BEST Inc (BEST) 2020 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 and Fiscal Year 2020 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 also being webcast 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 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 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 is in RMB.

I would now like to turn the conference over to Johnny Chou, Chairman and CEO of BEST.

Thank you, operator. Good morning and good evening, everyone. Welcome, and thank you for joining our earnings call. In the fourth quarter of 2020, we executed our strategic refocusing plan and turned our business around amid a made strong industry competition, tapping to our ability to make quick and effective changes in our strategic and operational practice. We continue to make improvements to all of our business segments and reduce the losses, which put us back on the path to strong growth and profitability.

Our Express segment under new management focused on strengthening network stability, optimizing product and cost structure as well as enhancing service quality, while Freight continued to solidify its industry leadership and returning to profitability.

Next, let me go over our quarterly results and recent developments. For Express, the new management team executed strategic refocusing plans announced in November 2020, which resulted in an encouraging recovery, demonstrated by improving parcel unit economics despite a net loss for the quarter due to 20.4% year-over-year drop in ASP per parcel it achieved net profit for the month of December. In particular, the cost per parcel was reduced by 8.4% month-over-month. We also focused on improving network stability by providing support to our franchise network. Our efforts have strengthened our franchisee network considerably. Our networks remained open during the Chinese New Year holiday this year and quickly recovered to its full capacity at the conclusion of the holiday.

These initial results have affirmed our strategic direction and bolstered our confidence that we are on the right path for a sustainable recovery. We have seen momentum continued into first quarter with accelerating parcel volume growth and improving cost structure. During the quarter, parcel volume increased by 6% year-over-year, representing market share of 9.5%. Gross margin contracted by 7.2 percentage points due to an ASP decline of 20.4% year-over-year, partially offset by a decrease in average cost per parcel of 14.3% year-over-year.

Our Freight business continued its strong post-pandemic recovery and delivered a strong quarter with a higher than industry average growth rate while returning to profitability. Gross margin improved to pre-COVID-19 levels as we continue to emphasize the e-commerce aspect of Freight services, solidify the company's leadership position and brand recognition and improving operating efficiency. Freight volume increased by 25.1% year-over-year in the fourth quarter of 2020. Its gross margin was 5.5%, improved by 4.5 percentage points quarter-over-quarter as pricing continued to rebound. Average cost per tonne and ASP both decreased by 16.7%.

Moving to BEST Supply Chain. We targeted quarterly growth and the profitability as we sharpened its focus to higher-margin accounts. In the fourth quarter of 2020, its gross margin decreased by 6.3 percentage points year-over-year, primarily due to one-off costs incurred by closing down Store+-related operations and the pricing pressure associated with certain legacy key account customers, which are in the process of being discontinued. The total number of orders fulfilled by Cloud OFCs increased by 11.7% year-over-year to 136.1 million in the fourth quarter of 2020. While total numbers of orders fulfilled by franchise Cloud OFC increased by 15.1% year-over-year to 67.1 million. The number of franchise OFCs increased by 22.2% year-over-year to 358 million.

BEST Global continued to make strong progress in cross-border and Southeast Asia business in the fourth quarter with strong volume growth and margin improvement. On a quarter-over-quarter basis, parcel volume in Thailand increased by 25% quarter-to-quarter to 12.3 million, while parcel volume in Vietnam increased by 36% quarter-over-quarter to 14 million. Its gross margin expanded by 7.4 percentage points year-over-year.

In November, December 2020, we expanded our sortation center in Bangkok, Thailand and established a new flagship sortation center in Ho Chi Minh City, Vietnam. Across Southeast Asia, we now operate 24 Express hubs and sortation centers, along with over 1,000 franchised last-mile service stations. Looking ahead, we continue to invest in our network, focusing on market share gain and parcel volume growth in those countries and to enhance unit economics in order to achieve profitability in the near future.

Turning to BEST Cargo -- UCargo. We continue to scale our full trucking brokerage model to connect more drivers and customers onto its platform while reducing transportation costs for Express, Freight and Supply Chain Management. As of December 31, 2020, the number of registered drivers on the UCargo mobile apps increased by 70.6% year-over-year to 320,000. In the fourth quarter of 2020, the total number of transactions of trucking brokerage platform increased by 19% year-over-year to 255,000.

For BEST Store+, we have completed the winding down of the Store+ business as announced November 15, 2020.

