Hello, everyone. I'm Robert Sun, Senior Analyst at Water Tower Research, and I'm again happy to be joined by Junling Liu, CEO and Co-Founder of 111. 111 currently trades on the NASDAQ under the ticker YI. 111 has developed and operates one of China's leading tech-enabled healthcare platforms, committed to efficiently manage the pharmaceutical chain by digitally connecting the key stakeholders of that chain, from drug manufacturers through to distributors, pharmacies, and ultimately, consumers. For 111 Safe Harbor statements, please refer to the company's filings filed with the SEC. So welcome, Junling. Nice to see you again.
Good morning, Robert.
So, let's start with your most recent event. You recently reported your results for the second quarter. Can you give us the key takeaways from that earnings report?
Yeah, certainly. You know, first of all, we achieved profitability for the second consecutive quarter. And in the meantime, we also realized the positive cash flow for the second consecutive quarter as well. And all our operating metrics are trending better with 120 basis points improvement on the operational expenditure. We actually feel very proud of that accomplishment, given you know the macroeconomic pressure we're facing.
Right. The last couple of quarters prior to this second quarter were affected by unfavorable comps due to the spike in revenues as a result of the resurgence of COVID cases in China in late 2022, early 2023. For the latest report, you mentioned macroeconomic challenges. Can you be a little bit more specific about how this environment impacted your business in the second quarter?
Yeah. You know, people expected some robust recovery post the pandemic, but the reality didn't quite meet the people's expectations. Therefore, the confidence level for consumption is relatively low. People are much more conservative when it comes to spending money, including the non-essential spending in the pharmaceutical space, and obviously, despite of all the challenges we faced, 111 still delivered a very solid quarter, as I just briefly talked about at the beginning of the call, and I would believe this situation should not last for too long, and consumer confidence will return in the future, and the consumption will resume.
We believe this is one of the best industries in this vast market with, you know, the aging population and, you know, people are having a much better awareness of healthcare after a few decades of rapid growth in the country.
So just following on from that, can you give us an overview of the market outlook for the next couple of quarters and your expectations as to how that will impact 111's B2B and B2C businesses and the company's profit goals in the second half of the year?
Sure. We are very fortunate that the current policies from the central government are quite favorable to our business. First of all, the anti-corruption campaign in the pharmaceutical space, and there is also the separation of medical services from selling drugs in hospitals, and there is also the zero markup policy. If you're not familiar with that policy, let me just go into a little detail. You know, before, the hospitals are given the right to mark up the drug prices by 15%, so the hospitals are incentivized to sell more drugs. Therefore, there has been a overprescription overall across the country, and recently, the government took that policy away, and they call it the zero markup, and the implementation was quite successful.
You know, all those policies will result in the fact that the pharmacy retail market benefiting from those reforms. We should anticipate that more pharmacies will open up. You know, when we started our business seven years ago, there were only about 450,000 pharmacies nationwide. I think by the end of this year, I won't be surprised if you know, the number of pharmacies in China will exceed 700,000 . You know, that says a lot because you know, this is a better industry compared to majority of you know, other industries because you know, people are still rushing in to open more stores.
The online pharmacy will also benefit from those reforms, and we are happy to see how those big forces are reshaping the industry. As you know, we will benefit from both of our B2C and B2B business. We feel fairly bullish to carry on the momentum from the first half.
That's very interesting. So let's now talk about your expansion plans for various parts of your business, including the form of fulfillment centers, expansion of offerings that you have, and the partnerships across the supply chain ecosystem.
Yeah. So we're expanding our coverage in Q3 and Q4 with more fulfillment centers being deployed. I think there are 6-7 JV fulfillment centers and franchised fulfillment centers to be launched in the next few months. We also have a couple of teams working directly with the pharmaceutical companies on a direct sourcing relationship to in the effort to really solidify our supplier base. And we also have other teams working with a few thousand commercial distributors across the country. In this way, we will significantly increase our selections for our customers, you know, providing a one-stop shop shopping experience. Our business logic is very simple, that is to provide customers a one-stop shopping experience with the richest selection and the competitive prices and the great services.
I believe, you know, those kind of services or those kind of experiences will create the best customer loyalty.
Great. So let's turn to technology, which I suppose represents the core of your business model. Can you highlight your progress this year in that area, and what to expect with respect to the rollout of new innovations in the coming quarters, and the importance of AI in them?
Yeah. So, you know, we acquired a few new patents with a total of 28 by now. You know, obviously, digital operating system is essential to our business. We have a few dozens of systems to make our operation 100% digital, which contributed to our accomplishment in the operational efficiency. This year, we have made very impressive progress, especially in the adoption of AI and its applications in a few areas, you know, such as acquisition of new customer leads, such as automated outbound calls, and such as customer service. We're also, you know, leveraging AI to manage our, you know, upstream and downstream product database, managing the pricing database, and so on.
Right. Thank you for that. So given the challenging macroeconomic environment you've just mentioned, and couple that with your reasonably strong financial condition, do you see any acquisition opportunities? And if so, what type of opportunities would you be looking at to further strengthen?
Well, you know, Robert, our focus is still centered around being profitable, building our core competencies, and delivering superior customer experience. I believe, you know, this is the right strategy to deal with the uncertainties in the marketplace, both in the near term and in the long term, and we will stay focused on those.
So you're focusing really on more organic growth than any external
Right now, and I think absolutely, you know, if we keep delivering sound financial results, you know, we might be in a position to look into other opportunities.
Okay. Thank you very much for all of that. I think we'll wrap it up here. So if you have any questions for Junling Liu, please send them through to me, and I'll pass them on. For analysis of the company, please refer to the Water Tower Research website, www.watertowerresearch.com. It's an open access website. Finally, I'd like to thank you again, Junling Liu, and for the update, and have a good day in advance.
Thank you, Robert.