BEST Inc.
Q1 2018 Earnings Call Transcript

Published: 10 May 2018

[Operator:]

Good day, ladies and gentlemen, thank you for standing by and welcome to BEST, Inc.'s First Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. Following management's prepared remarks, there will be a Q&A session. Please note this event is being recorded. I would now like to turn the call over to Mr. George Chow, Chief Strategy and Investment Officer of BEST, Inc. George, please go ahead.

[George Chow:]

Thank you, Operator. Hello everyone and welcome to BEST, Inc.'s first quarter 2018 results conference call. With us today are Johnny Chou, our Chairman and CEO; and Alice Guo, our Chief Accounting Officer and Senior Vice President for Finance. For today's agenda, Johnny will give a brief overview of our business and operational highlights, Alice will explain the details of our financial results. Following the prepared remarks, you may ask your questions. Please note this call is also being webcasted with a live Investor Presentation on our IR website at ir.best-inc.com. A replay of this call will be available on our IR website later today. Now let me quickly remind you of our Safe Harbor statement. Today's discussion will contain forward-looking statements. These forward-looking statements are based on management's current expectations dealing about 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 statements as a result of new information, future events, or others except as required under applicable laws. Please also note that certain financial measures that we use 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 our press release. Finally, please know that unless otherwise stated, all the figures mentioned during this conference call are in RMB. Now I'd like to turn the call over to Johnny Chou, Chairman and CEO of our company. Johnny, please go ahead?

[Johnny Chou:]

