BEST Inc (BEST) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to BEST Inc.'s Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the call over to Mr. George Chow, Chief Strategy and Investment Officer of BEST Inc. George, please go ahead.

Thank you, operator. Hello, everyone, and welcome to BEST Inc.'s Second Quarter 2018 Earnings Conference Call.

With us today are Johnny Chou, our Chairman and CEO; and Alice Guo, our Chief Accounting Officer and Senior Vice President of Finance.

For today's agenda, Johnny will give a brief overview of our business and operational highlights and Alice will explain the details of our financial results. Following the prepared remarks, you may ask your questions.

Please note, this call is also being webcast with a live investor presentation on our IR website at ir.best-inc.com. A replay of this call will be available on our IR website later today.

Now, let me quickly remind you of our safe harbor statement. Today's discussion will contain forward-looking statements. These forward-looking statements are based on management's current expectations. They involve inherent risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the management's control. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or others, except as required under applicable law.

Please also note that certain financial measures that we use on this call are expressed on a non-GAAP basis, such as EBITDA, adjusted EBITDA, and non-GAAP net loss. Our GAAP results and a reconciliation of GAAP to non-GAAP measures can be found in our earnings press release.

Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB.

Now I would like to turn the call over to Johnny Chou, Chairman and CEO of our company. Johnny, please go ahead.

Thanks, George. Good morning and good evening. Thank you all for joining our earnings call today. I'm very pleased to report that we delivered a solid second quarter. We achieved strong revenue growth and the margin expansion across business units. The result was continued strong progress on our strategy of delivering strong growth with a continued service quarterly improvement, market share gain, increasing operational efficiency, and a margin expansion.

We continue to benefit from healthy growth in the Chinese ecommerce industry and growing specification of our customers. The deep penetration of new retail has made our integrated supply chain and logistic solutions more essential than ever.

This quarter, we recorded record revenue of RMB 6.7 billion, an increase of 38.6% year-over-year. Gross profit margin for the second quarter improved 3.5 percentage points to 6.2%. An important milestone for our business, we achieved positive EBITDA for the first time this quarter. Adjusted EBITDA for the quarter was RMB 42 million and our adjusted EBITDA margin was 0.6%, making strong progress towards profitability.

In effect moving in competitive landscape. Consumers and merchants today are more demanding than ever. As the competitive market environment continues to push pricing lower, we remain focused on executing against our significant opportunities to drive further operational efficiencies throughout our business.

Expand the breadth our service offerings to drive meaningful margin expansion, achieve solid topline growth, and capture more market share. This strategy continues to prove itself in the second quarter and we choose to win but with integrated solutions and superior services rather than simply competing on price.

More customers and merchants are choosing BEST to meet their needs and we are continuing to broaden our relationship with existing customers and engaging them with a wider range of our solutions and products.

Now, let me share some highlights for the quarter that illustrate how BEST is delivering for its customers in each of our business areas. BEST Express continued to focus on providing quality services and customer experience, reducing costs and gaining market share.

In the second quarter of 2018, we outperformed the industry with volume growth of 39.6% versus an industry average of 25%. For the first half of 2018, our volume growth was 49.8% versus an industry average of 27.5%. We have now achieved 10.5% of China's overall Express market share compared to 9.4% in the same period of 2017.

According to the State Post Bureau, in the second quarter of 2018, BEST consistently led major industry players with low effective complaint ratios. In April, May and June, effective customer complaints per 1 million parcels were 0.35, 0.32, and 0.3 respectively. We've been increasing consumer's classification, we have seen better service quality and (inaudible) stability being market share to BEST and expect this trend to continue in the foreseeable future.

Having reached the critical scale and network coverage, we continue to improve operational efficiency of our Express Services by optimizing our network and deploying better this year to reduce costs. Total number of hubs and sortation centers were reduced by 29.3% year-over-year to 128 compared to 121 as of June 30, 2017. We continue to invest in an upgrade automation systems in our hubs and sortation centers, including high-speed automated sorting lines and dimension and weight scanning systems.

