BEST Inc (BEST) 2021 Q2 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 Second Quarter 2021 Earnings Conference. (Operator Instructions) With us today are Johnny Chou, BEST Inc.'s Chairman and CEO; and Gloria Fan, Chief Financial Officer. For today's agenda, Johnny will give a brief overview of business and operational highlights. Then Gloria will explain the details of financial results. Following the prepared remarks, you may ask your questions. Please note, this call is being webcasted on BEST Inc.'s IR website at ir.best-inc.com. A replay of this call will be available after the call. An investor presentation is also available on the IR website. Before it begins, I will 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 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 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 in BEST Inc.'s earnings press release.

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

Now I'd like to turn the call over to Mr. Johnny Chou, Chairman and CEO of BEST Inc. Mr. Chou, the floor is yours, sir.

Thank you, operator. Hello, everyone, and thank you for joining BEST's second quarter earnings call today. In the second quarter, we continued to press forward with our strategic refocusing plan and build on the encouraging signs we are seeing in network stability, service quality and cost reduction, while adapting to the competitive industry landscape. Notably, Express continued to make progress in unit cost reduction and witnessed significant network improvements with enhanced service quality. For Freight business, it continued its industry-leading position and registered a net profit for the quarter with emphasis on our e-commerce capability.

Supply Chain Management achieved profitability by serving high-margin customers, expanding Cloud OFCs network supported by smart logistic management for BEST operating efficiency. Our Global business continued its growth momentum with parcel volume in Southeast Asia increasing 140.7% year-over-year despite a resurgence of the COVID-19 pandemic in the region.

Next, I will talk about key developments and our operational performance during the second quarter. For BEST Express, we have seen a promising trend in the market, benefiting from government's policy on fair market competition. We are optimistic that by committing to our refocusing strategy to optimize product and cost structure, improve network stability and customer satisfaction, we'll be able to improve our financial metrics later in the year and build a solid foundation for long-term growth.

In the second quarter of 2021, parcel volume increased by 1.2% year-over-year to RMB 2.3 billion. Gross margin contracted by 11% -- 11 percentage points due to a decline in ASP per parcel of 18%, partially offset by a decrease in average cost per parcel of 8.5% year-over-year. Our efforts in stabilizing our network have been fruitful as evidenced by our low effective complaint ratio published by State Post Bureau in June.

BEST Freight, strengthening its industry leadership through continued operating efficiency, network expansion and enhanced service quality. Freight returned to bottom line profitability in the second quarter of 2021. The average cost per tonne remained relatively steady year-over-year despite higher oil prices in the second quarter and the absence of highway coal subsidy compared to same period of last year. The freight volume for this quarter increased 9.3% year-over-year, while the volume attributable to e-commerce growing significantly at 23.1%, contributing 19.2% of the total volume. We will remain focused on the e-commerce market for freight services and will continue prioritizing unit cost reduction to position ourselves for long-term profitability.

Moving to BEST Supply Chain Management. In the second quarter of 2021, we remained focused on high-margin customers, expanding our Cloud OFCs network and enhancing operating efficiency. In addition, as a pioneer of integrated smart supply chain service provider, we are well positioned to benefit from the increasing customers' demand for integrated supply chain and logistics services to further improve their operating efficiency and cost structure.

The total number of orders fulfilled by Cloud OFCs increased by 8.2% year-over-year to 120.5 million in the second quarter, and total number of orders fulfilled for franchised Cloud OFCs increased by 36.3% to 73.1 million. The number of franchised OFCs increased by 5.8% year-over-year to 345 in the second quarter of 2021. We also -- we have also established multiple warehouses as custom clearing centers partnered with local government in the border cities such as Qianjiang and Kunming to support fast-growing cross-border e-commerce business in Southeast Asia.

BEST Global continued its fast growth momentum in Southeast Asia and has made a significant margin improvement. Parcel volume in Southeast Asia increased by 140.7% year-over-year to 38.8 million, driven by 80% and 195.5% growth in Thailand and Vietnam, respectively. Global's gross margin improved significantly by 7.0 percentage points year-over-year, benefiting from economies of scale, fueled by increasing market share and network expansion in the region as well as utilization of our strong supply chain management capabilities and cross-border logistics solutions by leveraging our express, freight and supply chain management expertise.

In conclusion, our strategic refocusing plan has delivered promising results in the second quarter as evidenced by BEST Express's effective unit cost reduction, BEST Freight's return to profitability, BEST Supply Chain Management's strong performance and BEST Global's fast-growing business. Looking ahead, given the supportive industry regulatory environment and continued strong e-commerce growth, we are optimistic that our strategic refocusing plan will position us to deliver improved operating and financial results in the coming quarters.

Now I would like to turn the call over to our CFO, Gloria, for further review of our second quarter financials. Go ahead, Gloria.

