111, Inc. (YI) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the 111 Incorporated's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.I would like to hand the conference over to your first speaker for today, Mr. [indiscernible]. Thank you, please go ahead sir.

Thank you, operator. Hello, everyone, and thank you for joining us today for 111's third quarter 2019 earnings conference call. The company's results were released earlier today and are available on the company's IR website at ir.111.com.cn as well as on PR Newswire services.On the call today from 111 are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman, and CEO; Mr. Luke Chen, Chief Financial Officer; Mr. Harvey Wang, Co-COO, Mr. Barry Zhu, Co-COO; Ms. Monica Mu, Investor Relations; and Mr. Alex Liu, Finance Director.Junling will give an overview of the company's performance and operations, followed by Luke, who will discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows.I have to 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 could 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 take any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.It is now my pleasure to introduce Mr. Junling Liu. Junling, please go ahead.

Thank you, Rene [ph] and thanks to everyone for joining us on our third quarter 2019 earnings call. The company's earnings results as well as the supplementary slide presentation were released earlier today and are available on the company's website at www.ir.111.com.cn.My comments will correspond to the slides. If you have not already down so, I would encourage you to download the slides. Looking at Slides 5 and 6, we are very pleased to announce another quarter of solid financial and operational results. Our net revenue increased 123.2% year-over-year to RMB1.1 billion consistently exceeding the high end of our guidance for the fourth consecutive quarter. This overall growth rate of net revenue hit a record high since our IPO last September, showing a solid acceleration in our growth trends.Gross profit was RMB47 million, also a new high for us, up 204.3% year-over-year. For our year-to-date performance, net revenues increased 112% year-over-year to RMB2.6 billion, which already 46% higher than the 2018 full year's result. Our overall revenue growth was mainly attributable to the robust performance of our B2B segment.Let's dive in more about our B2B segment in Slide 7 and 8. Customers picking us increased during the quarter. We processed 280,000 orders, up 45.1% from last quarter and our B2B revenue has been growing at approximately 40% for the last three consecutive quarters. In the third quarter alone it was up 229.5% year-over-year and 39.9% quarter-over-quarter to RMB 909 million. Also both strong same-store sales and newly added pharmacy sales contributed to B2B revenue growth. Customers of our existing pharmacies placed orders more frequently and contributed an increase of RMB160 million in revenue, up 25% as compared with Q2.And as shown on Slide 8, during the quarter we added another 20,000 pharmacies into our virtual pharmacy network which drove RMB99 million in sales or an increase of 15% quarter-over-quarter. The company served 210,000 plus pharmacies which puts us on track to reach our goal of serving 230,000 pharmacies by the end of 2019.Moving to our B2C business as shown on Slide nine, revenue in Q3 decreased by 11% to RMB194 million from RMB218 million, but gross margin grew 125% to RMB30 million from RMB14 million be in the same quarter of last year. And B2C revenue YTD decreased by 8.8% and our YTD gross margin increased 500 bps to 15.2% from 10.2%. We have made a significant transition from driving growth with low prices to focusing on customer value.We stopped serving some of the money losing customers and shifted our resources to patients refill rate and duration of treatment. Moving forward, we will continue to invest in our capabilities in chronic patients' life-cycle wellness management and improve the experience of service modules of patient education and drive adherence management and online refill. Our mission is to build an integrated online and off-line platform and those critical capabilities are not only used to serve customers directly, but also extended to our pharmacies to help them to better manage their consumers.Now let’s move to our strategy execution. As we continue to deploy our T2B2C strategy, we made strong progress during the quarter. Let me highlights some key facts as shown on Slide 11. By the end of September, we now are directly sourcing products from 150 domestic and international pharmaceutical companies compared to 80 a year ago. We have grown our virtual pharmacy network from 130,000 in Q3 of last year to more than 210,000 this quarter.We established a new fulfillment center last quarter to further strengthen our smart supply chain. We now have a modern logistics network with five fulfillment centers strategically located in Southern China, Eastern China, Northern China, Central China, and the Western China. On August 23, we signed a strategic partnership agreement with TK.CN, the online arm of Taikang Insurance Group, a Fortune 500 company.Bothe parties will expand their businesses in the online consultation, e-prescription, e-commerce and delivery service, medication cost