111 Inc (YI) 2024 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 our Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Yang Chen, CFO of 111's major subsidiary, and Mr. Harvey Wang, COO.

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.

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 unknown and unknown risks and 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 filing 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 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, Junling Liu.

Good morning and good evening, everyone.

Thank you for joining our second-quarter 2024 earnings call.

The information we'll be discussing is also available in the slides posted earlier today on the company's website.

I encourage you to download the presentation as well as the earnings report from our Investor Relations website at ir.111.com.cn.

As for our performance in the quarter, we're pleased to report that we achieved operational profitability for the second consecutive quarter, which was driven by our ongoing improvement in operational efficiency that over road challenges in the macroeconomic environment.

In today's call, I will discuss the current macro environment, highlight the opportunities ahead and present our key financial achievements.

I will also cover how we are leveraging new technologies to enhance operations, recent patent milestones and our efforts on the supply side.

Finally, I'll outline our future growth strategy before handing over to our CFO, Mr. Yang Chen, who will provide a detailed analysis of our financial performance.

First, China's complex economic situation is impacting many industries and health care is not immune.

The challenging environment is prompting industry stakeholders to explore innovative models for retail development.

Despite volatile conditions, there are positive trends in the health care industry net present value of our opportunities.

The national anti-corruption campaign in the health care sector initiated in mid-2023 is intensifying this year.

Recent developments indicate a broader and more comprehensive approach with regulatory and ethical oversight now targeting the entire industry change.

We anticipate that this rigorous scrutiny will evolve into a long-term process for greater transparency and integrity in healthcare transactions, particularly in hospital procurement.

A key outcome of this campaign is the acceleration of transitioning product sales and prescriptions to retail pharmacies, which offer a more accessible and transparent alternative to the traditional hospital system.

This is the shift strongly encouraged by the states.

Given our expertise in the out of hospital pharmaceutical markets very well positioned to capitalize on the significant growth opportunities for this shifted payments over the long-term, along with the expected continued expansion of retail pharmacy stores across China.

By offering a comprehensive and cost-efficient product range, coupled with an unwavering commitment to customer experience, we aim to boost market share in this sector.

There are challenges and opportunities coexist.

In parallel, the digital transformation of the healthcare value chain is continuing to gain momentum.

The progress is supported by strong initiatives for the industry's high quality development.

In June, China's State Council issued key tasks for the pending, for deepening medical and the health system reform in 2024.

The focus is on integrated development and governance of medical insurance, healthcare and pharmaceuticals, while highlighting the critical role of information, technology and digitization in driving these reforms.

As a leader in this digital revolution, we are dedicated to transforming the industry through our fully digitized operating system, providing both the upstream and downstream customers we've advanced digital technologies [will] enable them to further cut operating costs and increase the efficiency.

Our cutting edge digital solutions enhance every aspect of operations from sales and procurement to customer demand analysis, product inventory management and warehouse allocation.

The meaningful progress we made earlier this year has persisted into Q2, underscoring our ongoing success in digitization.

As a whole mentioned, even with these macroeconomic challenges, we generated profit from operations for two consecutive quarters, reflecting the effectiveness of our growth strategies and business model.

In the second quarter, our income from operations reached RMB3.3 million compared with a loss from operations of RMB41.4 million a year ago.

Non-GAAP income from operations was RMB8.5 million compared with non-GAAP loss from operations of RMB17.2 million in the same quarter of last year The profitability is primarily driven by ongoing improvements in operational efficiency, supported by consistent enhancements across nearly all business functions.

In the second quarter, total operating expenses accounted for 6% of net revenues, a decrease of 120 basis points from the previous year.

Specifically, we've made significant reductions in various expense categories.

We've managed to cut fulfillment expenses to 2.6% of net revenues during the quarter, down from 2.7% a year earlier, reflecting a decrease in fulfillment costs by 7.3%.

Our general and administrative expenses fell to 0.5% of net revenues from 1.9% a year ago.

Selling expenses decreased to 2.3% as a percentage of net revenues from 2.6% in the previous year.

Technology expenses were 0.5% of net revenues as well, down from 0.7% a year ago.