Thank you, Johnny, and hello to everyone. In the second quarter of 2021, our revenue was RMB 7.4 billion compared with RMB 7.8 billion of Q2 2020. The slight decline was driven by lower ASPs in Express and Freight, partially offset by higher volume in both business units. Our net loss narrowed down to RMB 457.5 million compared to first quarter of 2021, benefiting from our effective cost control across business units.

As part of our refocusing plan, we continued to improve our balance sheet and streamline our asset base. From beginning of the year, we have completed approximately RMB 1 billion of financing and asset conversion. In addition, we are working a pipeline of financing and strategic initiatives to further strengthen our balance sheet. The balance of cash, cash equivalents, restricted cash and short-term investments were RMB 3.4 billion at the end of the second quarter. Our strategic refocusing plan charted a clear path for us to achieve sustainable growth and profitability in the long run.

I will now provide a brief review of our Q2 financial results. With an intense market environment, our gross profit for Q2 was negative RMB 144 million compared to RMB 484.5 million in the same quarter of 2020. Gross margin was negative 2% compared to 6.2% in the same quarter of last year. Adjusted EBITDA for continued operations was negative RMB 253 million compared to RMB 225 million in the same period of 2020.

Next, moving on to key financial highlights for our core business units. On a year-over-year basis, BEST Express revenue decreased by 17% to RMB 4.3 billion in the second quarter of 2021, primarily due to an 18% decrease in ASP per parcel, partially offset by a 1.2% increase in parcel volume. Adjusted EBITDA for Express was negative RMB 215.6 million compared to RMB 212.4 million for the same period of last year.

BEST Freight continued its leadership position and returned to profitability during the quarter. Its revenue increased by 2% to RMB 1.4 billion, primarily due to a 9.3% increase in freight volume, partially offset by a 6.5% decrease in ASP per tonne. Adjusted EBITDA for Freight was RMB 36.6 million compared to RMB 81.7 million for the same period of last year.

Q2 revenue for BEST Supply Chain Management decreased by 5.9% to RMB 479 million due to discontinuation of certain low gross margin key accounts. Adjusted EBITDA for Supply Chain Management was RMB 22.4 million compared to RMB 5.7 million for the same period of last year.

Q2 revenue for BEST Global increased by 63.4% to RMB 314 million driven by continued growth momentum in parcel volumes in Southeast Asia. Adjusted EBITDA for Best Global was negative RMB 47.3 million, which was flat compared with Q2 last year.

Now let's take a look at some major operating expense items of the second quarter. Please note, all of these expenses exclude share-based compensation. Selling, general and administrative expenses for continued operations were RMB 429 million or 5.8% of revenue compared to RMB 370 million or 4.8% of revenue in the same quarter of 2020. The increase in SG&A expenses was primarily attributable to additional bad debt provision resulting from the pandemic and the absence of certain COVID-19 pandemic-related subsidies that were available in 2020.

R&D expenses for continuing operations was RMB 58 million or 0.8% of revenue compared to RMB 39.5 million or 0.5% of revenue in the same quarter of last year. CapEx in the second quarter was RMB 174.5 million or 2.4% of total revenue compared to RMB 424 million or 5.5% of total revenue in the same period of last year.

This concludes the second quarter financial review.

And now for our outlook, due to the competitive market dynamics for Express and Freight, we expect our revenue for the full fiscal year of 2021 to be between RMB 28 billion to RMB 32 billion. This outlook reflects management's current preliminary estimates based on current market and operating conditions, all of which are subject to uncertainty. As we're moving into second half of the year, we will continue to optimize our cost structure and increase our efficiency. We will also continue our strategic evaluation and are prepared to take appropriate actions to strengthen our balance sheet and liquidity in support of our strategic refocusing plan.

With that, we will now open the call to questions. Thank you.

(Operator Instructions) And the first question we have will come from Thomas Chong of Jefferies.

I have 2 questions relating to the Express side. One is relating to the macro environment in China. We have seen our guidance is revised at this time. And I just want to get a sense about is this mainly due to the macro environment that we are seeing, the industry growth is getting affected. And on the other hand, if not, can you comment about the competitive landscape right now? I think in the prepared remarks, we have talked about the landscape is getting more rationalized. But if that's the case, what are -- how should we think about the ASP trend going forward?

Thank you, Thomas. Yes. So the -- basically, the whole Express macro environment on 3 fronts, one is that the macro -- the government's policy to install more competitiveness into the market, that will help the market to be able to have less price competition. So pricing, what we see is kind of eased out. So in other words, it's bottomed out. So we don't expect it to be -- have further reductions in the pricing.

Meanwhile, second is that, with that, the last-mile delivery fees, it should also be stabilized. We don't see a trend to continue to reduce the last-mile, the fees. Of course, that will help to stabilize the network and the customer satisfaction as well as the service quality. That's on the second thing.

