BEST Inc (BEST) 2018 Q4 法說會逐字稿

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to BEST Inc.'s Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions)

With us today are Johnny Chou, BEST Inc.'s Chairman and CEO; George Chow, Chief Strategy and Investment Officer; and Alice Guo, Chief Accounting Officer and Senior Vice President of Finance.

For today's agenda, Johnny will give a brief overview of the business and operational highlights. Then Alice will explain the details of the financial results. Following the prepared remarks, you will have -- we will answer your questions.

Please note that this call is also being webcast today and there -- with investor relations presentation at BEST Inc.'s IR website at ir.best-inc.com.

A replay of this call will be available on the IR website later today.

Before I begin, I would like to read the safe harbor statement on behalf of BEST Inc.

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 statements as a result of new information, future events or others, except as required under applicable law.

Please also note that certain financial measures and the company uses -- on this call are expressed on a non-GAAP basis, such as EBITDA, adjusted EBITDA and non-GAAP net loss. The GAAP results and the reconciliation of GAAP to non-GAAP measures can be found on BEST Inc.'s earnings press release.

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

Now I would like to turn the conference over to Johnny Chou, Chairman and CEO of BEST Inc. Johnny, please go ahead.

Thank you. Good morning and good evening, everyone. Welcome, and thank you for joining our fourth quarter and fiscal year 2018 earnings call. We are very pleased to report that we had an excellent quarter and a fiscal year, driven by solid revenue growth, stronger market share gain and a margin improvement and excellent performance in long-term growth initiatives.

The fourth quarter was a milestone quarter for BEST, as the group achieved positive net profit on a non-GAAP consolidated basis. This is an important marker for our business as we continue to achieve fast growth and improved efficiency in our core businesses while investing in the future.

For the fourth quarter, BEST's total revenue increased by 38% year-over-year to RMB 9 billion, exceeding the top end of our guidance.

Gross profit increased by 82% and the gross margin improved by 1.4 percentage points.

Our non-GAAP net profit was RMB 20 million compared to a non-GAAP net loss of RMB 116 million in the same period of 2017.

Meanwhile, fourth quarter adjusted EBITDA was RMB 150 million compared to negative RMB 24 million in the fourth quarter of 2017.

For the fiscal year 2018, revenue increased by 40% to RMB 28 billion, gross profit increased by almost 200% to RMB 1.4 billion and gross margin improved by 2.7 percentage points.

2018 was the first full fiscal year since our IPO. Building on the significant business achievements and the successes we have made, we executed our strategies of gaining incremental market share, improving operating efficiency and the productivity, enhancing technology adoption and the customer engagement for our Express, Freight and Supply Chain businesses. At the same time, we continued investing in our Store+, Global, UCargo and Capital businesses, and to further our objectives of building a leading smart supply chain platform. Now let me give you some business highlights.

Express delivered significant growth in the fourth quarter. Parcel volume increased by 47% year-over-year to RMB 1.87 billion, which was about 1.8x the industry growth. Our market share continues to expand, reaching 11.7% in fourth quarter 2018 compared to 10.8% in third quarter of 2018 and 10% in fourth quarter 2017.

Full year parcel volume by 45% year-over-year to RMB 5.47 billion, which was 1.7x the industry growth. The reduction in average cost per parcel continued to outpace the decrease in average revenue per parcel, as a result of volume growth, network optimization, operational efficiency improvements and the investment in automation and digitization.

In the fourth quarter, we further reduced the total number of hubs and sortation centers by 27% year-over-year to 106, and added 10 high-speed automated sorting and 283 dimension and weight scanning systems. As a result, gross profit per parcel in the fourth quarter increased by 12% year-over-year to RMB 0.17. We believe Express will continue to outgrow the industry in 2019.

Freight had another outstanding quarter and the fiscal year. Freight volume grew by almost 30% year-over-year to 1.6 million tonnes in the fourth quarter, significantly higher than industry growth. Gross profit margin increased by 5.8 percentage points year-over-year to positive 5.7% as a result of volume growth, focuses on e-commerce-related transactions, freight network optimization and operating efficiency improvements. We further reduced the total number of hubs and sortation centers by 16% year-over-year to 111. And to better serve our customers, we expanded last-mile service coverage extensively, increasing the total number of franchised last-mile service stations by 45% year-over-year to about 14,000. We believe [economies of scale] (corrected by company after the call), network optimization, increasing demand from e-commerce and growth in consumptions will continue to drive freight growth and margin expansion.

Supply chain management continues to serve as an important foundation of our logistics infrastructure. And demand for our integrated supply chain management solutions remained strong. In the fourth quarter, orders fulfilled by Cloud OFCs increased by [84%] (corrected by company after the call) to 48 million. We are happy to see better-than-expected growth from franchised Cloud OFCs. In the fourth quarter, the total number of orders fulfilled by franchiser cloud OFCs increased by almost 70% year-over-year. Total gross floor areas of our Cloud OFCs increased by 18% year-over-year to 2.8 million square meters as of December 31, of which 1 million square meters were owned and operated by franchised OFCs. Gross margin improved by 0.8 percentage points as new projects signed from previous quarters come online.

Leveraging our core competency in supply chain to business to consumer technologies and application, we continue to grow the BEST Store+ platform. Our strategic focus for 2018 was to improve the quality of membership stores, optimize merchandise selection, grow branded stores and accelerate branded stores integration with Express and Supply Chain to expand our last-mile service network and reach more consumers.

