BEST Inc (BEST) 2021 Q1 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 First 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 the financial results. Following their prepared remarks, you may ask your questions. Please note this call is also 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 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 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 a 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 would like to turn the call over to Johnny Chou, Chairman and CEO of BEST Inc. Johnny, please go ahead.

Thank you, operator. Good morning, and good evening, everyone. Welcome, and thank you for joining our earnings call. Our first quarter results reflected a mix of both the progress brought about by our November 2020 strategic refocusing plan and the ongoing challenges we are still facing. Our execution of the strategic refocusing plan delivered substantial improvement in Freight, Supply Chain Management and Global as reflected in their top line growth, along with strong gross margin expansion. We continued to solidify our leading position in the freight market while refocusing our efforts on high-margin accounts for Supply Chain Management. We also gained ground in the Southeast Asian market through Global despite COVID-19 pandemic.

Next, let me go over our quarterly results and the recent developments. For Express, we continued to focus on optimizing product structure, improving network stability and flexibility as well as enhancing service quality and customer experiences during the first quarter. While the results from these actions are not fully visible from our financial results, we believe they have improved the underlying fundamentals of our network, and we will further accelerate our actions to target a return to profitability later in the year. During the quarter, parcel volume increased by 33.6% year-over-year and gross margin contracted by 3.2% points due to a decline in ASP per parcel of 17.6% year-over-year, partially offset by a decrease in average cost per parcel of 15.1% year-over-year.

While our strategies are on the right track, the rapidly evolving competitive landscape requires us to quicken the pace of our action. Our accelerated measures will focus on networking stability and service qualities by optimizing the structure of products, customers and franchisee partners in order to create a clear path to sustainable profitability.

Freight once again delivered a strong quarter with a higher-than-industry-average growth rate and improving profitability. We continued to emphasize the e-commerce aspect of the freight services, solidify its leadership position and brand recognition, and improve operating efficiency. Freight volume increased by 81% year-over-year in the first quarter of 2021. Average cost per tonne and ASP per tonne decreased by 20.6% year-over-year and 5.4% year-over-year, respectively. For Freight, in addition, our efforts to enhance service quality have produced tangible results. In March, we ranked first in the China index among all franchise freight networks. Looking ahead, we will keep investing in our network, focusing on service quality and enhancing customer satisfaction while maintaining its strong cash flow generating -- generation capabilities.

Moving to BEST Supply Chain Management. The total number of orders fulfilled by self-operated and franchised cloud OFCs in Q1 have increased by 11.2% and 30.6% year-over-year, respectively. The Q1 gross margin for Supply Chain Management was 5.4% compared with 0.8% in the same period of 2020, benefiting from the discontinuation of legacy low-margin accounts as well as improved operating efficiencies. Going forward, we will leverage our Express and Freight operations and target our customer acquisition efforts on leading customer brands, which not only bring incremental business opportunities but also helps us to strengthening our brand awareness. We will also promote value-added services in terms of solutions and management systems.

Moreover, cross-border business is another key area that we mainly target on. We have now operated 3 warehouses in Yiwu, Shenzhen and Guangzhou, connecting our Express network in Southeast Asia and China. As our strategic refocusing plan firmly took its role, we will remain focused on quarterly growth and profitability and deliver further improvement in our supply chain business in the second half of the year.

BEST Global continued to expand both cross-border services and in Southeast Asia Express market with an especially strong margin improvement. In the first quarter of 2021, parcel volume in Southeast Asia increased by 249% year-over-year to 30.8 million. Global's gross margin significantly improved by 22.2 percentage points year-over-year due to better economics of scale.

BEST UCargo continued to scale its full-trucking brokerage model. As of March 31, 2021, the number of registered drivers on the UCargo mobile apps increased by 66.2% year-over-year to 348,000. In the first quarter of 2021, the total number of transactions on the trucking brokerage platform increased by 64 -- 65.4% year-over-year to 186,000.