The third thing is that the economic e-commerce side of growth is still pretty robust. So we will see a pretty robust continued general market. As you were saying that the guidance was somewhat reduced. So we are looking at a whole cross-border of our business review based on the ASP reduction that we have seen from second quarter. Even though the third, fourth quarter, we don't expect too much of an ASP reduction there as well as the Freight side and Express and all the macro side basically. That's why we did an adjustment there.

And next, we have Hans Chung of KeyBanc.

So I have a couple of questions. First on Express business. So I guess, I want to say, like, for the past quarters, we continued to see the ASP decline by around, like, 20% or high teens. And then -- however, we saw this kind of slowing growth momentum on the volume side. And so I think as a result, we see the cost -- the path of cost reductions actually also come down quite a bit. If you compare to the ASP decline to the cost reduction, I think the gap kind of become wider. So my question is, like, how do we achieve profitability, right, if the trend persists going forward? So in other words, right, what do we have to do to make a turnaround to come going forward? And then -- that's my first question.

And then second question is on Freight. So since, like, Freight also came in below expectation, I mean from a volume or revenue perspective, so I guess maybe my question is, is that because of the increased -- the competition? And then also, can you also update the landscape here? And then what should we think about the industry going forward?

Thank you, Hans. With Express, the first one, you were talking about the profitability, how -- the plan to make it to profitability. First of all, if you look at our cost reduction, actually, it's much more significant than we expect. Looking at the -- if you look at the transportation cost, transportation cost last year during the second quarter because of the recovery from the pandemic, actually, we have -- government has given subsidies to the -- or waive for the whole -- the toll and the bridge toll for the several months. So that has significantly reduced the transportation costs last year.

The second is this year, actually, since the beginning of the year, the oil price -- oil price has increased significantly from the last year. So if you take this into consideration, our cost actually being improved much more, is about -- reduced about 16%. So in that sense that we did not put into -- this into consideration. So cost reduction continues to be there. So that's the first thing I want to clarify on the cost reduction side.

Second, go back to the profitability. So basically, profitability, we have about RMB 0.10 loss on the per parcel basis. So what are we seeing is that -- so how you can play the balancing the ASP and the cost to recover the RMB 0.10 to make it profitable. So the -- on the ASP side, we've actually seen a market a little bit stabilized. More importantly, in the past 6 months, we have -- since the beginning of the year, we have been doing a lot of restructuring.

For one thing is that we have to continue to optimize our network. Things, 10 years ago, when we start getting to this market, our express market, our market share was in -- between 1% or 2%. Ever since, the whole team, including the franchise, has been running very fast. Every year, 50%, 100% growth up to about 2019, and we reached about 12% market share. In that, a lot of franchisee kind of a little bit tight on the capital and everything else. And that's why we need to help them to strengthen their liquidity, also their customer acquisition capability and all this stuff.

So we have seen a good progress in the past 6 months that our franchisees are getting stronger in the sense that we're helping them to acquire customers and also helping them to pass this difficult time in the past year since the pandemic happened. That's number one. So there, we'll help in the small and medium franchisees to be able to acquire the customer better. They typically have higher ASPs because the customers typically are a little bit smaller. The ASP are higher versus a very much concentrated large customer based on a few large franchisees and which typically have a very small ASP.

So on the ASP side, what we want to do is 3 things, right: network stability to make sure the service qualities and customer satisfaction is better; second is to help in the network franchisees to better health in terms of the money -- making money or customer acquisition; and third is that we wanted to have a better customer base instead of just focusing on a larger customer base, but more to the medium and the smaller customer that will have a typical higher ASP. So that's on the ASP side that we are seeing there a gradual upward momentum on the ASP side, in our side month-by-month we are tracking.

Second is on the cost side. As you can see, as I just explained before, from the reporting side, we said about 8% cost reduction, but actually taking into a lot of other consideration of toll waivers last year, oil price increase, et cetera. So actually, the cost reduction is much more than the -- was reported. And going forward, the 2 areas -- 3 areas that we will be able to further optimize our cost structure, one, is hoping that in the second -- in the later couple of quarters, a traditional high season, the volume will increase. The volume increase will further utilize our capacities and reduce the cost. Second is that we are doing a lot more of synchronization of the transportation side with freight that will reduce the freight cost further. And furthermore, that we are actually actively looking at our operating centers or hub centers and to see if there's any kind of spaces, which we can reduce or sublease out or et cetera, to further reduce the leasing cost on that.

So we're confident that in the next couple of quarters, based on the work we already have been done in the past 6 months with a more stabilized macro environment, we should be able to back to the profitability.

