111, Inc. Q2 FY2022 Earnings Call

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 Wangg, 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 gets 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 we'll be discussing here is also provided in the slides that have been posted earlier today on the company's website. I would encourage you to download the presentation along with the earnings report @ 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 meeting 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 three 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 broke out in Shanghai in the spring, and the pandemic subsequently spread to other cities in China. The Chinese government instituted lockdowns in numerous cities to prevent the spread of the pandemic. As a result, our Shanghai headquarters and several of our fulfillment centers were shut. Our headquarter office had to be shut down for part of the second quarter, and no one was able to return to the office. Simple matters like securing permits with customers and suppliers 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 got 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 truly tested. Despite the severe impact of the 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 Kunshan fulfillment center to Shanghai on a daily basis. We worked diligently and leveraged our online and offline digital platform capabilities to aid pandemic regions, and continuously provided medicine and online medical services for patients nationwide. We have provided free online consultations for customers in over 370 cities and provided over 3000 medicinal products covering more than 400 diseases during the lockdown period. Despite the economic downturn and material detrimental impact on the offline retail sector, our Q2 revenue reached RMB3.04 billion, achieving slight growth under extremely difficult circumstances. However, our gross profit grew 43% year-over-year, reaching RMB192 million. Gross profit margin rate of the company increased from 4.5% in Q2 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 to our revenue, which reached RMB2.9 billion. Gross profits of our B2B segment rose to RMB169 million or 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 of 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. Armed with our CRM, big data, and health management database, 111 cooperated with pharmaceutical manufacturers to build private label products, which include medicines, health supplements, medical devices, etc. So far, we have already developed three brands targeting specific market segments. With our online and offline digital platform and nationwide distribution capabilities, these proprietary products will improve gross profit and improve 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 RMB22 million. Our operational efficiency is trending positively due to the improvement in business scale, team efficiency, and technological advancement. The operating expense as a percentage of net revenue decreased from 10.7% in Q2 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 to 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 has 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 operating 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 pharmacists 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 improve their drug commercialization efforts and digital marketing efficiency. This quarter, we have also seen that our pharmaceutical coaching and logistic capabilities improving rapidly. As of July, our coaching and 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. One Health is a digital franchise model that effectively connects pharmaceutical companies with pharmacists and patients in order to empower more to midsized pharmacy chains. One Health provides both small and medium chains with more product selection while it will also improve their business decision-making optimization by availing drug sale information and smart chain support. One Health also helps its members leverage data to optimize assortment and better customer relationship management. Through digital franchising, One Health has so far helped more than 11,000 pharmacies through AI technology, big data analysis technology and SaaS services such as CRM and O2O, etc. 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. One Health members' monthly user average revenue per user and customer satisfaction metrics have increased significantly over the past few quarters. Meanwhile, the average gross profit contribution by One Health members was 1.6 times that of non-members. Cloud promotion is an innovative S2B2C management platform which connects pharmaceutical companies with pharmacists, pharmacy managers, pharmacists, sales personnel, and consumers by facilitating the assignment of specific tasks from pharmaceutical companies to the pharmacies. These parties include training, taking exams, product display, promotion, and patient education, etc. 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 pharmacists, and close to 10,000 pharmacy managers 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 three creations, i.e. innovation, invention, and creativity, and the four news, i.e., new technology, new industry, new business formats, and new models, and is constantly devoted 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 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 collect 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 efforts to pursue 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 the digital transformation of the healthcare industry and upgrade platform services so that patients at large could gain access to high quality medical services and drug purchasing services. Our goal is to ultimately achieve profitability as soon as possible and create value for our shareholders and society at large. We wish to thank all investors who have supported us all along. 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 slides 13 to 16, section two 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. The 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 had been significantly disrupted for two full months. Despite all the challenges from the pandemic lockdown and thanks to our team's efforts, we have managed to keep our revenue stable by continuing to fast grow our gross profit and margin. Total net revenues for the quarter grew 0.4% to RMB3.04 billion, and the total gross profit for the quarter grew at 43% to RMB192 million, and gross margin improved from 4.5% to 6.3%. The B2B segment was the major contributor to the total gross profit and margin improvement. B2B segment revenue grew at 1.3% to RMB2.9 billion while gross segment profit for the 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 RMB103 million with gross segment margin improved from 20.2% to 22.5%. Total operating expenses for the quarter were down 16% to RMB272 million. As a percentage of net revenue, total operating expenses for the quarter was down to 8.9% from 10.7%, which reflected continuous improvement in our operation 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 the 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 streamline 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 major tech development programs last year and believe that a current spending reflects the appropriate amount of investment in technology. As a result, non-GAAP loss from operations narrowed to RMB52.8 million compared to RMB147.9 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 RMB68.3 million compared to RMB118 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 profits. 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 investments of RMB885.6 million. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Thank you. The first question comes from the line of Xipeng Feng from CICC. Please go ahead. Your line is open.

