BEST Inc. (BEST) on Q2 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 Second Quarter 2021 Earnings Conference. Following management’s prepared remarks there will be a Q&A Session. 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 we begin, 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 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 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. Mr. Chou, the floor is yours sir.
Johnny Chou: Thank you, operator. Hello everyone. And thank you for joining BEST’s second quarter earnings call today. In the second quarter, we continue 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 the witnessed significant improvement with enhanced service quality. For progress in unit cost reduction and network improvement 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 and 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 are seeing a promising trend in the market benefiting from government's policy on fair market competition. We are optimistic thereby committing to our refocusing strategy to optimize product infrastructure, 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 $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 every 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 is 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 ton remained relatively steady year-over-year, despite higher oil prices in the second quarter and the absence of highway toll subsidy compared to same period last year. Freight volume for this quarter increased 9.3% year-over-year, while the volume attributable to e-commerce growing significantly at 23.1%, contributing to 19.2% of the total volume. We will remain focused on the e-commerce market for freight services and it will continue prioritizing unit cost reduction to position ourself 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 who saw further improve their operating efficiency and a 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 the total number of orders fulfilled by 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 have also established multiple warehouses as custom clearing centers partnered with local government in the border cities, such as Pingxiang 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 significant margin improvement. Parcel volume in Southeast Asia increased by 140.7% year-over-year to 38.8 million, driven by 80.0% 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 increased 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, strategic refocusing plan has delivered promising results in the second quarter. As evidenced by BEST Express effective unit cost reduction, BEST Freight returned to 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 a 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 will like to turn the call over to our CFO, Gloria, for further review of our second quarter financials. Go ahead Gloria.
Gloria Fan: Thank you, Johnny. And the hello to everyone. In the second quarter of 2021, our revenue was RMB7.4 billion, compared with RMB7.8 billion of Q2 2020. The slight decline was driven by lower ASP in Express and Freight, partially offset by higher volume in both business units. Our net loss narrowed down to RMB467.5 million compared to the first quarter of 2021, benefitting 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 RMB1 billion of financing and asset conversion. In addition, we are working pipeline of financing and strategic initiatives to further strengthen our balance sheet. The balance of cash, equivalents, restricted cash and short-term investments were RMB3.4 billion at the end of the second quarter. Our strategic refocusing plan charts 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 RMB144 million compared to RMB484.5 million in the same quarter of 2020. Both margins was negative 2% compared to 6.2% in the same quarter of last year. Adjusted EBITDA for continued operations was negative RMB253 million compared to RMB225 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 RMB4.3 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 RMB215.6 million compared to RMB212.4 million for the same period of last year. BEST Freight continued its leadership position and return to profitability during the quarter. Its revenue increased by 2% to RMB1.4 billion, primarily due to a 9.3% increases in freight volume, partially offset by a 6.5% decrease in SAP per tonne. Adjusted EBITDA for Freight was RMB36.6 million compared to RMB81.7 million for the same period of last year. Q2 revenue for BEST Supply Chain Management decreased by 5.9% to RMB479 million due to discontinuation of certain low gross margin key accounts. Adjusted EBITDA for Supply Chain Management was RMB22.4 million compared to RMB5.7 million for the same period of last year. Q2 revenue for BEST Global increased by 63.4% to RMB314 million driven by continued growth momentum in parcel volumes in Southeast Asia. Adjusted EBITDA for BEST Global was negative RMB47.3 million, which was flat compare 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 RMB429 million or 5.8% of revenue compared to RMB317 million or 4.8% of the revenue in the same quarter of 2020. The increase in SG&A expenses was primarily attributable to additional bad debt provision resulted from the pandemic and the absence of certain COVID-19 pandemic related subsidies that were available in 2020. R&D expenses for continued operations were RMB68 million or 0.8% of revenue compared to RMB39.5 million or 0.5% of revenues in the same quarter of last year. CapEx in the second quarter was RMB174.5 million or 2.4% of the total revenue compared to RMB424 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 RMB28 billion to RMB32 billion. This outlook compress management’s current preliminary estimate based on current market operating conditions, all of which are subject to uncertainty. As we move into second half of the year, we will continue to optimize our cost structure and increase our efficiency. We will also continue our strategic evaluations and are prepared to take appropriate action to strengthen our balance sheet and liquidity in support of our strategically focusing plans. With that, we will now open the call to questions. Thank you.
