111 Inc (YI) 2022 Q2 法說會逐字稿

Hello, everyone, and thank you for joining 111's conference call today. On the call today from the company are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of 111's major subsidiary; Mr. Harvey Wang, COO; and Ms. Monica Mu, Investor Relations Director. As a reminder, today's conference call is being broadcast live via webcast.

The company's earnings press release was distributed earlier today and, together with the earnings presentation, are available on the company's IR website at ir.111.com.cn.

Before the conference call get started, let me 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 would 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 undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law.

Please note that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year-over-year basis.

With that, I will turn the call over to 111's CEO, Mr. Junling Liu.

Good evening, and good morning, everyone. Thank you for joining our Q2 2022 earnings call. The information that I will be discussing here is also provided in the slides that have been posted earlier today, the company's website. I would encourage you to download the presentation along with the earnings report at ir.111.com.cn.

In today's call, I will talk about the general economic situation and how the company rose to the challenge of mitigating the impact of both the COVID pandemic and the economic uncertainties. Secondly, I will also provide some color on our strategies in the areas of building momentum for margin growth, improving operational efficiency and strengthening supply chain capabilities. Then, our CFO, Mr. Luke Chen, will walk you through our results.

Although we have been in the COVID pandemic for 3 years, 2022 proved to be the most challenging year in China. The uncertainties in the international economic environment and the strict lockdown measures created significant challenges for many companies.

As many of you are aware, COVID infections rose sharply in Shanghai in the spring, and the pandemic (technical difficulty) cities in China. The Chinese government instituted lockdowns in numerous cities to curb the spread of the pandemic. And as a result, our Shanghai headquarters and several of our fulfillment centers were shut.

Our headquarter office had to be shut down for the (technical difficulty) in the second quarter, and no one was able to return to office. Simple message like (technical difficulty) with customers and suppliers, talking contracts for normal business transactions became impossible.

The overall supply chain was severely disrupted and the transportation and other logistics were tightly regulated in pandemic hit areas. Logistics costs rose significantly. In many cities, our deliveries stuck in transit. And we also experienced a severe shortage of medicinal supplies as our suppliers were not able to replenish inventories as usual.

This is the moment when companies are being truly tested. Despite the severe impact with pandemic, the company rose to the challenge. Through the team's tremendous efforts, our company was appointed by the Shanghai Government as a supply guarantee enterprise and opened a special green channel, which enabled our vehicles to deliver from Qianshan fulfillment center to Shanghai on a daily basis.

We worked diligently and leveraged our online and offline digital platform capabilities to aid pandemic hit regions and continuously provided medicine and online medical services for patients nationwide. We have provided 3 online consultations for customers in over 370 cities and provided over 3,000 medicinal products covering more than 400 diseases during the lockdown period.

Despite economic downturn and a material detrimental impact on the offline retail sector, our Q2 revenue reached RMB 3.04 billion, achieving slight growth under extremely difficult circumstances. However, our gross profit grew 43% year-over-year, reaching RMB 192 million.

Gross profit margin rate of the company increased from 4.5% in Q2 of 2021 to 6.3% in Q2 2022. I had mentioned that we will be laser focused on our margin growth and we delivered on that. This achievement came from optimized product assortment and smart pricing as well as improved team efficiency and technical capabilities.

Our B2B business remains the key contributor of our revenue, which reached RMB 2.9 billion. Gross profit of our B2B segment rose to RMB 169 million, an increase of 65% year-over-year. Gross profit margin for our B2B segment rose to 5.8%, representing a growth rate of 53% year-over-year.

Gross profit margin in our B2C segment rose to 22.5%, representing a growth rate of 11% year-over-year. We will continue reducing procurement costs as well as optimizing our product assortment and structure. I'm pleased to report the progress we have made on our private label initiative. With its CRM big data and health management database, 111 cooperated with pharmaceutical manufacturers to build private label products, which include medicines, health supplements, medical devices, et cetera. So far, we have already developed 3 brands, (inaudible) targeting specific market segments with our online and offline digital platform and nationwide distribution capabilities. This proprietary product will improve gross profit and improved downstream customer stickiness significantly.

