111, Inc. (YI) Q3 2020 Earnings Report, Transcript and Summary

Hello, everyone, and thank you for joining us today for 111 Third Quarter 2020 Conference Call. 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, CFO of our major subsidiary; Mr. Harvey Wang, Co-COO; Mr. Barry Zhu, Co-COO; Ms. Monica Mu, Investor Relations Director; and Mr. Alex Liu, Finance Director. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The Company's earnings press release was distributed earlier today, and together with our earnings presentation are available on the Company's IR website at ir.111.com.cn

Good morning and good evening everyone. Thank you for joining our 2020 third quarter earnings call. As the COVID-19 pandemic continues to make headlines globally, I'd like to start on this topic to provide some context to this call. As much of the world see the resurgence of coronavirus cases and the continued economic downturn as a result, China has been one of the few bright spots with the pandemic successfully under control and the economy is starting to pick up. In addition to being something to be celebrated in its own right, the economic recovery in China has also created a positive environment for our operations. However, as a company and a country, we continue to stay vigilant for any new wave of infections. I want to thank the staff of 111 for their diligent dedication to meeting the needs of our customers and consumers and all healthcare workers and the scientists for their unwavering determination in this long fight against the pandemic. And before diving into the numbers, a couple of corporate news I'd like to update you on. Firstly, Mr. Luke Chen, until recently CFO of 111 has been appointed CFO of Yao Fang Information Technology in Shanghai, the 111's subsidiary preparing for listing on Shanghai Stock Exchange's STAR board. We thank Luke for his work, setting a strong financial foundation for 111 and believe that in his new position, he will guide Yao Fang to a strong growth trajectory and successful IPO. In the meantime, in addition to my role as CEO, I will step in as acting CFO alongside Luke during the transition until a new CFO is appointed.

Thank you, Junling. Moving to the financial section on Slide 12, you can see the details of the third quarter 2020 results from Slide 13 to 15 of our presentation. I would like to highlight a few key business and the financial metrics and our focus on year-over-year comparisons, all numbers are in RMB unless otherwise stated. Our total net revenue for the quarter grew 113% to RMB2.36 billion which exceeded top end of our guidance range. Our B2B segment revenue grew 134% to RMB2.2 billion. Revenue contribution from E-Channel, which previously disclosed as a separate segment was now incorporated into B2B segment this quarter. The strong growth in B2B segment was attributed to strong growth from our existing customers as well as the newly added customers in our network.

Thank you, sir. We have the first question from the line of Sherry Yin. Please ask your question.

Thank you for taking my question. This is Sherry from JPMorgan. Congratulations on strong third quarter results. I have three questions today. My first question is about the business strategy updates. We saw many encouraging partnerships that 111 has established over past few months. Could you give us a business strategy revisit, if any major change. And my second question is specifically for Dr. Yu. We know that Dr. Yu was key management in Amazon's worldwide supply chain operation. As the market is the recently turning a lot of attention to Amazon's big move marching into online pharmacy industry. Could you help us on this and the major difference between China and U.S. online pharmacy market. And my last question is about the last week's NNPA announcement of the online drug regulation change. Could you share more color about these regulatory updates implication to 111's business operation and competition landscape. That's all my question. Thank you.

Thank you, Sherry. I'll take on the first question and then let up to Yu to continue. About the future strategy, first of all -- so this year I believe we will deliver well over $8 billion in revenue and we will be very close to profitability. However, we still want to run this business as a start-up, we have laid out our mission, which is to digitally connect medicine with patients and healthcare services. So accomplishing that mission, I'd like to use three keywords. The first keyword I want to use is digitization. I think everybody would agree that this industry is relatively backward in China, when it comes to digitization. We had 111 investing very heavily on doctor-patient interaction platform, so we can move doctors and patients to the digital world. We're also digitally tracking the whole value chain from the point when the drug leaves the factory, all the way to the patients. It's also amazing to realize how much enthusiasm on digital marketing, including patient education, doctor education, pharmacist education, etc. And I could not have imagined that the live cast from two of our internal stuff on our app can generate over RMB10 million in sales within two hours. And the next keyword I want to use is infrastructure. Essentially, we are laying the infrastructure for the next generation of healthcare delivery in China. We were able to reach consumers directly through our through our 300,000 plus pharmacy network and then through doctors. One can understand this as the B2C, the B2B2C and the B2D2C using our supply chain, our cloud-based solutions, our big data, all part of this infrastructure. And the third keyword I'd like to use is commercialization. Our view of the future is that the pharmaceutical and the bio-tech companies are going to face pretty tough competition with the BVP implementation majority of the pharmaceutical companies are going to focus on innovative drugs. As we all know recently in the Hong Kong and Shanghai Stock Exchanges, there were many new biotech companies that got listed. And I think will take no long all -- well, not all, maybe most of those newly listed companies are going to face challenges in commercialization unless their drugs get approved. So this is an area where we have been investing pretty heavily. Our omni-channel commercialization platform will be a great -- will be in a great position to help them. So let me recap the three keywords, digitization, infrastructure and the commercialization. So this is really the strategy we're implementing and those are the areas we're investing. So, I'll pass on the next questions to Dr. Yu.