Okay, thank you. Thank you for taking my questions and congratulations on the company's progress. While I have three 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 the COVID epidemic and the 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.

Thank you, Xipeng. Let me just address your questions. First of all, in our last quarter it was extremely difficult for the majority of the three months. Our head office was under lockdown, and even after the lockdown was over and our staff gradually returned to the office starting from the second week of June, still no one from our head office could travel out of Shanghai to conduct the badly needed business. Also, the supply chain was disrupted pretty badly as quite a number of cities were experiencing outbreaks of COVID. Many of our orders got stuck in transit, causing tremendous problems in customer experience and a lot of customer frustration. Some of our fulfillment centers were shut down, and even the inventory replenishment became extremely difficult. In the meantime, our pharmacy customers were also under tough challenges as they were not allowed to sell fever and cough-related medicines. There were four types of medicines that they were not allowed to sell, which account for a substantial amount of their business. As a result, we were not able to sell those drugs to them either. Just under those 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 that popped up. They all had their daily meetings with their respective teams. I was deeply moved by the dedication our team members demonstrated during that tough period. I'll give you an example. As you may know, once you leave your residential estate, it becomes extremely difficult to re-enter as every estate is strict on the inbound traffic. At that time, many customers placed orders online and they needed to get riders to collect those medicines from one of our collection centers. Some of our staff used their own personal vehicles to dispatch some of the orders to customers who lived farther away. As we understood, once they left their home, they couldn't return home for many days. At the 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 result, given the extremely difficult circumstances. With your second question about impact and how we're going to deal with it in the third and fourth quarter, it is quite obvious. The pandemic created negative impacts on our revenue and margin and therefore the overall business. The cost of conducting business also increased significantly. Imagine the orders stuck in transit and the extra vehicles we had to hire. Even though some warehouses were under lockdown, we continued to pay our employees. 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 due to lockdowns in many cities, including some of the major logistical hubs. We anticipate Q3 and Q4 will remain very challenging for our business. The overall economic situation is not as encouraging as we would like it to be. This will add extra challenges to our business, but as you know, as we did in Q1, we will continue to operate with great vigilance and do the best we can. Regarding your third question, future strategy, we always had a three-step strategy. Our first step is to build the infrastructure and the ecosystem. As you all know, 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 closed the loop from online to offline, and B2C to B2B, B2B2C model. With that infrastructure, we were able to scale. As 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. Today, as you can see, we have already covered about 70% of the overall market. With that scale, we are in a much better position, either to deal with upstream suppliers or downstream pharmacy customers. Of course, our stage three of the strategy is to pursue profitability. As we have demonstrated in the last few quarters, every single quarter we're making substantial progress. We are firm believers. If we look at the bigger picture, we want to use digital technology to transform this healthcare industry and we are firm believers that technology will be the key driver and the area that can give us the edge. We will be pursuing both top-line and bottom-line growth and we believe that technology will be the best tool to give us that edge. This is at least a trillion-dollar 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, I thank you for your question. I hope I answered your questions.

Yes, sure. It's very clear and helpful, and thanks for the sharing. Thanks.

Next question comes from the line of an unidentified analyst. Please go ahead.

Yes, I'm an individual investor, Fergus Macpherson. Congratulations on performance last quarter. I have also three 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? Thanks.

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

It's cash reserve.