Next, let me discuss our strategic plan for 2021. China's solid macroeconomic growth and the booming e-commerce market will lend a tremendous support to the logistics and the supply chain industry. We will continue to execute on our refocusing strategy in an effort to drive long-term growth and profitability.

For Express, while market expected to remain competitive, we do expect ASP per parcel decline to stabilize. We will continue to focus on sustainable long-term growth and profitability by focusing on optimizing product structure, improving operating efficiency, enhancing service quality and customer experience and gaining market share. We are targeting 20% to 25% volume growth for 2021. We also expect to reduce average cost per parcel by 10% for the full year, driven by optimized product mix, improved dynamic routing schemes, refined sorting efficiency and the investment in last-mile solutions.

For Freight, ASP per tonne has recovered to pre-COVID level in the first quarter. We are targeting a volume growth of 30% and continue to adopt our strategy of growing e-commerce-related transactions, investing in our network, our services and enhancing customer satisfaction. We will continue to enhance our franchise network capacity by incentivizing existing franchisees to expand customer base and bringing more franchisee partners into our network. We are confident that Freight will deliver both a higher than industry growth rate and increased profitability, further strengthening its market-leading position in the upcoming year.

Supply Chain Management will focus on quality growth and profitability and will be lighter and leaner in 2021. It will continue to grow the company's franchise OFC business, focus on key account customers with higher margins and reduced operating expenses.

Global provides another pillar for our growth in addition to further expansion in Southeast Asia. We intend to leverage our domestic international largest networks to capture the fast-growing cross-border opportunities. We are targeting 100% parcel volume growth in Southeast Asia and significant margin improvement.

In summary, while companies suffered major setbacks due to the pandemic in 2020, we have taken decisive actions to steer the company back to the path of growth and profitability. We firmly believe the worst is behind us and the future is bright. We entered 2021 with optimism, strong momentum and anticipated strong growth of our business as the year progresses. We're determined to strengthening our market share, optimize cost structure, improve service quality and customer experience and build out a leading integrated smart supply chain and logistics company to deliver sustainable and a powerful future growth.

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

Thank you, Johnny, and hello to everyone. We concluded a challenging 2020 with fourth quarter focusing on strategic initiatives. We took decisive actions to realign our business to adapt to the evolving competitive market conditions as well as set a solid foundation for future growth.

Our revenue for continued operations affected by the challenging pricing environment and the wind down of Store+ during the fourth quarter was RMB 9.3 billion. As part of our refocusing strategy, we identified and executed additional measures to manage our costs, expenses and liquidity.

In the fourth quarter, we generated a net operating cash flow of RMB 347 million while maintaining a healthy combined balance of cash, cash equivalents, restricted cash and short-term investments of RMB 4.5 billion.

I will now provide a brief review of our fourth quarter 2020 financial results. Please note, we only started to execute our refocusing strategy after mid-November, which has brought encouraging initial results across the segments, but with little of that reflected in our overall fourth quarter financials. 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 continued operations was RMB 50 million compared to RMB 562 million in the same quarter of 2019. Gross margin was 0.5% compared to 5.5% in Q4 2019. Adjusted EBITDA for continued operations was negative RMB 288 million compared to RMB 259 million of Q4 2019.

Next, moving on to key financial highlights for our business units. On a year-over-year basis, BEST Express revenue decreased by 15.6% year-over-year to RMB 5.8 billion in the fourth quarter of 2020, primarily due to a 20.4% year-over-year decrease in ASP per parcel, partially offset by a 6% year-over-year increase in parcel volume. The decrease in ASP is primarily attributable to competitive market dynamics. Adjusted EBITDA for BEST Express was negative RMB 158 million compared to RMB 338 million for the same period of last year.

As Johnny mentioned, it achieved net profit in December, giving early signal on the effectiveness of our turnaround measures.

BEST Freight strengthened its leadership position during the quarter. Its Q4 revenue increased by 4.2% year-over-year to RMB 1.6 billion, primarily due to a 25% year-over-year increase in freight volume. This was partially offset by a 16.7% year-over-year decrease in ASP per tonne. Adjusted EBITDA for BEST Freight was RMB 32 million compared to RMB 33 million for the same period of last year.

Q4 revenue for BEST Supply Chain Management decreased by 10.9% year-over-year to RMB 542 million due to pricing pressure associated with a few legacy key account customers, which are in the process of being discontinued. Adjusted EBITDA for BEST Supply Chain Management was negative RMB 67 million compared to negative RMB 58 million for the same period of last year.

