In the second quarter of 2024, 111 Inc. (Ticker: YI) reported a significant milestone by achieving operational profitability for the second consecutive quarter, with total net revenues reaching RMB 3.4 billion. The company's income from operations turned positive at RMB 3.3 million, a notable improvement from the previous year's loss. Operating expenses saw a decline of 18.1% to RMB 204.3 million, and the company also maintained a positive operating cash flow. The healthcare sector player attributes its success to a strategic focus on digital transformation, retail pharmacy partnerships, and technological innovations.
Key Takeaways
- 111 Inc. sustained operational profitability in Q2 2024.
- Total (EPA:TTEF) net revenues were RMB 3.4 billion, with a positive income from operations.
- Operating expenses decreased by 18.1% to RMB 204.3 million.
- Positive operating cash flow was maintained for two consecutive quarters.
- The company is leveraging digital transformation and expanding retail pharmacy partnerships.
- Innovation initiatives include AI-driven pricing tools and a growing logistics network.
- CEO Junling Liu emphasized the importance of digitization and market leadership.
Company Outlook
- 111 Inc. plans to maintain its focus on operational efficiency and digital transformation.
- The company aims to expand its product selection and partnership networks.
- It intends to pursue competitive pricing strategies to enhance customer loyalty.
- Investments in AI and digital technologies are a priority for future growth.
Bearish Highlights
- The company did not mention any bearish highlights in the earning call.
Bullish Highlights
- Achieved a positive income from operations after a previous loss.
- Decreased operating expenses significantly.
- Expanded the logistics network and plans for further expansion.
- Developed a comprehensive digital operating system and innovative AI tools.
Misses
- The summary did not include any specific misses or shortfalls in performance.
Q&A Highlights
- The CEO discussed the role of digitization in driving operational efficiency.
- Confidence was expressed in strengthening market leadership and growth opportunities.
- The expansion of stores was seen as an opportunity to increase service offerings.
In conclusion, 111 Inc. has reported a strong financial performance for the second quarter of 2024, indicating robust growth and strategic advancements in China's healthcare sector. The company's focus on digital innovation, operational efficiency, and market expansion has yielded positive financial results and is expected to continue to be central to its strategy moving forward. With leadership optimistic about the future, 111 Inc. is positioning itself to further solidify its market presence and capitalize on the evolving landscape of pharmaceutical sales and healthcare services.
Full transcript - 111 Inc (YI) Q2 2024:
Conference Moderator, 111: Hello, everyone, and thank you for joining 111's conference call today. On the call today from the company are Doctor. Gang Yu, Co Founder and Executive Chairman Mr. Junling Liu, Co Founder, Chairman and CEO Mr. Luke 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 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 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 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 R and D 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.
Junling Liu, Co-Founder, Chairman and CEO, 111: Good morning and good evening, everyone. Thank you for joining our Q2 2024 Earnings Call. The information we will 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 2nd consecutive quarter, which was driven by our ongoing improvement in operational efficiency that overrode 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 will outline our future growth strategy before handing over to our CFO, Mr. Luke Chen, who will provide a detailed analysis of our financial performance. First, China's complex economic situation is impacting many industries and the healthcare 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 healthcare industry that present valuable opportunities. The national anti corruption campaign in the healthcare sector initiated in mid-twenty 23 is intensifying this year. Recent developments indicate a broader and more comprehensive approach with regulatory and ethical oversight now targeting the entire industry chain. 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.
The key outcome of this campaign is the acceleration of transitioning blood sales and prescriptions to retail pharmacists, which offer a more accessible and transparent alternative to the traditional hospital system. This is a shift strongly encouraged by the state. Given our expertise in the out of hospital pharmaceutical market, we're well positioned to capitalize on the significant growth opportunities this shift brings 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 where 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 deepening medical and 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 by providing both the upstream and downstream customers with advanced digital technologies will enable them to further cut operating costs and increase 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 Paul mentioned, even with these macroeconomic challenges, we generated profit from operations for 2 consecutive quarters, reflecting the effectiveness of our growth strategies and business model. In the Q2, 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 RMB 8,500,000 compared with non GAAP loss from operations of RMB 17,200,000 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 Q2, 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 1.1% 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 2nd consecutive quarter. Our operational efficiency stems from strategic investments in infrastructure and optimal staffing allocation with a focus on key areas that drive long term sustainable growth. Over the years, we've developed highly sophisticated physical capabilities that allows us to deliver exceptional value and performance to our customers, while significantly reducing both technology and staffing expenses.