Oh, cash reserve. Okay, Luke, you answer the last one. Yes, we have made a lot of progress in Smart Supply Chain as well as in technology. Let me answer the two questions separately. In terms of the supply chain, our Smart Supply Chain, we made progress in both systems and in our infrastructure. For example, we launched our cloud B2B program about two and a half years ago. We didn't have a coach and coverage. Starting from the beginning of this year, we launched coach and coverage. This allowed us to deliver many new and innovative drugs to customers in remote areas. Right now, our coach and coverage can fulfill orders to 270 cities and provides tremendous convenience to our patients. Secondly, regarding innovative ideas for the franchising fulfillment center program, we know from experience that it is very difficult and takes a long time to build this fulfillment center. It takes effort in searching for the site and getting CFDA approval and building the internal processes essentially. A usual fulfillment center takes more than a year to launch. Thus, we had the idea of partners using our partner fulfillment centers, which we call franchising fulfillment centers. We had this idea at the beginning of this year, and by now we have already assigned 11 fulfillment centers, eight of which are already in operation. These cloud fulfillment centers can be treated as our fully deployed fulfillment centers. They are closer to customers so that they can shorten the delivery time and also have lower fulfillment cost, which provides tremendous help to us. Furthermore, we can have a much larger coverage. One last example regarding our fulfillment center is that we try to reduce our operational costs by separating the bulk sales from unit sales. A lot of cutting boxes that fit into one SKU were directly shipped to our B customers. By separating the bulk from the units, we lowered our fulfillment costs, especially picking and packaging costs, by almost 20%. These are the improvements we have made in our Smart Supply Chain. Regarding our technology, we are continuing to invest in our technological development. Junling mentioned that we are recognized by the Chinese Ministry of Science and Technology as a specialized high-end new technology enterprise. Additionally, we received the China Pharmaceutical Retail Leader Award. These awards reflect our digital technology capabilities. We also built a patient lifetime management platform, which connects patients with doctors, pharmacists, and medical assistants. Through usage of these platforms, patients gained tremendous convenience for accessing doctors, medication, and disease education. Let's take diabetes patient management as an example. The DOT duration of treatment is a significant measure for patient medical adherence, and that index has improved by more than 30%. We also provide various tools for our marketplace vendors, which help improve product availability, timely fulfillment, and post-sale customer services. The marketplace CTO has decreased from 8% to 4.5%. This helps improve our customer experience tremendously. Through these examples, I hope I can demonstrate that our investments in our Smart Supply Chain and new technology have been achieving results.

Yes. On the company's cash reserve, as we disclosed as of June end 2022, we had cash and cash equivalents, restricted cash, and short-term investments of RMB886 million. You can also see from our cash flow statements that the net cash outflow in the first half of this year is significantly lower than the first half of last year. We believe this trend will continue as we further lower our operating loss and get closer to profitability. We believe our current cash reserves are sufficient to support our daily operations. I hope we answered your questions.

Yes, that's very thorough. Thanks.

Thank you.

Thank you. The next question is from the line of Zoe Bian from Citi. Please go ahead.

Hi, thank you management. Good evening and good morning. This is Zoe from Citi. Thank you for taking my questions. I have two questions. The first is we saw a strong improvement in the gross margin in the second quarter. What are the reasons behind it, and what level of gross margins do you expect in the near to long term? The second one is, could you give us more color on the margin product program? Thank you.

Thank you, Zoe. I think I'll take your first part of the question, and then maybe my team can help out with the follow-up question with a little more detail. Yes, we made a strategy to focus on margin delivery, and in the last few quarters, we worked extremely hard on our product structure optimization, which is the main driver for better margin. Of course, another driver is to reduce our procurement costs. We invested pretty heavily into our supply team, and we negotiated pretty hard with our upstream suppliers. With our technological capability, we're getting better and better on our Pricing Intelligence System (PIS). If you are not familiar with that, PIS stands for Pricing Intelligence System. What we do is we use algorithms to keep testing price elasticity, arriving at an optimized pricing for specific cohorts of SKUs. This has been instrumental in helping us improve our margin and also project an image of competitive pricing. Furthermore, our product mix included the so-called gold label products, which means high-margin products. While the revenue for this product category is not very high, the margin contribution is very pleasing. The last point I would like to make is that finally, our private label has been launched. It's early stage, but we are very excited by the potential for this line of business. So far, we have created three brands. The reason we have those brands differently is because we want to target our different market segments. To conclude, I believe this margin growth is very sustainable in the foreseeable future.