control, healthcare insurance and jointly develop a PBM model to address the challenges of access to healthcare services and overly high drug prices in China. This is a key milestone for 111 following a strategic partnership with Manulife, Sinochem and MSH China in the internet pharmaceutical plus insurance space.In order to better articulate the execution of our T2B2C strategy let me go through some of our current products and projects. On Slide 12 we leveraged big data and machine learning to enable pharmacies. Under the traditional model, pharmacies need to place orders by phone which wastes a lot of time in identifying the specifications and prices of drugs for 100s of SKUs. All the more difficult as pharmacies are under time pressure to place a high quantity of orders to reach preferential amounts in order to reduce costs. It becomes even more labor-intensive when the pharmacies manually input the purchase into their ERP system for inventory management.Our Smart Sourcing System provides an integrated solution to address those pinpoints. Our system generates a purchase list to automatically match specific drugs when pharmacies upload a purchase order. 1 Drug Mall accepts small orders or even orders for just one single product and our Smart Supply Chain can provide just-in-time service to pharmacies. After aggregating all the market data, our system offers smart recommendations through machine learning. With our system, pharmacies only need 15 minutes to complete their purchase process versus several hours in the past and can also better manage their inventories.Secondly, pharmacies have the flexibility to adjust their purchase amounts to reduce inventories and enjoy better prices. They can also obtain insights on the market through 1 Drug Mall's platform which can improve their sales, revenue, and profitability. In the right part of the slide, we compare those pharmacies with smart sourcing system versus those without. Average purchase amount went up 233%, average purchase breadth went up 178% and average order frequently went up 107%. The result is a win-win for our pharmacy clients and 111.To Slide 13, on the supply side, we help pharmaceutical manufacturers expand their market coverage by leveraging our field sales force, phone sales, and app, we're able to effectively reach all provinces and regions across the country. For example, there was the pharmaceutical manufacturer that asked us to promote one of its new drugs. Within one month we saw the drug to approximately 5000 pharmacies across 269 cities and advertised to over 50,000 end-users. To better manage our sales force by leveraging data collected from multiple touch points, we have developed a tool which is called Hawkeye.Moving to Slide 14, Hawkeye captures every behavior when pharmacy customers surf in 111 website and also real-time monitors the supply chain update. For example, if the replenishment of one SKU finished, Hawkeye will immediately generate a task for sales force to reach any customers who have researched, or who searched this SKU before. This tool enables our sales team to identify the purchase intention of pharmacies more intuitively and make more effective recommendations. As a result, our field sales coverage efficiency improved by 3x.And we are not forgetting C-type users as shown on Slide 15. As previously mentioned in the past, we were more focused on making drugs available at very low prices and left our customers alone. This year we started the transformation of this business. A state-of-the-art CRM pool is provided to our C-type users. Let's take diabetic patients as an example. When they submit an online diagnosis and place an order, our online doctor will keep in touch with them to provide post the diagnosis management services including additional information on symptoms, medication consultation, outreach for feedback on a regular basis, and a real-time drug and a nutrition recommendation. On the touch care [ph] the refill rate of the diabetics improved to 65% from 39%.Now to Slide16, let’s discuss some recent healthcare reform updates. There are three important points that I want to bring to your attention in this quarter. China adopts Revised Drug Administration Law which allows drug sales online. Social medical insurance coverage extended to online healthcare service, 4+7 Centralized Urban Pharmaceutical Procurement Program. In September 2019 the 4+7 program was further expanded to cover another 25 provinces lowering generic drug prices up to 96%. Those policies present great growth opportunities for China's pharmaceutical retail industry, both online and offline, where we are competitively positioned.Now that we have walked through what happened this quarter, I would like to move to where we are headed next on Slide 17. In three years we are aiming to serve 400,000 plus pharmacies, clinics, and hospitals. In three years we will be prepared to provide online consultation, diagnosis, drug prescription, and chronic disease management services for over 100 million patients directly and indirectly. In three years we plan to directly serve 1000 plus mainstream pharmaceutical companies and assist them to reach more patients across the country.With that, I will hand the call to Luke to walk through our financial results this quarter. Luke?