In summary, although we expected the turnaround of Express to take approximately 6 to 9 months, we have a solid, clear strategic direction, targeting sustainable development, supported by attractive growth perspectives of e-commerce and a unique value proposition of our integrated smart supply chain solutions and logistic services. We are fully dedicated to positioning our company to long-term success.

Now I would like to turn the call over to our CFO, Gloria, to walk you through our first quarter financials. Go ahead, Gloria.

Thank you, Johnny, and hello to everyone. In the first quarter of 2021, our revenue reached RMB 6.5 billion, increasing 30% year-over-year while our net loss was RMB 604 million, as our initiatives for Express take time to materialize as the bottom line. Our focus today continues to be on cost reductions across the entire origination, including unit cost structure optimization for Express and Freight as well as the streamlining of SG&A expenses. As we navigate through the current environment, we are making various strategic evaluations and are prepared to take appropriate actions to strengthen our balance sheet and liquidity in support of our strategic refocusing plan. In particular, we are looking at financing options in relation to certain of our business units, and we will provide details as necessary or appropriate if any definitive step is taken.

We continued to maintain a healthy combined balance of cash, cash equivalents, restricted cash and short-term investments of RMB 4 billion. What's more encouraging, Freight, Supply Chain Management, UCargo and Capital segments achieved positive operating cash flow during the first quarter, which was the traditional slack season, and our operating cash flow from all segments improved significantly for the same period of 2020.

I will now provide a brief review of our first quarter 2021 financial results. Given the limited time on today's call, I will be presenting some abbreviated financial highlights. I encourage you to read through our press release issued earlier today for further details. With the intense pricing environment, our gross profit for Q1 was negative RMB 193 million compared to negative RMB 238 million in the same quarter of 2020. Gross margin percentage was negative 3% compared to negative 4.8% in the same quarter of 2020.

Adjusted EBITDA for continuing operations for Q1 was negative RMB 397 million compared to negative RMB 503 million of the same period of 2020.

Next, moving on to key financial highlights for our business units. On a year-over-year basis, BEST Express revenue increased by 10% year-over-year to RMB 3.7 billion in the first quarter of 2021, primarily due to a 33.6% year-over-year increase in parcel volumes, partially offset by 17.6% year-over-year decrease in ASP per parcel. Adjusted EBITDA for BEST Express was negative RMB 311 million compared to negative RMB 190 million for the same period of last year.

BEST Freight strengthened its leadership position during the quarter. Its Q1 revenue increased by approximately 71% year-over-year to RMB 1.2 billion, primarily due to an 81% increase in freight volume. This was partially offset by a 5.4% decrease in ASP per tonne. Adjusted EBITDA for BEST Freight was negative RMB 26 million compared to negative RMB 185 million for the same period of last year.

Q1 revenue for BEST Supply Chain Management increased approximately 10% year-over-year to RMB 448 million. Adjusted EBITDA for Supply Chain Management was RMB 200,000 (sic) [RMB 167,000] compared to negative RMB 34 million for the same period of last year.

Q1 revenue for BEST Global increased by 116% year-over-year to RMB 250 million, primarily due to strong growth in parcel volume in Southeast Asia. Adjusted EBITDA for BEST Global was negative RMB 52 million compared to negative RMB 64 million for the same period of last year.

We are now grouping UCargo and Capital in other segments. Its revenue increased by approximately 119% year-over-year to RMB 911 million. Adjusted EBITDA for others was RMB 3 million compared to negative RMB 15 million for the same period last year.

In terms of operating expenses, we achieved cost savings through operating efficiency improvement. Our operating expenses, excluding share-based compensation, were RMB 441 million or 6.8% of our revenue compared with RMB 401 million or 8% of our revenue in the same period of last year.

Next, let's review some major operating expense items. Please note all of these expenses exclude share-based compensation. Selling, general and administrative expenses were RMB 390 million or 6% of the revenue in the first quarter compared to RMB 352 million or 7% of the revenue in the same quarter of 2020. The decrease in SG&A expenses as a percentage of revenue was primarily attributable to improved operating efficiency.