Second, on the Freight side, you were talking about the growth and also -- the Freight side, actually this year, there was a lot of impact of the severe weather pattern and abnormal weather pattern, which makes a lot of area flood and also second in some area resurgence of the pandemic in certain states and provinces. That also has some kind of impact to our volume on the second quarter. So that's number one. So the macro side is something that we -- the weather, the pandemic has some impact on that. That will reduce the total volume growth in that.

Second is that the -- also the cost side and macro side is also competitive. And as you can see that our ASP per tonne is -- actually remains quite flat. The -- so -- but we will see -- typically, if you see on the past couple of years, on the high season like the third and fourth quarter, starting from late August now to end of the year, that's the high season, the actual pricing will go up back up a little bit.

So on the macro side, I think Freight is still growing in the sense of the general market. However, are very competitive, not as the ASP side. The pressure is not as high as like the Express side but continually still have a fair good competition in the general market. Hans, that will be my -- some of the input to your questions.

Yes. That's helpful. And then may I have one question? So just -- yes, so it seems like recently we have the COVID-19 resurgence across the country. So I just wonder, would that be -- could that be potential -- could that have potential impact on logistics or supply chain, et cetera, like, we have faced in -- I mean last year? I guess on that, I just want to hear your thoughts here.

Oh, yes. Good news is that the resurgence on the COVID-19 is actually well under control. I believe that in the next couple of weeks, the -- most of the pandemic resurgence is going to be under control. So the impact to our business is going to be, or as what we've seen, probably a little bit on the second quarter and the third quarter, of course, July and August for the pandemic. But as we're seeing that this is less a factor now. I'm sure that can be in control very soon.

So as a result, generally -- yes, to our business, I think short term, we'll have some impact, but I don't see moving forward from now, we'll have a more severe impact on that.

(Operator Instructions) The next question we have will come from Ronald Keung of Goldman Sachs.

Johnny and Gloria, I have 2 questions on the Express side. I would like to seek your kind of thoughts on those. First is with our roughly flat volumes on a year-on-year basis, just wanted to know how many kind of new customers that we gained during the process that we kind of kicked out some of the lower-quality customers and hopefully, these newer higher-quality customers. And in that, you talked about the improved service quality. So the metrics like end-to-end delivery time or other metrics that we track, which could show our gap has been narrowing or improving versus, say, the leaders, ZTO, in delivery time.

And then my second question is any comments on the market structure. We know J&T has been growing very rapidly while we are taking more on a -- building ourselves in service and not as aggressive in terms of our market share. We actually have flat volumes. So how do we see the competition with these newer entrants and the market structure that we see the industry may evolve to based on your best estimate?

Thank you, Ronald. On the first question on the Express, talking about the flat volume and certainly, in this kind of environment, we want to make sure that we're balancing the bottom line as well as the volume growth. So in this competitive market -- and we choose to continue to service better customers in the sense that has a higher ASP versus some of the customers on parcels, which is purely money losing. So in the process, we will -- as we said, we were helping the franchisees, especially in the middle layers, small and medium franchisees. They can serve smaller customers with a higher ASP rather than a purely concentrated, a -- high-volume customers, which has -- typically has a very severe pricing pressure on that.

On the quarterly side, so if you look at the June, government Post -- the Post Bureau governments released statistics, we actually ranked #2 in terms of the customer complaint ratio and everything else. #2, I'm talking about the BEST, #2 side. So we're tracking, of course, a lot of these metrics in terms of the customer satisfaction, completion ratios, delivery time, et cetera. So we continue to see, especially on the delivery time side, and we have some quarter-to-quarter improvements. Of course, we compare with, like you said, the top of the player like ZTO, we still have some of the distance. But if we compare with ourselves and the rest of the players, we continue to make pretty good progress on that.

Second, you're talking about the market dynamics or market structure. In general, if you look at the market structure where you're seeing the same -- some of the other players, new entrants -- entrant has a fairly rapid growth, which I -- if you look at the number in the past 6 months, I didn't think it was the case, but has some broad progress, but I don't think it's the ramp progress. But I think really what we need to do from a BEST point of view, then we need to really focus on our own strategy, focus on our own strategies. So first, as we said, we really need to make a much more stabilized, a better service network rather than purely just lower the price and have fighting on the market share side.

So #1 focus for us right now, short term-wise, is really to try to put our house in order to make the franchisees stronger, make our service quality, the real-time customer satisfaction better. And then meanwhile, to completely or modify or optimize our customer profiles to make it a better ASP customers in their sense. So I think the -- if we can -- we're confident that with the 6 months and the whole year that we have been doing, each province we see, the network itself is much healthier now. The franchisees are stabilized and service quality can be improved in that sense, that we think that we have a much better competitive capability in the coming quarters to do that.

At this time, we'll go ahead and conclude today's question-and-answer session. I would now like to turn the conference call back over to the management team for any closing remarks.

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

And we thank you, sir, to the rest of the management team for your time also today. The conference call has now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care, and have a great day.