BEST UCargo's Q4 revenue increased by 5.4% year-over-year to RMB 950 million. Adjusted EBITDA for BEST UCargo was negative RMB 35 million compared to negative RMB 14 million last year.

Q4 revenue for BEST Global increased by 87.1% year-over-year to RMB 253 million, primarily due to strong growth in parcel volume in Southeast Asia. Adjusted EBITDA for BEST Global was negative RMB 55 million compared to negative RMB 59 million for the same period of last year. We are now reporting Store+ in discontinued operations.

Next, let's review some major operating expense items of fourth quarter. Please note, all of these expenses exclude share-based compensation. Selling, general and administrative expenses for continued operations was RMB 475 million or 5% of the revenue in the fourth quarter compared to RMB 374 million or 3.7% of the revenue in the same quarter of 2019. The increase in SG&A expenses was primarily attributable to additional accrued provisions for certain trade receivables as some of our customers' credits were affected by the pandemic and the losses on the disposal of fixed assets due to upgrades of Express equipment.

R&D expenses for continuing operations was flat compared to the same quarter of 2019, which was RMB 52 million. CapEx in the fourth quarter was RMB 331 million or 3.6% of total revenue compared to RMB 388 million or 3.8% of the revenue for the same period of last year.

For more of our 2020 full year financial results, please refer to our earnings release for further details.

And now for our business outlook. Based on current market conditions and current operations, we expect our revenue of full year of 2021 to be between RMB 34 billion to RMB 36 billion. This represents management's current and preliminary expectations, which is subject to change. Our CapEx is expected to be RMB 1 billion for 2021 as we anticipate the recovery and the future growth of our business.

Looking forward, the combination of cost reduction, cash flow management and the optimization of resource allocation remains a top priority within our segment operations and at the corporate level. As we progress into 2021, we will remain focused on improving our capital structure, enhancing our balance sheet and cash flow to support company's future growth.

This concludes the fourth quarter financial update. Now we are opening the call to Q&A. Thank you.

(Operator Instructions) Your first question comes from Hans Chung from KeyBanc Capital Markets.

So I have a couple of questions. First, can you -- it's good to see we made a breakeven for Express in December. And then can you provide any color for near-term trend like, say, the monthly performance in Express in -- from January, February and then March month today in terms of the volume growth and then the profitability? And is it possible maybe just how does that compare to the overall industry?

And then second question would be about the '21 outlook. Just any color about the profitability or the margin for the full year in Express and overall?

Okay. Hans, basically, in the fourth quarter, we have restructured our organization and also strategically realigned our cost structure with the volume. So we are kind of balancing our volume growth as well as the profitability. So in our words, we want to balance in the cost side of the picture then the growth side of it and make sure that the bottom line is not impacted.

So your question is for the color for the month-by-month in January and February. I cannot give you exact number because the quarter is not end, it's not audited. So what I can say is that in January and February, we continue to execute what we have done in the February -- in December. So the January and the February has improved tremendously comparing with last year's same quarter.

With comparison with the market, our volume growth this year, we will be looking for a modest based on our own 20% to 25% as we have said on this trend. Basically, what we want to do is, again, to kind of strategically -- to align our volumes quarterly versus purely just a number. So that's number one. Number two is the portfolio outlook. As we said, we are continuing to looking for 20% to 25% of growth. The market growth could be a little bit stronger and could be a little bit less based on the post of euros forecast, maybe about 17%, 18%. But we are targeting about 20% to 25%.

For full year in the Express side, our general goal is, number one, is to improve the quality of services. As the number -- as the costs continue to go down and the ASP continue to gone down, it's more important to really stress on the quality side, the timing of the delivery, the stability of the last-mile franchisees delivery quality as well as, again, balancing your product mix between cost and the -- so as a whole result, the growth could be -- we targeted about 20% to 25% will improve the margin. And hopefully, the full year will bring us to a profitability.

I think I have one more question. Just regarding the -- our balance sheet, just -- so we have the cash equivalent above RMB 4.5 billion. And then the shortened day is around 3 to 3.1. And we have CapEx plans for this year, about RMB 1 billion, right? So what's the working capital requirement for the year? And then it says that we might need just any plan not to do the capital raising in the near term to enhance our balance sheet, the health.