The number of branded stores, including franchised BEST-Neighbor and the self-operated WOWO increased by almost 390% year-over-year to 1,840 as of December 31.

The number of membership stores increased by 17% year-over-year to over 420,000.

In the fourth quarter, 22% of the total number of store orders fulfilled was for branded stores. As a result, Stores+'s' revenue grew by 4% while gross margin improved by 1.4 percentage points year-over-year.

Store+ development has reached the key stage as it has achieved critical 2B scale, which allow us to invest and move forward into the next phase of building the 2C platform in the last-mile service network. We have launched our membership program as well as online to off-line and community group buy services in selected cities. We are very excited about Store+ business development and are in the process of evolving the business and launching new products and services.

Other services revenue increased by 4.8x year-over-year in the fourth quarter to RMB 574 million, primarily driven by tremendous growth of UCargo, which was only made available to external customers since March 2018.

In the fourth quarter, revenue generated from external customers on UCargo platform increased significantly to RMB 467 million, representing an 82% increase from third quarter of 2018.

As of December 31, the number of registered agents increased 49% year-over-year to over 4,500 and the number of registered trucks increased 45% year-over-year to over 261,000. We expect the UCargo business will continue its growth trajectory and make meaningful contribution to the group in 2019.

In the 2018, Capital continued to expand its financing offering and solutions to our ecosystem participants while helping our other business units to control transportation cost. As of December 31, it had provided leasing service to over 8,000 trucks, a year-over-year increase of over 100%.

Cargo continued to develop cross-border solutions and broadened service offerings in international markets. To further expand its footprint and capture the tremendous growth opportunities in Southeast Asia, Global launched its express delivery services in Thailand, Greater Bangkok area in the fourth quarter. As of today, Global has operation center in 4 major cities to provide affordable, fast and high-quality delivery service across Thailand.

Now let's talk about 2019. As we just detailed, we started the year with solid momentum. And looking ahead, we are confident that the combination of strong growth in e-commerce and the consumption, ongoing consolidation within the Express, LTL and the supply chain management sectors and need of larger infrastructure support to rapidly growing digital economy in Southeast Asia will bring tremendous opportunities for us in 2019. We will continue to improve execution, focus on market share gain, operational efficiency, technology adoption and customer services.

For Express, we'll continue to target a much higher volume growth than the industry while continuing to optimize our network, invest in automation, reduce costs and improve profitabilities.

For Freight, we aim to solidify our market-leading position, target strong volume growth and a healthy margin improvement by growing e-commerce-related transactions, enhancing customer experience, improving the network and applying more automation and technologies.

For Supply Chain Management, we will continue to invest in service capability and technology and to further integrate with other business units to support Store+, Express, Freight, Global in providing online and off-line supply chain solutions.

In the meantime, we will continue to invest in our growth initiatives. For Store+, we have made major investments in the past 3 years and have built a robust 2B infrastructure. We believe that investments for the Store+ business peaked in 2018. Those infrastructure will support our strategy to focus on the expansion of our branded franchise BEST-Neighbor stores and self-operated WOWO stores. Branded stores are integrated with BEST Cloud and will serve as our community centers to provide last-mile services to consumers.

In 2019, we plan to significantly grow the number of franchised BEST-Neighbor stores and improve the quality of membership stores to enhance profitability. We also plan to roll out a membership program on the off-line services, community group buy and other initiatives services and the products in more cities and to reach more consumers.

For Global, our focus will be on Southeast Asia and the North America. We've already started in Thailand and our planning entry strategies into Vietnam, Indonesia and other evaluation opportunities in other countries. The successful launch of our Thailand network was enabled by our SLI model, technology and industry know-how plus our ability and willingness to collaborate with established local partners. We are excited by the opportunities in Southeast Asia and believe we can build a meaningful business there.

For UCargo, the demand for online for truck services is massive. We expect that the hyper-growth trajectory for UCargo will continue in 2019. We will enlarge our customer and the driver base, invest in technology to drive for enhanced customer experience, number and the quality of transactions. We're focusing on margin expansion and the profitability.

We also see tremendous synergy between the UCargo platforms and the Capital in terms of aftermarket and the financing services. As we scale up the UCargo business, we'll expect to further integrate UCargo and Capital to create valuable revenue opportunities between the 2.

Looking ahead, the continuous growth of e-commerce and the digital economy will create tremendous market opportunities for our businesses. We have demonstrated a track record of delivering stronger revenue growth and margin expansion through solid execution and strategically investing in new growth initiatives. We are confident that we will continue this winning path to capture these market opportunities, deliver sustainable, high-quality growth and achieve long-term value creation for our shareholders.

With that, I will turn it over to Alice, our Chief Accounting Officer and the Senior Vice President of Finance. Alice, go ahead.

Thank you, Johnny. Hello, everyone. We delivered strong results for the fourth quarter and the fiscal year 2018.

For the quarter, the revenue increased by 38.3% year-over-year to over RMB 9 billion, beating the top end of the revenue guidance by RMB 936 million due to strong growth across business lines.

For the fourth quarter, BEST recorded non-GAAP net profit of RMB 20.1 million, while the operation generated net cash of RMB 729 million.

For the third consecutive quarter, BEST reported positive EBITDA and adjusted EBITDA. EBITDA was RMB 109 million and adjusted EBITDA was RMB 150.1 million.