Thank you, Junling. Moving to the financials, you can see the details for the third quarter in sections 3 of our presentation on slides 19 to 21. I would like to highlight a few key pillars and the financial metrics and our focus on our year-over-year comparisons. All numbers are in RMB unless otherwise stated.Let's start with our topline performers. In Q3 our total net revenue grew 123.2% to RMB1.1 billion, which was mainly contributed by our B2B segment growth. Product revenues from our B2B segment were up 229.5% to RMB909.5 million this quarter from RMB276 million in the same quarter last year. In the first nine months our total net revenue grew 112% to RMB2.6 billion, which has already exceeded our 2018 full year revenue of RMB1.8 billion by 45.8%.In the first nine months product revenue from our B2B segments were up 240.7% to RMB2 billion from RMB593 million in the same period last year. In Q3, product revenue from our B2C segment decreased by 11% to RMB194 million from RMB218 million in the same quarter last year.Turning to Slide 20, gross margin in our B2C segment for the quarter was 15.6%, up from 6.2% in the same quarter last year. Gross margin in our B2B segment was 1.1% compared with negative 0.5% in the same quarter last year. The improvement in both our B2B and B2C segments was primarily due to an improving cost structure and a pricing strategy. Overall, gross profit for the quarter increased by 204.3% to RMB47.3 million. And the gross margin was 4.3% compared with 3.1% in the same quarter last year.Please turn to Slide 21 for a detailed breakdown of operating expenses. Total operating expenses for the quarter were up 13.7% to RMB165.4 million. As a percentage of net revenue, total operating expenses for the quarter were 14.9%, down from 29.1% in the same quarter last year.In the first nine months, total operating expenses were up 28.3% to RMB448 million. As a percentage of net revenue, total operating expenses was 17.2%, down from 28.4% in the same period last year. Fulfillment expenses for the quarter increased by 52.8% to RMB31.6 million, primarily as a result of the rapid growth in our B2B business. Fulfillment expenses as a percentage of net revenue was 2.8%, down from to 4.2% in the same quarter last year.Selling and marketing expenses for the quarter increased by 12.7% to RMB87.1 million, mainly due to an increase in the number of sales staff and expenses associated with the expansion of our B2B business. Sales and marketing expenses as a percentage of net revenue was 7.8%, down from 15.5% in the same quarter last year. G&A expenses for the quarter increased by 20.9% to RMB32 million, mainly due to an increase in professional service fees. G&A expenses as a percentage of net revenue was 2.9%, down from 5.3% in the same quarter last year.Technology expenses for the quarter decreased by 27.2% to RMB14.7 million primary due to an improvement in our system developments efficiency and the implementation of automation tools. Technology expenses accounted for 1.3% of net revenue, down from 4.1% in the same quarter last year.We will continue to make infrastructure investments to support rapid revenue growth and expect to further improve operational efficiency and effectiveness. Net loss attributable to ordinary shareholders was RMB123.3 million compared with RMB125.9 million in the same quarter last year.GAAP net loss attributable to ordinary shareholders was RMB109.7 million down from RMB111.1 million in the same quarter last year. Non-GAAP net loss accounted for 9.9% of net revenue, down from 22.3% in the same period last year, narrowing down to single digit percentage of net revenue for the first time.As of September 30, 2019, we had cash and cash equivalents, restricted cash and short-term investment of RMB784.6 million compared with RMB1.1 billion as of December 31, 2018. For fourth quarter of 2019, we expect total net revenues to be between RMB1.18 billion and RMB1.24 billion, representing year-over-year growth of approximately 112% to 123%.This forecast is based on current market conditions and reflects our current and the preliminary estimates of market and operating conditions and customer demand, which are all subject to change.On August 15, 2019, the Company announced a share repurchase program, whereby the Company is authorized to repurchase its own Class A ordinary shares in the form of ADS with an aggregate value of up to $10 million within the next 12 months. As of September 30, 2019, the Company had used an aggregate of $2.6 million and repurchased 606,953 ADS.This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A sessions. Thanks.

Thank you, sir. [Operator Instructions] Our first question comes from the line of [indiscernible]. Please go ahead.