Excluding share-based compensation, operating expenses as a percentage of net revenues dropped 70 basis points to 5.8%.

Additionally, our operating cash flow remained positive for the second consecutive quarter.

Our operational efficiency [spent] some strategic investments in infrastructure and an optimal staffing allocation with a focus on key areas that drive the long-term sustainable growth.

Over the years, we've developed highly sophisticated technical capabilities that allows us to deliver exceptional value and performance to our customers while significantly reducing both technology and staffing expenses.

We'll always aim to become the most efficient healthcare e-commerce operator in the industry.

Despite our relatively small revenue, we've already achieved a level of operational efficiency that can compete against some of the more established players.

We are committed to setting the industry benchmark for efficiency while maintaining and improving profitability.

As we grow and refine our operations, we expect further reductions in marketing costs driving even higher efficiency.

Our commitment to this goal is unwavering as we believe it will be a key competitive advantage and help us to build a unique business moat.

You can also invest those savings from increased efficiency into other strategic areas such as innovation, market expansion and customer engagement to support future growth.

Next, let's move to how we adopted noble technology approaches to drive significant improvements across various operational facets.

Continuous technology advancement is a cornerstone of our strategy, enabling us to build a more resilient, efficient and customer centric business, poised for greater returns in the future in the evolving healthcare e-commerce industry.

First, we developed merchant Bidding Tools and then Automated Operating System and integrated a price index driven by big data to deliver intelligent motion pricing.

This has not only 111's value proposition of low costs, but also enhanced procurement efficiency.

Notably with our digital investment promotion platform underpinning the subsidy campaign as the core operational strategies, the procurement conversion rate has risen to a historical high of over 32%.

This has a significantly improved customer satisfaction and long-term loyalty, which are crucial just sustainable growth.

Second, our Supply Chain fulfillment has seen remarkable improvements in cost reduction and efficiency management through technology-driven enhancements.

The optimization of algorithms has led to a notable 11% increase in overall efficiency in warehouse shelving and replenishment and a strategic adjustments in automatic grouping have reduced picking paths by 15%, further boosting output and efficiency.

Additionally, the implementation of the digital logistics network for last-mile delivery has cut distribution costs by over 5% underscoring our commitment to operational excellence.

Well, our application of AI in product matching has significantly elevated the accuracy and efficiency are offering not only in pharmaceutical products, but also in medical devices and health supplement products.

The creation of a comprehensive databases and the development of sophisticated entity recognition and similarity models have doubled the matching rates.

With dedicated to consistently and continuously advance and upgrade our technological capabilities, which position us as the industry leader in operational efficiency, cost reduction and customer satisfaction.

We're pleased to announce the acquisition of four new patents, bringing our total to 28.

Among these is the invention patent for a method for processing human resource demand and personnel scheduling system, which offers accurate predictions on intelligent scheduling, significantly enhancing HR management efficiency and supporting informed decision-making.

Additionally, we secured a breakthrough patent, [from the barrier entry column method] and a system based on information categories.

This technology bolsters our data protection efforts, reducing the risk of which is lower and operational costs and improving overall efficiency through automated countermeasures.

We also obtained two more invention patents in fact, A Drug Retrieval Method and a system based on principal component [spectral and distance] and assistance for enhancing client load balancing based on the [Arrow Group] and granularity.

These digital technology innovations further improve our operational efficiency, reinforcing our pursuit of quality and growth.

Collectively, these patents not only safeguard our intellectual property, but also enhance our market competitiveness, providing robust technical support for our long-term growth and driving the digital transformation of the pharmaceutical industry.

Furthermore, we continued to strengthen the supply side during the second quarter.

First, our transshipment model Kunpeng has streamlined logistics and reduced transportation costs, delivering robust progress.

By consolidating shipments to one warehouse before intelligent distribution, we've significantly improved efficiency and the lowered internal distribution costs.

It's also adds value to the external supply chain, showcasing our commitment to leveraging digital technology to empower the sector.

Additionally, compound approach is particularly cost effective for penetrating the remote regions of China and we now offer the service, and I'll offer this service to merchants

[for a separate fee]

In the second quarter, we established a vertical network across five major fulfillment centers, East China, Central China, South China, North China, and the Southwest China.