For the second question regarding high-margin products, as Junling just mentioned, our SaaS-based digital marketing tools and various platforms, like One Health and the cloud promotion platform, help promote those new products or special products from pharmaceutical companies. The margin for these products is typically around 20% and averages about 23% to 24%. These products not only yield high margins for us but are also significantly high-margin products for pharmacies as well. This has been a transformation for our 111 sales teams in promoting those high-margin products. We are pleased to see that we have successfully implemented these strategies and can see quarter-by-quarter increases in high-margin product sales.

Thank you, management. I look forward to your future development. Thanks again.

This is from the line of Lauren Kai from HSBC. Please go ahead.

Hi, thanks management for taking my questions, and congrats on your solid results. I have two questions about your new initiative. The first one is on your One Health program. Can you share with us how does the program improve active users in general? What's your future plans for the program? Do you have targets for 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 cloud promotion program? What are the feedbacks from the pharma companies and pharmacies so far? What's their satisfaction level with the new service? Thanks.

Yes, thank you. Actually, these two questions are all about our new initiatives. For One Health, One Health is becoming the first in the industry with the S2B2C model, and our virtual franchise model enables over 10,000 small or medium-sized pharmacy chains to provide superior products and services to their customers. For our next step, One Health is currently hosting a member summit in Wuhan, where we will discuss exclusive SKUs and private labels with our members, which will target high margins. For the next initiative, the cloud promotion program is a SaaS-based platform connecting pharmaceutical companies with pharmacists in pharmacies and ultimately with end users or patients. We launched this program only a few months ago and currently have about 10,000 pharmacists and assistants registered on this platform. Several pharmaceutical companies are participating in this program, and we expect the cloud promotion program to become an excellent digital marketing tool and a platform to connect pharmaceutical companies with end users and patients.

Thank you. Thank you for your answers.

Thank you. Next question is from the line of Steve Lou. Please go ahead.

Thank you for taking my questions. I have two questions. The first one is, what are the reasons behind the contracting non-GAAP loss from operation as a percentage of net revenue? How is this sustainable? The second one is what is that supply guarantee and how does it apply to 111's medical service during the epidemic? Thank you.

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 compared to 4.9% 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 second quarter of last year. The total operating expense reduction contributed the rest, but as Junling and Harvey mentioned earlier, we have plans for revenue and margin expansion. Looking at our operating expenses (OpEx), you will see that in Q2, we have made great efforts to optimize our organizational structure, streamline our operation process, and make full utilization of automated digital tools to improve operational effectiveness and efficiency. As a result, all of the expense line items, such as sales and marketing expenses decreased by 24% and G&A expenses decreased by 25%. We also took a conservative approach to our R&D spending. We believe we will be able to keep this spending level stable for the rest of the year while continuing to grow our top line and gross profit. Overall, we are optimistic and positive that we will continue the trend to narrow the loss until we are profitable. Junling, would you like to touch upon the technical aspect?

I'll touch upon the supply guarantee enterprise. Steve, thank you for that question. That is not a concept that everybody is familiar with. 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 citizens fed. These companies are classified as supply guarantee companies and are given special permits to operate on the road. Initially, there were only companies delivering food and water, which are essential for survival. Our government relations team proved its value by approaching relevant authorities repeatedly during initial chaos when the city just got locked down. Eventually, it made sense to the authorities that, in addition to food and water, many chronic patients need drugs to survive. Therefore, they granted us the permit. However, our fulfillment center is in Kunshan, which is in a neighboring province, and we had to go through a similar process in Kunshan governed by different decision-makers. To put it briefly, we sorted it out and eventually made it work. Both governments granted us the green light, and our vehicles were able to transport medicine to Shanghai daily to deliver essential drugs to our consumers. As far as we know, we were the only online company in Shanghai able to provide this service to consumers. We set up four collection centers across Shanghai, with two in Puxi and two in Pudong. The drugs were delivered from our fulfillment center to those collection centers, where our staff sorted the drugs out based on different suburbs, allowing customers to get their riders to collect those orders. Some customers lived further away and couldn't get those riders, so some of our staff used their vehicles to deliver those drugs directly to customers. We are very proud of the fact that our customers received such services, and we've received many letters and calls from customers expressing that it was a truly life-saving service. Thank you, Steve. I hope that answers your question.

Yes. Thank you for answering my question. This information is very useful.

Thank you.

Thank you. And that was the final question. So in closing, on behalf of the entire 111 management team we would 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.