Good evening, Management, thanks for taking my questions. I've got two questions. The first one is about pharmacies number. The number grew rapidly in this quarter, so can you share some color on the key drivers behind the growth, and how many do you expect to have at the end of this year and next year?And I have another question regarding bottom line. I noted net loss narrowed in this quarter. So just wondering your consideration of profitability? Thanks.

Okay, thank you for the questions. With regards to your first question, we have a sales force on the ground to - our terminology internally is called a business development, the actually sales team, right? So what they do is every day, they get a region. So they will go out and look for those potential customers and [indiscernible] the customers, once they agree to sign up, we will exchange permits and so on.So, our team has been doing a great work to actually continue to sign up new pharmacies. And our objective is, by the end of this year, we should reach the number of 230,000. That is roughly about 50% of the total market. And that is going to be our strategic priority for 2019.And we are pretty confident, we can actually execute that strategy and we'll be happy about it. And, obviously, moving forward, we will be more focused on really better service the existing customers because 50% is a very substantial number and we should be very happy about it. And we're going to execute on this strategy.With regards to the net loss narrowing to single digit for the first time, we're very pleased about it. And as you can tell, for the last few quarters, every single quarter, not only are we bringing top line, but we're also achieving savings on the bottom line every single quarter.And our expectation is to continue to deliver that and we're pretty confident. And, of course, we aim to achieve profitability in the middle of 2021. Thank you.

Very helpful. Thank you. Thank you.

Thank you. Our next question is from the line of Sherry Yin of JP Morgan. Please go ahead.

Hello, this is Sherry, congratulations on another strong quarter result. And here I have three questions. The first one would be about the industry trends. As we know that the China's retail pharmacy market is still quite fragmented and there has been a lot of reform policies to accelerate the consolidation. So how do you position 111 in this consolidation trend in the long-term?And as we know, many of our clients are those individual pharmacy or small chain pharmacy, who will see a lot of headwinds under these consolidation trends, and what will be your expectation for them or new solution offering to them?My second question would be about, more specific about our results. We have seen very encouraging reduction in the operating expense ratios. What are the key drivers for that? And finally, especially our fulfillment cost is quite impressive, only 2.8% in this quarter, so could you share more color behind it? Okay, that's all my questions. Thank you.

Thank you, Sherry. It's a lot of questions. I think I'll take on the first question maybe we'll get Luke to address that.

Yes, thank you.

So, any other questions right. So yes, with regards to the industry trend or with regards to consolidation, yes, I agree with you, there will be consolidation and that is fully anticipated. But I'll tell you what, in the retail space if you look at China's retail, the CVS [ph] kind of convenience stores, that space is actually growing, those Mama Papa shops, especially you go down to tier three, four or five cities, right?But our anticipation is actually in the pharmacy space, there will be more consolidation and some of the smaller guys will find it harder and harder to survive and, but they're not going to all disappear and maybe 10% 20% will disappear. And we love it because this presents great opportunities for us to help some of the smaller chains and you know, a lot of those Mama Papa shops standalone stores and because of our services, because of our capabilities, I think they're going to stay.And consolidation is not going to happen as fast as people have projected, because there has been no lack of effort in that space. If you look over the last five, six years, and all those big guys have been aggressively acquiring out there, and if you look at today's market, the biggest chain today is still pretty much unknown, only got 5000 some stores and only takes about slightly over 1% of the share.So fragmentation will still be the norm in this space. And, you know, obviously, that is great news for us. We are actively working on a concept of future pharmacy and internally, obviously, we have developed certain ideas. And at this moment, we are not ready to share what the future store is going to look like, but I can like turn [ph] the direction.We're going to have the best assortments, best relevant assortment for the pharmacies, and we're going to use our technology to provide things like chronic patient management, we're going to have IoT devices to constantly monitor the vital signs. And with our enabling business model, with our virtual pharmacy network, there is no reason why we cannot build out a virtual pharmacy chain, which will be known to all Chinese like CVS or Walgreens in the United States. So I'll pass on to the next part of the question about the financials.