Starting the fourth quarter, we began separately reporting EBITDA and adjusted EBITDA attributable to Store+ business. We believe the additional disclosure will provide investors with more insights into the strength of our ex-Store+ business units and the progress of Store+ development. Reconciliation of non-GAAP measure to comparable GAAP measures and the relevant adjustments can be found in our earnings press release.

Now I would like to discuss some of the key financial highlights in the fourth quarter.

Express revenue increased by 36.7% year-over-year to RMB 5.9 billion, primarily due to a 47.1% increase in parcel volume.

Gross profit increased by 64.3% to RMB 311 million and the gross profit margin improved by 0.9 percentage points. Our ability to reduce the average cost per parcel continued to outpace the decrease in revenue per parcel. While the average revenue per parcel decreased by 7.1% to RMB 3.18, average cost per parcel decreased by 7 points to 9% to RMB 3.01, primarily due to the improved economies of scale from volume growth and the enhanced operating efficiency from the ongoing platform optimization, network planning and the technology application.

As a result, our gross profit per parcel increased by 11.7% year-over-year to RMB 0.17.

Freight revenue increased year-over-year by 26.2% to RMB 1.2 billion, primarily due to 29.7% increase in freight volume. The average cost per tonne decreased by 8.4% year-over-year to RMB 715, while the average revenue per tonne decreased by 2.7% to RMB 758, resulting in an increase in gross profit margin by 5.8 percentage points to positive 5.7%.

Supply chain revenue increased by 29.5% year-over-year to RMB 686 million primarily due to a 38% increase in the number of orders fulfilled by our Cloud OFCs. Gross profit increased by 62.3% year-over-year to RMB 26.7 million and the gross profit margin improved -- increased by 0.8 percentage points year-over-year to 3.9%.

As Johnny mentioned. So far, focus in 2018 was to improve the quality of the membership store, optimize merchandise selection, grow branded store and accelerate branded stores integration with Express and the Supply Chain to expand our last-mile service network and reach more consumers.

In the fourth quarter, gross profit margin increased by 1.4 percentage points to 10.5%, while revenue increased by 4% year-over-year to RMB 615.6 million.

Our other service lines, UCargo, Capital and Global are becoming important revenue contributors. During the fourth quarter of 2018, revenue from these service lines grew by 482.5% year-over-year to RMB 574 million. This significant increase was primarily driven by UCargo platform starting service to external customers in March 2018. The increase in the number of trucks financed by Capital and the Global's ongoing business expansion also contributed to the strong growth of this service line.

Gross profit increased by 74.1% year-over-year to RMB 52.6 million.

We are pleased with improvements in our operating efficiency for both selling expense and the G&A expense. Of the major operating expense items are excluding share-based compensation expense, selling expense as a percentage of revenue decreased by 0.6 percentage points to 2.6% compared to the same quarter of 2017.

G&A expenses as a percentage of revenue decreased by 0.2 percentage points year-over-year to 2.8%.

R&D expenses, as a percentage of revenue, increased by 0.2 percentage points year-over-year to 0.6%, primary due to the hiring of additional R&D professionals to support business units with new initiatives.

During the fourth quarter 2018, adjusted EBITDA was RMB 150 million, up from negative RMB 24 million in the fourth quarter of 2017. The improvement was mainly driven by strong revenue growth and the improved operating efficiency.

Breaking down the adjusted EBITDA. RMB 353 million was attributable to ex-Store+ service line, negative RMB 86 million was attributable to the Store+ service line, and the negative RMB117 million was attributable to unallocated expenses primarily related to corporate, administrative and R&D and other miscellaneous items that are not allocated to individual service lines.

Net cash generated from operating activities was RMB 729 million compared to negative RMB 9.3 million in the same quarter of 2017.

Cash and the cash equivalents, restricted cash and the short-term investments in the total were RMB 4 billion as of December 2018 compared to RMB 3.9 billion as of September 30, 2018.

The increase was primarily due to the net cash generated from operating activities, partially offset by CapEx, the purchase of leased equipment and other investment activities.

Our healthy balance sheet gives us the resources and the flexibility to accomplish our business and strategic objectives. We continue to invest in technology and automation to further improve our operational efficiency and service equality.

In the fourth quarter of 2018, our CapEx was RMB 284 million or 3.1% of total revenue compared to RMB 254 million or 3.9% of total revenue in the same quarter of 2017. As previously explained, most of the CapEx this year was used to upgrade the automation system in major hubs, sortation centers and the Cloud OFCs, including investment in high-speed automated sorting and the dimension and weight scanning systems.

Next, I want to quickly go over some of the fiscal year 2018 financial highlights.

In fiscal year 2018, our revenue increased by 39.9% year-over-year to RMB 28 billion..

Express service revenue increased by 38.5% indiscernible] to RMB 17.7 billion.

Freight service revenue increased by 29.1% year-over-year to RMB 4.1 billion.

Supply Chain Management service revenue increased by 29.6% year-over-year to RMB 2.1 billion.

Store+ service revenue increased by 27.8% year-over-year to 2.8 billion.

And other service revenue increased by 523.5% year-over-year to RMB 1.2 billion.

As we continue with the effort in increasing the operating efficiency and the application of technology, the gross profit margin improved by 2.8 percentage points to 5.2% from 2.4%.