R&D expenses were RMB 52 million or 0.8% of the revenue in the first quarter compared to RMB 49 million or 1% of the revenue in the same quarter of 2020. CapEx in the first quarter was RMB 254 million or 3.9% of the total revenue compared to RMB 346 million or 6.9% of total revenue for the same period of 2020.

This concludes the first quarter financial overview. Going forward, we will continue to execute on the refocusing plan aligned -- align our cost structure with our growth initiatives and adapt to the evolving competitive market conditions. We are working in earnest on alternative financing options. In order to enhance liquidity and financial flexibility for future growth.

With that, we will now open the call to Q&A. Thank you.

(Operator Instructions) Your first question comes from Thomas Chong with Jefferies.

I have 2 questions. The first one is about the competitive landscape. Can management comment about what we have seen in the first half regarding the dynamics and how we are looking into the second half? Is there any intensified competition on ASP catastrophe?

And my second question is relating to the June 18th marketing campaign. Can management comment about the trend in terms of the parcel volume for the June 18th marketing campaign? Any difference that we are seeing compared to previous year?

Okay. Thank you, Thomas. First question on the landscaping -- landscape, and I assume you are talking about Express market. The -- yes, so we do see a continued competitive pricing pressures in the first half year. However, there has been much more smooth or much more -- less -- much less than the last year. So generally, we will continue -- going to see somewhat of pricing pressures through the full year, even the half year.

As to the ASP, we do not expect a too much increase from what is in the second quarter through the full year. That's what we see in the market. In general, the pricing pressure is there, but it's less intense compared to the period of time last year. That's on the competitive -- the landscape side.

On marketing campaign on 6/18, we do see a 6/18 marketing campaign as usual. It's a significant picking up from the normal parcel volume. However, comparatively through the next -- last year, from what we see, it is slightly less than last year's total number of parcel.

Got it. May I quickly ask a follow-up question? Is it slightly less in parcel volume? Is it mainly due to the high base last year due to the pent-up demand? Or is it relating to competition?

I'm sorry. Tom, can you rephrase your question? I didn't seem to get it very clearly. I'm sorry.

Yes. Sorry. Just a follow-up question regarding the previous comments that the parcel volume in June 18 may be slightly less than last year. Just wanted to get a sense, is it due to the high base last year on the pent-up demand in Q2 2020? Or is it because there's more competition, which led to slightly less in terms of the parcel volume?

Okay. Got it. So you're talking about the 6/18 from our -- what we see. Now of course, we don't have a total market number in the sense of what it exactly is. From what we see is that 6/18, we do have high volume than average days, but that, compared to last year, seems a little bit less. As to the reason, it could be multiple reasons. So one is demand side, it could be a little bit less, others could be the volume being more spread through the multiple platforms or everything else. That's all the possibilities.

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

First question. Can you just -- just to start with a follow-up to the pricing commentary. I think from a regulatory environment, it seems like the regulator discourage the price war, right, and then also want to assure benefits in the labor side. So just from your perspective, are there any implication to the landscape or pricing dynamic or cost structure going forward, I mean, assuming we'll see more tightening regulation here?

And then second question, just can you provide a little bit more color about the second quarter in Express in terms of the volume growth and ASP or the profitability for second quarter?

Thank you, Hans. The regulatory environment and -- obviously, the government has noticed last year's -- the pricing on the Express market has been -- declined significantly. As a result, many franchisees and also delivery network across the industry has been not very stable in terms of the work services and stoppage -- service stoppage and everything. So I think, first of all, we very welcome regulatory pulling on the efforts to limit or minimize the pricing downturn. That will help in the long term to -- for the industry's service -- improved service quality and also protection on the delivery boys -- delivery people's benefits. So in a sense, it's welcome. I think most people in the industry welcome that, and we certainly do.