Thanks George. Hello everyone, good evening, good morning. Welcome and thank you for joining our 2018 first quarter earnings call. I'm very pleased to announce that we started off 2018 very strongly. Thanks to the great job done by all of our business units, to achieve our target of high revenue growth with significant margin improvement. First quarter is traditionally a low season due to business slowdown over the long Chinese New Year Holiday. We generated revenue of over RMB5 billion which represented a 54% year-over-year increase. Gross margin was 2.2% representing a improvement of 6.4 percentage points. Adjusted EBITDA improved by over 37%, while non-GAAP net loss was reduced by over 25%. BEST Express substantially outperformed the industry with valuable growth of over 66% and we achieved a solid gross margin improvement of 4.8 percentage points year-over-year. Freight continued to execute its aggressive plan to term profitability. Gross margin improved by almost 12 percentage points ahead of plan. The ongoing platform integration of Supply Chain management, Express, Freight, and UCargo, further improves transportation solutions we offer to customers. It has resulted in several large wins with Supply Chain management and expected to give us more competitive advantage going forward. Store+ accelerated its last-mile services network expansion, the number of membership store reached over 375,000 an increase of 46%. Other service including Capital, Global and UCargo are also growing rapidly. As we continue to innovate and invest in technology to build new services and solutions and we improve operational efficiencies. I'm confident that we will continue to execute our business strategies and initiatives that drive for long-term growth and shareholder value. During the last earning call, I talked about accelerating gross in e-commerce, domestic consumption upgrade, and the New Retail and how they are driving demand for smart integrated logistics and Supply Chain services, solutions and remunerations and the vast amount of opportunities they created for us. For this call, I will first talk about the market dynamics in the segments that we are operating before I get into some highlights of our business. First, Express Market. The overall Express Market continued its strong growth. China's Express industry grew at about 30.7% in first quarter of 2018 versus 24.3% in fourth quarter 2017. Although the price per parcel trended slightly lower again Q4, I believe the price has reached to an inflation point and the cost related to parcel delivery continued to rise. Meanwhile the Express Market consolidation is accelerating, leading to a more mature market, its pricing pressure is easy, the focus will shift to annual experience. Players with better service quality and network stability will grab the more market share. The Freight market is driving with many new investments and the new players entering the market. The Freight market size is much larger than Express Market. I expect this Freight market to start consolidating similar to the Express Market it's done right; the Freight business can be just as profitable as this Express business. Currently, we are one of the few companies with a nationwide Freight network and among the top three in terms of volume, unlike Express where we were the new guys and have to play catch-up to the big players. We have a tremendous gross advantage in Freight and are well-positioned to become the leader of the pack. The market for Supply Chain has become increasingly comparative. The Supply Chain market like Express is also undergoing rapid consolidation. Given the consumption upgrade and the consumer demand for last-mile services, the traditional B2B players will face increasing challenges as the trend is clearly B2B to C. BEST is well-positioned to capture full integration of online and offline and will further cement our position as one of the leaders in the industry. The competition for B2B platforms for convenient stores has also intensified due to the two leading e-commerce players entering the market last year. We're already seeing a few players exit the industry and we expect this trend to continue with only a few big players left in coming years. To succeed, we need to have merchants upgrade their stores and improve consumer store experience. So core competency for the business is Supply Chain capabilities and technology applications. I strongly believe our Store+ business is our natural extension of our integrated platform. It has joined as a hip with our Supply Chain management business as a large portion of its cost is associated with fulfillment and transportation. Tremendous synergies between the two business, as they feel off each other and benefited from each other's growth. In addition, Store+ is important for our Express business for its last-mile delivery services. We've always been focused on the last-mile space. You will see more results in coming quarters. Despite the ongoing noise surrounding Trade Wars between China and the U.S., the trend for cross-border trade continues to grow along with the rising demand for cross-border logistics and Supply Chain solutions and with e-commerce growth in Southeast Asia taking off the opportunities for more sophisticated Supply Chain services in those countries and regions are huge. We are committed to growing our U.S. business and looking for opportunities in Southeast Asia. Smart and efficient transportation is becoming very informed in the new economy. Demand for intercity gapping time delivery, full truckload, and green energy vehicles are leading to innovation platforms like our UCargo. There are many sub-truck drivers in China constantly looking for businesses and the huge opportunities in after-market services. Key for those parcel [ph] to succeed is to have ability to consistently provide businesses to drivers, while provide high quality services to merchants. We are in process of scaling the UCargo platform. There are tremendous synergies between UCargo platforms and BEST Capital as we scale up UCargo and we also scale up our financing business. Lastly, [indiscernible] and the flexible technology inflexion [ph] become even more informed. It's not only improved the company’s operating efficiency but it also empowers companies to use Big Data analysis to provide more value-added services and solutions, while enhancing the user experience for companies with both an integrated service platform and strong technology capabilities will stand out as integration between online and offline deepens and demand for more sophisticated smart logistics and Supply Chain solution incentivize. Now let me give you some of our business highlights from the first quarter. Net Express continue to deliver strong growth, parcel volume increased by 56.3% more than double the industry-wide growth of 30.7%. Average parcel weight reduced to 1.23 kilograms from 1.43 kilograms in first quarter 2017 resulting in a decrease in revenue per parcel. We continue to significantly reduce the transportation cost by increasing the application of technologies and artificial intelligence, as a result, gross profit per parcel increased significantly. Tax rate also grew much faster than the market, volume increased by 24.7%, gross margin improved significantly by almost 12 percentage points. We expected the economics of scale, network of migration and planning, customer service focus, technology application and synergies with our other businesses will continue to drive Freight margin expansion. We are confident that BEST Freight is on track to become profitable this year. Then Supply Chain management directly provide B2B, B2C and O2O fulfillment and transportation services to over 500 corporate customers. The number of orders fulfilled by Cloud OSPs increased by around 40%. Supply Chain management also started building out intra-city same day delivery network by leveraging our technology infrastructure and synergy with Express Networks, we have always rolled out our service in Shanghai and expected to cover more cities throughout the year. For BEST Store+, our core competency into B2B, B2C supply chain management provides us with clear competitive advantages. We continue to focus on deepening engagement with stores and optimizing merchandize collection and the product offerings while expanding our footprint. The number of membership stores increased over 375,000, the number of branded stores increased to 452, the number of store orders fulfilled increased by 74% increased over 100% and the gross margin improved by almost 10 percentage points. We will continue to build our last-mile service network by accelerating stores integration with Supply Chain management and Express. Our Other Service revenue increased by 544%, gross profit increased by 614%. BEST Capital entered into strategic agreements with multiple truck manufacturers to leverage their resources and network to expand its financing offering and solutions to transportation service providers. BEST Global will continue to broaden its reach; it started coverage in Spain and Thailand to provide cross-border logistics and supply chain solutions and now operates in 10 countries and regions outside of Mainland, China. UCargo opened its platform to external merchants to solve truckload capacity. We were thoroughly UCargo development to increase transportation volume and the revenue by attracting more merchants and transportation service providers to its platform. Capital, Global, and UCargo are expected to become new growth engines for the company. The company continued to introduce technological enhancements to deliver improved capabilities and enhanced efficiency. BEST Cloud integrated convenience stores, POS, and membership rewards programs with Store+ and Supply Chain Management for full data visibility. It also integrated Express and the Freight's dynamic routing calculation that is expected to further reduce transportation costs. In addition, BEST Cloud has started a pilot simulation process in Cloud OFCs and Express hubs to analyze and optimize personnel resources planning in order to increase labor utilization efficiency. Overall, we delivered an excellent results in the first quarter of 2018 with a leading nationwide integrated logistics and supply chain service platform enabled by robust and flexible proprietary technology infrastructure, BEST is well-positioned to capture huge market opportunities presented in the new economy. With that, let me hand over the call to Alice, our Chief Accounting Officer and Senior Vice President of Finance to go through our financial results. Go ahead, Alice?