Share-based compensation expense in fiscal year 2018 was RMB 109 million. Excluding share-based compensation expense, operating expenses, as a percentage of revenue, decreased to 7.1% from 7.4% in 2017.

We reduced our non-GAAP net loss to RMB 452 million from RMB 923 million in 2017.

Adjusted EBITDA was negative RMB 18 million compared to negative RMB 583 million in 2017 and RMB 83 million in 2017.

Breaking down the EBITDA. RMB 792 million was attributable to ex-Store+ service line. Negative RMB 375 million was attributable to Store+ service line. And the negative RMB 436 million was attributable to unallocated expenses.

Our asset-light model allows us to achieve high growth without significant CapEx. In 2018, CapEx was RMB 1.08 billion or 3.9% of revenue. Net cash generated from operating activities was RMB 637 million.

Finally, let's discuss the 2019 financial outlook. As mentioned from our previous quarterly call, starting from 2019, we will begin providing annual revenue guidance. We expect revenue for full year 2019 to be in the range of RMB 36.5 billion to RMB 37.2 billion. This represents management's current and preliminary expectations, which is subjected to change.

This concludes my prepared remarks, and we will now open the Q&A. Thank you.

Thank you, operator. Hello?

(Operator Instructions) And the first question comes from Baoying Zhai with Citi.

Johnny, Alice (foreign language)

(foreign language)

Okay. All right (foreign language)

(foreign language)

(foreign language) Okay. (foreign language) My first question is very old but people like to ask this question. The Express delivery ASP, I want to know more about reasons behind it. So we didn't disclose last-mile delivery ASP this quarter. And can you disclose that? And if excluding the last-mile delivery ASP, how much the ASP would come down? And after ASP come down, what's the reasons behind? Can you further provide breakdown such as how much is caused by the light-weight? And how much is caused by more subsidies to franchisees? And how would we react to price war this year in 2019 in terms of subsidy budget. This is my first question. (foreign language) So my second question is regarding Store+ business and non-Store+ business. This is the first time we see you break down the EBITDA level by Store+ and the non-Store+ in results. So excluding Store+ and headquarter expenses, we already see other businesses making decent profits. But this is only 2018 numbers. Compared with 2017, how this number looks like? And in 2019, how would you balance Store+ and other business growth? So this is my second question.

Okay, Baoying. Thank you very much. So I'm going to answer in English, if anyone want to translate, it will be fine, because time is limited. So first question, basically regarding to the 2018 fourth quarter, the ASPs as to the last-mile delivery cost and as to the --without it, what the ASP look like. So yes, so fourth quarter, we actually increased the last-mile delivery cost by about 6%. So the total last-mile cost is about -- average about RMB1.65, RMB1.65 per delivery versus last year, probably about RMB1.55. So we increased about RMB RMB0.10 for the last-mile delivery. But our average cost has decreased significantly in light of the increase of the last-mile delivery. So the ASP without -- the revenue without the last-mile delivery, if you take out the last-mile delivery, it actually is about RMB1.53, which is about -- so if you take RMB1.53, add RMB1.65, that's about RMB3.18. The cost was reduced some more, the total cost without the last mile, take out the last mile, the pure cost is about RMB1.37 which was about 21% less than last year -- same time last year. Last year fourth quarter is about RMB1.72, exclude the delivery -- last-mile delivery, RMB1.72 is cost. Now it's about RMB1.37. So a 21% reduction. And you were talking about why is the fourth quarter some of the ASP has reduced and what was the attributes. Basically, it's various things, right? Some due to the parcel weight reduction, which has continued to improve, the weight has continued to reduce but not significant and another positive is due to the competitive advantage -- the competitive environment in term of the -- for the sales rebate and all this stuff. So this is the first question and answer. The second question you rightly noticed that we have actually taken out the presentation for the Store+ to be separately listed. And basically, if you look at without the Store+, actually, the whole year we had about RMB 700 million or so of the EBITDA, excluding the Store+. Store+ this year is about RMB 390 million. So close to RMB 390 million of loss, and which is more than last year. So consider about what we have achieved this year. Actually the Store+ actually, we have purposefully in third and fourth quarter to control its growth be focusing on more quality stores and the delivery. And nevertheless, as mentioned in the earning call that, [the investment] (corrected by company after the call) has peaked. So actually -- the fourth quarter actually has less loss than the third quarter, and we're expecting the next year and year after will continue to improve quarter-by-quarter.

Baoying, did I answer your question?

Okay. yes, but for the first question, I guess, a lot of investors, are still be very interested to know. So how would we react to the price war this year? So how about the subsidy budget this year compared to last year?

Oh okay. So I missed this year's plan. Okay. So this year, we continued to, as we said in the call, that we are confident we are continuing to working on the cost reduction and operational efficiency. And that will help us to drive down the cost -- continue to drive down the cost. And as the market goes that we will -- as we stated, we will continue about the strategy to have a much faster growth than the EBITDA in the market. So basically, what I was trying to say is that, this year, we are still confident that we can be growing much faster than the industry-wide growth continuously, and as for pricing, we will continue to monitor the competitive environment and adopt whatever is necessary but we are confident that we will continue to drive down cost.

