BEST Inc.
Q2 2019 Earnings Call Transcript

Published: 14 Aug 2019

[Operator:]

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to BEST Inc.'s Second Quarter 2019 Earnings Conference Call. [Operator Instructions] With us today are Johnny Chou, BEST Inc.'s Chairman and CEO; and Jenny Pan, Principal Accounting Officer and Senior Vice President of Finance.For today's agenda, Johnny will give a brief overview of the business and operational highlights, then Jenny will explain the details of the financial results, following the prepared remarks you may ask your questions. Please note this conference is being recorded. Please also note this call is being webcast on BEST Inc.'s IR website at ir.best/inc.com. A replay of this call will be available on after the call. An investor presentation is also available on the IR website.Before I 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 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 otherwise, 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. Our 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 are in RMB.Now, I would like to turn the call over to Johnny Chou, Chairman and CEO of BEST Inc. Johnny, please go ahead.

[Johnny Chou:]

Thank you, operator. Good morning and good evening, everyone. Welcome and thank you for joining our 2019 second quarter earnings call. BEST's integrated supply chain and logistics networks continued to execute its strategy and deliver strong results despite competitive market dynamics and ongoing industry consolidation. I'm pleased to report we achieved positive non-GAAP net income first time in the second quarter. Our core segments of Express, Freight and Supply Chain Management continued to gain market shares, reduce costs and improve operating efficiency, while Store+ continued to optimize its operation to reduce losses.UCargo and Global delivered tremendous growth and are contributing to future growth of the company. The overall macro environment validates our business strategies and the long-term forward looking approach. In the second quarter of 2019, we continued to see accelerating demand for supply chain solutions and logistics services and further industry consolidation.They are driven by; one, growth in domestic consumption, increase in disposable income in consumer spending in low tier cities. Further online penetration of larger consumer goods such as furniture's and home appliances, intensified competition, technology adoption to support the digital economy, growth in cross border commerce and economic expansion in Southeast Asia, favorable government policies supporting the logistics industry, BEST technology enabled integrated service platforms and a strong execution capability position as well to capitalize on these vast opportunities and succeed in a competitive market environment.Let me share some business highlights with you. BEST Express continued to benefit from strong industry volume growth. For the quarter we're gaining the market share by achieving above market growth while reduce the costs and expenses significantly. Parcel volume exceeded 1.9 billion, an increase of 49% year-over-year, which is 1.72 times of industry wide growth. Market share increased to 12.2% from 10.5% in the same period of 2018. Due to the intense competition in the second quarter ASP including last-mile fees decreased by 12.5% year over year.The decrease in ASP was offset by decreasing costs and operating expenses as we continue to optimize Express network and invest in technology to improve operating efficiency. Cost Per parcel decreased by 11.6% year-over-year, highlighted by significant improvements in transportation and the labor costs. Although gross profit per parcel decreased by 1 percentage points year-year-year, EBIT per parcel was not impacted due to the significance operating leverage and the proactive expense management, we do expect the pricing pressure to ease in the second half as we approach into our peak season.BEST Freight, our leading nationwide less-than-truckload platform continued to expand its last-mile coverage footprint. The total number of franchisee operated service stations increased by 55% year-over-year to over 17,000 from 11,000 in the same period of 2018. The expanded last-mile service coverage positions as well to serve increased demand for e commerce and to see large item transactions. For the quarter Freight volume exceeded 1.73 billion tons, an increase of 26.6% year-over-year significantly higher than industry average. Gross profit margin increased by 1.2 percentage points year-over-year to 6.4% as we'll continue to optimize the network improve operating efficiency to drive down costs.For Best Supply Chain Management, our strategy to focus on FMCG and the fashion apparel segment is paying dividends as we continued adding new customers, while growing franchised Cloud OFC businesses. The total number of orders fulfilled increased by 42% year-on-year to 86.7 million, of which the total number of orders fulfilled by franchised Cloud OFCs increased by 79% to over 36 million. As of June 30, total GFAs of Cloud OFCs increased by 19% year-over-year to 2.84 million square meters of which over 1.2 million square meters were operated by franchisees. Gross Profit Margin improved by 1.1 percentage points to 8.7%.For Best Store products, as mentioned in our previous calls, our focuses in 2019 is to improve the profitability of the business by growing the number of higher quality franchised BEST-Neighbor stores, while improving older qualities of membership source. As a result, total number of all orders fulfilled decreased by about 13.2%, while revenue decreased by 1%. While gross profit margin improved by 2.5 percentage points year-over-year to 10.5%. EBITDA loss is also reduced RMB 15 million compared to the same period of 2018.Total number of branded stores, including franchise and self-operating stores increased by over 315% year-over-year to over 3100 as of June 30, of which the number of times a franchised Best-Neighbor stores increased to 2761 from 476 in the same period of last year. Number of orders fulfilled for branded stores exceeded 214,000 accounting for almost 20% of total number of orders fulfilled. This represents a 13 percentage point increase from the same period last year. We are in the midst of conducting a speech each have a review of the Store+ business to fine tune its models. We'll tell you more about it as we restructure the business.UCargo, our truckload service brokerage platform continued to grow rapidly, the number of external transactions on the UCargo platforms increased by 256% year-over-year to over 94,000. The number of registered agents on the UCargo platform increased over 22% year-over-year to over 4800 and the number of registered trucks increased by about 33% year-over-year to nearly 295,000 as of June 30. In the second quarter, revenue generated from external customers increased significantly to RMB 521.8 million which accounted for 5.9% of our total revenue. We are confident that with our leading technology infrastructure, transportation operations expertise and the favorable government policy UCargo platform is well positioned to capture the enormous opportunities in China's truckload market and became the leader of the industry.BEST Global continued to expand its cross border logistics businesses and building its presence in Southeast Asia. As of June 30, Best Global served 18 countries and regions outside of mainland China. We continue to grow operations in Southeast Asia. Our Thailand Express and fulfillment business is growing rapidly and we are ready to launch Vietnam nationwide express services. We will continue to look for opportunities to invest and expand our services and networks in Southeast Asia. Best Capital continued to provide financial solutions to our ecosystem participants and contribute to improved overall operating efficiencies in our network.Overall, we deliver excellent results in this quarter. Looking ahead, we are focused on executing our strategy of solid revenue growth, market share gain, cost, structure improvements, quality of services, profitability and investing in the future. I'm more confident than ever that our technology enabled integrated supply chain and logistics platform is the right formula for long-term success.With that, I will turn it over to Jenny, our Principal Accounting Officer. Jenny, go ahead.