We have always aimed 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 an 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 note.
We can also invest those savings on increased efficiency into other strategic areas such as innovation, market expansion and the customer engagement to support future growth. Next (LON:NXT), let's move to how we adopted novel technology approaches to drive significant improvements across various operational facets. Continuor's 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. 1st, we developed merchant bidding tools and an automated operating system and integrated a price index driven by big data to deliver intelligent merchant pricing. This has not only reinforced 111's value proposition of low costs, but also enhanced procurement efficiency.
Notably, with our digital investment promotion platform and the billing subsidy campaign as the core operational strategies, the procurement conversion rate has risen to historical high of over 32%. This has significantly improved customer satisfaction and long term loyalty, which are crucial for sustainable growth. 2nd, 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 the strategic adjustments in automatic grouping have reduced kitchen parts by 15%, further boosting our own 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.
3rd, our application of AI in product matching has significantly elevated the accuracy and efficiency of our offering not only in pharmaceutical products, but also in medical devices and health supplement products. The creation of comprehensive databases and the development of sophisticated entity recognition and similarity models have doubled the matching rate. We are dedicated to consistently and continuously advance and upgrade our technological capabilities, which position us as an industry leader in operational efficiency, cost reduction and customer satisfaction. We're pleased to announce the acquisition of 4 new patents, bringing our total to 28. Among these is the invention patent for Amexip, comprising human resource demand and the personnel scheduling system, which offers accurate predictions and intelligent scheduling, significantly enhancing HR management efficiency and supporting informed decision making.
Additionally, we secured a breakthrough patent from adaptive anti caller method and a system based on information categories. This technology bolsters our data protection efforts, reducing the risk of breaches, lowering operational costs and improving overall efficiency through automated countermeasures. We also obtained 2 more invention patents, a drug retrieval method and a system based on principal components spectral angle distance and a system for enhancing client load balancing based on URL grouping 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 Q2. 1st, our current shipment model, Qimpong, has streamlined logistics and reduced transportation costs, delivering robust progress. By consolidating shipments to 1 warehouse before intelligent distribution, we significantly improved efficiency and lowered internal distribution costs. This also adds value to the external supply chain, showcasing our commitment to leveraging digital technology to empower the sector. Additionally, Kunpeng's approach is particularly cost effective for penetrating remote regions in China and we now offer this service and now we offer this service to merchants for a separate fee.
In the Q2, we established a vertical network across 5 major fulfillment centers, East China, Central China, South China, North China and the Southwest China through a trunk plus branch delivery model. This is paving the way for National Guangdong Pharmaceutical (TADAWUL:2070) Logistics Network, ensuring efficient last mile delivery in supply dense areas with full control of the supply chain. Hongtong now operates 20 truck transportation routes and 1st mile warehousing services servicing 72 external clients, up 105% from 37% in Q1. The network supports a business scale of over RMB200 1,000,000 and has achieved total cost savings of RMB2.95 million to date. Qimpong 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 costs by over 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 Kuintang Logistics network and the last mile delivery services, delivery expenses decreased, combined with reduced warehouse labor, packaging material costs from improved efficiency and the lower warehousing expenses, this resulted in a 7% year over year reduction in fulfillment costs to RMB8 1,000,000 to RMB8 1,000,000 in the 2nd quarter. Moreover, to support future growth and advance our strategy for the nationwide quantum logistics network, we plan to add 2 more JV fulfillment centers in the 3rd quarter, bringing the total to 13.