Digital waybill usage rose to 98.4% from 89%. As a result, gross profit per parcel increased over 47% year-over-year to RMB 0.18 in the second quarter. BEST Freight continued to expand its business and improve its margins by growing and optimizing its network.

In the second quarter of 2018, revenue grew by 31.6% year-over-year while freight volume grew by 24.7% year-over-year, significantly higher than the industry wide growth. Gross profit turned positive to RMB 54 million and a gross profit margin increased significantly by 13 percentage points year-over-year from negative 7.8% to positive 5.2%. We continue to optimize our freight network to reduce the total number of hubs and sortation centers, improve operational efficiency, and reduce cost.

This resulted in lower transportation, labor, lease costs, and shorter delivery time. We also significantly expanded services coverage by increasing the total number of franchise operated last mile service by 85% year-over-year to over 11,000 from 6,000 in the same period of 2017.

Going forward, we will continue to grow and optimize our leading nationwide LTL platform and a focus on growing ecommerce rated transactions for our freight business.

BEST supply chain management continued to add new customers while significantly growing its franchise cloud OFC business. In the second quarter, we added 46 new corporate customers, including many major global brands and increased the total number of corporate customers to 561. The total number of orders fulfilled by our cloud OFCs increased 37.7% year-over-year to 61.2 million, of which the number of orders fulfilled by our franchise cloud OFC increased 73.4% year-over-year to 20.5 million. This record growth and growing roster of top tier customers reflects BEST as a leading supply chain solution provider in China.

We continue to invest in Store+ and expanded our network to offer better services to convenience stores and improve the last mile services for consumers. As of June 30, the number of membership storage reached almost 400,000 and our branded stores, (inaudible) and Best Neighbor reached 748 stores. The number of store orders fulfilled increased by 39.3% year-over-year to over 870,000, representing over 20,000 SKUs and total revenue increased by 34.5% to RMB 798 million.

Going forward, our Store+ strategy is focused on growing the scale of our branded stores, accelerating its integration with Best Express, Best Supply Chain, and Best Cargo to offer better services and reach more consumers. This is part of a long-term strategy to realize further efficiencies across the supply chain and build out our last mile service network.

Other service revenue also increased sevenfold in second quarter to RMB 228 million. This reflects the flexibility of our business model and the synergies between our business units and demonstrates our commitment to investing in fast growth business, such as our online trucking brokerage platform, financing, and cross-border logistics.

We are seeing tremendous growth since UCargo opened this platform to external customers in the first quarter of 2018. The number of registered agents on UCargo platform has increased from 1,700 to 4,000 and the number of registered trucks on the platform increased from 100,000 to over 220,000 over the past year. Transaction volumes increased to approximately 96,000 from 28,000 and the revenue generated from the external customers reached over RMB 150 million.

We expect to ramp up UCargo significantly going forward as more merchants and drivers see the value in our platforms. BEST Global continued to develop cross-border solutions to help facilitate trade between China and the world. As of June 30, BEST Global reached 13 countries and regions outside of mainland China, including new coverage in Malaysia, Hong Kong, and Italy (inaudible).

In May, we launched international parcel services from China to the U.S. and Southeast Asia. In June, we opened our third fulfillment locations in the U.S. to serve its South Central Region. This Dallas facility brings our total warehousing space interest he U.S. to approximately 800,00 square feet.

BEST Capital, our financing operation to our ever growing ecosystems entered into strategic agreements this quarter with multiple truck manufacturers to leverage their resources and network to expand its financing offering and solutions to transportation service providers. As of June 30, it has provided financing solutions for the purchase of over 5,000 trucks, an increase of 61.7% compared to the end of second quarter 2017.

Overall, we delivered strong results in the second quarter of 2018. As we look forward to the second half and prepare for the peak season, we will continue to focus on solid revenue growth, market share gains, core (inaudible) services, winning new business with integrated solutions, and investing for the future.

I'm more confident than ever that we have the right formula for long-term success. With that, I will turn it over to Alice, our Chief Accounting Officer, and Senior Vice President of Finance. Alice, go ahead.