We were able to leverage our digital capabilities to deliver more value-adding services to our partners. The market continues to show strong demand for our diverse service solutions.

Even during the pandemic, our service revenue reached RMB 22 million. Our operational efficiency is trending very nicely due to the improvement in business scale, team efficiency and technology advancement.

The operating expense as a percentage of net revenue decreased from 10.7% in Q2 of 2021 to 8.9% this quarter. The sales and marketing expenses were down to 3.3% from 4.4%. General and administrative expenses were down 1.3% from 1.7% and technology expenses were down to 1.1% from 1.7% in the same quarter last year. The total amount of sales and marketing, general and administrative and technology expenses year-on-year have been reduced by 24%, 25% and 36%, respectively.

Although the current environment has resulted in challenges to our business, we're still committed to executing our strategy to continue to grow our revenue and gross margin. I'm pleased to report that our non-GAAP loss from operations as a percentage of net revenues decreased from 4.9% in Q2 2021 to 1.7% this quarter. This brings us another step closer to profitability.

As of Q2 2022, 111's virtual pharmacy network reached approximately 410,000 pharmacies, covering about 70% of the total in China. As we deepened our relationship with upstream pharmaceutical companies, 111 has also strengthened its relationship with downstream pharmacy customers. As a result, we were able to help those pharmaceutical companies to improve their drug commercialization efforts and digital marketing efficiency.

This quarter, we have also seen that our pharmaceutical co-chain logistic capability improving rapidly. As of July, our co-chain service is deployed in over 270 cities, over 80% of which orders can be completed within 48 hours. This capability has provided convenience for rural users, in particular.

We always believe that innovation is the most important driver for growth and our efforts are rewarded with encouraging results. 1 Health is a digital franchise model that effectively connects pharmaceutical companies with pharmacies and patients in order to empower more to a midsized pharmacy chain. 1 Health provides both small and medium chains with more product selection while also improving their business decision-making optimization by availing drug sale information and a smart chain support. 1 Health also helps its members to leverage them to optimize assortment and better customer relationship management.

Through digital franchising, 1 Health has so far helped more than 11,000 pharmacies through AI technology, big data analysis technology and the SaaS services, such as CRM, O2O, et cetera. This digital service made our S2B2C business model possible, which already covers over 67 million consumers and has opened up the digital marketing link for upstream pharmaceutical companies.

1 Health members' monthly active users', average revenue per user and the customer satisfaction metrics have been significantly increased over the past few quarters. Meanwhile, the average gross profit contribution by 1 Health members was 1.6x that of (technical difficulty).

Cloud promotion is an innovative S2B2C management platform, which connects pharmaceutical companies with pharmacies, pharmacy managers, pharmacists, sales personnel and the consumers by facilitating the assignment of the specific tasks from pharmaceutical companies to pharmacies. These tasks include taking exams, product display, promotion, patient education, et cetera, for pharmacy managers, pharmacists and sales personnel. This platform enables pharmaceutical companies to precisely target sales channels and implement customized pharmacists and sales personnel training. At present, dozens of pharmaceutical companies, over 7,000 pharmacies and close to 10,000 pharmacists and sales personnel have joined this platform.

As a national high-tech enterprise certified by the Chinese Ministry of Science and Technology and a specialized high-end new technology Shanghai Enterprise, selected by the Shanghai Municipal Commission of Economy and Information, 111 has proactively responded to the call for the 3 creations, i.e., innovation, invention and creativity and the 4 news, i.e., new technology, new industry, new business formats and new model and have constantly devoted itself to scientific and technological innovation.

Since its establishment, 111 has pursued continuous technological innovation advancement. In July this year, we won the 2021 to 2022 China Pharmaceutical Retail Leader Award with our innovative business model and the leading digital technology capabilities.