This expansion includes a second center in Wuhan and a new center in Wuhan, a 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 increase overall efficiency. Our supply side efforts are also demonstrated in our expanded cooperation. First, in the Q2, we entered into a strategic direct supply partnership with comprehensive pharmaceutical enterprise, Beijing Syrian Pharmaceutical to enhance nationwide drug accessibility and distribution, particularly for Cerian's flagship products like Cerian Folic Acid Tablets. The partnership builds on our existing collaboration since 2017, utilizing big data, digital marketing and cloud services to help Solian's medications and pregnancy related products reach a broader market more efficiently.
2nd, during a recent visit to ASIC Hope Pharmaceutical Co, the company engaged in discussions with several pharmaceutical firms regarding various partnership opportunities. This resulted in the formation of an alliance named 1 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 exclusivity, long term commitments, traditional Chinese medicine and insurance coverage. This initiative highlights 111's commitment to expanding its partnership network on a broader scale.
Finally, let me dive into our strategies for growth in revenue, margin and profit. Our core strategy is to provide highly efficient, cost effective, one stop shopping experience that addresses customer needs and solidifies our competitive position. By harnessing 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, we plan to broaden our extensive medicine offerings on our digital technology and power platform, driving shared 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 the 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 product label business, which generates pleasing results.
Driven by increasing demand from customers, its revenue advanced 35% from the previous year in the first half. This line of business featuring 3 brands offers customers a diverse range of products, whereas the company enjoys a healthy gross margin of 29%. This also raises our buying equity and builds 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 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 it will strengthen our competitive position and become a critical catalyst to long term growth and profitability. Our operational efficiency is simple to our strategy and we are 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 fully digitizing throughout our operations, we aim to generate even greater operational efficiency, enhance customer engagement and foster new products and services.
We are confident these efforts 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 the market leadership enabling us to achieve higher revenue and profit levels.
With that, I'll hand the call to Mr. Luke Chang to walk through our financial results. Thank you.
Luke Chen, CFO, 111: Thank you, Junle, 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 Q2 2024 results, please refer to Slide 17 to 20 in Section 2 of our presentations. Again, our comparisons are year over year and our numbers are in RMB unless otherwise stated.
Let's start with the Q2 results. Total net revenues were RMB3.4 billion and the gross segment profit was RMB207.6 million relatively flat compared to the same quarter last year. Total operating expenses for the quarter decreased 18.1 percent to RMB204.3 million. As a percentage of net revenue, total operating expenses for the quarter was down to 6%, down 7.2% as we continue to enhance our operating leverage and optimize our operating 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 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 percent of net revenue, down from 0.7% in the same quarter of last year. As a result, income from operations were RMB3.3 million compared to loss from operations of RMB14.4 million in the same quarter of last year. And the non GAAP income from operations was RMB8.5 million compared to the GAAP loss on operations of RMB7.2 million in the same quarter of last year.
The GAAP net loss attributable to ordinary shareholders was RMB8.8 million compared to RMB33 1,000,000 in the same 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're improving our financial performance quarter by quarter and maintained operational profitability for the 2nd consecutive quarter. Please refer to Slide 21 to 25 of the appendix section for selected financial statements. A quick note on our cash position as of June 30, 2024, we had cash and cash equivalents, restricted cash and short term investment of RMB615.5 million and we are pleased to report positive operating cash flow for 2 consecutive quarters.
As of the date of this earnings release, the company had a total outstanding amount of RMB1.1 billion, which has been included in the balance of the redeemable non controlling interest and accrued expenses and other current liabilities owing to a group of investors of One Pharmacy Technology pursuant to their equity investment made in 2020 as previously disclosed. As of the date of this earnings release, we have received redemption 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 1 Pharmacy Technology. Furthermore, the company has entered into reaching agreements and our commitment letters with investors, representing the majority, the total recurring amount. We're continuing to be negotiating with these investors to firm up the pay redemption request. This concludes our prepared remarks.
Thank you. Operator, we are now ready to begin the Q and A session.