So a truck plus branch deliver model.

This is paving the way for a national component pharmaceutical logistics network, ensuring efficient last-mile delivery in supply dense areas with full control of the supply chain.

Kunpeng operates 25 transportation routes and the first mile warehousing services servicing 72 external clients, up over 5% from 37 in Q1.

The network supports our business scale of over RMB200 million and has achieved total cost savings of RMB2.95 million today.

Kunpeng is transitioning from a cost center to a profit center, enabling external supply chains by providing professional pharmaceutical, logistics and distribution services to upstream and downstream partners.

This has helped clients reduce cost by 15%.

It also addresses industry pain points like mixed cargo handling, high damage rates and inefficient acceptance processes with a 55% reduction in delivery damage rates.

This improves our service quality and enhances our customer engagement, solidifying our role as a key enabler in the pharmaceutical supply chain.

With the expansion of the compound logistics network and the last-mile delivery services, delivery expenses decreased, combined with reduced warehouse labor, packaging material costs from improved efficiency and a lower warehousing expenses this resulted in a 7% year-over-year reduction in fulfilling costs to RMB88 million in the second quarter.

Moreover, to support future growth and advance our strategy for the nationwide compound logistics network, we plan to add two more JV fulfillment centers in the third quarter, bringing the total to 13.

This expansion includes a second center in Wuhan and a new center in [Liberty City] in the Northwest.

We expect the expansion of our fulfillment centers will enhance our logistics network, improve service across diverse regions, reduce delivery times and increased overall efficiency.

Our supply-side efforts are also demonstrated in our expanded cooperation.

First, in the second quarter, we entered into a strategic direct supplier partnership with comprehensive pharmaceutical enterprise, Beijing Syrian pharmaceuticals to enhance nationwide truck accessibility and distribution.

Particularly for Syrian 's flagship products like Syrian Folic Acid tablets.

The partnership builds on our existing collaborations since 2017, utilizing big data, digital marketing, and account services to help Syrian's medications and pregnancy related products reach a broader market more efficiently.

Second, during a recent visit to a [tech hope] Pharmaceutical Co, the company engaged in discussions with several pharmaceutical firms regarding the various partnership opportunities.

This resulted in the formation of an alliance named [One] Summit.

The objective of this alliance is to foster innovative collaboration and address market challenges through joint efforts.

The partnership aims to build a comprehensive high level and a diversified network by focusing on products with distinctive features such as inclusivity, long-term commitments, traditional Chinese medicine, and insurance coverage.

This initiative highlights111 commitment to expanding its partnership network on a broader scale.

Finally, let me dive into our strategies for growth in the revenue margin and profit.

Our cost strategy is to provide highly efficient cost effective one-stop shopping experience that addresses customer needs and solidifies our competitive position.

While Huntington data analytics and market research, we can fine tune our product portfolio to match customers' preferences while prioritizing low prices through intelligent digital tools.

Additionally, we will continue to strengthen our partnership network with pharmaceutical companies by expanding cooperation, with plan to broaden our extensive medicine offerings on our digital technology empower platform, driving share growth through enhanced sales, especially in lower-tier cities.

Our digital marketing network plays a pivotal role in this strategy, providing a robust platform to highlight our partners' products.

Through focused marketing initiatives, we will enhance in brand awareness and penetrate previously underserved markets.

This strategic expansion of our partnership network not only benefits our pharmaceutical partners, but also strengthens our position as a leading e-commerce platform in the pharmaceutical sector, which is a foundation for sustained long-term growth.

As we drive higher sales volumes and optimize our product offerings, we will see a positive impact on our overall profitability.

Another growth engine is our private label business, which generates pleasing results driven by increasing demand from customers, it's revenue at 35% from the previous year in the first half.

This line of business featuring three brands offers customers a diverse range of products.

Whereas the company enjoys a healthy gross margin of 29%.

This also raises our brand equity and build customer trust.

Moreover, we will expedite our investment in the JBP platform.

This innovative model has been increasingly attracting new partners and significantly expanding our product lineup, highlighting its compelling value proposition and effectiveness in engaging with various stakeholders.