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

Thank you. Thank you. Hi, hi, Johnny, George, and Alice. Congratulations on the strong results. I want to ask on Freight actually after Express. We see a good reacceleration in growth. Just can you share just how large is e-commerce contributing to the Freight? For example, volumes at this point? And do we see this larger-sized items being a key growth driver? Partly because we do see new entrants over the past 2, 3 years -- 2 years that are run by express companies with the LTR arms. Just thinking how do we position our franchisees versus the rest of some of the new entrants, particularly as we target this incremental growth in e-commerce large-sized items?

Okay, Ronald. The Freight is primarily driven by 2 factors. One is that online e-commerce large item -- larger-ticket items being sold online more and more. And the second is basically the continued expansion of consumption in the Tier 3, Tier 4, Tier 5 cities. So before, most of the consumption were focused on Tier 1, Tier 2 cities, but now we're going to Tier 3, Tier 4, Tier 5, the shipment is much more on uploading the full truck, but much more invest in truck load. So these are the primary driving for the market growth. Now Freight traditional is very much a B2B business. So in the past, probably we have about 90% of the business on B2B side. It's a -- and then now we are -- since last year, we start to notice a very large growth online for larger bulkier items like furnitures, 3C products, refrigerator, jogging machine, et cetera, online more and more. So we basically had also turned to focus on a faster-growing e-commerce market. As of last of fourth quarter, we probably have about 14% to 15%, which is come from the online larger-ticket stuff and purchase, and 85% or 86% has continued to be a factory B2B type business. So we will see -- continue to see online B2C will grow faster or e-commerce will grow faster. And the B2B continued will grow, but growing at lesser place. So that's why this year, our primary focus will be on the e-commerce side and how -- it's actually a very big challenge right? Because you deliver a 50-kilo larger item to a home is a lot more difficult than deliver a 1 kilogram of parcel into home. So that's the only challenge, but I think that's where the values are and the growth where it is. But that's where I see our growth in fourth quarter last year and it will be giving continued high growth this year and largely driven by e-commerce growth.

Johnny, so with the improvement in gross margins into the fourth quarter, you've some expectations or guidance for Freight as well or for margin? What are you expecting for that improvement? Continue to improve? Or we, kind of, focus more on growth in 2019?

Yes. So Freight. We really had achieved a very large turnaround. From last year, we -- actually the fourth quarter last year, our margin were still negative for the Freight. And this year, first quarter, we already have about 5.7% positive. So in general, basically, we had about 5.8%. As a result of the Freight actually, EBITDA-wise everything else was actually positive for 3 consecutive quarters. And we will see continued margin expansion this year, primarily due to, again, the volume expansion. We continue to see -- we'll see a very high volume growth this year for the Freight. And we'll continue to see as the volume growth if something still comes in. Actually we're also adopting some technology for more automation, just like what we did for the Express. In that, we will continue to see the improvement in the margin and the profitability on the bottom lines. So if you want to have a little bit color on that so I can give you a little bit colors. On the Freight, same thing, the last-mile delivery this year, we have increased upon RMB137 to RMB151 per tonne. So in other words, we have increased the last mile cost or the paid fees in the first quarter, but meanwhile, our cost has reduced significantly. If without the last mile cost included, just the operational cost like transportation and other stuff was down about 12%. So that's what the expense. So even though the last mile deliver would pay more for people to have a better service to pay them a little bit more to do the last mile services. But excluding that, we still have 12% reduction in the last mile cost reduction. So overall, we probably have about cost reduction by 8%. So that is what is driving all the volume -- the margin expansion.

And the next question comes from Scott Schneeberger with Oppenheimer.

Johnny, a big part of BEST's long-term story is integrating multiple segments with each other. And it sounds, you said it earlier, that you are investing in that progression in 2019. So kind of a 2-part first question. What percent of revenues should we expect CapEx to be in 2019? It's still in the 3%to 4% range. And my follow-up question on that is, could you please elaborate on the investments in integrating the multiple segments that you have planned?

Thank you, Scott. So the CapEx, as we mentioned, we continue to invest about 3% to 4%. This year, as the industry point, the whole year is about 3.9%. So next year,probably, will be little bit less, it's 3.5% across multiple business units. So Express is still going to be a larger CapEx involved. Our second largest CapEx will continue to be on the fulfillment warehouses, the robotics and stuff like that. And sort of on the Freight this year, we will invest some of it into Freight sorting centers and that -- and other CapEx probably relate to international, so we're going to have some international expansion, like in Thailand, we're building like a 4 sort centers, warehousing, et cetera. So these are the -- about the CapEx. Versus the investment into various business and new initiatives. I think we as we say, we've been balancing the growth and the profitability. So 2019, we will see a continued investment in Store+. But as I said, Store+ investment in infrastructure's pretty much peaked out. So you know what's the investment will be reduced as the revenue continue to grow, the bottom line will continue to improve, but we will add a little bit more money to the international to build up a little bit more because we just got started. But I don't see a huge, significant amount where the money will be invested there. And the UCargo is actually is -- it's a platform, it's an online platform so it's very asset-light. It's not a CapEx or investment heavy. In fact, we actually -- the UCargo actually on the fourth quarter last year 2018 we're not losing money. We should -- actually it was profitable already. So UCargo, I don't see a very big investment in that, but I think the International, we will see some investment. And Store+ will continue to see some investment, but not in the -- a scale as we have seen in the last couple of years. As we said, that, that had peaked out. And after last 3 years investment, basically, that infrastructure is to supporting the B2C going there. So we just have to expand it, continue to expand the growth and driving up the efficiencies.