Thank you, Johnny. Hello, everyone. The second quarter results were a milestone for BEST in terms of reaching positive EBITDA and the objective EBITDA. This demonstrates our commitment to achieving (inaudible) long-term profitability for our (inaudible).

Adjusted EBITDA was RMB 42 million and adjusted EBITDA margin (inaudible) percentage compared to (inaudible) RMB 135 million and a net (inaudible) 2.8% respectively in the (inaudible).

Moreover, we have reduced our non-GAAP net loss significantly to RMB 56 million with non-GAAP net margins improved by 3.3 percentage points to net 0.8 percentage. The comparison of non-GAAP measures to comparable GAAP measures and the relevant adjustments can be found in our earnings press release.

I will now go through a key points on segment cost financial performance. Our year-over-year (inaudible) BEST Express revenue increased by 35.8% to RMB 4.2 billion, primarily due to a 6% increase in parcel volume. Gross profit increased by 100 and 5.6% to RMB 229 million. Gross profit per parcel increased by 47.3% to RMB 0.18% as average revenue per parcel (inaudible) 2.7% to (inaudible) [26] and average cost per parcel decreased by 4.6% to RMB 3.08.

The decrease in cost per parcel is primarily due to improved economies of scale from volume growth and the enhanced operating efficiency from ongoing platform optimization, network planning, and the technology application. In our highly competitive pricing environment, we remain this disciplined in our pricing strategy. Our focus on service quality and network of stability allowed us to stay above pricing competition and achieve high volume growth, and capture market share while maintaining our commitment to margin improvement.

BEST Freight revenue increased by 31.6% to RMB 1 billion primarily due to a 24.7% increase in freight volume and a 5.5% increase in average revenue per tonne. The increase in average revenue per tonne was primarily due to price increase and ongoing product optimization. Average across the per tonne equates by 7.2% due to included economies of scale from volume growth and the enhanced operating efficiency from ongoing platform organization and the network planning.

Gross profit turned positive for the first time to (inaudible). Gross profit margin increased significantly by 13.1% to positive 5.2% compared to negative 7.8% in the same quarter of 2017.

Best Supply Chain revenue increased by 32.7% to (inaudible) primarily due to 37.7% increase in the number of orders fulfilled by our cloud OFC. Gross profit Gross profit increased by 7.4% to RMB 38 million and the gross profit margin decreased by 1.8% to 7.6% primarily due to onboarding of new projects that incurred upfront costs in lease agreement and labor, and other industry pricing pressure.

We continue to invest in our Store+ business. BEST Store+ revenue increased by 34.5% to RMB 798 million primarily due to a 39.3% increase in the number of store orders fulfilled in connection with the ongoing expansion of our Store+ network. We continue to invest in expanding our last mile network and the continuous organization of merchandise selections and offerings, and the deepening engagement with the existing membership and the branded store.

We expect to maintain a similar rate of investment in the third quarter to further enhance our presence and the control over the (inaudible) operation.

Our other service lines, BEST UCargo, BEST Capital, and BEST Global are becoming important contributors. Revenue from those service lines increased by 7 countries and 8.8% to RMB 28 million. This significant increase was primarily due to UCargo's opening of its platform to external customers this year and its ongoing (inaudible) of the platform, which saw the number of transactions increase by 240% to 96,000. It was also due to a 61.7% increase in number of trucks financed by BEST Capital and the BEST Global's ongoing business expansion.

Gross profit increased by 141.3% to RMB 33 million. We are proud of the strides we made in this quarter to improve efficiency, which is reducing cost and having a positive impact on our margins and measures of profitability. Of the major operating expenses items, or excluding stock-based compensation expenses, selling expenses as a percentage of revenue decreased by 0.3% to 3% compared to the same period of 2017. This improvement over the primary (inaudible) to enhance the operating leverage across business units.

General and administrative expenses as a percentage of revenue increased by 0.3% to 3.6% primarily due to investments in the growth of company's operations. Research and development expenses as a percentage of revenue increased by 0.1% to 0.7% primarily due to the hiring of additional R&D professionals.