As the national health digitization drive gathers pace and the state provides more support for the development of platform businesses, we will continue to invest in research and development, aiming to achieve continuous incremental improvements for our business.

I would also like to brief you on 111's ESG efforts during the pandemic. As a supply guarantee enterprise in Shanghai, we have proactively provided a timely boost to the ongoing fight against the pandemic. We collected purchase orders via proprietary purchasing channels and assigned special personnel to process them, thus ensuring timely delivery to patients.

1 Clinic, 111's online hospital launched free online service since the pandemic began and provided free online consultations, free prescription renewal for chronic disease sufferers and other medical services to the public. The company has proactively organized donations and offered anti-pandemic PPEs for the enterprises resuming work and production.

All the ESG efforts carry our core values, and we will firmly fulfill our social responsibilities as we have done in the past. We will make unremitting efforts to pursue core growth opportunities, further consolidate and enhance our leading position and to bolster our competitiveness in the medical service industry.

Driven by digital technology, we will continue to deepen on the digital transformation of the health care industry and upgrade our platform services so that patients at large will gain access to high-quality medical services and drug purchasing services.

Our goal is to ultimately achieve profitability as soon as possible and to create value for our shareholders and society at large. We wish to thank all the investors who have supported us all long.

I will now hand the call to Mr. Luke Chen to walk through our financial results. Thanks.

Thank you, Junling, and good morning, or evening, everyone. Moving to the financials. My prepared remarks will focus on a few key business and financial highlights. You can refer to the details of the second quarter 2022 results from Slide 13 to 16, Section 2 of our presentation.

Again, all comparisons are year-over-year and all numbers are in RMB, unless otherwise stated. Let's start with the second quarter results. Second quarter had been extremely difficult for our business due to COVID lockdowns in Shanghai and many other cities. Our head office in Shanghai had to be closed and operations in our regional fulfillment centers has been significantly disrupted for 2 full months. Despite all the challenges from the pandemic lockdown and thanks to all team efforts, we have managed to keep our revenue stable while continued to fast grow our gross profit and margin.

Total net revenues for the quarter grew 0.4% to RMB 3.04 billion and the total gross profit for the quarter grew at 43% to RMB 192 million and gross margin improved from 4.5% to 6.3%. B2B segment was the major contributor for the total gross profit and margin improvement. B2B segment revenue grew at 1.3% to RMB 2.9 billion, while gross margin -- gross segment profit for B2B segment increased by 55% with gross segment margin up from 3.8% to 5.8%. This was attributable to our optimization of selection portfolio and competitive pricing.

We had also focused ourselves on high-margin products and launched private label products with much better margin. Our B2C segment revenue was negatively impacted by the lockdowns, which decreased 20% to RMB 103 million, with gross segment margin improved from 20.2% to 22.5%.

Total operating expenses for the quarter were down 16% to RMB 272 million. As a percentage of net revenue, total operating expenses for the quarter were down to 8.9% from 10.7%, which reflected continuous improvement in our operational efficiency.

Fulfillment expenses as a percentage of net revenue for the quarter was 2.9%, up from 2.8% in the same quarter of last year. The increase was mainly attributable to additional logistic costs incurred as a result of pandemic lockdown.

Sales and marketing expenses as a percentage of net revenue for the quarter was 3.3%, down from 4.4% in the same quarter of last year. We continued to leverage our sales automation tools to enhance the sales effectiveness and streamlined the operation in the quarter.

General and administrative expenses as a percentage of net revenues accounted for 1.3%, down from 1.7% in the same quarter of last year, which was attributable to our continuous optimization of our supporting functions.

Technology expenses accounted for 1.1% of net revenue, down from 1.7% in the same quarter of last year. We completed a major tax development program last year and believe that the current spending reflected the appropriate amount of investment in technology.

