BEST Inc. (BEST) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to BEST Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the management’s prepared remarks, there will be a Q&A Session. With us today are Johnny Chou, BEST Incorporated’s Chairman and CEO and Gloria Fan, Chief Financial Officer. For today’s agenda, Johnny will be giving a brief overview of business and operational highlights. Then Gloria will explain the details of the 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 we begin, I will read the Safe Harbor statement on behalf of BEST Incorporated. Today’s discussion will contain forward-looking statements. These forward-looking statements are based on management’s current expectations. They involve inherent risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the management’s control. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or others, except as required under applicable law. Please also note that certain financial measures that the Company uses on this call are expressed on a non-GAAP basis, such as EBITDA, adjusted EBITDA and non-GAAP net loss. The GAAP results and a reconciliation of GAAP to non-GAAP measures can be found in BEST Incorporated’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 Incorporated. Johnny, please go ahead.
Johnny Chou: Thank you, operator. Hello, everyone, and thank you for joining BEST's third quarter earnings call today. In the third quarter, we remained dedicated to realigning the company around our core competencies and unlocking value for our shareholders. Let's first talk about our recent transaction with J&T Express China. On October 29, we announced the agreement to sell our Express Delivery Business in China to J&T at a valuation of RMB6.8 billion. We arrived at this decision after very thorough evaluation of various alternatives. As you must be all aware, the Express market in China has been exceedingly competitive with both leading players and the new entrants aggressive in their pricing strategies. The situation has been further compounded by the COVID-19 pandemic. Against this backdrop, we strove to enhance our Express network stability and our service quality as well as optimize the product mix for customers. These efforts led to concrete improvements in our network and services, but not taking the business out of loss making. This transaction enables us to focus on our core supply chain competencies and to execute on our strategic roadmap, allowing us to allocate resources more efficiently towards our integrated supply chain logistics, freight and global supply chain and logistic services. Next, I will talk about key developments and our operational performance during the third quarter. With respect to Express, while we continue to improve operating efficiency and enhance customer experience with upgraded service quality, in the third quarter of 2021, parcel volume decreased by 10.9% year-over-year to RMB2.1 billion amidst a competitive landscape. Gross margin contracted by 7.6 percentage points due to a decline in ASP per parcel of 12%, year-over-year, partially offset by a decrease in average cost per parcel of 5.5% year-over-year due to our cost reduction measure despite the higher oil prices and rising labor costs. BEST Freight continued to grow in its e-commerce-related transaction, reduce costs and invest in network expansion and service quality improvement. However, due to a traditionally low season in the third quarter and macroeconomic growth affected by pandemic, freight volume decreased by 1.5% year-over-year in the third quarter of 2021, with e-commerce volume accounting for 20.4% of total, up 4.5 percentage points year-over-year. The average cost per ton decreased by 1.3% year-over-year despite higher oil prices and rising labor costs. Thanks to our freight team's dedicated cost control. However, the gross margin was a negative 5.4% in the quarter, 6.7 percentage points lower year-over-year, primarily due to the ASP decline of 7.5% year-over-year. Moving to BEST supply chain management. In the third quarter of 2021, we remain focused on projects with higher margins and the clients with strong credit profile, while expanding our franchise's cloud OFC network and implementing cost reduction measures. Its gross margin was 3.6% in the quarter, 0.6 percentage points lower year-over-year as we realized one-off charges related to the closing of lower-margin comps. The total number of orders fulfilled by cloud OFC increased by 1.4% year-over-year to RMB103.6 million in the third quarter of 2021, of which the total number of orders fulfilled by franchised cloud OFC increased by 27.1% year-over-year to RMB68 million. The number of franchised OFCs increased by 1.7% year-over-year to 351. BEST Global maintained its robust growth in Southeast Asia with improved margins despite the continued impact from COVID-19. Parcel volume in Southeast Asia increased by 78.7% to RMB37.1 million in the third quarter of 2021 with particular strength in Thailand, Malaysia, and Cambodia, where parcel volume increased 123%, 933.2% and 264.5% year-over-year, respectively. Global's gross margin rose by 4.1 percentage points year-over-year, primarily driven by our growing economic scale, underpinned by our enriched cross-border services and solutions as well as our expanded network in the region. Going forward, with our strengthened balance sheet, we will be equipped