With that, I think the second quarter or the rest of the year, on the pricing side, we should see a less of downturn because of this effort by government trying to -- putting to a kind of a standard into the delivery fees and -- as well as the pricing, the floors and stuff like that. So that's all welcome. I think it should be good news for the whole industry as a whole.

With regard to your second question about second quarter volume growth and pricing side, et cetera, I think, we continue to balancing our growth needs as well as the bottom line profitability needs in that we probably will -- our pricing strategy will probably be more -- focusing more on reducing the losses, improving the profitability side. So the growth will be there, but it will be less than we would like to see. But -- however, the -- our effort is try to balance and make sure that we have a healthy, sustainable growth in the long term.

Got it. And then may I ask one more question? So just regarding the liquidity, so if I just calculate the -- if I just net out the short-term debt, right, it seems like we have around just about RMB 1 billion cash. And then I know there is still -- there is about around, like, RMB 500 million for (inaudible). And then -- but other than that, I think we have -- I mean based on Q1 burn rate, we have about over RMB 500 million outflow of operating cash. So I just want to get an idea, like, do we have any plan to raise more capital or do any type of capital structure or activity in the near term?

This is Gloria. Thank you for this question. So basically, currently, you're absolutely right, we have about RMB 1 billion cash on the balance sheet and, at the same time, we also have about RMB 300 million short-term investment, which we will easily convert that into cash. So the free cash is about like RMB 1.3 billion. And we will -- we are really focusing our efforts evaluating any other strategic financing alternatives. And once we have more definitive decision, then we will share our decision with you.

Yes. So I'd like to add something more on that. So as you have noticed on our last release -- our news release, we have actually -- we still have about, let's say, over RMB 2 billion assets in our capital. Basically, that's from the leasing, from the factoring and loan and [discounted] assets. We still have about RMB 2 billion company's total assets there. We already have converted about RMB 500 million to RMB 600 million of that to cash in the first quarter. So we're still looking at about RMB 2 billion that's usable asset conversion by transfer to investors who like to have this asset. In fact, a lot of people are interested in this asset because it's actually a very healthy liquidity -- liquid assets there. That's, first of all, I mean, in addition to the cash reserve we have. So we do have another RMB 2 billion of financial -- BEST Capital's assets there.

The second, like you said, we are looking at various ways to raise more capital for supporting our turnaround efforts in the next 6 to 9 months. As we -- a lot of things are going on. And as time comes, we will announce that. So basically, we look at all means of fund raising tools.

I see. Okay. And actually, just one last question from me. Just can you -- so in Q1, Global seems very strong, and I just wonder what drove the upside. And then I think we have seen the significant growth acceleration from last quarter. So just any color about what's the underlying driver and then how should we think about this business, like, say, for Q2 or the whole year.

Okay. Okay. So our Global -- the first quarter was particularly strong through the -- all countries we are operating in, mainly in Southeast Asia. In Southeast Asia, as everybody knows, there's quite a large population and also the penetration for e-commerce is relatively low still. However, the growth on the e-commerce is pretty high. The pandemic -- COVID-19 pandemic even though brings a lot of challenges to our operations because many countries are shut down and many countries are putting quarantine, everything else. However, demand is actually quite high. That's on one side, demand is quite high.

Second is that we actually entered these countries, Thailand, Vietnam, Malaysia, particularly, build out a whole nationwide network. So that allowed us to continue to provide strong services to meet our customers' needs. So the gross volume comes from platforms such as Lazada, Shopee. Many other local platforms and social media are quite strong. So -- and we still upgrade our capacities and build out the -- even though the capacities are now somewhat challenging because travel and everything is restricted. But the -- however, we continue to invest and build more capacities, improving our quality of services.

Secondly, we do see a very strong cross-border activities associated with our supply chains as well as our global efforts. So there is a lot of cross-border transactions from China to Southeast Asia. Basically, consumers in Southeast Asia are buying from platforms in China, such as Taobao, Tmall or any other platforms. We'll get them together, and we'll ship them to the Southeast Asia such as Malaysia, Singapore, Thailand, et cetera, and use our local network to distribute it to the consumers.