As a result, non-GAAP loss from operations narrowed to RMB 52.8 million compared to RMB 147.9 million loss in the same quarter of last year. As a percentage of net revenues, non-GAAP loss from operations decreased to 1.7% in the quarter from 4.9% in the same quarter of last year. Non-GAAP net loss attributable to the ordinary shareholders was RMB 68.3 million compared to RMB 118 million loss in the same quarter of last year. As a percentage of net revenue, non-GAAP net loss attributable to ordinary shareholders decreased to 2.2% in the quarter from 3.9% in the same quarter of last year.

As you can see, we are improving our financial performance quarter-by-quarter and we are very close to profitability. We have full confidence that we have the right strategy and the right team to steadily expand our revenue and gross segment profit. Please refer to Slide 17 to 20 of the Appendix section for selected financial statements.

A quick note on our cash position as of June 30, 2022. We had cash and cash equivalents, restricted cash and short-term investment of RMB 885.6 million.

This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

(Operator Instructions) The first question comes from the line of Xipeng Feng from CICC.

Congratulations on the company progress. Well, I have 3 questions actually. And the first one is, how did your company achieve growth for both revenue and gross profit in the second quarter, especially amid such terrible circumstances, such as COVID epidemic and economic uncertainties?

And my second question is, what specific challenges did the company experience from the economic and COVID pandemic in the second quarter? And how will these challenges affect the company in the second half of 2022?

And the last question is about the strategy. Could you please elaborate on the company's strategies going forward?

Thank you, Xipeng. Let me just address your questions. And so first of all, last quarter was extremely difficult. For majority, for the 3 months, our head office was under lock-down. And even after the lockdown was over, and started gradually return to office starting from second week of June, still no one from our head office can travel out of Shanghai to conduct the badly needed business. And also the supply chain was disrupted pretty badly. It's quite -- a number of cities experiencing outbreak of COVID. Many of our orders got stuck in transit, causing tremendous problems in our customer experience and also a lot of customer frustration. Some of our fulfillment centers were shutdown. And even the inventory replenishment became extremely difficult.

And in the meantime, our pharmacy customers were also under tough challenges as they were not allowed to sell fever and cough-related medicines. And they are full type of medicines that they are not allowed to sell, which account for a substantial amount of their business. And as a result, we were not able to sell those drugs to them either.

Just under these difficult conditions, our team proved its true color. Given the extraordinary circumstances, we established a virtual command center with all the functional leaders dialing in every day to make decisions to deal with all kinds of issues popped up. And then, they all have their own daily meetings and with their respective teams. I was deeply moved by the dedication our team members demonstrated during that tough period. And to give you an example, as you may know, once you leave your residential estate, it will be extremely difficult to reenter as every state is so strict on the inbound traffic. At that time, many customers placed orders online. And they need to get the riders to collect those medicines from one of our collection centers.

So some of our staff used their own personal vehicles to dispatch some of the orders to customers who live afar. And as we understand, once they leave their home, they couldn't return home for many days. So end of the day, I think it's the team's spirit and our execution capability that contributed to the business results. We're very pleased with the results given the extremely difficult circumstances.

With your second question about the impact and also how we're going to deal with it in the second, third and fourth quarter? I mean, it is quite obvious. The pandemic created a negative impact to our revenue and margin. And therefore, the overall business, the cost of the conducting business also increased significantly.

Imagine the orders stuck in transit, extra vehicles we'll have to hire. And even though some of the warehouses were under lockdown, we have to continue to pay our employees. And the pandemic is not over yet. Although we are able to work in the office now in Shanghai, many cities right now in China are going through what Shanghai went through. As we speak right now, we have thousands of orders stuck in transit right now due to the lockdowns in many cities, including some of the major logistical hubs.

We anticipate Q3 and Q4 will remain very, very challenging for our business. The overall economic situation is not as encouraging as we would like it to be. This will add extra challenge to our business. But as we have done in Q1, we will continue to operate with great vigilance and do the best we can.