Let me just take the question on how we improve our supply chain, okay. We are a technology company. So we improve our efficiency through business intelligence, data and systems. So, we have built more than 30 some systems and probably close to half of them are supply chain management. For example, we built the system, procurement management system, assortment management system, warehouse management system, translation management system, inventory optimization system and all kinds of systems.So through these systems, and this is all driven by optimization models and algorithms. So through these systems, we optimize our network, optimize our product supply chain and we are confident that we provide one of the most efficient supply chains in the pharmaceutical retail distribution space.

On the OpEx side, I'll just share with you this quarter our net revenue growth 123% while our total OpEx only grew 15.7% and on a year-to-date basis, our revenue grew 112%, and our total operating expenses grew 28.3%. So as a result, you see the operating expenses as percentage of that revenue is going down on a quarterly basis is going down from 29.1% to 14.9% significantly.So, looking forward, we expect we will continue to deliver a quarterly revenue growth on a year-over-year basis at triple digits while the OpEx increased is around like 20% something. So we will expect the OpEx as a percent of net revenue will continue lower as a result of the loss will be as a percentage of net revenue will be also narrowed down and then let me just share with you that we aim to be profitable in the middle of 2021. Sherry, Ihope we answered your questions?

Yes, that's very helpful. Just - could you share more specifically about the fulfillment cost? I know like previously we are already quite impressive, low compared with peers. But we still see continued improvement in the fulfillment costs. So is there any new updates you may share with us?

Well certainly, this all I mentioned that all driven by application of our systems, we continue to optimize. For example, our warehouse operations efficiency improved by almost more than 50% year-over-year and we keep doing that.

Oh okay.

Yes, based on our - just applying our systems and more data intelligence.

Yes, got it.

We continue to grow with a scale. We certainly expect we can, - there is still more room for us to improve on the cost to fulfill.

Yes, we gain a lot of efficiencies through scale economy. And we also have a much better arguing power with third party logistics, with – we built a lot of direct sourcing relationships, all these will help our efficiency.

Yes, thanks very much for the follow up explanation.

Thank you, Sherry.

Thank you. [Operator Instructions] We have a question coming from the line of Zhiqiang Xing of CICC. Please go ahead.

Hi, this is Zhiqiang from CICC and thanks management for sharing the updates on the company. I – here I have two questions and the first one is well, with regard to the favorable policy relating to online sale of prescription drugs recently, well, what preparations has the company made already? And my second question is, would you please introduce more about the company's cooperation with pharmaceutical companies? And what value is realized by your company in their cooperation? Thanks.

Okay, I suggest that I'll take up the first part and Gang you can pick up the second part of the question. Yes, thank you for the question about the regulatory change. Obviously, in the past, it is always the policy to allow a drug sales online. And now the People's Assembly in China passed it as a law to allow drug sales online. That is great news.And with regards to getting prepared, ready for it, and I think we are probably more ready than the most. First of all, our internet hospital is the second ever during the first batch of the permits that Minister of Health recognized. And we have fully complied practices there. And, of course, we have more than 2,000 in-house and affiliated doctors there. We are able to service consumers directly.And also, we can handle all the prescriptions from hospitals with our logistic network. We cover the country without any blind spots. We can probably cover the majority of the country like 80% of the GDP within 24 hours. Even if you live pretty far away, we're still able to reach you in, let's say 48 and 72 hours. And that is going to be a huge plus.And obviously, we're the ones who built most of the direct sourcing relationships with the upstream pharmaceutical companies and we can buy some of the drugs at a competitive price. And we are better than I would say anybody out there in the space when it comes to the assortment and availability.And in addition to that, we also can enable the pharmacies. So when the customer walks into the pharmacy, if they don't have a prescription, they can always access our cloud doctors by scanning a QR code and throw the diagnosis our online doctors can issue a digital prescription to the pharmacy on the spot.So at that moment in time, that pharmacy would be transformed into a virtual clinic. And the latest development from our space is that we started working with some of the system integrators that are working with some of the provinces to provide the prescriptions sharing platform.For instance, we're working with the biggest system integrator called Taikang [ph] in China, who's been doing this system integration for quite a few provinces. And we're the preferred supplier in terms of drug delivery once the prescription is flowed outside of the hospital.So, in a nutshell, I think we're very ready for the deployment of the policy and we're looking forward to it.