Net cash generated from operating activities was RMB 432 million compared to RMB (inaudible) in the same period of (inaudible). Our cash and cash equivalents, restricted cash, and the short-term investments was RMB 4.3 billion or USD 667 million as of June 15, 2018 compared to RMB 4.7 billion as of March 31. 2018.

The decrease is primarily due to the debt repayment, CapEx, investment activities, and partially offset by positive (inaudible) growth from operations. We continue to invest heavily in technology and automation. In the second quarter of 2018, our CapEx was RMB 230 million, a 3.4% of total revenue compared to RMB 220 million or 4.5% of total revenue in the same period of 2017.

Most of the CapEx this year is to upgrade the automation systems in major hubs and sortation centers, including investments in high-speed automated sorting lines and the dimension and the weight scanning system.

Finally, I would like to discuss financial guidance. The high growth across all the business units and the fast moving competitive (inaudible) market landscape have led to continued adjustments in our business strategy as we move quickly to capture new opportunities and a response in changing dynamics (inaudible) continue to adjust quickly from operational standpoint, we remain steadfast on our long-term strategy and the commitment to achieving market expansion and profitability.

For this reason, beginning in 2019, we expect to adjust our guidance to provide (inaudible) revenue expectations and are considering other options to help investors follow the progress of our business. We expect to provide updates on this during our first quarter earnings call.

For the third quarter of 2018, we expect revenue to be between RMB 7 billion and RMB 7.2 billion and for the full fiscal year 2018, we are providing preliminary guidance of RMB 26.6 billion to RMB 27 billion.

That concludes my prepared remarks and we will now take your questions. Thank you.

(Operator Instructions) And the first question comes from David Ross with Stifel.

Could you talk a little bit about the growth at BEST? It's obviously a very fast growing company and you guys are still gaining market share. The growth might have been less than some people expected in the quarter. Is there a reason for that specifically in terms of either a renewed focus on profitability? Has the market growth slowed? Anything you can talk about add color there would be helpful?

Okay, David. Thank you. So as we stated, we are -- our strategy is to continue to drive for strong topline growth, but meanwhile, we have to be able to drive for that efficiency and quality. So this year, we put a lot of efforts on our quality initiatives as well as the efficiency of the operation. So somehow that with the market comparative pressure, we did not really want to just by reducing the price.

So if you look at from our statement and the release, you can see the growth is still about 37%, 39%, 38%. So clearly high. But as we look at our parcel revenue, we actually did not really change from last quarter. So somehow, the quarterly revenue is not really -- ASP has not really dropped significantly because we are holding the line in (inaudible). But meanwhile, you can see the margin being grown significantly across the business lines, including the parcel and the freight.

I think the supply chain will have a little bit of pressure due to some of the new style. We have 46 new customer coming so we prepare for some of these labors and upselling investment, et cetera. But in general, I think we continue to drive for high growth on topline through our business lines, gaining market share, as well as the profitability improvement and efficiency improvement.

And then another question that comes up from time to time. In looking at the market share growth you’ve had specifically in the Express side of things, is Best buying market share in the China Express and Freight markets? And if so, is it sustainable? Do you plan to change strategy at some point? Any color you can give about your pricing philosophy.

Okay, I think from our financial number release that you can see our second quarter ASP. It's really not much different from the last year. It's about 1% or 2% different from last year. So as we stated, our strategy this year is to continue to maintain a similar type of ASP. ASP is still going to fluctuate for months and months, quarter-to-quarter, but it's going to be significant. You're not talking about a large number of fluctuation there.

But you will see continuous improvement in the margin improvement, and efficiency, and the bottom line. So that -- if you look at freight, the same thing. If you look at our freight, our freight gross is [37%], much higher revenue growth of 37% . Much more higher again than the market. Our ASP for the freight has also increased from last year because of the volume increase only about 24 and the topline of 31. So actually, in freight side, we actually just not maintained the pricing but we actually increased the price from last year same time. And that as a result, we improved our gross margin by 13 percentage points from the last year. Last year, it was negative [7.7%] and this year, it was positive [5.7%].