Yes. Okay. So as you noticed, the cash and cash equivalent, one more thing is that we also have about -- on the BEST financial side, we still have about RMB 2.8 billion of assets, basically, has been collecting very quickly and returning very quickly. So on that side, on the BEST financial side, we still have about RMB 2.8 billion, and that should give us enough cushions onto the financing the liquidity side.

Meanwhile, it's possibility during the year that we're still looking at some of the other financing schemes by raising capitals for the other business unit, such as Global as well as Freight to strengthen our balance sheet. So we do have a plan on that. So basically 2 things to answer liquidity side. One is the BEST financial has RMB 2.8 billion assets. We are fastly collecting them back. So hopefully, we have more than RMB 1 billion will be coming back this year. We're not investing any more assets into the BEST financial group. So we're collecting all this back. And another one is that the other separate fundraisings for Freight and the Global.

Your next question comes from Ronald Keung from Goldman Sachs.

I guess I have a few questions. For your Express, Johnny, you've mentioned that you expect ASP decline to stabilize quite a bit this year, at least the rate of decline has stabilized. How do we see this -- the behavior of our other players? I think we do have some new entrants that has consistently been very aggressive in pricing and have been growing fast. So when we talk about the ASP declines, do you think that will be for the industry or for specific players? Or if there are more aggressive players, how would we plan to react and respond to the still evolving competitive landscape for rest of this year?

Okay. The Express -- the ASP in average last year dropped -- the whole industry dropped about 20-plus. So we are a little bit over 20-some plus, and some of our peers even reduced a decline more significantly. So 20-plus is average decline in ASP last year. Given that, we think the ASP is still going to be under some pressure due to a capacity over large capacity that has been built up over the years and also due to still expanding market in general. But we don't see the ASP decline will be significantly expanded compared with what we did last year. So I think this year, we're kind of expecting 5% to 10% maybe of a declining side. Not just us, I think it's the general market because, as I said last year, it was a huge drop. Basically, made everybody -- every player is in a very tough environment. So yes, we do expecting a 5% to 10% drop, but we're also expecting at least 10% of improvement in our cost side.

Right. And then on the Supply Chain business, you're also focusing on higher-quality merchants and the growth has slowed a bit. And specifically, what kind of customers are we kind of focusing on? And I think traditionally, the customer has been a Tmall supermarket. Is that one of those high quality that you will consider? And -- or otherwise, what's our kind of focused maybe by category or merchants that we're thinking about in this segment for the 2021 quality growth focus?

Okay. Yes. So Supply Chain, actually, last fourth quarter was actually really impacted by shutting down the Store+ business. In the overall Store+, they had about -- Supply Chain Management group had about 40 -- over 40 warehouses was supporting the Store+ business. And by shutting down that, they incurred a lot of temporary onetime costs.

With that behind us, but we also see 2020 was 2 things, and one is during the beginning of the year and middle of the year, some of the customer does have some difficulties in their own business. So we had some issues on the collectibles and also margins and also reduced volumes, et cetera. But with the rebounds -- fast rebound in economics, especially in the fourth quarter and economic growth of about 6.5%. So especially we rebound that, and what we are doing right now is to taking out some of the customers that during the year, which impacted by dynamic or some other competitive reasons, market reasons, we will kind of really need to stop the service there.

But we were focusing on -- I mean we're always focusing on that. We are very strong on sell industry. One is the apparel -- closing apparel-related area. We probably will have the best in this service category. Second is the fastest-moving consumer goods, FMCG, and that because we had a large history of working with Store+ as well as some customers along. So these are 2 areas we're really focusing on.

Meanwhile, Supply Chain, I think the strategy is, as you can see from our release statement, our Cloud OFC, so franchise OFC is actually growing strong. So we are actually going to be moving to a lighter model with less of our own operated warehouses, which will cushion us on a hard time, right? Last year was really a big hit because we have over 1 million square meters warehouses, which we basically operated ourselves. And when the general economic come down, we've got a lot of vacant space and all this stuff, and that made some impact. So this year, if you see, we are -- already in the last fourth quarter, we already reduced a lot of self-operated warehouses by closing down or get out of lease and moving more towards a franchise model, which will give us a much lighter, and service management operated the model rather than hands on and everything well ourselves. So that is the -- moving forward, our strategy.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Johnny for closing remarks.

Thank you, operator. 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.

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