Excellent. And then just as a follow-up on that. In the supply chain segment, could you touch on the competitive environment and your ability to differentiate and win business with a -- covering pricing as well?

Okay. So you have noticed that supply chain we, on 2018, our margin has been little bit struggle compared with what we need, primary due to several reasons. One reason is that because of last year, actual, supply chain will have grown -- pretty significantly, grown by about 30%, 29%. In this, kind of, supply chain -- supply logistics growing 29% is quite a lot the investment up front like the warehouses, and all this stuff. So we do have, like fourth quarter, a lot of warehouses were coming online, on lease and but the customers are not in yet, so it had to be fulfilled in the first quarter, second quarter this year. And others because we increased about over 100 customers and whatever, all having a starting cost and everything else. But this year, we are going to be much more focused on our key objectives. I think, as you rightly so to say, where is our competitiveness? I think our competitiveness come from 2 areas. One is to do with the fashion, clothing, all the stuff because that are typically are very hard to do and they're pretty much B2C integrated, and it's very hard to do because there are a lot of SKUs, tens of thousands of SKUs per customers versus some other product maybe only have 10, 20, 30, 100 and it's like easy to fulfill. So fashion clothing is going to be one of the area where we think we have dominant expertise and dominant capabilities and advantages. And second probably was the FMCG, with consumption rate FMCG and that was matched very well with our strategy for the Store+. So we will be focusing on supporting Store+ as well as the FMCG, the other B2B online O2O to B2C and also the clothing and the fashion.

And the next question comes from Eric Zong with Macquarie.

So I have a couple of questions. First of all, I want to ask about more details on the new business and the Store+. So for Store+, like what kind of like revenue growth rate you are looking at for 2019 because like fourth quarter was quite slow, that was by design, right? So should we look at it like a 20 percent-ish revenue growth again for Store+, just like what we achieved for the full year 2018? And also, for the UCargo, quite interesting in the business because the revenue growth clearly in the fourth quarter, exceed our expectation. So should we also look at higher growth on a very fast growth for UCargo? And also in terms of profitability, you mentioned, fourth quarter last year, you was actually at a breakeven level, right? So in 2019, do you expect the take rate actually continue to rise in a compound way for fourth quarter 2018? So and just a follow-on question for your business, do you think the continuous investment in the new business areas like UCargo and Global were resulting to a higher EBITDA loss at a high quarter level? So this is my question.

Okay. Thank you, Eric. As you noticed it was noticed on the Store+, in fourth quarter, we are purposely to slow down and a focus on a better quality shipment and to improve the margin. So margin was improved significantly by about over 1% points, but while the growth rate should slow down. So 2019, we will continue to focus on our branded store. So that achieved a very higher margin and also a higher efficiency on the logistics services. So -- but our growth will be somewhat slower full year than the full year 2018. So we are, kind of, looking at about 20-ish -- anywhere between actually we're plan 17% to 18% growth, so a little bit shy of 20%. That's our current view on the Store+. And on the -- so as I said, I mean, the investments peaked last year until the first quarter 2018. Second quarter, we'll gradually improve that. Even though the growth will be slow down, but I think that's a healthier growth. On the UCargo side, yes, so growth is -- had been very high and driven by the continued demand for a lot of people looking for full truck or better services onto our platforms. So we're still expecting a very high growth next year. So this next year, we're expecting about 180% to 200% growth. So somewhere around 180-ish, 180%, 180% to 200%-ish growth. And with some of the things we're thinking about, we probably will be able to see a higher growth on that. So we're expecting that to be -- it just scratched the surface. So we just started a year ago, 2017. We basically a platform, try sorting, looking for trucks, additional trucks for Express and Freight for supply chain that requires some trucks which they needed on the spot. So the platform actually was very well -- the utilization very high. And we see great resources to be used. So we just opened up full services for the outside, for external customers. And just for 3 quarters and we are having phenomenal growth. So I think this -- next year, we actually also planning a very high growth.

In third quarter, you had sort of profitability. As you said, fourth quarter, we have achieved non-GAAP positive net income. And what happened next year was investment on these new initiatives would be worth it. So our next year target is actually to continue to improve the EBITDA. So all the things that we're talking about is a consolidated group level. So for the consolidated level, I think our EBITDA is going to be greater improved over the last year. And last year, overall, the whole year still has a little bit like RMB 10 million or RMB 15 million any loss for the adjusted EBITDA for the whole 2018. But I'm sure 2019 that the adjusted EBITDA on a full year and consolidated basis is going to be positive. And so is the net. We continue to improve the net. So we're not going to see a worsening bottom line but we should see a surprising, pretty healthy growth on the bottom line as well as the top line.

Okay. Johnny just a quick follow-up question on the Express delivery side that you've already said such as like what you did in the past quarter. Would you mind to share with us a breakdown for unit cost for Express delivery business?

Okay. I covered -- alluded to this a little bit before, so I think I can give you a little quick update on that.

Our total cost, including the last mile delivery is RMB3.01. So RMB3.01 is the total cost, for which RMB1.65 is contributed to last mile delivery, which is about RMB0.10 higher than last year. But anyway so if you deduct that, our non-last mile delivery cost about RMB1.37, for which about RMB0.84 is contributed to transportation, RMB0.28 contribute to sortation center and labor cost, and lease cost is about RMB0.09, which is down about 10%. I'll give you another thing. The transportation is RMB0.84, down 14% quarter-by-quarter -- from last quarter -- same time last quarter. Labor cost is down by 33% from RMB0.42 to RMB0.28, so which is about RMB0.28. Yes. Lease costs down about 10%. So it's from RMB0.10 to RMB0.09. And the other cost, miscellaneous or other cost, is down about 30% from RMB0.21 to RMB0.15. So total cost is about RMB1.37. And we believe we can continue to drive down these costs.