So you can see a tremendous turnaround in the freight. Volume and topline still growing very healthy, much faster than the market and the pricing is going up as resulting, the profit margin improvement of 13 percentage points. So these are all, if you look at all the other, like the supply chain, same thing. We had a 37% growth. Margins are lower. It's about 1.7% lower than last year but still maintain about 7.5% margins. In general, still bring profitable.

So if you look at the Express, our freight, our supply chain business, they'll all positive, not just on the EBITDA level, but in general they're all positive on the business. So other business we're still doing on top of that, like the Store+ is still going to have some time to come before it will come to profitability.

The answer is no, we're not buying the market share but we will reasonably facing the market pressure, pricing pressure, but we no longer be competing on the price. But we are more competing on the efficiency, quality. If you look at our internal tracking number, our parcels, per parcels touch number being improved dramatically. So touch is how many times people are touching each parcel from the beginning to the end. So being improved. Delivery times are being improved across our business.

The next question comes from Scott Schneeberger with Oppenheimer.

Just kind of following up on that, on David's question. Johnny, with the price in Express, the guidance through the end of the year. Is what you just said how you're thinking about your strategy for pricing? Regardless of what happens in the industry, will you keep a disciplined focus or will you react more to what's occurring in the market to balance the volume and the price?

Of course, we will track the market situation very closely because it's our business, right. We try to read all of our markets. But our first priority is really try to improve the quality. I think pricing is -- I think it's low enough and you're going to have some room to move. But I'm not going to say absolutely here saying we're not going to change at all. But I'm saying that our priority number one is to improve the operational efficiency, to improve the quality and for the customer experience to gain the market share, rather than try to being a pure low price player.

So that's number one. Number 2, I would say that if the price doesn't change dramatically in the marketplace, we would respond somewhat to that degree. But as I said, we're not expecting a significant difference from the last year. Last year, significant drop or change compared with last year. Last year, we do have a fairly large adjustment from the beginning of the year to the end of the year. And this year, we're going to be more disciplined about that.

But I'm confident we're still going to be growing at least much faster than in the industry. That (inaudible) market share is continuing to improve. Profitability continuing to improve. I'm confident on that. So if market adjustment few percentage points it's possible, just like you see on second quarter and it's possible. But what you can see as a result is that the profitability or margins will improve more and the profitability improve more.

I'm curious, this is a question for both Freight and Express. Where do you see -- could you give us an update on how much further you can reduce the hubs and the sortation centers and discuss a little bit about the leverage you expect to get there. Thank you.

So right now, we have priced maybe about 125 hubs and sortation centers for both Express and the Freight. Our targets reduced down to about 110 by end of this third quarter (unintelligible) in October. Our target is about 110. Next year, we will continue to reduce to about 90.

Now, reducing all this stuff has a (inaudible). The reason is that because the scale is getting big enough. The scale is getting big enough that some of these (inaudible) no longer needed. So we can just take them out. And by taking them out, you actually reduce the labor costs. You actually reduce the transaction or the touching points, right. So you reduce the labor cost, reduce transportation costs, and you also improve the efficiency and the time of delivery. So it's all good.

So as your question is that we still think there's about 20% or 30% to go this year down to about 110 for both Freight and the Express. And next year, we will further reduce down to about 90. At about 90 I think that's about the right number going forward.

The next question comes from Vivian Tao with Citi.

Good morning, good evening everyone. Hi, Johnny. I have 2 questions. The first question is on the revenue. The (inaudible) after first quarter, the management guided the revenue for second quarter would be RMB 7.1 billion to RMB 7.3 billion and we came in at RMB 6.7 billion. Can you please give us more details like on which sub segments or where the revenue came below the expectation we had a few months ago? This is my first question.

Okay, hi Vivian. So I guess everybody noticed that. So we were guiding on the RMB 7.1 billion to RMB 7.3 billion on the last call. We were looking in the market and assuming that market conditions is not going to be much from first quarter. But since the later part of the quarter, we do see a pressure on the marketplace. So we adjusted down and we head down to about RMB 6.7 billion.