Operator: And the first question we have will come from Thomas Chong of Jefferies. Please go ahead.
Thomas Chong: Hi. Good morning. Thanks management for taking my questions. I have two questions relating to the Express side. One is relating to the METCO Environmental in China. They have seen our guidance is be wise at this time and I just want to get a sense about is this mainly due to the METCO Environmental 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 – how should we think about the ASP trend going forward? Thank you.
Johnny Chou: Thank you, Thomas. Yes, so the basically the whole Express macro environment is from when is that the macro the government’s policy to in-store the 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 where it says bottomed out, so we don’t expect it to be have a further reduction in the pricing. Meanwhile secondly, is that with that the last mile delivery fees, it should be also be stabilized. We don’t see a trend to continue to reduce the last mile fees costs that will help to stabilize the network and 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 of general market. As you were saying that the guideline – guidance was somewhat reduced. So we are looking at it as a whole across board, our business review based on the ASP reduction that we have seen from second quarter even though the third, fourth quarter, we don’t expecting too much of an ASP reduction there. As well as the Freight side, and Express and all macro side basically, that’s why we did a adjustment there.
Thomas Chong: Got it. Thank you.
Operator: Next we have Hans Chung of KeyBanc.
Hans Chung: Hi. Thank you for taking my question. Good morning, Johnny and Gloria. So I have a couple questions, first on Express business. So I guess, I won’t say that for the past quarter, as we continue to see the SAP declined 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 costs – the path of cost reductions has also come down quite a bit, right? If you compare it to the ASP decline to the cost reduction, I think that kind of become a wider. So my question is like, how do we achieve profitability, right, if the trend precede going forward? So in other words, what do we have to do, right to make a turn around to come, and then – going forward and then? That's my first question. And then second question is on freight. So since that freight also coming below expectation, I mean, from volume or revenue perspective. So I guess maybe, my question is, is that because of the increased competition and then also can you also update the landscape here? And then what's your think about the industry going forward? Thank you.
Johnny Chou: We extract the first one. You were talking about the profitability, how the clients will make it profitability. First of all, if you look at our cost reduction actually is a much more significant than the 8% looking at – if you look at the transportation cost, transportation cost last year during the second quarter, because of a recovery from the pandemic actually we have – government has giving a subsidies to the ways, the whole, the toll and the bridge toll for the several months. So that has significant reuse the operation that the transportation costs last year. The second is this year, actually since the beginning of the year, the oil price has increased significantly from last year. So if we take this into consideration our costs actually being improved much more it's about reduced about 10%. So in that sense that, we did not putting to discount all into consideration suppose to this deductions continue to be there. So that's the first thing is I want to clarify on the cost reduction side Second, go back to the profitability. So basically, probability we are at about RMB0.10 loss on per cost basis. So what are we seeing that is that so how you can play the balancing the ASP, and the cost to recover the RMB0.10 to make them profitable. So on the ASP side, we actually seen market a little bit stabilize more importantly in the past six months, we have – since 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 that are – 10 years ago when we start getting to this market – Express market, our market share was in between 1% or 2%. I have a thing for the whole team including the franchisor has been running very fast every year, 50%, 100% growth up to about 2019 and we reached about 12% of market share in that lot of franchisee kind of very, very tight on the capital and everything else, and that's what we need to help them to strengthen their the – also their customer acquisition capability and all the stuff. So we have seen a good progress in past six months that our franchisees are getting stronger in the sense that we helping them to help acquire the customers and also helping them to pass this a difficult time in the past year since pandemic happened. That's number one. So that will helping the small and medium franchisees able to acquire the customer better on that typically have a higher ASPs because the customer typically a little bit smaller, the ASP are higher versus very much concentrated a large customer base on a few large franchisees, and which typically have a very small ASP. So on the ASP side, what we want to do is three things right now visibility to make sure the service quality and customer satisfaction et cetera. Second, so helping the network franchisees to better health in terms of the money – making money or customer acquisition and so that we wanted to have a better customer base instead of what just focusing on a larger customer base, but more to the medium and the smaller customer that will have the typical higher ASP. So that's on the ASP side that we wish – we are seeing that gradual upward momentum on the ASP side in our side month by month we’re talking. Second is on the cost side. As you can see, as I just explained before from the reporting side that we see that 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 as a much more than the, I was reported. And we've going forward, the two areas, three areas that we will be able to further optimize our cost structure. One is hoping that