By improving the platform to better meet the needs of our partners and expanding its reach, we anticipate a broader and more diverse partner base, leading to increased product offerings and sales opportunities.

As we continue to refine and scale the platform, we believe we will strengthen our competitive position and become a critical catalyst to long-term growth and profitability.

Operational efficiency is central to our strategy, and we're committed to investing in cutting-edge technologies to streamline processes, minimize waste and elevate productivity.

Our emphasis on AI innovations and digitization is crucial.

By embedding AI and a fully digitizing throughout our operations, we aim to generate even greater operational efficiency, enhance customer engagement and a host of new products and services.

We're confident these assets will cement our market leadership as well as stimulate our growth opportunities.

Digitization is important to our future and is driving our industry-leading operational efficiency.

With our internal operating system being 100% digital, we've not only improved our financial performance, but also established us as a transformative force to reshape the entire industry.

Our technological ecosystem extends beyond our operations, providing both upstream and downstream customers with access to our advanced digital tools and expertise.

Looking ahead, we believe our continued focus on digitization will maintain our competitive edge and market leadership, enabling us to achieve higher revenue and profit levels.

With that, I'll hand the call to Mr. Yang Chen, to walk through our financial results.

Thank you.

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.

For details on our second quarter 2024 results, please refer to slide 17 supporting in section two of our presentation.

Again, all comparisons are year-over-year and all numbers are in RMB unless otherwise stated.

Just start with the second quarter results.

Total net revenues were RMB 3.4 billion and cost segment profit was RMB207.6 million, relatively flat compared to the same quarter last year.

Total operating expenses for the quarter decreased 18.1% to RMB204.3 million.

As a percentage of net revenues, total operating expenses for the quarter was down to 6% from 7.2% as we continue to enhance our operating leverage and optimize our operation efficiency.

Specifically, fulfillment expenses as a percentage of net revenue for the quarter were down to 2.6% from 2.7% in the same quarter of last year.

Sales and marketing expenses as a percentage of net revenue for the quarter was 2.3%, down from 2.6% in the same quarter of last year.

General and administrative expenses accounted for 0.5% of net revenues, down from 1.1% in the same quarter last year.

Technology expenses amounted to 0.5% of net revenue, down from 0.7% in the same quarter last year.

As a result, income from operations was RMB3.3 million compared to loss from operations of RMB41.4 million in the same quarter of last year.

And the non-GAAP income from operations was RMB 8.5 million compared to the net loss from operations of [RMB7.2 million] in the same quarter of last year.

Non-GAAP net loss attributable to ordinary shareholders was [RMB 8.8 million] compared to RMB33 million in the second quarter of last year.

As a percentage of net revenue, non-GAAP net loss attributable to ordinary shareholders decreased to 0.3% in the quarter from 0.9% in the same quarter of last year.

As you can see, we are improving our financial performance quarter-by-quarter and maintain operational profitability for the second consecutive quarter.

Please refer to slide 21 to 25 of the appendix section for selected financial statements.

A quick note to our cash position as of June 30, 2024, we had cash and cash equivalents.

Restricted cash and short-term investments of only RMB615.5 million, and we are pleased to report positive operating cash flow of two consecutive quarters.

As of the date of this earnings release, the company had a total outstanding amount of RMB 1.1 billion, which has been included in the balance of the between the growth and controlling interest and accrued expenses and other current liabilities.

According to a group of investors or one pharmaceutical knowledge pursuant to the equity investment made in 2020 as previously disclosed, as of the date of this earnings release, we have received 10 requests from certain of such investors for a total redemption amount of RMB0.2 billion in accordance with the terms of their initial investment in one of pharmacy technology.

Furthermore, the company has entered into payments and our commitment letters with the masses representing the majority, the total carrying amount.

For continuing negotiating with these inventors to [firm up our the] pending redemption, our redemption request.

This concludes our prepared remarks.

Thank you.

Operator, we are now ready to begin the Q&A session.

Thank you.

(Operator Instructions) Xipeng Feng, CICC.

Hi.

This is Xipeng Feng from CICC.

Thank you for taking my question and congratulations on the company progress.