to increase investment in automation and systems to enhance our services. As a pioneer of integrated smart supply chain and the larger service provider, we will be well positioned to serve companies that seek to further improve their operating efficiency and to accelerate their supply chain digital transformation. For supply chain management, with advantages at a higher reputation of our services for apparel and the fast-moving consumer goods industries, we continue to expand it in higher gross margin industry, such as auto parts and pharmaceuticals. We also continue to invest in infrastructure, such as the warehouses and fulfillment centers network and delivery system to further improve customer experience. We are optimistic that the supply chain and logistics will achieve profitability in 2022. For Freight, we will continue to solidify our position as an industry leader by further enhancing Freight's business capabilities, serving customers in the e-commerce space, where the pricing is more attractive and leveraging synergies with our supply chain management, we also expect the Freight to be profitable for the full-year of 2022. As e-commerce penetration deepens in Southeast Asia and China, Asian cross-border trades grow at a double-digit rate, Global will continue to be the growth driver for our company. We will promote further utilization of our strong supply chain management capabilities and provide smart logistics solutions for both local and cross-border operations in Southeast Asia. In conclusion, conditions around the world has brought to light the vital importance of smart supply chain solutions and larger services for every business. Looking forward, we will continue to strategically develop and explore synergies among our business units to create value. We are confident that our streamlined realignment and the focuses on our core strengths will enable us to capture the enormous opportunities that lie before us. Now, I would like to turn the call over to our CFO, Gloria, for further review of our third quarter financials.
Gloria Fan: Thank you, Johnny, and hello to everyone. Revenue for the third quarter was RMB6.8 billion, a decrease of 14.6% year-over-year, as macroeconomics and market dynamics weighed on the volume and average selling price for Express and Freight. However, BEST Global excelled in the quarter, maintaining a strong growth despite the pandemics lingering effect in the worldwide logistics and shipping disruptions. The strategic transaction with J&T Express China will significantly improve our liquidity and provide us with financial flexibility to reduce leverage and increase investment, laying a solid foundation for us to return to profitability and establish our growth trajectory. Our balance of cash, cash equivalents, restricted cash and short-term investments were RMB3.4 billion at the end of the third quarter. Now, let me walk you through our financial results in the third quarter of 2021. Within the intense pricing environment, our gross loss for Q3 was RMB505 million compared to RMB58.5 million in the same quarter of 2020. Gross margin was negative 7.4% compared to negative 0.7%. Adjusted EBITDA for continuing operations for Q3 was negative RMB481 million compared to negative RMB369.5 million in the same period of last year. Next, moving on to key financial highlights for our business units. On a year-over-year basis, BEST Express revenue decreased by 21.7% to RMB4 billion in the third quarter of 2021, primarily due to a 12% year-over-year decrease in ASP per parcel and a 10.9% year-over-year decrease in parcel volume. Adjusted EBITDA for BEST Express was negative RMB348.5 million compared to negative RMB187.7 million for the same period of last year. For BEST Freight, we continue our effort to grow its e-commerce-related business and invest in network expansion to improve service quality. Its Q3 revenue decreased by 9% year-over-year to RMB1.4 billion, primarily due to a 1.5% year-over-year decrease in freight volume and a 7.5% decrease in ASP per ton. Adjusted EBITDA for BEST Freight was negative RMB140.4 million compared to negative RMB37 million for the same period of last year. Q3 revenue for BEST Supply chain management decreased by 11.5% year-over-year to RMB400.6 million. Adjusted EBITDA was negative RMB16 million compared to negative RMB26.7 million for the same period of last year. Q3 revenue for BEST Global increased by 38.1% year-over-year to RMB298.3 million, driven by the sustained growth momentum in parcel volumes in Southeast Asia. Adjusted EBITDA for BEST Global was negative RMB61.8 million compared to negative RMB60.7 million for the same period of last year. Q3 revenue for UCargo and Capital grouped in other segments increased by 6% year-over-year to RMB767 million. Adjusted EBITDA for others was negative RMB78.5 million compared to negative RMB26.7 million for the same period of last year. Our operating expenses, excluding share-based compensation totaled RMB455.5 million or 6.7% of the revenue compared with RMB466.1 million or 5.8% of the revenue in the same period of last year. Now let's take a look at some major operating expense items from the third quarter. Please note, all of these expenses exclude share-based compensation. Selling, general and administrative expenses for continued operations were RMB396.4 million or 5.8% of the revenue in the third quarter