With regards to your third question, Xipeng, future strategy, we always have a 3-step strategy. Our first step is to build the infrastructure and the ecosystem. As you all knew, we started from a B2C business. And then we had the Internet hospital with 1 Clinic and then we also had the B2B business. With that, we actually completed a close-the-loop online, offline and B2C2B2B -- B2B2C model. With that infrastructure, we were able to scale as one can understand and one can appreciate in the Chinese market, scale matters a lot. And without scale, nobody takes you seriously.

So we aggressively pursued the volume of the business over the last few years. And we had an objective to really take on 50% of the 500-or-so pharmacies market. And today, as you can tell, we already covered about 70% of the overall market. And with that scale, and obviously, we're in a much better position, either to deal with the upstream suppliers, or downstream pharmacy customers. And of course, our stage 3 of the strategy is to pursue profitability. As we have demonstrated the last few quarters, every single quarter, we're making substantial progress.

We are a firm believer. If we look at the bigger picture level, we wanted to use digital technology to transform this health care industry. And we are the firm believer that technology will be the key driver. Also technology will be the area that can give us the edge.

So we'll be pursuing both top line and bottom line growth. And we believe that technology will be the best tool to give us that edge. And this is at least a $1 trillion market. And there is a lot we can do. Of course, we want to establish our leadership position in servicing the pharmacies first and then pursue other goals.

So Xipeng, thank you for the questions, I hope I answered your questions.

(Operator Instructions) Next question is from the line of [Fergus McPherson from Octeva].

Yes. I'm an individual investor, Fergus McPherson. Congratulations on performance last quarter. I have also 3 questions, if you don't mind. The first is, have you made any progress on the supply side upgrade? The second is, have you made any progress on technological innovation or development? And lastly, what is the status of the company's cash reserves?

I can answer the first 2 questions. I didn't hear the last one.

It's cash reserve.

Cash reserve, okay. Luke, you answer the last one. Yes, we have made a lot of progress in our smart supply chain as well as in technology. Let me answer the 2 questions separately.

In terms of supply chain, our smart supply chain, we made progress in both systems and our infrastructure. For example, we launched our cloud DTP program about 2.5 years ago. We didn't have co-chain coverage. Starting from the beginning of this year, we launched co-chain coverage. This allowed us to deliver a lot of new and innovative drugs to customers in remote areas. Right now, our co-chain coverage can fulfill to 270 some cities. And it provides tremendous convenience to our patients. So that's one.

Second is about innovative idea for the franchising fulfillment center program, okay? Through our own experience, we know that it's so difficult. It takes a long time to build new fulfillment centers. It takes effort in searching for the site and getting a CFDA approval and build, the internal processes, especially. Usually, a fulfillment center takes more than a year to launch. So we have a new innovative idea to have partners using our partners fulfillment centers. We call franchising fulfillment center. So we had this idea beginning of this year. And by now, we already signed 11 fulfillment centers, 8 of them are being in operations.

These fulfillment -- cloud fulfillment centers can be treated as our forward deployed fulfillment center. They are closer to customers, so that they can shorten the delivery time. And they also have a lower fulfillment cost, so really a tremendous help to us. And plus, we can have a much, much larger coverage.

Last example is about the -- inside our fulfillment center, we try to reduce our operational costs. One idea is to separate the bulk sales from unit sales. So a lot of the carton boxes we treat them like 1 SKU, directly ship to our B customers. And by separating the bulk from the units, we lowered our fulfillment costs, especially the picking and packaging costs by almost 20%. So these are the improvements in our smart supply chain.

Regarding to our technology, as you know that we continued to invest in our technology development. Junling mentioned that we are recognized by Chinese Ministry of Science and Technology as a specialized high-end new technology enterprise. And also, we received the world China Pharmaceutical Retail or Leader Award. These awards are for -- especially based on our digital technology capabilities. And also we build this patients' lifetime management platform, which connects patients with doctors and pharmacists and medical assistance. Through usage of these platforms, patients gain tremendous convenience for accessing doctors, medication and disease education.