Well, I have two questions about financials.

And the first one is I see that the OpEx ratio in the second quarter decreased compared to that of the second quarter in 2023.

So what's your guidance on the expenses ratio in the long run?

And my last question is, well, we noticed that the company achieved operating profit in the second quarter.

I just wonder what the drivers behind the results and what's our guidance for net profit for the year?

Xipeng Feng.

Yes, good to see on the call.

Thank you for the questions.

Yes.

So let me address the first question first, with regards to the OpEx.

Perhaps let me start with how we run a lean operation.

First of all, we have an in-house developers operating system, which comprises dozens and dozens of other systems.

It's 100% digital.

At any given time in anywhere, the management can access real-time operations in either it's sales in various regions of different types of customers, categories of products, allocation of tasks to sales team, fulfillment operation, et cetera.

The cooperation is transparent and real-time data available, we can make decisions and adjustments faster.

With continuous optimization of operations, we achieved an operational efficiency that can match some of the well-established the giants in the industry.

Remind you in compared to those big size of the sales of hundreds of billions and our revenue was still relatively small at RMB15 billion last year.

We have a bigger pipeline, we can further scale down our operational expenditure.

We are very confident in that, but our estimate is that if we can run sales at a scale or a RMB20 billion or more, we should be able to operate under 5%.

With regards to your second question, how we flow into profitability.

It's really like I said, in first of all, operational efficiency is our core competence and our principle is to provide customers with the richest selection with competitive patches and good services.

And obviously, moving to the future we will continue to invest to build a bigger supply base to ensure that our product assortment meet customers' needs.

And of course, one of the cost packages this year is not that we're going to relentlessly pursue competitive prices.

This will drive customer loyalty, which will drive more and more customers, this will really increase our RPU coupled with the operational efficiency, we are really in a good position to achieve our goal and to sustain our profitability at least for 2024 if the market conditions remain the same.

Thank you.

Okay.

That's very clear

Zoe Bian, Citi.

Thank you management for taking my question.

And I have three questions.

The first one is given that the offline pharmacies has operating pressure this year.

I want to know in case the overall customer demand in [decreasing], how will we increase the penetration rate into the pharmacy clients?

And the second question is on if your kind of strategies, do you trying to improve profitability instead of the revenue growth.

And the third question, how is the retail price sorry the retail drug price comparison policy affect one on one operation.

Thank you.

Your lines are not very clear.

If I heard you correctly, let me just repeat the question first.

Like you were saying that the offline pharmacies are under pressure and how we can improve our penetration rate.

Second question is I think there is a profit on the biggest priority for the company.

And the third is how do we deal with the price comparisons from pharmacy [procurement] team

?

Yes.

So wrapping the questions, let me just address them one by one.

I'll first of all we anticipate that in the short term, our end customers will experience some challenges and it will be hard to maintain the same store sales as in the past.

However, this slide presents a great opportunity for them online to help those pharmacists to overcome the challenges.

We indeed our priority for 2024 will be focusing on profitability.

In the meantime, we are optimizing our selection to ensure that our offerings can meet our customers' demand, and a lot of assets have been made on the supply side.

And we made a tremendous progress on providing the richest selection for our customers to make it a one-stop shop who believe that shopping experience is crucial especially for the small to medium chains.

And this way, we can continue to grow our wallet share.

As for the price comparisons, we have always anticipated the fact that more and more customers are going to have multiple platforms to compare process before they place the order.

This year, we've made low prices as the overarching strategy operationally.

We always believe that we're going to win the market in the marketplaces to offer the greatest selection with low taxes.

Let me also add all those industry is under pressure.

If you look around a business as one of the broad industries as more and more stores are opened.

The recent data shows that the overall number of pharmacies has reached 700,000.

Last year was still in a 500 out some space, right?

And this suggests that we're in the right industry.

With more stores open up, they have more opportunities to service them and with the recent anti-corruption campaign going on, we also anticipate that the growth from the hospital drug sales will peak and more and more medicines will be sold through online and offline pharmacies in the long term, and that's where my mind is well positioned to take advantage of.

Thank you.

Jessie Lu, HSBC.

You may taking my question.