Thanks, Sherry for asking the question. So let me answer your second one that you mentioned about Amazon's recent launch of their online drug store sales. I think that Amazon started in early 2003 and 2004, when I was serving, I think in fact for Amazon, the product company called Drugstore.com. But for this many years that category has not been developing as fast as other categories. I think in China, it's more aggressive in terms of acceptance online, doctor consultation online, drug purchase, I think due to several reasons. One is that the vast penetration of mobile devices and more online e-commerce customers, I think we are certainly in a great market and also the policy by the Chinese government is more -- also wide open. Just as you know that recent policy allowing online prescription drug sales and allowing online consultation, doctor consultation being covered by medical insurance and more encouragement of online healthcare. I think this all really facilitated the growth of China's online health industry. And the second question, you mentioned about the last week's new...

Third question.

The third question, right. It is mainly retention of feedback. And in fact, we participated in the whole discussion with the Chinese government and we gave them our feedback. I feel this is a really a very positive to the whole industry and also very positive to us. The whole tune of the policies that it will be more open to online health care and certainly by -- will have more rigorous, more scientific monitoring, management and the control of the quality. So certainly these policies will allow the companies that are more compliant, that are more transparent and have a higher efficiency to service. I think it is a great -- I think we are certainly in a great industry to be in and this is -- so, definitely we feel that all these new policies, all those change, all very positive to us.

Yes. That's very clear and helpful. Thank you.

We have the next question from the line of Bingyu Chen. Please ask your question.

Thanks for taking my questions and congratulations on these results. Actually I have several questions. First of all, we have seen that the B2C segment is developing rapidly and once you see what's the reason behind and how will you keep the growth momentum. And second is about the profit side because we see there is a gross margin increase in B2B segment and it increased fulfillment costs. And would please let us know how you managed to achieve that. And the third question is about, maybe you please share more color on the increased number of orders. Thanks.

Okay. This is Harvey. I would take these three question regarding the B2B growth and B2B margin as well as the order volume increase. So, first of all for B2B growth, on one hand our B2B customer side is increasing which has exceeded 300,000 representing about 60% of our China total market. And on the other hand, the revenue of our existing customers is also increasing rapidly. The growth is mainly coming from our strength and capability on digital marketing. For example, we offer a total solution to pharmaceutical companies to commercialize their drugs through 111 digital marketing tools. We also enable our B2B customers with cloud-based digital services such as cloud pharmacy services, cloud clinic, cloud inventory as well as cloud CRM. And internally we also develop two tools, one call Hawkeye and the other called Turbo to use big data internet technology to build up a mechanism for our sales force, to acquire more customers, activate existing customers and improve BAU, improve revenue, especially in the lower-tier cities which contribute to a major part of our B2B business. These digital marketing technology and tools help us to improve our sales force efficiency. Then on the margin side, I think there are three reason how can we keep good margin improving trend, meanwhile, we also keep three-digit growth rate. First of all, and just now Junling just mentioned, we are more and more direct sourcing from pharmaceutical companies. Secondly, we launched our PIS that is Price Intelligence System to build a smart pricing mechanism to improve profit while without any negative impact to our sales growth and expansion. Third reason, we also bring in more higher margin SKU in the past quarter, which help pharmaceutical companies to promote the sales of these SKU through our digital marketing platform and meanwhile bringing in more margin. And I hope I've answered your question. Well, I think the third question regarding the B2B order volume. Yes, it's a good capture on the big increase in our B2B order volume. I think firstly in the past quarter, we have increased our SKU selection through our new supply chain model and SKU selection has increased several times. We believe the selection is the most important element of customer experience. And secondly through continuous innovation on our supply chain technology and supply chain network, we have managed to improve our operational efficiency and lower our fulfillment costs to 2.5% as Luke just highlighted. We have returned our saving on fulfillment cost to our customers by lower the free shipping threshold, and which improve our customer buying frequency and also improve our order volume and improve their ARPU, net revenue. Okay. Is it clear or any other follow-up question?