Let's take diabetes patient management, as example. The DoT, duration of treatment is a measure for adherence of -- patient medical adherence. That index has been improved by more than 30%. And also we provide a lot of tools both for our marketplace vendors, help them improve product availability, timely fulfillment and post-sale customer services. And the marketplace CPO has dropped from 8% down now to 4.5%. So this helped us to improve our customer experience tremendously.

So through the few examples I hope I can demonstrate that our investment in our smart supply chain and in technology has been achieving, what has been, fruits.

Yes. On the company's cash reserve, as we disclosed as of June end of 2022, we had cash and cash equivalents, restricted cash and short-term investments about RMB 886 million. And you can also tell from our cash flow statement, the net cash outflow in the first half year this year is significantly lower than the first half year last year. And we believe this trend will continue as we further lower our operational loss and getting closer to profitable. We believe our current cash reserves are sufficient to support our daily operations. I hope we answered your questions.

(Operator Instructions) Next question is from the line of Ruili Bian from Citi.

This is Ruili from Citi. I have 2 questions. The first is we saw a strong improvement in the gross margin in the second quarter. What are the reasons behind this? And what level of gross margin you expect in mid to long term? The second one is, could you give us more color on gross margin product program?

Thank you, Ruili. I think I'll take your first part of the question and then maybe Luke Chen can actually help out with a follow-up question with a little more detail. Yes, we made a strategy to focus on margin delivery. And in the past few quarters, we worked extremely hard on our product structure optimization, which is the main driver for better margin. And of course, another driver is to reduce our procurement costs. We invested pretty heavily into our supply team and negotiated pretty hard with our upstream suppliers. With our technological capability, we're getting better and better on our PIS system.

If you are not familiar with that, that stands for Pricing Intelligence System. So what we do is we use algorithms. We keep testing price elasticity. And we arrive at an optimized pricing for certain cohort of SKUs. So this is really instrumental in helping us improving our margin and also project an image that our selections had very competitive pricing. And also our product mix included the so-called gold label products, which means high-margin products, which maybe Haihui can elaborate on. The revenue for this category of products is not very high. But the margin contribution is very, very pleasing.

And the last point I would like to make is that, finally, our private label has been launched. It's early stage. But we're very excited by the potential for this line of business. So far, we have created 3 brands. They are (inaudible) The reason why we have those brands differently is we want to target different market segments. So to conclude, and I believe this is very sustainable, the second part of your question. We should anticipate that our margin growth will continue to grow faster than revenue in the foreseeable future.

Second question, for the second question regarding the high-margin product, actually, as Junling just mentioned, this is actually with our SaaS-based digital marketing tools and our various platforms like 1 Health, like cloud promotion platform and to promote those new products or special products from pharmaceutical companies.

And margin is normally above 20% and average about 23%, 24%. And these products -- not only high-margin products of 111, but also, which is, even more important, also those high-margin products for pharmacies. So this has been a transformation for our 111 sales team to promote high margin products. And we are pleased to see we have successfully gone through the transformation as we can see quarter-by-quarter and high-margin product sales are increasing revenue.

(Operator Instructions) Next is from the line of [Lauren Cai] from HSBC.

Congrats on your solid results. I have 2 questions about your new initiatives. The first one is on your 1 Health program. Can you share with us how does the program improve active users in general? What's your future plans for those programs? Do you have target for like how many pharmacies to cover in the future?

And my second question is, can you talk a bit more about your future plans for the [Quell] promotion program? What are the feedbacks from the pharma companies and pharmacies so far? What's their satisfaction level with the new service?

Yes. Thank you. Actually, these 2 questions are all about our new initiatives. For 1 Health, 1 Health is becoming the first in the industry with the S2B2C model. And our virtual franchise model enabled over 10,000 small or medium-sized pharmacy chains and to provide superior products and services to their customers.