On the supply chain side, for example, we do have -- like, we set up and operating 3, what we say is, collection points in Yiwu, Shenzhen and Guangzhou. So basically, we're collecting all the buyers from the Thailand and Southeast Asia, whatever they buy from China or sellers in China, we put all these merchandise together and we ship it through the air or land or sea. Particularly, on the supply chain side, we also set up 2 cross-border ports, one in Guangxi. We're working with government -- local government and set up a clearing house on the -- for customer clearance and use the land transportation -- land transport through China across Vietnam to the rest of Southeast Asia. That will also see a tremendous growth there.

So basically, driven by both domestic local market demand as well as cross-border demand for services. And that is -- looking forward to Global, we still continue to anticipate a fast growth in terms of volume as well as improved financial numbers in terms of the margin improvement and -- as well as reduce the losses on the bottom line. The -- we do anticipate in certain countries towards the end of the year probably we're reaching to a operating bottom line to net 0 or profitability base. Expecting next year, we will see a much better (inaudible) growth and bottom line improvements.

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

So I guess I have 2 questions. One is, you talked about the turnaround for Express in 6 to 9 months. I just want to hear what is the assumption behind and what is the target for that. Does that assume the current pricing competitive environment or irrespective of that, we just have this turnaround in profitability or in kind of more operational turnaround? So what would be -- will market share be more of a result of that or that's also part of the 6- to 9-month target? Because as you mentioned, in the second quarter, maybe our market share could have been coming lower. So are we mainly just focusing on profitability in that 6- to 9-month turnaround time?

And then my second question would be on how -- we talked about our different strategic evaluations, financing options. Just want to hear what has been mostly the challenges over the past, say, months or quarters in looking into those options? Because we have seen companies like A&E filing to be listed. There are freight-matching platforms that also have filed for listing. So it seems like at least comparable peers, say, of Freight or of BEST UCargo, these are -- people are tapping the capital markets through these times. So I just want to hear what have been maybe some of the challenges and how do we see the progress or future options ahead. And are we open to maybe even partnerships with any of our competitors?

Thank you, Ronald. It's good to hear from you again. The -- for the first question on the turnaround, yes, so as you can see, we -- if you see our Express development, I mean, we're basically -- when we started in 2011, we started from about less than 1 percentage of market share and all the way up to fourth quarter 2019, we were actually at about 12.4%. And because we just had (inaudible) I just looked at the number 12.4%. But 2020, it is a particularly challenging year, right? So -- I mean we were -- on the 2019 fourth quarter, end of 2019, we were feeling like we can do another great year for 2020. But the sudden pandemic as well as new entrants into certain of the -- into the market with particularly low pricing and everything else does -- really did a major challenge to us in 2020 and through the 2021.

The challenge is basically, in the past 4, 5 years, we have been running up the market share, particularly growth much, much higher than the market. When the macro environment is okay, the pricing wouldn't get low and that strategy works because, basically, you're still going to have -- you can focus on growth. Meanwhile, your bottom line is not that much impacted. Pricing is still okay. They allow you to run fast.

But when the pricing is coming down so much, 25% versus your cost going down 12%, 15%, and there's a big gap there, then your lot of assumptions and the way of doing it, you need to -- has a major challenge there. So when we say turnaround, particularly in 4 areas, right, one area is about the organization. So we really need to restructure some of the organization as we have been doing there since first quarter last year. I mean we have changed a lot of leadership positions and into [each province], we want to see if something can be solidified and improved. So organization is something that needs to be more beefed up.

Second is more about franchisee side. We want to make sure that our franchisees are able to survive healthily. They can also contribute to the growth of the market. In the past, the parcels are very much concentrated into percentage -- less -- more percentage of franchisees. So in other words, top 20%, 30%, probably -- the franchisees probably had 80%, 90%, even 95%, very higher parcel shares. But now with that, we really needed to have a small or medium size of franchisees. They are capable to apply more customers doing better services, et cetera. So in that sense, we need time to basically help establish, to nurture more middle level -- middle to small level franchisees to make sure under this kind of pressure level, they can still apply the customers and provide better services.