compared to RMB423.3 million or 5.3% of the revenue in the same quarter of 2020. R&D expenses for continuing operations were RMB59.1 million or 0.9% of revenue compared to RMB42.8 million or 0.5% of revenue in the same quarter of last year. CapEx in the third quarter was RMB116.9 million or 1.7% of total revenue compared to RMB484.3 million or 6.1% of revenue in the same period of last year. This concludes the third quarter financial overview. We believe our recent transaction with J&T will open a new chapter for our company. This allows us to become linear and focus on leveraging our technology strength to deliver sustainable and profitable long-term growth. We will continue to explore, innovate and invent creative supply chain-based logistic solutions, helping our customers achieve success as the industry move into the digital era. With that, we will now open the call to questions. Thank you. Operator?
Operator: Thank you. We will now begin the question-and-answer session. The first question comes from Thomas Chong with Jefferies. Please go ahead.
Thomas Chong: Hi. Good morning. Thanks management for taking my questions. I have a question regarding our 2022 outlook for different business segments with regard to freight, supply chain and global. How should we think about the competitive landscape for different segments in the region and our competitive edge? And how we stand out from competition and achieve the KPI highlight. And with regard to the positive from the deal, how should we think about the use of the cash? Thank you.
Johnny Chou: Okay, Thomas. Your first question is regarding to 2022 global and supply chains some landscape in the competitive landscape and as well as our advantages. First of all, let's talk a little bit more about Global. Global basically has driven very fast growth in terms of the Southeast Asia's e-commerce penetration and also a fast growth in a cross-border between China and Southeast Asia in the trade. In both of this, we have a significant advantage. First of all, in the local market in each countries, we have spent few years already. We have been engaging in network development and buildup all the infrastructure. In Thailand, I believe we do have about close to nine sorting centers and hubs; in Vietnam, it's about 10; in Malaysia, we had done about seven or eight, so as Singapore and then Cambodia. So these are the infrastructure we have been continuing to invest and build in the past couple of years. Second of all, that we had build a fairly covered network, both in all these countries, we have almost completed 100% of coverage into these – especially in Thailand, Vietnam, in the early entrant markets. Third is that the cross-border, we leverage our supply chain business, supply chain capability and also the network, both Freight and Express in China. Recently, for example, we have helped one of the major manufacturers in China set up a logistics services in multiple Asian countries for both the direct trade with the last-mile delivery, warehousing, cross-border, et cetera, door-to-door services. So we continue to see a multiple – many of larger China-based companies want to enter the Southeast Asia requires – needs a end-to-end warehouse last-mile delivery, both in bulky items as well as in parcel services into the market. So I think that give us a very large advantages in terms of developing these markets. Back to the supply chain, we have been pioneers in supply chain services in China more than 10 years ago. So we're the first one who really rolled out a digital B2B, B2C services in China on the supply chain. In the past, we have done many successful clients. Based on the macro development, we have been more choosy or selective into our customer base in terms of the – in the industry as apparels and fast consumer goods and this area we concentrate. Recently, we picked up some pharmaceutical, electric vehicle manufacture the parts and services. So on the supply chain side, we see quite a strong demand for a B2B, B2C services – integrated services in the marketplace. So we will focus on these markets, supply chain and global into the 2022, along with the Freight. And they actually had quite a synergy because a lot of the supply chain customers both requires a freight services deliver to the stores to their distributors, resellers, as well as some of these companies or customers who aspire to global expansion. So that will be our 2020 outlook for the global supply chain, I think, as both are growing very good future as well as we have a very good competitive advantage on that. With regarding your second question about use of cash. After the exit from the China's Express market, the cash will be better used in terms of the – for the remaining business, especially in the freight, global supply chain. In the area of – multiple area, one is automation. I think the Freight has also been using more and more automation to reduce the labor cost as well as efficiency on the operations side. Global also, we have invested some of this in capital expenditures as well as the expansion to our network. And supply chain, the same thing, we will need a more automation on that. So that's one side. It's more automation, digitization of the network. Some of the R&D development will be further enhance our digital transformation as well as some of the expansion to the network and the customer acquisition. Thomas?
