc. - Future growth initiatives: Grow JBP business segment, deepen strategic relations with upstream pharmaceutical customers, AI-driven customer experience upgrade, AI for pricing, relentless focus on operational efficiency, organizational optimization, and commitment to digital transformation.

In the third quarter of 2023, 111 achieved a net revenue growth of 9.5% year-over-year, reaching RMB3.7 billion. The gross segment profit faced a temporary challenge, decreasing by 5.6% compared to the same period last year to RMB190.6 million. Total operating expenses for the quarter decreased by 4.1% to RMB271 million, with total operating expenses as a percentage of net revenue dropping to 7.4% from 8.4% in the same quarter of the previous year. Procurement expenses, sales and marketing expenses, general and administrative expenses, and technology expenses all saw decreases as a percentage of net revenue.

• Grow JBP business segment to increase selection and enhance customer experience, allocating resources to strengthen JBP as a cornerstone of efficiency. - Deepen strategic relations with upstream pharmaceutical customers by focusing on direct sourcing and high-margin products. - AI-driven customer experience upgrade using advanced algorithms to identify best products for customers. - Employ AI tools for pricing to make data-driven decisions for competitive pricing. - Continue to enhance operational efficiency through technology integration and workforce optimization. - Undertake organizational optimization to align with evolving business landscape. - Pledge to digital transformation with ongoing cooperation with Tencent and anticipation of further patents in Q4.

As of the date of the earnings release, there was a redemption request from certain investors for a total reduction amount of RMB0.2 billion in accordance with the terms of their initial investment in 1 Pharmacy Technology. 111 is currently in the process of negotiating with these investors and other relevant stakeholders regarding the repayment and restructuring of such redemption obligations.

Q: What is the main reason behind the decreasing operating expense ratio and will it continue to decrease in the future?

A: The overall operating expenses have been reduced due to efforts in enhancing operational efficiency across all functions. Sales and marketing, G&A, technology-related, and fulfillment costs have all decreased. 111 believes with increased sales volume and implementation of new AI technology, the reduction in operating expenses will continue.

Q: Please discuss the progress made recently in the company's investment in technology?

A: 111 has been awarded the 13th China Data Management Excellence Award and the best data innovation benchmark in the medical industry master data applications. They have acquired 3 new patents and 80% of internal and external customer service inquiries are handled by AI algorithms powered by internal and open AI platforms.

Q: How did the company maintain a 21st consecutive quarter of Y-o-Y growth since NASDAQ IPO and will this growth continue?

A: Key factors include focusing on customer experience, building infrastructure and scale, and continuous technology focus. The company looks forward to continuing growth with ongoing efforts in technology, customer experience, and strategic initiatives.

Q: After factoring in adjusting and normalizing the backlog of inventory, how will 111 navigate the competitive market?

A: 111 will focus on expanding JBP business and first-party business on the supply side, using both centralized (dedicated teams for big pharmaceutical companies) and decentralized (leveraging JBP partners) approaches to enhance selection and customer experience.

Q: What are the expected outcomes of the JBP business expansion and how will it enhance customer experience and operational efficiency?

A: JBP business expansion leads to faster selection expansion, fuller service coverage, more effective use of smart supply chain, less stock shortage, which enhances customer experience. It also brings competition among JBP partners for better pricing with the same selection.

Q: What actions have been taken to improve supply chain management operational efficiency and expected results?

A: Actions include GoPartner project reducing inbound exception rates, warehouse capacity expansion, integrated delivery providers reducing delivery costs, digital ordering process increasing procurement team efficiency, and inventory management system upgrade reducing product out-of-stock rate. Expected results include improved operational efficiency and better supply chain performance.