in the second – that in the later couple of quarter a positional high season, the volume will increase. The volume increase will further utilizing our capacities and reduce the cost. Second is that we are doing lot of more of synchronization of the transportation side with the freight. That will reduce the freight cost further. And furthermore, that we are actually actively looking at our operating centers – hub centers and to see if there's any kind of spare spaces, which we can reduce or subleased out or et cetera to further reduce the leasing cost on that. So we're confident that the – in the second quarter based on the work we already have been done in the past six months with a more stabilized a 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 is a lot of impact of the severe weather pattern and normal weather pattern, which makes a lot of area flood and also second in some area risk resurgence of the pandemic sort of states and provinces. That's also has some kind of impact it's while we're on the second quarter. So that's number one. So the macro side of that is something that 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 or network side is also competitive. And as you can see that our ASP per ton is actually remained quite a flat. So but we will see typically if you see on the past couple of years on the high C&I just third and fourth quarter starting from late August now to end of the year, that's a high season the actual pricing will go up back up a little bit. So on the macro side, I think freight still growing in the sense of a general market, however, of very competitive, not as the ASP side, the pressure is not as high as like Express side, but continually still have a fair, good competition in the general market. Hans, this – that would be my some of the input to your questions.
Hans Chung: Yes. Thank you. 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 logistic or supply chain et cetera like we have faced in, I mean, last year. I guess not, but just want to hear your thoughts here?
Johnny Chou: Yes. Good news is that the resurgence on the COVID-19 is actually well under control I believe that in 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 as well we seen, probably a little bit on the second quarter and third quarter of course July and August for the pandemic. But as we're seeing that this is less effective now. I'm sure that can be in control very soon. So as a result generally to our business, I think a short term will have some impact, but I don't see moving forward from now. We will have a more severe impact on that.
Hans Chung: I see. Thank you. That's all I have.
Johnny Chou: Thanks, Hans.
Operator: The next question we have will come from Ronald Keung of Goldman Sachs.
Ronald Keung: Thank you. Hi, Johnny and Gloria. I have two questions on the Express side would like to seek your kind of thoughts on those. First is with our roughly flat volumes on a year-on-year basis. Just wanting to know how many kind of new customers did we gain 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 improved service quality. So the metrics like an end-to-end delivery time, or the metrics that we track, which could show our gap has been narrowing or improving versus say that the leaders as CTO 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 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.
Johnny Chou: 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 were balancing the bottom-line, as well as the volume growth. So in this competitive market and we choose to continue to service a better customers in the sense that it has a higher ASPs versus some of the customers on some parcels, which is purely money losing. So in the process, we will as it was said, we will helping the franchisees, especially in the middle layer small and medium franchisees they can, so smaller customers with a higher ASP rather than a purely concentrated a highly volume customers, which has a – typically had a very severe pricing pressure on that. On a quarterly side, so if you look at the June government post bureau government’s release of statistics, we actually ranked the number two in terms of the customer complaint ratios and everything else. Number two unpopular that the Best, number two site. So we tracking of course, a lot of these metrics in term 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'll compare with like you said, the top of the player like CTO we'll still have some of the distance, but if we compare with ourselves and the rest of the players, and we've continued to make pretty good progress on that. Secondly, we're talking about the market dynamics or market structure. In generally if you look at the market structure where you see that the same some of the other players new entrants – entrant has a very rapid growth, which – if you look at the number in the past six months, I didn't think it was as a case, but has some growth progress, but I don't think it's . But I think the really what we need to do as it's been from a Best point of view, then we need to really focusing on our own strategy, focusing our own strategies the first, as we said, that we really need to make a much more stabilized, a better service network on water, again, purely just lower the price and have fighting on the market share side. So, number one focus for us right now short-term wise is really to try to put our housing order to make the franchises stronger, make our service quality, the real time customer satisfaction better. Then meanwhile to compete, we completely or modify or optimize our customer profiles to make it a better ASP customers in that sense. So I think the – if we can, we are confident that with the six months or in the whole year that we have been doing on itself is a much healthier now. The franchisee 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.
Ronald Keung: Thank you, Johnny. That’s very useful.
Operator: 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.
Johnny Chou: 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.
Operator: 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.