[Alice Guo:]

Thanks Johnny. Hello everyone. We delivered another excellent quarter. Our revenue increased by 54% year-over-year to RMB5 billion since some strong growth and momentum across all segments. Meanwhile our gross profit margin improved by 6.4 percentage points to positive 2.2% and our net loss margin improved by 6.2 percentage points year-over-year. Excluding share-based compensation expense, operating expenses as a percentage of revenue decreased to 8.7% from 9%. We have reduced our non-GAAP net loss to RMB315 million from RMB423 million. Adjusted EBITDA was negative RMB211 million compared to negative RMB339 million. Reconciliation on non-GAAP measure to comparable GAAP measures and the relevant adjustments can be found in our press release. Now let’s take a look at the core segment. Express revenue increased by 53.8% to RMB3.2 billion primarily due to significant increase in parcel volumes. Gross profit margin for Express went up by 4.8 percentage points to positive 0.9% due to volume growth ongoing platform optimization network planning per active cost control measures and technology applications. Freight revenue increased by 36.8% to RMB763 million. This increase was a result of increasing Freight volumes and 9.7% increase in average revenue per ton. The increase in average revenue per ton was pulmerated to AQ water price adjustment. Gross profit to margin for Freight increased significantly by 11.8 percentage points to negative 2.2%. Supply Chain management revenue increased by 28.7% to RMB399 million prime rated to the increased business volume. Gross profit margin for Supply Chain management was 5%. Store+ revenue increased by 100.1% to RMB525 million prime rated to an increase of 74.1% in the number of store orders fulfilled in connection with the rest expansion of the Store+ network. Gross profit margin was 10.1% an increase of 9.9 percentage points as a result of optimization of merchandize selection and the product offering and the deepening engagement with existing membership and the brand new store. We are also delighted to see a significant increase in revenue from other service lines in Capital, Global, and UCargo. The revenue from those service lines increased by 544% to RMB72 million, while gross profit increase by 640% to RMB22 million. We expect them to further integrate with our product in this segment to supported the BEST ecosystem and become new growth engines. Of the major operating expense item without the effect of share-based compensation expense selling expenses increased by 88.4% to RMB213 million. Selling expenses as a percentage of revenue increase to 4.3% from 3.5%. This increase was primarily attributable to the increase in performance level and the lease cost in connection with the expansion of Store+ network. G&A expense as a percentage of revenue was 3.9% and RMB expenses as a percentage of revenue was 0.6%. Share-based compensation expense was RMB21 million. Net cash used in operating activities was RMB611 million compared to RMB301 million. The increase was primarily attributable to seasonal reduction in accounts payable by RMB540 million during the Chinese New York holiday period. Our cash and cash equivalent restricted cash and the short-term investments were RMB4.7 billion or U.S.$757 million as of March 31, 2018. Our SLI model allows us to achieve high growth without a incurring significant CapEx. In the first quarter of 2018 CapEx was RMB151 million or 3% of revenue. Our strong balance sheet gives us the result and the flexibility to achieve our business and strategic objective. Finally, I would like to discuss our financial guidance. For the second quarter of 2018, we expect our revenue to be between RMB7.1 billion and RMB7.3 billion. This concludes our prepared remarks. Now, we are ready to begin the Q&A session.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Ronald Keung of Goldman Sachs. Please go ahead.