So for our next step of our 1 Health, actually, currently, I'm right now in Wuhan tomorrow. We will have a 1 House Member Summit in for those members from Central China on our next step of this program. That is to set up a closer connection on our marketing on this -- all of our members. And marketing about those exclusive SKUs and also about our private label, like [Guangzhou]. Guangzhou is designed for 1 Health members, which basically almost a very high-margin one. So we can expect the margin percentage of this program is going to increase.

And for the next initiative, that is cloud promotion program. And this is actually a SaaS-based platform, connecting pharmaceutical companies with pharmacists in those pharmacies and eventually with the end user or patients. Only -- we just launched in only a few months, and we have about -- currently about 10,000 pharmacists and assistance in the pharmacies registered in this platform. And we also have a number of pharmaceutical companies who are participating in this program.

So we are expecting the cloud promotion program become a very good digital marketing tools and also a platform to connecting pharmaceutical company with the end user with the patient. Thank you.

(Operator Instructions) Next question is from the line of Steve Lu.

I have 2 questions. The first one is, what is the reason to hide contracting non-GAAP loss from operations as a percentage of net revenue? How is this sustainable? The second one is what is the supply guarantee and price? How does it apply to 111's medical service during the epidemic?

Thank you, Steve. Let me answer your first question. Yes, our non-GAAP operating loss for the quarter is 1.7% of net revenue, which is significantly improved if you compare to 4.9% loss in the same quarter of last year. If you zoom in, you will see that the improvement was contributed by, first of all, the gross margin improvement, which is 6.3% this quarter versus 4.5% in the same quarter of last year. And also, the total operating -- actually reduction contributed the rest.

Just now Junling and Haihui were talking about our plan on the revenue and margin expansion. If you look at our OpEx, you will see that in Q2, we have made great efforts to optimize our organization structure, streamline our operation process and make full utilization of our automated digital tools to improve operational effectiveness and efficiency.

And as a result, all the expense line-items such as selling and marketing expenses decreased by 24%, G&A expenses down by 25%. And we also take a conservative approach on our R&D spending. And so we believe that we will be able to keep this spending level in the rest of the year while continuing to grow our top line and gross profit. So overall, we are optimistic, positive that we will continue the trend to narrow the loss until profitable.

Junling, you want to answer the...

Yes, let me touch upon the supply guarantee enterprise. And Steve, thank you for that question. I guess that a lot of concept that everybody is familiar with. And as you can imagine, during the lockdown, all the logistics were suspended with the exception of government-approved companies which can deliver essential goods such as food to residential compounds to keep the citizens fed.

And those companies are classified as supply guarantee companies. They've given special permits on to the road. Initially, they were only companies which can deliver food and water, which is the most essential for survival. And our DR team proves its value. They approached relevant authorities repeatedly. As you can imagine how chaotic it can be when the city just got locked down initially. And the system was literally in shock. And eventually make sense to the authorities that in addition to food and water, many chronic patients who need drugs to survive. So they granted us the permit. But unfortunately, our fulfillment center is in Qianshan, which is a neighboring province. And we have to go through a similar process in Qianshan which was governed by different decision-makers.

To put the long story short, we got it sorted and eventually made it work. And both governments give us the green light. And our vehicles were able to transport medicine to Shanghai on a daily basis to deliver the badly needed drugs to our consumers. And as far as we knew, we were the only online company in Shanghai, who were able to deliver this service to consumers. And what we did exactly was we set up 4 collection centers across Shanghai, 2 in Puxi and 2 in Pudong. And the drugs will be delivered from our fulfillment center to those collection centers where our people will have to work pretty hard to sort all the drugs out based on different suburbs and so on. And then the customers can get their riders to collect those orders.

As I said before, some customers were simply not able to get those riders because they live a little further away. And some of our staff will have to use their own vehicle and leave their residential compound to deliver those drugs to consumers. We're very proud of the fact that our customers can receive such services, received so many letters from customers and are calling that really life-saving services.

Thank you, Steve. I hope that answers your question.

And that was the final question. So in closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting 111 in Shanghai, China, please let the company know. Thank you for joining us on today's call. This concludes the call.