Yes. It's very clear and thank you for your answer. And I have no other questions. Thanks.

Thank you.

We have next question from the line of Rachel Yang. Please ask your questions.

Okay, thank you. Hi, first congratulations for such a strong third quarter result. This is Rachel from HSBC. I actually have four questions. The first one is on your digital healthcare platform. So could you please share with us the recent progress and achievement for that platform. And what's the plan for next year? And because the online medication market is quite competitive nowadays with many internet giant jumping into that. So how do you think over technology or over facility behind could differentiate us from those internet giants? This is the first question on the digital platform. The second one is on your clouding service. So, what is that? And do you charge the standalone pharmacies for the clouding service you are providing them. This is number two. The third question is your logistic systems. We read from the PPT that you have a logistic system that's covering all the province and you have the capability to reach or -- you have the capability for a 24-hour delivery in over 300 cities. So how that capability is compared to other online medication players. Last one is on your financial front. So we know that we are already at some cash flow positive and I guess next year we would eagerly reaching the total top line of RMB10 billion. So how far do you think we are from financially break-even. So these are the four questions.

Thank you. I'll take the first question then. If I understood you correctly, it's about our digital solutions, right? So really at the heart of our digital platform is the doctor-patient interaction platform. And in addition to that we also digitally track the drug flow from factory to patients. In the past, a lot of those transactions actually happening in offline. And the other capability we have built out over the last few years is really digital marketing, which we have seen an tremendous progress and of course our smart sourcing greatly helping those pharmacies when they place orders. In the past, they use a sheet of paper and they figure out what SKUs they need to replenish, and then they will spend half a day to call different suppliers. With our digital tool, which is called the digital -- our smart sourcing, they can complete their procurement within, let's say, five minutes instead of half a day. And of course, and I think one thing we've done the best in the industry is really the Patient Care Program. I'll just give you some examples, right. So with the Patient Care Program, we have a D plus one, D plus seven, T minus seven and T minus 10. Let me just quickly go through that. For instance, what is DB, so let's say diagnosis. On the first day when the patient got diagnosed and I'm assuming this is a chronical patient, obviously a drug is prescribed and delivered, and of course our platform will be able to use different algorithm based on different DB types And on day one, after the diagnosis, we're going to send out a material related to the disease, the education material. And the D7, we're going to send out the importance of following on the compliance over the doctor's prescription and so on. And T means the time they should be refilling. So T minus, our system is going to automatically calculate. We're going to send out a note to the patient to remind he or her, him or her, it's about time to refill. And by T minus zero, on the actual day, if it is still not happening, obviously our pharmacists can follow up with the call and then try to find out what's going on. And the other thing we are very proud of is really the digital marketing we are conducting for pharmaceutical companies, and especially when it comes to patient education, the doctors' education, the pharmacist education. And essentially we have built out a -- I don't know how to describe this in English, it's . It's a matrix of different high traffic media. For instance in China, the biggest traffic came from Doyin, from Toutiao, from WeChat and so on. So we all -- we as a company set up accounts in all those big traffic sites and when we run a patient education program, we can actually reach much, much broader audience and compared to a single pharmaceutical company can do. We'll give you an example. We conducted a diabetic education, sponsored by Eli Lilly and during the live session, we had more than 5 million users participate and then we actually recorded in that session, overall over 10 million people actually viewed that session. That is a clear advantage over the traditional ways with the digital solution we have and obviously we're going to really exploit that capability we have. I don't know who should follow-up the next question.

Let me answer. Let me take the question on cloud services. So we basically provide cloud service systems, all persistent on ecosystem, including doctors, pharmacies, pharmaceutical companies, insurance companies etc. So let me just use pharmacies as an example. So we'll provide throughout pharmacy. We will move their pharmacy online. So really increase the coverage of their -- the coverage. Also provide online clinic, so transform a pharmacy into clinical pharmacies. So we've got innovations that will transfer pharmacies kind of got into our hold, and reach our doctors or pharmacies to combination and we get a piece of prescription in order to find a drug from that drug store. We also provide online inventory, so that -- product inventory so that with the large selection cycle. We also provide cloud CRM, to help the pharmacy to measure customers. With this way, we gain more thickening loyalty of the customers. Also I have answered the question on the coverage. We mentioned that we cover 300 cities with that. In fact, we cover more than 80% of customers with . So you mentioned that you asked other services. We feel that the thing we can hold with the customer experience. So our customer satisfaction right now is 99%, and we feel that we are proud of that is going to provide that, customer satisfaction. So that certainly includes the on-time delivery, selection, price and other customer services. We see that as the three metrics that we focus about.

