BEST Inc. (BEST) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to BEST Inc.’s First Quarter 2021 Earnings Conference. 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.
Johnny Chou: 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 continue 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 continue 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.
Gloria Fan: Thank you, Johnny and hello to everyone. In the first quarter of 2021, our revenue reached RMB6.5 billion, increasing 30% year-over-year while our net loss was RMB604 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 rates 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 continue to maintain a healthy combined balance of cash, cash equivalents, restricted cash and short-term investment of RMB4 billion. What’s more encouraging? Freight, supply chain management in cargo 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 RMB193 million compared to negative RMB238 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 RMB397 million compared to negative RMB503 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 RMB3.7 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 RMB311 million compared to negative RMB190 million for the same period of last year.
Operator: Thank you. Your first question comes from Thomas Chong with Jefferies. Please go ahead.
Thomas Chong: Hi, good morning. Thanks management for taking my questions. I have two 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? And my second question is relating to the June 18 marketing campaign. Can management comment about the trend in terms of the parcel volume for the June 18 marketing campaign? Any difference that we are seeing compared to previous year? Thank you.
Johnny Chou: Okay, thank you. First question on the landscaping – landscape and I assume you are talking about Express market. Yes, so we do see a continued competitive pricing pressure 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 continue going to see a somewhat of pricing pressure through the full year, even the half year. As to the ASP, we do not expecting a too much increase from what is it in the second quarter through the full year. That’s what we see in the market, in general, the pricing pressure it’s there, but it’s less intense compared to period of time last year. That’s on the competitive – the landscape side. On camping on the 6/18, we do see a 6/18 marketing campaign as usual. It’s the significant picking up on from the normal parcel volume. However, comparatively through the next – last year, but what we see is slightly less than last year’s total numbers as a parcel.
Thomas Chong: Got it. Thank you. Thank you. May I quickly ask a follow-up question? This is slightly less in parcel volume. This is mainly due to the high base last year due to the pent-up demand or this is relating to competition benefit?
Johnny Chou: I am sorry. Tom, can you rephrase your question. I didn’t seem to get it very clearly. I am sorry.
Thomas Chong: Yes, sorry. Just a follow-up question regarding the previous comments that the parcel volume in June seems maybe slightly less than last year, just want 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 is more competition, which led to slightly less in terms of the parcel volume? Thank you.
Johnny Chou: Okay, got it. So you are 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 a high volume than average days, but that is comparatively to last year, it seems to deliver there. As to the reason, it could be multiple reasons. So, one is demand side, that could be a little bit less. Others could be the volume being more spread through the multiple platforms or everything else. That’s all possibilities.
Thomas Chong: Got it. Thank you.
Johnny Chou: Thanks, Thomas.
Operator: Your next question comes from Hans Chung with KeyBanc Capital Markets. Please go ahead.
Hans Chung: Hi, good morning, Johnny and Gloria. Thank you for taking my questions. So, first question, can you just – just to start follow-up the pricing commentary. And I think from 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 implications to the landscape or the pricing dynamic or cost structure going forward. I mean, assuming we will 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 in ASP or the profitability for second quarter? Thank you.
Johnny Chou: 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 service stoppage and everything. So, I think, first of all, we are very welcome to 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, improve the service quality and also protection on the delivery – benefits. So, in the sense, that is welcomed. I think most people in the industry will welcome that and we certainly does. 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 tried to putting to a kind of the standard into the derivatives and as well as the pricing, the floors and stuff like that. So, that’s all welcome. I think should be a good news for the whole industry as a whole. With regarding to your second question about second quarter volume growth and pricing side, etcetera, I think we are 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 the – reduce 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 balancing and make sure that we have a healthy sustainable growth in long-term.
Hans Chung: Got it. And then may I ask one more question?
Johnny Chou: Sure.
Hans Chung: So just regarding the liquidity, so if I just calculate the – if I just net out the short-term debt, right, and then it seems like we have around just about RMB1 billion cash. And then I know they are still – they are about around like RMB500 million for sale assay. And then – but other than that, I think we have – I mean, based on Q1 burn rate, we have about over RMB500 million the 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, the structure activity in the near-term?
Gloria Fan: This is Gloria. Well, thank you for this question. So basically, currently, you’re absolutely right. We have about RMB1 billion cash on the balance sheet and at the same time, we also have about RMB300 million short-term investment, which we will easily convert that into cash. So the free cash is about like RMB1.3 billion. And we will, and we are really focusing our effort, evaluating any other strategic financing alternatives. And once we have more definitive decision, then we will share our decision with you.
Johnny Chou: Yes. So I’d like to add something more on that. So as you have noticed on our last release on our news release, we have actually – we still have above, let’s say, over RMB2 billion assets in our capital, basically, that’s from the leasing, from the factoring and loan and discount of assets. We still have about RMB2 billion companies total assets there. We already have converted about RMB500 million to RMB600 million of that to cash in the first quarter. So we’re still looking at about RMB2 billion that’s usable asset conversion, so by transfer to other investors 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 result we have, so we do have another RMB2 billing of financial BEST capital’s assets there. The second, like you said, we are looking at various ways to raise more capital to supporting our turnaround efforts in next 6 to 9 months. As we – a lot of things are going on, and as times comes, we will announce that. So basically, we look at all meanings of fundraising tools.