And the next question comes from David Ross with Stifel.

I wanted to talk a little bit about the growth outside of China. You mentioned growing into Thailand, Vietnam, et cetera, building some warehouses. As you think out over the next few years, how does that business look? Is it focused mainly in supply chain? Do you have Express? Do you have Freight? Do you have a UCargo-type model there? And then are they separate country operations? Or are you building out more of a cross-border network?

Thank you, David. We are primarily -- we're seeing a great opportunity global-wise. I have been traveling for last 3 weeks, I just came back actually a week ago. So I went to many countries, Vietnam, Thailand Indonesia, U.S and et cetera. First of all, we are primarily focused probably in 2 regions: North America and Southeast Asia. Now, North America, everybody knows, we already have a pretty big presence there. We have a Dallas operation, L.A. operation. We have a New Jersey operation. So about close to 80,000 or 100,000 square meter warehouses or some paid stores there. So we already have a very big presence there and we continue to scale up the -- some of the capability, primarily to B2C but mainly B2C -- to the -- also for the cross-border. I think the opportunity I'm getting more excited about is in Southeast Asia. Countries like Thailand, Vietnam, Indonesia, Malaysia, Philippines, et cetera. For multiple reasons. One is that the e-commerce has been growing tremendously, driven by young population, poor off-line infrastructure. A lot of people want to have pent-up demand to getting merchandise, but they couldn't get off-line. So everybody have a mobile phone, and they buy on the Facebook, they buy a lot of this website, Alibaba, et cetera, Lazada, et cetera, Shopee, et cetera. So these are growing very rapidly, but their infrastructure is very poor. As we look at the infrastructure, both basically for fulfillment, like warehouses, and everywhere we go and people want to say, "Can you help us on doing this?" And also the last mile delivery. Now in China, in the past 10 years, this infrastructure has been developed quite well. In turn, it had driven the digital commerce growth and significant e-commerce growth and vice versa. I mean, basically, they help each other grow. But in Southeast Asia, what we see is that lacking of the infrastructure. And actually I mean, the demand there for e-commerce. So what we will do there is not just a -- put up a warehouses and doing a fulfillment. I think, actually, but on top of that is really doing a much more integrated service, not just fulfillment, but the Express and the Freight. In fact, in Thailand and Vietnam, I see a tremendous opportunity for Freight, for UCargo and for you Express. But, of course, we're not going to do one -- everything on one shot. So we can do it in a step-by-step investment basis to make sure that our balancing to achieve profitability, high profitability also this long-term initiative can be balanced. So in Thailand, we're basically starting with the full coverage of the Thailand for Express delivery and the volume has been growing very rapidly. The -- also the fulfillment. And I think in the next step, maybe we were working there for a Freight network or for a UCargo type of services. I think that's all in future demand because basically, you can consider these countries about 10, 15 years ago in China. And there -- the infrastructure should -- is going to be upgraded. The economy is just in a high speed of growth, but it is nevertheless still in a smaller scale. So they need to come services that we have in China and to the -- and given that Southeast Asia have about 600 million people, young populations, I think that, that is a really reasonable business. I think we should do a very meaningful and profitable business there.

And the next question comes from Calvin Wong with JPMorgan.

Hello? Can you hear me?

Hi, Calvin.

Johnny, George, Alice. Firstly, congratulations on a very impressive set of numbers. So my question is primarily related to what we are seeing, kind of, year-to-date on the ground especially for Express. So -- I mean, we're already in March, right? So we've had a couple of months of operations. So just in terms of industry growth, there was previously some concern about some potential macro headwinds and slowdown on consumption. So what are we seeing on that side? And on pricing, are we seeing fairly stable? Or are things kind of picking up, especially during the off-peak season in the first quarter right now? And just on Express volumes, we mentioned that we're looking to continue to gain market share this year. Do we have kind of a rough target with respect to volume growth? Previously we had given sort of a multiple -- a rough multiple guidance versus industry. So that's, kind of, what I wanted to ask about.

Okay. Look in 2019, I can't give you an exact number because that quarter hasn't ended yet. But I can roughly say, based on the first set -- first 2 months of set of number, we are on target. So we are on target, actually slightly ahead of our target in terms of the Express side. We do see some pressures on the ASP side, on the general market side as people come out of last year, so first quarter peak season has still a lot of capacity. And every year, we will see some pressure there as the market goes. But in general, we're still seeing a fairly good recovery from Chinese New Year after we come back from the Chinese New Year long holiday. And we are still seeing a on-target movement development in the first 2 months. In general, the -- I think that this year, we -- as we have -- as I have mentioned on the call, that we will continue to focus on networking improvement, quality improvement, driving down the cost that would meet any challenge from the market. So I think we are confident there. The team are able to focus on the cost reductions focus on the market development and the network optimization and to continue to have a strong growth than the market.