[Jenny Pan:]

Thank you, Johnny. Hello everyone. We had a strong quarter. Company's revenue was RMB 8.8 billion representing a year-over-year increase of 31%. Revenue including Store+ business increased by 30.5% year-over-year this led to continues growth momentum of our core business.We also see solid bottom line improvements in this quarter. We recorded positive non-GAAP net income of RMB 6.5 million, compared to a net loss of RMB 56 million for the same period of last year. Non-GAAP net income, excluding Store+ business was RMB 107 million. Adjusted EBITDA was RMB 148 million, an improvement of 256% year-over-year. Adjusted EBITDA excluding Store+ business was RMB 247 million.Non-GAAP net loss for Store+ business was RMB 107 million. The company also recorded positive operating cash flow of RMB 334 million for the quarter and positive operating cash flow of RMB 128.7 million for the first six months of 2019, compared RMB 178.1 million for the same period of last year. Reconciliation of non-GAAP measures to comparable GAAP measures and relevant adjustments can be found in our earnings press release.Now, I would like to discuss key financial highlights during this quarter. On a year-to-year basis, Express revenues increased by 30% to RMB 5.4 billion primarily due to a 49% increase in parcel volume. As Johnny mentioned, the decrease in ASP was largely offset by decrease in costs and operating expenses as we continue to optimize network and invest in technology application to improve operating efficiency.Revenue per parcel increased by 12.5% to RMB 2.86 per parcel, cost per parcel decreased by 11.6% to be RMB 2.73 per parcel of which transportation cost increased by 17.7% year-over-year to RMB 71 cents per parcel. Labor cost decreased by 31.5% to RMB 23 cents per parcel. Lease cost decreased by 16% to RMB 9 cents per parcel. Other costs increased by 25.2% to RMB 14 cents per parcel.Last-mile delivery cost only decreased by 2.1% to RMB 12.55 per parcel in order to maintain service quality and network stability. Gross profit increased to RMB 244 million representing an increase of 6.7% year-over-year. Freight revenue increased by 37% year-over-year to RMB 1.3 billion, primarily due to 36.6% increase in Freight volume.Unit economics continues to improve driven by economics of skills, network planning and product optimization. Revenue per ton increased by 0.2% year-over-year to RMB 755 per ton, a while cost per ton increased by 1.1% to RMB 725 per ton of which transportation costs equates by 8% to RMB 351.Labor cost decreased by 7% to RMB 94 this cost increased by 1.5% to RMB 55 and other costs increased by 10% to RMB 45. Gross profit margin was 6.4%, representing an increase of 1.2 percentage points compared to the same period of last year. Gross profit increased by 55% year-over-year to RMB 83 million for the quarter.Supply Chain Management levels increased by 30% year-over-year to RMB 5.99 million primarily due to 40% increase in order fulfilled by our Cloud OFC. Gross Profit Margin increased by 1 percentage points year-over-year to [technical difficulty] and gross profit increased by 36% year-over -year to RMB 52 million.Store+ revenue decreased 1% year-over-year to RMB 791 million. The revenue slowdown is due to a decrease in total number of orders fulfilled for membership stores through our ongoing efforts to improve other quality. Gross profit increased to RMB 83 million from RMB 64 million year-over-year, while gross profit margin improved by 2.5 percentage points year over year to 10.5%.Our other segments, BEST UCargo, BEST Capital and BEST Global continue to show growth momentum and are becoming important contributors. Revenue from those service lines increased significantly by 183% year-over-year to RMB 647 million primarily due to the less growth of UCargo platform. Revenue generated from external customers on the UCargo platform increased significantly [technical difficulty] contributed 2 million.Gross profit for other service lines increased by 74% year-over-year to RMB 57 million. Of the major operating expense items are excluding share based compensation expense compared to the same