Okay. And let me answer the same question on how we're partnering with pharmaceutical companies. We mentioned that we now have strategic partnership with 150 pharmaceutical companies, international/domestic and we provide all kinds of services to them.Now let me just mention a few. For example, we do geographic and channel coverage for them, including the geographic region to third, fourth fifth tier cities. And we help them to do a new product launch. And we help them to do online branding and marketing. For example, with we do the online expo, and every time we have tens of thousands drugstores, private hospitals, clinics, to participate.We provide supply chain integration for them. We are the supply chain integrator for more than 17 pharmaceutical companies to supply to other e-commerce companies. And we help them with data service. For example, helping them to understand to gain customer insights, customer behavior and profile.We help them to monitor and maintain prices. We help them with consumer education. So all kinds of services we will provide to all these pharmaceutical companies. And we are in partnership with the top tier pharmaceutical companies.

Okay, thanks, that's very clear.

Thank you. Our next question is from the line of David Chang of Citibank. Please go ahead.

Hello, Dr. Yu and Mr. Liu, this is David Chang from Citibank. I just have two simple questions. The first one is about your T2B2C business. So can you share with us the latest strategy on your technology driven B2C business?The second one is, just because I just saw your B2C business now. The growth of business is not really strong. So what's the plan for the B2C business going forward? Thank you.

Okay. So let's come to that and come back to the T2B2C strategy. So in my speech, I have provided some updates. For instance, we made progress like with purchasing or sourcing direct relationship with 150 pharmaceutical companies and now we have 210,000 pharmacies doing business with us, we're servicing them. And we signed up another insurance partnership, which is very major.Obviously, our direction is to use technology to enable the key stakeholders in our value chain. Dr. Gang, you just mentioned about the number of things we do for the pharmaceutical companies. And, for instance, in other spaces like the insurance companies, right, we work with them in many areas.For instance, online consultation, the e-prescription, the delivery service, the medication cost control, even selling insurance. And we joint developed PBM models and the drug practice are pretty high and we're able to help them to make it transparent, et cetera.And another point I want to mention is that we actually built a team, we have a dedicated team. We call that team the enablement team. All they need to do is to figure out better ways to better equip our ecosystem partners, especially the pharmacies. As I mentioned we are developing a blueprint for the future pharmacy and that's the team that is dedicated in thinking about how we can migrate our capabilities in servicing our consumers to our pharmacy customers.And your next question with regards to the B2C business and our view of it; first of all, B2C is very important. Everybody saw that. It didn't grow as well as the B2B business, but it's a quintessential part of our business and we attach great importance to that. As a matter of fact, we're very pleased with that business transformation. And as I mentioned, in the past, we used to focus on providing low costs to drive growth. And now we are much more focused on customer value. And our vision is that we have to build the capability in the patient's lifetime wellness management.And for instance, today, we built out modules like patient education, like the drug adherence management, the hassle free online refill modules. Those service modules are going to be extremely important because every chronic patient we acquire, we have probably on average more than 20 years to service them. That is why that business is very important to us. Now that we have fixed the cost structure, we aim to reignite growth for this business next year.

Thank you.

Thank you. Next question is from the line of Tom Hamilton of Park Hill Capital. Please go ahead.

Hi guys, thank you for taking my question and congratulations on the quarter an impressive performance. Two questions, first thank you Junling for going into the B2C business. But I'd like to ask about the B2B side. I mean, how long can the fast pace of growth on that side of your business be maintained? What are sort of some of the core drivers down the line and how can you increase revenues on the business side? That's the first question. Second question is, is there any plan to continue building more warehouses in China? What is your target number there? Thank you very much.

Thank you, I think probably Harvey you can answer the first question and Gang can answer the second question.

Okay, regarding the growth of business on our B2B side, and our B2B continues very strong growth and new one, we have already set up for five B2B fulfillment centers in each region to better serve our B2B customers. Instead of talking about how we can grow, we believe that today it is just a thought, through internet, pharmacies and clinics enjoying a much broader direction, and much more competitive price than our offline distributors.And meanwhile, we have doubled our B2B gross margin in the past three quarters, and the profitability of B2B will be further improved with more and more direct funding from domestic and international pharmaceutical companies. Thank you. And I will pass the second question to Gang.