Understood. Just a quick follow-up. I just wanted to get a quick comment from your side. So we have seen effectively all of the other major players also set targets to gain market share this year. Do you think that, that could trigger some increase in pricing pressure? Or do you think there's actually room for pricing to remain fairly stable or rational in terms of the competition? And at the same time, we all, kind of, continue to drive incremental consolidation in the market.

Yes. I think both. I think the expectations for the several major players all expecting to have a high growth in the market and gaining market share. I think there is primary from several things. One is that there has few companies and the concentration on the marketplace continue to increase. So in other words, the top companies continue to consolidate the market shares from a Tier 2 or Tier 3 players. So in other words, the concentration continues to happen to the top few companies. Secondly, is that the -- as a result, I think the price competition and the pressure is going to be there. But as I said, as long as we will be focused on our execution, reduce the cost and optimize the network to make sure the network is stable, the customer service is well, I think we are confident that we'll continue to be able to perform well and execute as the stated goal.

The next question comes from Hans Chung with KeyBanc Capital Markets.

A follow-up on the supply chain business. And Johnny, you mentioned earlier 4Q, seems the gross margins will be a little bit soft, that's because we have a new capacity and then because of new customers. So can you give me more color around how many new customers we added in the fourth quarter? And then maybe any -- a few one worth mentioning? And then also, what would be the trend for the first quarter and '19? -- so I actually mean like do we expect that the gross margin to start to recover near term? And then also, what would be the longer-term target model for the supply chain?

Okay. First of all, in that questions so people do have some -- I'm glad you asked that question so I can clarify it a little bit. Actually, the fourth quarter 2018, we actually have marginally improved from fourth quarter 2017. When I say that the margin was a little bit soft, I was referring to the whole year. So fourth quarter, we actually recovered a bit. So fourth quarter actually was about 0.8 percentage better than last year fourth quarter. But typical fourth quarter margin is always a little bit soft. The reason is that Double 11, huge ramp up of volume in a week or 2, then you have to get a lot of people, laborers and you get a lot of equipment and the warehouse ready just for a peak of season of sales. So typical, their margin would be low because the efficiency and the labor force efficiency, everything else is going to be lower. But nevertheless, this year fourth quarter, better than last year fourth quarter. However, given said that the full year, last year we achieved about 6.1 percentage at the full year of 2017 and this year whole year is only about 5%. So this is a little bit light than we like to see. This year, we actually had gained 100 plus customers. But -- so we -- what we are doing is that we are being -- starting on the fourth quarter, we started focusing on 3 things, right? One is focusing on the industry and what we're working on. So I, as I was mentioned before, that we will focus on more of the clothing, fashion, the garment side of it, the apparel. And that actually is hard to do because the SKUs are large and, typically, the volumes are higher. So we prefer this, kind of -- margin is also higher. And second, we're focusing on FMCG, because we do a lot of FMCG to supporting the Store+ and altogether. And we try to make the whole supply chain of consumption-related, especially FMCG together. So we're focused on that. So this is first actually -- first things we actually are different from the last year, a year before and probably we'll do a lot more for various customer base and sectors, but now we're focusing. That will surely improve the margin significantly. Secondly is that we are looking at more of a capital base because we focus on the strategic factors and several customer valuing that sectors will probably have to let that go. So we choose a customer to be more suited for our growth strategy. So as a result, long-term, I think you will see 2019 I think we will see an improvement of the supply chain margin. In fact, not just higher than this year, they should be higher than 2017 to go over to the about 6% or 7%. So that's our -- so I think that the supply chain, as the time goes, and as we're consolidating the position in our supply chain leadership, we actually I would think we do it to -- we are the one with the best supply chain fulfillment company. As we solidify this link our margins continue to improve. So in the long run, I think that this be about at least a low teen percentage of the business versus now a single-digit business. So I think it's really a double-digit business. But that will probably take a year or 2 years or 3 years to get there. So 2019, you will see significant improvement over this year and should be better than 2017 as well.

Got it. So just a quick follow-up on Express. So, overall, what do you think the trend for last mile fee this year? And also, what would you expect the cost of reduction, excluding last mile fee? We have that over 20% year-over-year reduction last year. So what do you think about this year?

Okay. I think the last mile delivery fee will be -- ease out a lot. I don't think this year, we will see a strong upward push for the last mile delivery cost. Given RMB1.65, it's pretty good already. And second that because Baoying had said that average weight for parcel is actually decreasing, so that will also give us the last mile delivery on somewhat relaxed fee. So I think the last mile cost, you will not see a significant increase like we said like we did on 2018 last year. We will want to maintain the last mile delivery quarterly, and so we just increase the fee and they ensure that delivery people will have a better service.

On the cost reduction side, I think, as we said, excluding the last mile delivery cost, the total cost of our operation -- total cost of Express sortation and/or operation was down by 21%. And this -- we will still see a low teen cost reduction in the next couple of years. So I think probably driven down -- there is more room there on transportation, there is more room on the sorting cost, on the labor cost and the lease cost, there is some room there, the other costs will have some room there. So we will see about low teen, 10%, not 21%, this high teen, but I think we will see low teen, kind of, type of cost reductions.

Thank you, and this conclude our question-and-answer sessions. So I would like to return the conference to Johnny Chou for any closing comments.

Thank you for the -- thank you for joining our call, and I really appreciate at your support of BEST. Please reach out to our Investor Relation teams if you have any further questions. We look forward to speak to you soon. Thank you very much.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Thank you.