This is Jesse from HSBC.

And congratulations on another solid quarter.

I have two questions.

The first one is on financials.

We saw that the net cash generated by operating activity was really on the RMB100 million in this quarter.

So can you help us understand the key factors that how you contribute to this?

And the second question is on your Kunpeng logistic model.

We saw that not only helps the company to reduce costs and improve efficiency.

It also empowers industry chains.

Can management share more color and update on the development of the system.

Thank you.

Let me answer your first question.

Our business objectives for the quarter was very clear is to turn to profit and achieve positive operating cash flow.

So we have been very careful to improve our working capitals, specifically our accounts payable turnover days and our inventory turnover days.

If you compare our accounts receivables, balance and the inventory balance between June 30 and March end, as you will see clearly that we made improvements

.

Additionally, we also introduced the supply chain finance sponsored a party to our customers, mainly our pharmacy customers.

So they are using third-party financing to make payments to us for purchase of trucks.

Now this create a win-win situation on a win for the pharmacy, which they get a financing to make purchase of the message we've got.

The win for this asset to partly finance institution and they get customers and a win for us is also we get payment immediately when they have 90 days to the purchase.

Now moving forward, we will all continue to pay particular attention on the working capital items specifically that the inventories, the turnovers, the accounts receivable turnovers as well as our accounts payable turnovers

.

And we are quite confident that we will continue to see positive operating cash flow and overall cash flow in the coming quarters.

Okay.

Let me just take the Kunpeng project question.

How we started this project.

So basically, we optimized our allocation of our products.

Of course, all our fulfillment centers.

We have now a 13 centers in the nation.

And thus, we have to put the right products in the right fulfillment centers to both get closer to the customer at the same time to minimize the transportation or the fulfillment cost.

So by doing that, we have to try and ship products from a warehouse to warehouse.

So we started by doing the transshipment from our hub warehouse, these five major warehouses, and we find that the transshipment hub, we in the past, we rely on third-party logistics.

We found that cost was high and the damage rate was very high that we supply all route for transshipment

.

We found that costs reduced significantly at the same time as the [rate] reduced by 65%.

And thus among all major hub fulfillment centers and started service to our clients.

And now we already serve more than 70 clients and with RMB200 million in scale, and we believe that business model will continue the work of serve more and more customers.

And now we have saved customers of 15% of the costs.

Thank you.

Robert Sassoon, Water Tower Research.

Hi.

Thanks for taking my questions.

I'll have three actually, if I may.

We start with the first question.

Could you provide some more details on what more once clients are building new fulfillment centers in the second half of the year?

How many new centers do you plan to add and where will they be located

?

You want me to take your questions,.

Currently we have already launched 11 fulfillment centers across the country.

And as you mentioned about future plan, especially in the second half of the year.

Actually in the next quarters, we will exit by our process of setting up those fulfillment centers soon, but to a very new model.

That is instead of building up the fulfillment center by first-party model, and we will work with local partners to set up JV fulfillment center and also franchise performance centers.

So far the size, the 11 besides the 11 FC we have, there are seven new ones already in a preopening process like a warehouse separation, staff sharing system has seen even already in the inbound logistics process.

At least seven fulfillment centers locate in various provinces including Guangzhou, Hubei, Xinjiang Late target to Lanzhou I think from September, so probably November, December.

Yes, in the next three, four months at least seven fulfillment center will be opened.

And besides these seven, which already are almost ready for launch and there are more new fulfillment center in our pipeline, lots of land in northeast or Southwest of China.

And we believe with the setup of this the fulfillment centers and we will be able to provide a much better selection, better price and also [SLA] to our customers across the country, especially in the top tier cities.

Hope that answers your question.

Yes, thank you, Harvey for those details.

My second question is sprinkling partnerships is one of the company's key growth strategies.

So could you share some updates on in partnerships with pharmaceutical companies?

Yes, we have an already said, have a direct sourcing relationship with more than 400 pharmaceutical company, which brings a very rapid growth of our central purchase business.

I think your question is more than that, besides the simple buyer and seller model, we are doing a full process and to help these pharmaceutical companies are now digital marketing capability.