Conference Moderator, 111: Thank you. Your first question comes from Xipeng Feng with CICC.
Luke Chen, CFO, 111: Hi, this is Xipeng from CICC. And thank you for taking my questions and congratulations on the company progress. Well, I have two questions about financials. The first one is, I see that the OpEx ratio in the 2nd quarter decreased compared to that of the Q2 in 2023. So what's your guidance on the expenses ratio in the long run?
And my last question is, while we noticed that the company achieved operating profit in the Q2, so I just wonder what's the drivers behind the results? And what's your guidance for net profit for the year? Thanks.
Junling Liu, Co-Founder, Chairman and CEO, 111: Yvonne, yes. Good to see you on the call. Thank you for the questions. Yes, so let me address your first question first with regards to the OpEx. Perhaps let me start with how we run the VM operation.
First of all, we have an in house developed operating system, which comprises dozens and dozens of other systems. It's 100% digital. At any given time and anywhere, the management can access real time operations, either it's sales in various regions or different types of customers, categories of products, allocation of tasks to sales team, fulfillment operations, etcetera. The whole operation is transparent and with real time data available, we can make decisions and adjustments faster. With continuous optimization of operations, we achieved an operational efficiency that connects some of the well established giants in the industry.
Remind you, compared to those big guys with the sales of 100 of 1,000,000,000 and our revenue was still relatively small at RMB15 1,000,000,000 last year. With a bigger top line, we can further scale down our operational expenditure. We are very confident of that. Our estimate is that if we combine sales at a scale of RMB20 1,000,000,000 or more, we should be able to operate under 5%. With regards to your second question, how we grow into profitability, It's really like what I said, 1st of all, operational efficiency is our core competence and our principle is to provide customers with the richest selection with competitive prices and good services.
And obviously, moving into 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 strategies this year is that we're going to relentlessly pursue competitive prices. This will drive customer loyalty. This will drive more and more customers. This will really increase our ARPU coupled with the operational efficiency.
We're really in a good position to achieve our goal and to sustain profitability at least for 2024 if the market conditions remain the same. Thank you.
Luke Chen, CFO, 111: Okay. That's very clear answer. And thanks for the sharing.
Conference Moderator, 111: Your next question comes from Zoe Bien with Citi.
Zoe Bien, Analyst, Citi: Thank you, management, for taking our question. This is Zoe from Citi. I have 3 questions. The first one is, given that the offline pharmacy has operating pressure this year, I want to know in case the overall customer demand is decreasing, how will you increase the penetration rate into the pharmacy client? And the second question is, is your current strategy still trying to improve profitability instead of the revenue growth?
And the third question is, how the retail price sorry, the retail drug price comparison policy affect 111's operation? Thank you.
Junling Liu, Co-Founder, Chairman and CEO, 111: Right. So Zoe, hi. Lyon was 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.
2nd question is profit, the biggest priority for the company. And the third is how do we deal with the price comparisons from pharmacies procurement team?
Zoe Bien, Analyst, Citi: Yes.
Junling Liu, Co-Founder, Chairman and CEO, 111: Okay. So if that being the questions, let me just address them 1 by 1. 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 presents a great opportunity for 1 more month to help those pharmacists to overcome the challenges. 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 efforts 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. We 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 multiple platforms to compare prices before they place the order.
This year, we've made low prices as the overarching strategy operationally. We always believe that the way to win the market in the marketplace is to offer the greatest selection with low prices. Let me also add, although the industry is under pressure, if you look around, this is 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, it was still in a 500 some space, right?
This suggests that we're in the right industry. With more stores open up, we 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 111 is well positioned to take advantage of. Thank you.
Conference Moderator, 111: Your next question comes from Jessie Liu with HSBC.
Jessie Liu, Analyst, HSBC: Thank you for taking my question. This is Jessie 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 nearly RMB100 1,000,000 in this quarter. So can you help us understand the key factors that help you contribute to this? The second question is on your Kuangpeng logistic model. We saw that not only it helps the company to reduce costs and improve efficiency, it also empowers industry chain. Can management share more color and update on the development of this system?