All right, so you asked about, are we going to build more warehouses. Certainly, we will. Okay? We built our traditional models to optimize our network. So basically, right now we already have nationwide coverage. As the density of our orders increase, we want to make sure that we improve our customer experience as well. That means that we'll have a probably faster arrival, on-time arrival rate. And we can reach customers quicker and have more selections and have better service to every single customer in the nation.So certainly, but all those decisions will be based on full optimization of our total network. So we have to run the data where as we start growing more warehouses, I mean not warehouses, we call them fulfillment centers. We now have we call it hubs. And now we will build more four deployed warehouses fulfillment centers to reach customers sooner and with better services. Thank you.

Great, thank you.

Okay. Thank you. Next question is from the line of [indiscernible] Capital. Please go ahead.

Yes, congratulations on a good quarter management. So I've got two questions and to direct to Dr. Liu. So, what - about the warehouses and also the pharmacies. So in terms of a geographic location, and what's the portion of them are in the top tier city, tier one, tier two, what is the portion of that are even in the lower tier cities? And as you added more pharmacies and the warehouses, and the where are those newly added in the future are going to be? So that's the location issue. The second one is, as we increase order density, so what is the ideal, average SKU turnover days, new relations, and compared with today, what kind of the progress that will be? Thank you.

That's a very interesting question. So, basically, we decide locations by network organization model. We decide to work for locate the warehouse. So decision for multiple considerations based on the logistics availability, the total inbound and outbound cost, and also based on labor availability of that region. Certainly is based on the other third party logistics we are partnered with and how they can cover from that region. So we have a full organization model for network design. So that's hopefully that's [indiscernible]. Every time we add a new warehouse, new fulfillment center based on the density of our orders, based on our customer demand, satisfaction and total cost. So that's the first question.

And with regard to the second question, it's a great question by the way, inventory management, now I think this is our bread and butter, will have to do well, otherwise, we're going to lose our ability to have lunch, right? So today, we run inventory days on hand in the 20s. And we believe that is, very appropriate to the scale of the business today. And as we continue to progress, and obviously, we can optimize based on density in certain geographies, objective is to drive the inventory based on hand to stop 20 days.

Okay, that's very helpful. Thank you for that.

Thank you. We have another question coming from the line of Tom Hamilton of Park Hill Capital.

Hi, thank you for taking my question again. One more question back to the B2C business, how do you guys plan to win new customers on that side of the business? Thank you.

Okay, Barry do you want to have a shot at it?

Okay in that our [indiscernible] in e-commerce customers, we are trying to gain customers, who have high potentials amount of online products and diagnosis management services. Based on this purpose, we will focus on diseases that have the following [indiscernible]. The first one is chronic, and the second one is high self-pay ratio. The third one is privacy concerns, that has liberty fees [ph] and [indiscernible]. These patients attend by using online methods that has [indiscernible] precise advertising and cooperating with pharmaceutical companies and the hospitals. Thank you.

Great, thank you.

Thank you. [Operator Instructions] Yes. I have a question coming from the line of Jun Huang of UBS. Please go ahead.

Hello, hello management, this is [indiscernible] on behalf Rachel Yang from UBS. So can I ask one question on your collaboration with HEC [ph]. So could you please specify the difference between your collaboration with HEC [ph] and the collaboration with the other pharma companies. So where do you think we can add value to the collaboration and the two things that we will, have more and more this kind of collaboration in the future? Thank you.

That's a good question. Certainly you guys have seen our press conference a few days ago, and we build strategic partnerships on several fronts, why that - we help them to cover deep, a broader coverage and deeper penetration of their products. And we help them with a new product launch. We help them online marketing and customer education. And we also help them in terms of gaining more customer insights. So basically, it's very strategic partnership. We are paving the way for very, very aggressive growth for them in our channel, in the very near future.

Okay, thank you very much. It's very helpful.

Okay, thank you. No question at this time, and I would like to hand the conference back to Mr. [indiscernible] Anderson [ph]. Please go ahead sir.

Thank you, operator. In closing on behalf of the entire 111 management team, we'd like to thank you for your interest in participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now all disconnect.