period of 2018, selling expense as a percentage of revenue decreased by 0.6 percentage points to 2.4%. General and administrative expense as a percentage of revenue decreased by 0.5 percentage points to 3.2%.Research and development expenses as a percentage of revenue remains flat. Excluding Store+ business the selling, general and administrative expense, [indiscernible] expense are excluding share based compensation expense as well as percentage of revenue of excluding Store+ revenue was at 4.6%.Net cash generated from operating activity was RMB 334 million compared to RMB 432 million in the same quarter of 2018. The decrease was due to the single cash flow cycle, which was offset over the six month period. Net cash generated from operations activities for the first six months in 2019 was RMB 128.7 million compared to net RMB 178.1 million for the same period in 2018, an improvement of RMB 306.8 million.Cash and cash equivalents with used cash and short term investments in total were RB 4 billion as of June 30, 019, compared to RMB 3.9 billion as of March 31, 2019. CapEx in the second quarter was RMB 380.9 million, $55.5 million or 403% of total revenue compared to RMB 250.3 million or 3.4% of total revenue in the same period of 2018. The increase in CapEx was primarily due to the upgrade of automation systems in major hubs and location centers.Now, let's revisit our 2019 financial outlook. Based on current market conditions and operations, we maintain our full year 2019 revenue guidance to be in the range of RMB 36.5 billion to RMB 37.2 billion. This represents the management's comments and preliminary expectation, which is subject to change.With that we will now open the call for Q&A session. Operator?

[Operator:]

[Operator Instructions] Today's first question comes from Scott Schneeberger of Oppenheimer. Please go ahead.

[Scott Schneeberger:]

Thanks very much and good morning. Good evening, everyone. I guess if we could just start out in the Express segment, please. Could you address revenue per parcel going forward? Johnny, what you expect in the back half of the year and then obviously correspondingly how you're going to be managing your expenses to offset? Thanks.

[Johnny Chou:]

Okay, Scott, thank you for the questions. Looking forward we are somewhat of ease of the ASP pressure. So our expectations of Q3 on ASP should be relatively stable as compared with Q2, so probably with a $0.01 or $0.02 increase. Q4 in general will have a more upwards tick for ASP as to run a high seasons or peak seasons. So that's what we have managing. Costs continue to coming down and actually did a – achieved a great job in half first half of the year. Actually, the overall cost has been significantly cut down, if you look at the cost less of last-mile it's actually down 22%. But we continue to see I think, on the third quarter and fourth quarter some of the cost reduction mix.

[Scott Schneeberger:]

Excellent, thanks. And then switching up a little bit. I was curious if you could elaborate please on your mention of a strategic review of a best store?

[Johnny Chou:]

Right, so yeah, so our purpose of mission for doing the Store+ is really, we feel that in a digital economy, the last-mile becomes more and more important and it's very inefficient, it's very wasteful and low efficient. So we thought that with the technology and with the supply chain solutions, we are able to make it more efficient. So save the cost environmentally and everything else and make the consumer a good experience, a bad experience et cetera. But it will take some time to continue to grow. So we look at the strategy as to how the next – how to continue – definitely want to continue to do this, but is that one be – with a different way to do it such as maybe a separate business or everything else and still on the table. So we're look at this just as a – basically as an option and we do have a view on that. But certainly when we have a decision and approved by board and we will move up along leverage investment with this. So we're looking at doing a – constructively looking at all the business models and see how can we improve better.