Thank you.
Luke Chen, CFO, 111: Hi, Jeff. This is Sue Lue. Let me answer your first question. Yes, our business objective 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 receivable balance and inventory balance between June 30 March end, and you will see clearly that we made improvements. Additionally, we also introduced the supply chain finance from third party to our customers, mainly our pharmacy customers. So they are using third party financing to make payments to us for purchase of drugs. Now this creates a win win situation, a win for the pharmacy, which is they get a financing to make purchase of the message of drugs. The win for this 3rd party finance institution is they get customers.
And our win for us is also we get payments immediately when they do the purchase. Moving forward, we will all continue to pay particular attention on the all the working capital items, specifically the inventories, the turnovers, accounts receivable turnovers as well as 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 Jesse, let me take the Kuang Pong project question.
Let me share how we started this project. So basically, we optimize our allocation of our products across all our fulfillment centers. We have now 13 fulfillment centers in the nation. And thus, we have to put the right products in the right fulfillment centers to both get closer to the customers at the same time to minimize the transportation order fulfillment cost. So by doing that, we have to try and ship products from warehouse to warehouse.
So we started by doing the transhipments among our hub warehouses, 5 major warehouses. And we found that the transshipment cost in the past, we rely on 3rd party logistics. We found that cost was high and the damage rate was very high. Thus, we stepped our own route for the transshipment. And we found that the cost reduced significantly.
At the same time, the damage rate reduced by 65%. And thus, we inspect our own routes among our major hub fulfillment centers and started service to our clients. And now we already serve more than 70 clients and with 200,000,000 in scale and we believe that, that business model will continue and will serve more and more customers. And now we have saved customers about 15% of costs. Thank you.
Conference Moderator, 111: Your next question comes from Robert Sassoon with Water Tower Research.
Luke Chen, CFO, 111: Hi. Thanks for taking my questions. I have 3 actually, if I may. Let me start with the first question. Could you provide some more details on 111's plans for 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? Okay, Roger. Yes. You want me to take your question first, okay, the fulfillment standards?
Yes. Yes, sure. Okay. And currently, we have already launched 11 women centers across the country. And as you mentioned, about future plans better in the second of the year.
Actually, in the next quarters, we will expedite our process of setting up those fulfillment centers through a very new model. That is instead of building up the fulfillment center by 1st party model, we will work with local partners to set up JV fulfillment center and also franchise fulfillment center. So far, besides the 11th, besides the 11th FTE we already have, there are 7 new ones already in a preopening process, like warehouse decoration, staff training, system testing, even already in inbound logistics process. These 7 fulfillment centers located in various provinces, including Guangdong, Shandong, Hebei, Xinjiang, Wubei, Hunan and Chongqing. Late target to open, I think, from September to probably November, December, yes, in the next 3, 4 months, these 7 fulfillment centers will be open.
And besides these 7, which already almost ready for launch, There are more new fulfillment centers in our pipeline. Most of them are in Northeast or Southwest of China. And we believe that the setup of these fulfillment centers, we will be able to provide a much better selection, a better price and also SLA to our customers across the country, especially in the sub tier cities. Robert, hope I answered your question. Yes.
Thank you for that those details. My second question is, strengthening partnerships is one of the company's key growth strategies. So could you share some updates on new partnerships with pharmaceutical companies? Yes. We have already set up a direct sourcing relationship with more than 400 pharmaceutical companies, which brings a very rapid growth of our central purchase business.
But I think your question is more than that. Besides the simple buyer and seller model, we are building a full process to help lead pharmaceutical companies on their digital marketing capability. For example, we launched an ecosystem with Cocoa's telescope. And this telescope allows for crisis visualization of distribution data across a network of more than 20,000 pharmacies, those endpoints nationwide. Besides those distribution status, it also visualizes the dynamic consumer and sales status and also the sales price, which those pharmaceutical companies will be very interested.