The main reason honestly is the volume for the parcel is lower than we expected, than we planned. We were planning a much higher growth on the parcel side. We were expecting about 50% of something, or 45%. But actual result about less than 40%. It's about 38%, 39%. So that is one side, revenue growth on Express side, the volumes are lower.

The Freight side, same thing. We wanted to -- Freight was actually losing money and (inaudible) margin. But we think it's the right time right now looking at our competitive advantage, we think that we're very strong in the competitive position. We do not really need to go to our using a lower price to getting more market share. In fact, our price is pretty high compared with the market.

So the volume growth, about 24%, which is slightly lower than the plan. That’s part of the reason why the gross margin has improved so much. And the same thing for the Store+. The same thing, we wanted to be able to not just on the GMVs and total number fulfilled or the revenue, but we wanted to make sure that the quality of the stores, the deliveries, cost, and everything was being controlled and improved. So we did a deliberate plan, deliberate choice to say, hey, look, we may be getting hurt by lower the revenue but in general, I think for the company it's better in this kind of environment to focus on the quality improvement, focus on the efficiency improvement. So that's the main reason.

So in a nutshell is that cost (inaudible) on the Freight, Express, and Store+ side, we have achieved a lower than expected revenue growth. But we have achieved maintaining, despite a competitive market pressure, we achieved a bottom line and also the plan, also on the margin plans. So that was the reason.

So my second question I have is on the store business. You touched on that while you answered my first question, your mentioning of a store business in the past has been focused more on the quality and also the opportunity (inaudible). I recall previously, the (inaudible) also has been twice, like on the store focus, you will put much less focus on the number of membership sources but more focused on the more incentive merchandise to focus on the high value merchandise sold in the store.

However, under that strategy I noticed the average order value in second quarter this year actually has declined versus that of last year. The number shows for this year the average -- for second quarter, the average value per order is RMB 917 and last year, the second quarter, it was over RMB 1,000. So I just wondered was the reason behind it? Because I thought, again, the company is focusing on selling more higher value merchandise in the store. So I was just expecting the average order value to increase in the second quarter.

Okay, very good question. The first answer is that in the second quarter last year, we acquired WOWO. WOWO per order number is very high, is about 3,000. So the (inaudible) because (inaudible) company. So last year, the number is slightly higher because it's less -- other orders are less, right.

So this year, WOWO, incremental orders not increased that dramatically because WOWO is a convenience store chain. We did not open much more store on that. So as a result, the non-(inaudible), or mom and pop shops, or other orders has increased. And that has slightly lowered per order revenue. So as branded, it takes down the average order numbers. You got that?

So moving forward, we continue to see Best Neighbor stores actually being up, branded stores actually being increasing and that as a result actually will help to move back the per order number. In fact, the number I see the last couple months, the last month it has been increasing.

So the first initial reaction is that last year, we have 6,000, 7,000 orders per day, and that for which is a higher per order. But now, about 10,000, 11,000 for orders a day that orders incremental not as much as the store. And so branded average goes down.

(Operator Instructions) The next question comes from Ronald Keung with Goldman Sachs.

I have 2 questions. Firstly, on Express, you mentioned about the sorting hub numbers coming down ultimately to around 90. So that would put us really close and similar to the current DTOs and YTO. I just want to get your feel on when do you see our target profit for parcel level will be once our sorting hub structure will be quite similar to our peers? And versus our recent second quarter, we are already doing RMB 0.18 of gross profit per parcel. And so our peers are doing roughly RMB 0.60 to RMB 0.70. So should we expect our profit on parcel to expand quite strongly after we normalize our sorting hub numbers. That's the first question.

On the second question, could you share a bit on UCargo, given the growth has been phenomenal, particularly from external customers. Can you share about how this pure truck matching platform, some take rates or some gross margin metrics that you could share? Because we see from the other revenue line, the other segment line that the gross margin for the other businesses had fallen, I think partly on maybe cross-border. But the UCargo business, I would think would be quite a high margin business. So would like to hear some of the metrics that you could share.

Okay, Ronald, thank you. The Express Hub, first question, is that our model is slightly different from (inaudible) other peers. In the last -- from 2011 to 2016, we basically get back about 256 cities. So we spent about RMB 650 million to buy back all these rights on 256 cities for operation.