Thomas Chong: Got it. Very clear. Thank you.
Operator: The next question comes from Ronald Keung with Goldman Sachs. Please go ahead.
Ronald Keung: Thank you, Johnny and Gloria. Can I ask a few questions. Firstly, is the BEST Express, RMB6.8 billion of consideration. You mentioned earlier that it is RMB3.9 billion in cash. Just want to make sure what the rest, which is the remaining kind of RMB2.9 billion, is that kind of in debt and will that kind of pass-through in the BEST Express entity that will pass-through J&T. So we're still getting the whole benefit of the proceeds consideration of BEST Express at RMB6.8 billion. And then second question, can we go through some of the Freight volume trends. We see a slight decline in the third quarter. Is that something more due to the COVID situation? Are we seeing any improvement back to at least positive growth in recent one or two months? And my last question is actually thinking about your global and cross-border. Are we thinking of any freight forwarding aspects or business that we could do alongside our global network that is building up?
Johnny Chou: Okay. Yes. So first of all, on the expected transaction, yes, so the total consideration is 6.8% enterprise value. When we said we would have a cash reception expected approximately about RMB3.9 million, the remaining basically is pay down some of the debt, some of the Express the carryout, the working capital, the debt and everything else. So that is the – so basically the – on the Express company's book, they still have some unpaid working capital or some of the debts, including the transportation payment and some of the other payments that we still need to settle. So that will be deducted from that RMB6.8 million. So RMB6.8 million is basically a clean cash back to the group. Second is about the Freight. The Freight, basically, the third quarter is actually a little bit tough based on the three things, right? One is that the pandemic was flaring it up somewhere and when they're flaring up and basically will impact some of our hubs and will be – was closed and also being in a lot of areas, we cannot deliver also receiving the part of the goods, that will impact our volumes. Second is, as you probably have heard, some of the electricity curb and all the other stuff that have been happening, they will also have some impact into our volume side. And third is traditionally, third quarter is always light, third quarter, especially during the summer time, June, July, August is always a light month in the past and also macro pandemic, electricity curb and everything else compounded with some of this. But we do see an improvement on the fourth quarter already. I think the electricity curb has been eased, but lately, recently, also the pandemic, the COVID-19 has also flared up a little bit. But in fact, in October, November so far, especially during the past , we see our Freight volume has recovered significantly. So I'm expecting a gradual recovery on the Freight side. On the third question you had on Global side, about freight forwarding, we are not actively looking into that right now because we just want to focus on, one is that the local network development, but local network development like in Thailand, in Vietnam, we start to combining Express with a freight type of a network. So in other words, in China, if you look at the Express, the parcel is typically quite small, maybe less than 10-kilo. But in Vietnam and Thailand, we can go up to 50 kilos to 100 kilos. So that will help us to – in a very competitive market and give us a more service product. So there we'll be looking at more of coverage. And the second is a cross-border where we'll be looking at more of the – our cross border was a major – some of the large clients in China, wanted to expand in Southeast Asia. And supply chain, last mile supply chain, warehouses, services, that we will be concentrated on 2022 in next year. Freight forwarding, we've been looking at it, we'll be talking about it, but we don't have an active plan right now.
Ronald Keung: Okay. Can I follow-up with one more question is for the BEST Express disposal. How are we with the regulatory approval process and our expected completion?
Johnny Chou: We have filed and we're still waiting for the result. I don't have any comments on the expected time.
Ronald Keung: Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Johnny Chou for any closing remarks.
Johnny Chou: Yes. 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 any 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.