Hans Chung: I see. Okay. And actually, just one last question from me. Just can you – so in Q1, the global things very strong and 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? Thank you.
Johnny Chou: Okay. Okay. So our global – the first quarter was particularly strong through the – all the countries we are operating in, so mainly in Southeast Asia. In Southeast Asia, as everybody knows, there is quite a large population and also the penetration for e-commerce is relatively low still. But however, the growth on the e-commerce is pretty high, the pandemic – COVID-19 pandemic even though brings a lot of challenges for our operation because many countries have shut down and many countries are putting quarantine, everything else. But 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 the whole nationwide network. So, that allow us to continue to provide a strong services to meet our customers’ needs. So, the gross volume comes from platform such as Lazada, Shoppee on many of the local platform and social media are quite strong. So – and we still upgrade our capacities and build out the – even though the capacity now is somewhat challenging because of travel, 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 chain as well as our global efforts. So there is a lot of cross-border transactions from the China to Southeast Asia, basically, consumers in Southeast Asia buying from platforms in China such as or any other platforms. And we will get them together and we will ship them to the Southeast Asia such as Malaysia, Singapore, Thailand, etcetera, 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 three – what we showed is the collection points in the EU, 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 the supply chain side, we also set up a two cross-border port, one in Guangxi. We are working with government – local government and setup a clearinghouse on the customer clearance and use the land transportation, land transport to the 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 demands 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 the reduced – 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 – operating the bottom line to net zero or probability base. Expecting next year, we will see a much better growth and bottom line improvements.
Hans Chung: Got it. Thank you.
Operator: Your next question comes from Ronald Keung with Goldman Sachs. Please go ahead.
Ronald Keung: Hi, thanks, Johnny and Gloria and team. So I guess I have two 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. They are 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 has been maybe some of the challenges and how do we see the progress or future options ahead? And are we open to maybe partnerships with any of our competitors. Thank you.
Johnny Chou: 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 on 2011, we started from about less than 1 percentage of market shares and all the way up to fourth quarter 2019, we are actually at about 12.4% and because we just had more, I just look at a 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 will feel like we can do a great – another great year for 2020. But sudden the pandemic as well as a new entrance into certain – into the market with a particularly low pricing and everything else, it 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 grows 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 and meanwhile, your bottom line is not that much impacted, pricing is still okay. They allow you to run fast. But when the pricing coming down so much, 25% versus your cost are going down 12%, 15%, and there is a big gap there, then your lot of assumptions and the way of doing it, you need to have made a challenge there. So when we say turnaround, particularly in four areas, right, one area is about the organization. So we really need to we 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 product system, we want to see if there is something can be can be solidified and improved. So organization is something need to be more beefed up. Our second is more about a 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 public 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 and etcetera. So in that sense, that we need time to basically to 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 a better services. In the past, certainly, into the last year, especially the second quarter, but the second half of last year, a lot of the smaller franchisees actually get into trouble, right, because they have been running very fast in the past 5, 6 years. And – but all of a sudden, environment change, they have basically has challenge or difficult to survive or difficult to basically provide a better services. So that’s the thing that we really need to helping them giving time to do that. And third is basically, we need to look through 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 in 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 order on a parcel, regardless of the pricing, then you will find out that you are sustainable because your loss is 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 push out a more regulated – the delivery fee structure, so instead of a more ad-hoc and random rate for each parties. But now we have a more structured a lot of 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, that’s all they have some time. So that is something that we’re looking. 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 – look in the second quarter, yes, the number of the costs coming down 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 the 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 as its profitability, growth, everything is doing extremely well. Looking at our – the supply chain, we have over 10 years’ experience. We actually – with the partner on the supply chain on this world, integrated B2B, B2C services, with over 700 – Fortune 500 global and the China Fortune 500 customers. So we build up a lot of expertise into the area as well. But in the past, we have Store+. We are doing a lot of things that to try to support the last mile distribution, but it was to be focused. So within cutting down all this, you can see the – our supply chain side, actually, all the metrics has improved, right? The margin has improved. We – actually, our – for the first quarter, we lose money on 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 are 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, it’s going to be a very well needed and also 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 that actually profitable. Maybe the first quarter had some legacy issues and from the last year. But they are actually profitable into the January and February, certainly, March, certainly in the second quarter. So – but nevertheless, their scale is still in the less so compared with the spreads and looking at global also, right? So yes. So if you’re looking at that, we are looking at multiple ways to raise capitals and also defer our liquidity. By all means, by the raising funds for a particular business or working with other partners on some of them, we look at all the options and make sure that how to create shareholders’ value and best for the company to grow. And we’re looking at all these revenues.
Ronald Keung: Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Johnny Chou for any closing remarks.
Johnny Chou: 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.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