Yeah, this is Luke. Let me answer the question about the financial performance as well cash position and our break-even point. We are very excited about our achievements in third quarter, especially on the cash position. And as of September 30, 2020, we have total cash at hand amounting to RMB1.2 billion, and we have achieved positive cash flow from operating activities for the quarter as well as for period year-to-date. We believe that we will continue that trend and continue to generate positive cash flow from our operating activities in the future quarters. In terms of break-even point, we will not give any guidance at this stage, as we are still in the investment and expansion mode. We do not want to lose growth opportunity because of our end to investment. Having said that, we still believe that it was the strong top line growth, improve the margin profile, as well as operating efficiency, we will be able to further lower the net loss as a percentage of net revenue and which will lead to profitability in the foreseeable quarters. We hope that we will surprising ourselves as well as in that just anything that in the next year also. Rachel, hope we answer your questions.

Thank you. Thank you, Gang Yu and Luke. Just a small follow-up on the delivery system. So can you share with us how you're capability is compared with other online medication players.

I thought I answered the question. We feel that we are very efficient. We cover more than 80% of our customers with in-time flawless as we have a very efficient fulfillment costs, probably the lowest one, the lowest in the industry, and we are still optimizing our entire supply chain, and all we can focus is our customer experience.

Okay. Okay, thank you. Thank you for the clarification. I have no other questions. Thank you.

We have the next question from the line of Xipeng Feng. Please ask your question.

Okay, thank you for the question. And congratulations on the corporate program. Well, actually I have -- I have -- just have one little question. And I have seen that many well known pharmaceutical companies have entered into collaborations. Any strategic partnerships with 111 this quarter? Also I think that such collaboration goes beyond drug procurement activities and extends to more aspects, including Big Data, digital marketing and even brand building. So my question is what are the advantages of 111 Inc.? And what you could offer when other pharmaceutical companies choose to make cooperation with the Company. Thanks.

Okay. Let me take that question. That's a great question. So certainly we have enjoyed more and more strategic partnerships with global peers, top pharmaceutical companies. We feel that the main reason is on the volume. First is that we are -- US public company and we have high compliance and the transparency, and we have also very high efficient supply chain and broad coverage and deep penetration, and while the capability of going omni-channel drug commercialization and also enjoyed our scale and our customary breakup experience today in the industry. And also you know in the past years we have demonstrated our capability of innovation in the digital stability. I think these are the main reasons that our -- lot of pharmaceutical companies are, we are the preferred clients.

Okay. And that's very helpful and congratulations again on the great progress for the Company, thanks.

Thank you.

We have the next question from the line of Horace Cheng. Please ask your question.

Hi, congratulations on the great results. This is Horace from IDEATE Investments. I have three questions for the team. The first question is the key difference between 111 and JD Health and Ali Health especially JD Health on the B2B side. That's the first question. Second question is, your non-GAAP net loss has continued to narrow. Is this trend sustainable? Can you shed some more light on gross margin going forward? And also the last question is perhaps can share a little bit more progress on the listing on STAR Board. Thank you.

Thanks, I'll take the first question. The difference between 111 and JD Health and Ali Health. I think our positioning is very different than Ali Health and JD Health. First of all, if you look at the naming of the companies, it's quite interesting because JD is calling that business JD Health, and Ali is calling that business as Ali Health, and obviously our naming of the Company is actually Yao Wang, right. So we are more focused on drugs, whereas they are more focused on the consumers health. So we are very -- in this traffic they can gather, but we will have to position ourselves to very -- rather differently from them, because our size can never compete against those big size on traffic. So we focus much more on drug commercialization. And if you look at our biz model, our digital product and digital solutions are much more geared towards delivering value to pharmaceutical companies. And next point I want to make is, no one industry has the B2C, the B2B, B2C infrastructure that we have. You mentioned about JD's B2B. We haven't seen much. But as we understand, they are more focused on using the marketplace to deliver value to the pharmacies, but we actually run that as a first-party business that much better when it comes to customer experience and obviously the infrastructure we have to account is rather unique and this is our advantage and we want to exploit that to the fullest. I'll pass on the gross margin question to Luke.