For example, we launch an ecosystem is [quite Periscope] And this also allows for prices visualization of distribution payments across and net worth of more than 20,000 pharmacies.

Those are endpoints nationwide.

Besides those the distribution status, it also visualize the inventory, lending, consumer, and sales data and also the sales price, which I know some typical companies would be very interested.

Either orders or market penetration analysis and spending of 34 provinces, 600 plus spirits, which also provide YoY or [margin] MOM week-over-week and even day over day overview of those sales data checks.

So with Periscope and our digital tools, we are confident to further strengthen our strategic partnership with pharmaceutical companies on the transformation from a traditional multi-tiered distribution to additional marketing model.

Thank you.

And I have a final question.

Obviously, digital technology is at the core of your business model.

So can you discuss the progress you've made in digital technology in the second quarter and also particularly focused on the application of AI technology in your platform?

Okay. Thank you, Robert.

Key technology has always been our core competence and why we've made a significant investment

I'll discuss in a little bit more detail.

The first your mind about the billing system.

So we have a merchant platform that allow merchants to be on the platform and that will provide an automated billing.

But given the tightening that for intelligent pricing, allowing them to optimize their total mix of sale versus a covenant.

We found that through the distribution system that the total conversion rate has improved from 27.8% now reached historic high of 32%.

That's quite significant and will also use various optimization model in algorithms for optimized our supply chain in information that we optimize the kitchen path to optimize the order -- the order mixing for retrenchment shelving and the retrenchment, we have reduced the cost of picking by 15% and retrenchment costs in [Korea] decreased by 11%.

And also, let me mention about the AI technology how we applied.

A year ago, we launched data services on Shanghai daily change and that data was for -- medical data for medicine.

And we have extended our technology to [Hansaton contracts] one is for medical device database, the others for health supply database that will use the AI technology heavy in that the algorithm for matching product, for increasing the efficiency and accuracy.

We impact, we increased the match rate and accuracy by 50%.

Hope that answers your question.

Yes.

Thank you very much.

That's certainly not having a lot of details.

So I'll jump back on the line.

Michael, Individual Investor.

I have two question.

First is, how many new patents does your company currently having total?

And secondly, perhaps how many private and label products does your company have on the shelf and where you folks are accelerating your private labour business this year.

Could you please provide more detail on how the company plans to achieve this?

Thank you.

Yes, Michael you're concerned about the patent question.

So can you imagine that last quarter alone, we acquired about four patents and now have a total of 28 patents.

And this actually answers the question part of the what Robert asked for.

Several expansions of these patents relate to application AI technology.

For example.

First, we used a voice recognition combined with a large language models to improve our voice services for our customer service and we'll recognize what medicine it is.

It is so that using AI technology and for large data centers, our big data.

And Michael, for your second question, I mean, the [private label] Can't say by now they are about 200 private label SKU registered and launched in 111 and we have a couple of brand funds.

It's for our chain store customers. [Funtown] it's a royal honor, it's for our individual store and chain store supplements.

In this product in the past year have been well accepted by our pharmacy customers, and they are now as well sold in various pharmacies across the country, including very, very remote areas like the Xinjiang and there are more and more SKUs in our pipeline, including [OPCIX], dietary supplements and also medical devices.

As we all know, follows big chance on those.

The top pay [private label product] has been a very important margin contributor and also revenue contributor of net sales and which we have defined in our financial report.

But for our customer, which are mainly a small or medium, a chainsaw or even individual store, they don't have the capability to establish their own trend.

So our brand, like (Guanzhao) become a very attractive solution for them to differentiate with our major competitors and also to differentiate with a fixed chainsaw.

So to conclude this private label product growing sustainable profit to 111 and they also bring a sustainable profit to our pharmacy customer.

And let's say also help us build up a long-term relationship with those customers because those are exclusive.

We will continue our investment area.

As I mentioned, you're seeing more and more product in [ODCIX] and even Chinese medicine.

Thank you.

Okay.

In closing, on behalf of 111 management team, we'd like to thank you for your interest and participation in today's call.

If you require further information or have any interest in visiting 111 in Shanghai, China, please let the company know.

Thank you for joining us on the call today.

This concludes the call.