[Scott Schneeberger:]

Okay, thank you very much. I'll turn it over.

[Operator:]

And our question today comes from Baoying Zhai of Citi. Please go ahead.

[Baoying Zhai:]

Hi, Johnny. I have three questions. The first question is still regarding the Express ASP, actually in second quarter we're seeing great pressure on the Express ASP. And you mentioned some third quarter relatively stable and with $0.01 to $0.02 increase versus second quarter, which means is about 1.32 to 1.31 lines and this actually equivalent to 17% year-on-year decrease versus last for the quarter and but the decline magnitude actually should be narrowing the second quarter. I just want to confirm if my understanding is correct here. And on a separate note, actually we see you made a successful price hike in July and August. What's actually – what's the implication here, will it help our ASP in the third quarter or we can see – if assuming some new price hike and you'll will be actually use it to other regions to makes the ASP decline a still – in a significant, but should be better than second quarter to say the first question regarding the Express ASP.

[Johnny Chou:]

Okay, so this – the first question is similar to the last one from Scott. Yeah, so the third quarter we think the ASP – right now it is about – second quarter is about RMB 1.3 or 1.31, so I think it's going to be relatively stable for the full third quarter, maybe have a little bit uptick, but it's similar. With EU yes, you very informed that actually the pricing has been eased – the pricing pressure have been eased and I think that – I ever get a sense is that that as the peak season coming very soon so I think everybody is actually eased on the pressure. As to this gain is be used somewhere else and not, it depends on market how. We do not have any plan or any for now.

[Baoying Zhai:]

Okay, so do you think the EU ASP tag is – it actually can hold around for a while or you think it's just temporary?

[Johnny Chou:]

Hopefully, as the peak season – arriving of the peak season, typically July and August, early August and this four weeks is the lowest of the year, extra potential, yeah, later part of this month and started picking up – the orders picking up a little bit, so hopefully that this will stay for the remaining period of the year, but again no guarantee for that.

[Baoying Zhai:]

Okay, yeah, understood and my second question is on the Freight, actually food is doing very well, ASP increase and market share increase. What's the outlook for the Freight business and is the successful Freight experience could be used for our Express?

[Johnny Chou:]

Yeah, so Freight, we are enjoying a very good strong growth as well as top line and bottom line. So margins are going to improve, costs continue going down. So we're really having a good run on the free side. That's partially because we have done Freight – invest in the Freight somewhat time earlier than some of our other players. On that Express, like Express, we're getting to the, to the market somewhat late. So we're actually doing a catch up game. I remember when time we getting to this – when we started building Express business, our volumes about one tenths, our competitors are 10 times or 20 times bigger than our volume and our market share was less than 1% to the 2010 when we started. But after that nine years we doing a catch up game, right, every quarter we've been doing catch up. So now we're very close, so at least not 10 times, but maybe couple 20, 30, 40 percentage points to the top. But on the on the Freight side it's a completely different story, right because we're always in a very good leading position. So yeah, so we can learn from the Freight is that how managing the Freight network – actually Freight networks are very similar except this one is larger parcels and larger merchandise and others is just small parcel. Yeah, so that's what we'll say, I think Freight is doing well and we're enjoying the early move, the investment did earlier and we kind of enjoy it for Freight and Express we're doing a really big catch up from very good time [indiscernible].

[Baoying Zhai:]

But what's the outlook for Freight, but what's the outlook for Freight here because Freight is also has been very intensive competition right now right, so but we still managed to increase our ASP as well as our market, so what's the outlook here?

[Johnny Chou:]

Yeah, so Freight I think – Freight's on right term, the Freight business is unlike Express, right. Express is a small parcel. So when the volume goes up, you can increase the automation and lot of equipments to automate it and you can really handle a huge amount of orders. But Freight side is more of – still a more traditional man handling because they're heavier, use forklifts and stuff like that. So we are right now we are doing automation on some of these things and to see how you can help the Freight to improve the operation efficiency and lower the cost. But Freight and nevertheless it’s a complete – it's still different – in the operation side front different from the Express side. So going forward, I think we're still going to gain the market share in the Freight side and cost is still going to be gradually coming down and the probability that we think it's going to continue to improve soon quarter-to-quarter.

[Baoying Zhai:]

Okay, thanks, and my last question is regarding the Alibaba's potential controlling STO and what do you think? What's the implication to the industry competition landscape? As we all know, Alibaba – actually among them Alibaba has the highest shareholding in that, so will BEST to further cooperate with Alibaba going forward and especially in terms of the Store+ refinancing, it is on the radar already or on schedule already?