And even over the market penetration analysis spanning 34 provinces and 600 plus cities, which also provide a Y O Y of MOM week over week and even day over day overview of those sales data trends. So with Periscope and other digital tools, we are confident to further strengthen our strategic partnership with pharmaceutical companies on the transformation from traditional multi tiered distribution to a digital marketing model. Thank you, Robert. 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 Q2? And also, particularly focus on the application of AI technology in your platform. Okay. Thank you, Robert.
D technology has always been our core competence, and we have made a significant investment in it. And we also have achieved quite some progress in various fronts. Ping Li mentioned to you a few and let me just discuss a little bit more detail. The first one is about the bidding system. So we have a merchant platform that our merchants to bid on the platform, but we provide them an automated bidding, by giving them the price index for intelligent pricing, allowing them to optimize their total mix of sales versus profit.
We found that through this bidding system that merged the total conversion rate has improved from starting with 27%, 28 percent now reached historic high of 32%. That's quite significant. And we also used various optimization modeling algorithms to optimize our supply chain. We mentioned that we optimize the picking path. We optimize the order mixing for replenishment, shopping and the replenishment.
We have reduced the cost of picking by 15%. And replenishment cost decreased by 11%. And also let me mention about the AI technology, how we apply it. Boeing (NYSE:BA) said a year ago, we launched data services on Shanghai Data Exchange. That data was for medical data for medicine.
And we have extended that technology to non pharmaceutical products. 1 is for medical device database. The other is for health supply database. That is we use CI technology heavily in that algorithm for matching products, for increasing the efficiency and the accuracy. We in fact, we increased the matching rate and accuracy by 50%.
Hope that answers your question. Yes. Thank you very much. That's great. A lot of details.
So I'll jump back on the line.
Conference Moderator, 111: Your next question comes from Michael O'Neill with an individual investor.
Luke Chen, CFO, 111: Thanks for sharing. I have two questions. First is how many new tenants do you secure recently? How many tenants does your company currently have in total? The second question is how many private label products does your company have on the shelf and will you focus on accelerating your private label business this year?
Could you please provide more detail on how the company plans to achieve this? Thank you. Yes. Samuel answered about the patent question. So, Jimmy mentioned that last quarter alone, we acquired about 4 patents.
And now we have a total of 28 patents. And this actually answers the question partly what Robert asked before. Several of these patents all relate to application AI technology. For example, first, we use voice recognition combined with large language models to improve our voice services for our customer service and for our sales training. So that's one pattern.
Also, we have a pattern for photo based drug retrieval. Basically, it takes picture on the needs of the boxes, really the system will recognize what medicine it is. So that uses quite some AI technology and for a large database, our big data. And Michael, for your second question, I think the prime label. And currently, by now, there are about 200 private label SKU registered and launched in 111.
And we have a couple of brand. Guangzhou is for our chains or customers. Guangzhou is a royal owner is for our individual store. And Lanideer is for battery supplement. And this product in the past year have been well accepted by our pharmacy customers.
And they are now well sold in various pharmacies across the country, including very, very remote areas like Xinjiang or Xinjiang Province. There are more and more SKU in our pipeline, including OTC, Rx, dietary supplements and also medical devices. As we all know, for those 8th chance stores, those top PA, private label products have been a very important margin contributor and also revenue contributor of their sales, which we can find in our financial reports. But for our customers, which are mainly small or medium trans store or even individual stores, they don't have the capabilities to establish their own brand. So our brand like Guangzhou or Huangyao, become a very attractive solution for them to differentiate with their competitors and also to differentiate with those big KA chainsaw.
So to conclude, this private label product brings sustainable profit to 111, and they also bring sustainable profit to our pharmacy customer. And literally, they also help us build up a long term relationship with those customers because those are exclusive. We will continue our investment in this area as mentioned. We are seeing more and more products in OTC, RX and even Chinese medicine. Thank you.
Conference Moderator, 111: In closing, on behalf of 111's 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's in Shanghai, China, please let the company know. Thank you for joining us on the call today. This concludes the call.
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