So as a result, our hub in (inaudible) is going to be more, self-operated hub is going to be more. But when you see our peers (inaudible) that basically it's going to be more than that because a lot of hub is partly operated by the franchisees and because a lot of cities, they do not like us and have been buy back or operate ourselves.

So as we go down to about 90, I think that the reducing in cost is associated with multiple factors. One factor, of course, reducing the hub will increase -- will reduce the cost, definitely, but that's only part of it. The second part of it is a volume gain, right. So you know the volumes are bigger and then the (inaudible) is going to be bigger.

And number 3 is very important that as this goes that you can improve the efficiency through the hub automation and everything else. We do spend a significant amount of money in the CapEx second quarter and third quarter as we improve that. So as a whole brand, I think the per parcel cost is still going to be coming down.

So let me just give you a quick number on that. I mean, we are right now, if you look at our labor costs, right at about 35 cents. So if you look at last quarter, last year, it was about 49 cents. So we basically reduced from 49 to 35. There's a tremendous amount of room to go down. Lastly, parcel transportation cost is over $1 - over RMB 1, RMB 1.03 to be exact. On the second quarter it was only about RMB 0.87. Okay, on the lease and (inaudible) cost, last year was RMB 0.15. This year was RMB 0.11. Other costs also be significantly reduced from [$0.25 to $0.17]. So we look at all these number, we continue to be able to drive down these.

So your question is about what is long-term. I can't -- I am not at liberty to talk -- say exactly what number it is, but I can from [$0.18] quarter by quarter it's going to continue to improve. So as we continue to increase the market shares, the volumes increase, reduce the hubs, and also improve the investment in automation, technology, and all this stuff. We continue to drive down the cost and improve the per parcel margins. This was number one question.

Number 2 question is about UCargo. Okay, so our UCargo model, it's very different from the others, right. So our model is not just a platform doing a membership fee or doing a matching. But we actually are providing services, more like in the U.S. a company called CH Robinson. So similar type of model. So what we do is that we have a platform. Instead of open platform, have a merchant or freight owners talking to the truck driver themselves on the platform and try to negotiate deal. We basically doing the pricing, bidding on the back end and we provide a price to the customers.

The benefit of that is that customers do not need to deal with 10, 20 different truckers they’ve never met to do a transaction on the goods, merchandise they have to ship. So we're actually acting as agent in the middle. So we're actually doing the business in the front, through the customer, they give us the load to us. We charge them a fee based on the best price that we find on our network. So the customer does not need to go to talk to the individual drivers, which they never met, to try to strike a deal.

Okay. So this is number one on the model side. So now, we say you're talking about margin. So margin initially on that is going to be lower. The reason is that we are basically doing a middle man, right, where we basically sell the best freight costs to the people (inaudible) load. And typical right now 2 percentage points. But I think as the network getting bigger order, getting more, we think we can get a lot more bigger margins.

So actually, margin, if you carry through, margin on the UCargo, it's low. They don't lose money because they don't really have, like with Freight, or Express, or anything else, they have significant investment into the infrastructure of the network. So just the platform and people to manage that.

So profitability wise, I think in short-term, they don't lose money, okay. And we try to build the more frequency of usage and the more popularity through the trucker able to send the load on our network and our customers through shipping. So long-term wise, I think the gross margin is going to be higher but right now, we're seeing a very low single point. So it's a platform which providing the services and that is different.

So when you see RMB 150 million, it's not really just a brokerage fee, an introduction fee, but a platform basically we're doing a [service support] rate. And meanwhile, the biggest actually, the value add for this platform in the future is a value added services. For example, working with BEST Finance, doing the leasing and truck leasing, and the purchase. Insurance, factoring for the financial side, et cetera. I think that is the major income in the future. But right now, their part is small. It's just beginning.

But I see a tremendous amount of opportunity and also growth in that area. Because China has about 20 million, 30 million truckers, drivers, right, and every day they're looking for job, they're looking for load on their truck. And we're acting as an intermediary to help them to do that.