In the past, certainly, into the last year, especially the second quarter -- second half of last year, a lot of smaller franchisees actually get into trouble, right, because they've been running very fast in the past 5, 6 years. And -- but all of a sudden, environment changed, they have -- basically has challenge or difficult to survive or difficult to basically provide better services. So that's the thing that we really need to help them, giving time to do that.

And third is, basically, we need to look into our strategy on our pricing on the products, right? In the past, probably when the environment is all good, any kind of pricing, you can bring the customers, bring the parcel, that's good, even if you don't make money, but at least you don't lose that much money. But now if you bring [orders from the] parcel, regardless of the pricing, then you will find out that you are sustainable because your losses are getting bigger. So in a sense, we really need to go to retune up our pricing strategies as well as the product mix and everything, something like to give up and something we had to do more. That, into such a large network across our country, will require some time to change a lot of things.

But I would like to point out that, actually, I was happy to see the progress we have made. We did a lot of things, right? So we final -- we pushed out a more regulated delivery fee structure. So instead of a more ad-hoc and random rate for each provinces, now we have a more structured last-mile delivery fees based on the product mix and things like that. We also pushed out more product new pricing structures, which will help to improve the margins and profitability. But these through the whole network to change the -- to nurture the more -- franchisees to be more competitive, to make sure that our product mixing are more gross margin and bottom line balancing. This all will probably have some time. So that is something that we're looking at. We're not just looking at cost base.

Our cost is actually coming down a lot. If you look at our first quarter number, our cost actually went down about 15%, which is significant because basically, the -- a look in the second quarter, again, the number of the cost coming down is also very significant compared with last year. So yes, of course, we're going to focus on the operating metrics or operating efficiency. But more importantly, we changed the whole network structure, the product mix, all our structure and to a much more concise, much more mixing the optimized solutions. So that's the part we're talking about.

Your second question was really talking about financing side. You're absolutely correct. If you look at our business, aside from Express, which we have been -- everybody been focusing on, but if you look at our Freight, Freight is doing extremely well, not just in the industry market position but as well in its profitability, growth, everything is doing extremely well. Looking at our -- the Supply Chain, we have over 10 years' experience. We actually (inaudible) integrated B2B, B2C services, with over 700 Fortune 500 global and China Fortune 500 customers.

So we've built up a lot of expertise into the area as well. But in the past, we have Store+. We are doing a lot of things to try to support the last-mile distribution, but it was [too defocused]. So we've been cutting down all this. You can see the -- our supply chain side, actually, all the metrics have improved, right? The margin has improved. We -- actually, our -- for the first quarter, we lose money in February because of Chinese New Year. January and March, supply chain is actually positive as you're making money. And so is, I think, the second quarter, they're looking good, too. So supply chain has lots of value in terms of moving forward into -- if you look in China's economic growth and the structural change into the economy, supply chain, third-party logistics and all this stuff is going to be very well needed and our Supply Chain is in a really good position.

If you look at, like you said, our UCargo, UCargo, we actually have very few people. We only have about 150, 200 people in the whole group. But they're actually profitable. Maybe the first quarter had some legacy issues and -- from the last year, but they're actually profitable into the January and February, certainly -- March, certainly in the second quarter. So -- but nevertheless, their scale is still a little bit less compared to Freight and Express and looking at Global also, right?

So yes -- so if you're looking at that, we are looking at multiple ways to raise capital and also beef up our liquidity. By all means, by raising funds for a particular business or working with other partners on some of it, we are looking at all the options and make sure that -- how to create shareholder's value and BEST for the company to grow. And we're looking at all these avenues.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Johnny Chou for any closing remarks.

Thank you 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.

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