Yeah, we are confident that we will continue to narrow the loss to -- on profitability and we believe that's sustainable. So in the next coming quarters, we will continue to triple-digit grow our business in the tribute of scale because the scale does matters. With that, we will build direct partnership with pharma companies, but we would love to see we are not only making revenue from product sales, but also making revenue from the service and the -- on the TV business, you already see that we improve our margin profile from 1.4% to 2.6%, and we see the reason that actually that the gross margin for the business continue to improve, and we believe that could be up to 5% even to 8%. So with the improving the product mix and a focus on those high-margin products. So we believe that there is rooms for us to continue to improve the gross margin profile, plus the continue to improve our operating leverage and ultimately efficiency. So we will, as I just shared with investors that we are very confident that we will continue to make investment on the opportunity. But with the scale building up, the margin profile improvement that we will see that net loss -- percentage of net revenue continue to narrow and we will see the breakeven point coming. On the our listing plans of the subsidiary in China, we are making progress according to schedule and we will disclose it according to SEC rules. So I would encourage you to when the press release of that we will issue in the due course according to SEC rules. Hope we answered your questions.

Yes, thank you very much.

We have the next question from the line of Chen Gu. Please ask your question.

Yes, can you explain why on the B2C side, there is slight decrease, both on revenue and on the margins. So is the margin correlate with -- is like the volume very important as you decrease it, your profit margin will decline. Thank you.

Yeah. As I explained that in my remarks, really to give a conscious decision first to invest in better infrastructure to deliver longer-term value for our business. We are pretty confident that we're going to be back on the growth track very soon. And it's a great question about the margin. Obviously it showed a decline in margins, but if you look at the percentage, it is still above 20% and that is within the -- well within the range if you compare it to the other B2B platforms and we are fairly okay with that margin percentage, but moving forward, we should expect improvements in both at the top line and also the gross margin. Thank you.

Can you elaborate on your investing for growth in infrastructure. Is this due to more competition, especially from the giants JD or Ali, why you decided to invest for growth and what you did not have before.

Yeah, I mean, I think obviously it's pretty clear out there. We are not going to compete against the big traffic players and we need to play in a different space. Right. So right now we invest in infrastructure -- infrastructure is like the patient buffer interaction platform. That is going to help us acquiring customers in a much more efficiently. And also we are building the virtual clinics for doctors and we are working with pharmaceutical companies on products where they traditionally could not launch in the offline manner where a new drug is approved and when they -- the pharmaceutical company want to introduce that to the hospitals, it's going to take them one year or more to getting into the hospital's procurement list and we are working with a number of pharmaceutical companies to actually use our digital platform for the drugs to be delivered to patients if the doctor issue a prescription even the drug is new. And we're partnering with pharmaceutical companies, even with their sales reps, their medical reps as well. So those are the infrastructures that we will be using in the future. And we believe, this is going to generate much more sustainable business both top line and the bottom line, moving forward.

Yeah. I probably be very ignorant but you know I'm just thinking if I were a pharmaceutical company and I want to do patient education and interact with patient, when I choose like JD or Ali where I know there is significant traffic and those companies our planning or doing the same thing, you're doing right now.

Let me take that question quickly. I think as you can see that more than 70% of our sales are prescription drug. So clearly, we are very dedicated to more professional and prescription products instead of health awareness products. So I think this is the another reason that pharmaceutical companies really like to what we've done, typically to lot of the new innovative models like we recently launched our press release, we launched a specialized hospitals of diabetes for skin disease etc. So those are great examples that we are looking at.

Thank you.

We have the next question from the line of Sheng Hui. Please ask your question.

Yes, good evening. Thanks for taking the question. It's great that you reached like almost 60% of all pharmacies in China, but on the other hand, it looks like sales to each of the pharmacies and then like RMB8000. My question for you is how big you can -- you think you can go in terms of the sales to on average pharmacy.

Okay. I will take your question. I think although you know we are covering 60%, I think we still have the market is still very big. We can see in every year, the market size of the pharmacy business, it's -- they are 100 times of our current volume. So we believe that in future, we still have a very big room for further grow our business and meanwhile, we also have a big opportunity to further improve our gross profit. I think just the stock, it's here -- and the ARPU of our -- ARPU means the average revenue per user, our customer -- remember if it's individual pharmacy or it's a pharmacy has both increased quarter-over-quarter significantly.

I think it is great news when we got started. As you can tell, our penetration is still fairly low when it comes to wallet share. And we can absolutely sustain a pretty high growth for much longer time. Thank you.

Okay, thanks.

I think we're already --

At this time, I'd like to hand the call back to Monica for any closing.

Thank you, operator. In closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and the participation into this call. If you require any further information, please email us and thank you for joining us today. This concludes the call.

Thank you, ma'am. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.