And the next question comes from Calvin Wong with JPMorgan.

So I got a couple questions here. First is I would like to see if you can give a little bit more color with respect to on the profitability front. I think we all see that the improvement and everything is kind of moving in the right direction, but in terms of the pace of improvement, now that we're seeing maybe a little bit of pressure on the Express side.

Just in terms of reaching that net profit breakeven, right, I think we've had discussions on this before. Do you think that there is now expectations that this could be pushed back a little bit. I think if I'm looking at Street numbers, for example, broadly speaking, 3Q, quite a lot of people believed that we could start hitting that point. So I'm wondering if you could provide a bit of commentary there first.

Okay. Additional market pressure, definitely. Compared to the market, it's always the case before. If I may just give a little bit of color on that when you were asking Express on this. So Express, if you look at the CIA, so top 8 players by the Government State Bureau, you can see that concentration to the Tier 1 players is getting more and more. So in other words, the concentration of parcel is concentrated in the top few companies right now.

The past government has basically provided top 8 companies but if you look at [Tungda] in the past, 5 companies together, the number is significant, is increasing every month. So in other words, these parcels are going to be more and more concentrating in the top 2 companies, 5, 6 companies. That's number one. Number 2 is that you're talking about profitability. So despite of this market pressure, we still think that we're going to shift 3 things: market share growth, much higher growth rate than the industry and continued improvement bottom line.

As to the trajectory or the potential when it's going to be, I think in this year, we're still going to maintain that we're going to be turning the whole thing profitable. As to the third quarter, or fourth quarter, definitely. Third quarter, we're still working on the current strategy so I think very likely that the number we're providing and strategy we are working on will achieve the goal we stated.

The fact is that the (inaudible) may have a little bit pressure on that because we want to maintain slightly better margins and not to engage too much in pricing wars. But I think the bottom line improvement is real and we are positive we're confident we'll see that happen.

Great. And secondly is I think broadly speaking from prior conversations, Stores is one of the key drags, whether it be EBITDA or net profit still. We are still in a fairly high investment stage. We are kind of building for the future. But I don't know if you can give a little bit of color in terms of how big that drag is. Because if I'm looking at supply chain management, Express, the profitability of those there is improving quite meaningfully and I think we can see that. Just want to get a sense of how much -- what the profits might look like if the Stores wasn’t as big of a drag at least on a consolidated basis.

So if a store is not in the picture, it's not in consolidated, then the whole group if positive. I mean GAAP is positive. So if your store is not in consolidation on the second quarter. So but stores are a very important part of our strategy. So this is going to be, I think if people give me a few minutes, I'll explain to you a little bit more.

The store businesses, basically right now, we are focusing on more branded store. The branded store basically give advantage of 3 things. One is (inaudible) stickiness. So they have more predictable order patterns. So they order things. Number 2, every order are typically larger. Third, they are more using our power system and everything else we can inject in the parcel services and all this stuff into the store, which will see a significant intake and tremendous interest from the storeowner to injecting into the other parcel delivery, pickup, and also the delivery part of the business.

But nevertheless, this is going to be -- we're changing the landscape, right, we're changing the industry. We're changing a lot of things. There's going to be a lot of tough work, I agree. But just believe me, as I was doing the freight work 5, 6 years ago, a lot of people questioned why are you doing the freight. You should be focused on just 1 or 2 services. But I see a freight to be an important part of integrated services.

The same for store. I think that that is a very important part of our strategy moving forward. Short-term, we are being punished or being questioned, or doubted, or whatever you call them. But I still think that that's the right strategy and very soon, in next couple years, you can see the fruit of that. I'm still very confident and steadfast on the strategy that we're taking on is correct and short-term, we may have some doubts, have some pressures, but in long-term is the right thing to do.

Thank you. And that concludes our question and answer session. So I would like to return the call to Johnny Chou for any closing remarks.

Okay, all right, thank you for all joining our call and we appreciate your support for BEST. Please reach out to our Investor Relations teams if you have any further questions. We look forward to speaking to you soon. Thank you very much.