[Johnny Chou:]

Yeah, as being as being announcing on the media, yeah, Alibaba is putting more investment into OTO everyone knows about that. I would think that in the competitive landscape as Alibaba is investing in BEST, in SGO and YTO and GTO as well. I think that the competitive landscape is not going to be changing drastically, continue to going to be able to – every company is going to do their best to improve the efficiency and service quality. So with Store+ as I had mentioned earlier to Scott that we are looking at order of possibility to how to continue to bring the value to the last-mile and meanwhile also reduce the losses to the group and hopefully we'll expect. If you look at for our group, right now the stock price is the biggest drag into our performance. So we are doing some operational review on that.

[Baoying Zhai:]

Okay, thanks, Johnny.

[Johnny Chou:]

Thank you, Baoying.

[Operator:]

[Operator Instructions] Today's next question comes from David Ross of Stifel. Please go ahead.

[David Ross:]

Yes, good morning, good afternoon, everyone. First question is just on, I guess the competition over there. You talked about expanding into other markets, so Thailand is going well and into Vietnam. As you expand into those other markets, are you finding less competition than in China? Or is there a significant competition you have to compete against once you arrive in a new territory?

[Johnny Chou:]

Actually in the new territory, of course, it's less competition because there is not a very entrenched market leader in the yet. And still – the market is still – demand is growing very rapidly. And the need for infrastructure and the service capability is only left. So it reminds me like, 10 years ago China, when this orchestra started. Yeah, so the question is do we see a tremendous growth opportunity? But yes that's a competitive landscape compared with China

[David Ross:]

And we've talked in the past about labor issues, finding enough people for Express and for Freight in China, what's the update on the labor situation over there?

[Johnny Chou:]

Our labor situation is – for BEST we are pretty good, we are not shortage of any workers both Express and the Freight and part of the reason is because consolidation in industry that smaller players are getting out of market. And second is because the improvement of efficiency by very large investment in automation and technology et cetera. So actually we have less people now in Express. Freight, probably still not much more than what it was in first quarter last year. So we actually not seeing this issue where we are not seeing a labor pressure or anything.

[David Ross:]

That's good and then last question is just on inventories, whether it's what you're seeing is a supply chain or in talks with customers. What are they saying about current inventory levels right now? Are they too low, too high, just about right?

[Johnny Chou:]

Inventory, I don't have exact a customer or inventory, but we do manage the warehouses. So I think the percentage of movement is somewhat slower. Order movements in and out, it's somewhat slow. I'm talking about pro customer basis. So basically, we're getting new customers but being an existing customer somewhat a slower movement. That means you can consider that as an inventory level higher, yes.

[David Ross:]

Excellent, thank you very much.

[Operator:]

And our next question today comes from Eric Zong of Macquarie. Please go ahead.

[Eric Zong:]

Hi, Johnny. So I have a one question which is on the bottom line, right. So if we do – if we include the Store+ contributing in the second quarter ex Store+ long gap, that's more than double right. So I'm just wondering – so I think I guess this is driven by a lower loss contribution from the quarter, so I just wonder, so what's the reason behind such bigger change and can this improvement assist into the second half of 2019? Thank you.

[Johnny Chou:]

Okay. So you're talking about Store+ ex – the group ex Store+, so the EBITDA has increased dramatically. Mainly the reason is because one is operating scale, right, because even though our margin is somewhat a little bit lower on the – about 0.3% lower, but the scale is larger. So you actually have more gross profit. The second is that our operating expenses and G&A actually as a percentage of the sales should go down as well, so that contributes significantly to the ex Store+ business, your possibilities. Is that your question or I misunderstood your questions?

[Eric Zong:]

So just I have one more follow up question. So on G&A because you mentioned the ratio top, right, so just wonder if 0.3% you may be in the third quarter of fourth quarter this year?

[Johnny Chou:]

So you're talking about – I may be misunderstood a bit. You're talking about what [indiscernible].

[Eric Zong:]

Yes. Yeah, so the guidance maybe your expectation?

[Johnny Chou:]

So basically where we are affected with a breaking out the Store+ reporting is mainly having people investors and market can create to see what is reading act on that. So we basically took the DDT, anything can be allocated expenses we allocated to two business group and something like myself or the headquarters is still there. So when you have been located with reduced and also operation efficiency improved. So the ex Store+ margin actually improved. And so that's why we reported adjusted EBITDA ex Store+ of about 289 million, so which is significant improvement from the last year.

[Eric Zong:]

Okay, thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes your question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

[Johnny Chou:]

So okay, thank you 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:]

And thank you. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.