[Ronald Keung:]

Hi, thank you, Johnny, George, and Alice for taking my questions. One question on Express and the second question on Supply Chain, so we see a very strong positive growth of 66%, twice the pace of the industry just want to ask how has the growth trended so far in the second quarter and what are the strategies that we're doing to achieve possibly always to aiming for this twice the pace of the industry for the full-year? And the second question on Supply Chain, just want to -- if management could share about the competitive landscape for B2C and B2B supply chain and on the back of the recent fund rising in JD Logistics, are we seeing just a competitive landscape heating up and what are our strategies and what’s unique with our offerings that's new within the Alibaba ecosystem that we are aiming to do, and we see where 500, over 500 customers now, if you should share any new contract wins of key expansion projects with any brands that you could share with us and particularly on D-Mart Supermarkets. Thank you.

[Johnny Chou:]

Okay, thank you Ronald. It's Johnny. The first question on Express side we did achieve a very strong growth on the Q1. And you know for 2018 however our primary goal is really try to achieve high growth meanwhile try to improve the quality of services and customer experience. So how we’re balancing that and we are really taking very strong managing how to improve efficiency in the center transportation meanwhile how you can improve the customer experience. So yes, I think the first, second quarter, we still have see stronger growth and compared with the market but I’m not going to say it’s going to be twice or three times very strong growth over the market and meanwhile we like to see a more significant improvement on our margins and profitability and bottom line. So if you look at ASP our ASP this quarter on Q1 is relatively compared with Q4 last year is relatively similar. If you compare with old-year data cost continue to drop much faster than the ASP, so the margins are improving dramatically. On Supply Chain side, I think you have well pointed out, I think the market is become very strong demand in terms of the more and more customers require much more intra-day offline and online B2B, B2C integration services. Given that and BEST really have lot of advantages in term of from warehouse management for B2B, B2C as well as transportation from Freight to the parcel through the full truck UCargo services. Yes, we see a strong demand increase but we also see a strong competitive competitions in the market with two e-commerce platforms basically very well joining into the market. So both I think we -- from our point of view, we are having advantages over our supply chain services and integrated with parcels and freight and also UCargo delivery.

[Operator:]

The next question is from Vivian Tao of Citi. Please go ahead.

[Vivian Tao:]

Good evening, Johnny, George and Alice. Just have two questions. The first question is a follow-up question on the Express industry, Johnny asked because BEST started to very robust growth since the second quarter of last year, so with a very high base steady second quarter are we still expecting our volume growth to be like above 50% is that right in the remaining three quarters of 2018 and also I just want to see what the comments on the [indiscernible] parcels to the overall industry, what's the growth we got from the [indiscernible] and what’s the impact to our margin for the Express business? The second question is on Freight business, earlier Alice mentioned that the ASP of Freight increase was mainly due to the adjustment of the Freight rate, can you please elaborate a little bit on that, what have we done provide more services to specify for the higher freight rate or what’s the reason behind that and also we have noticed the gross profit for Freight has improved significantly in the first quarter, we only had about 17 million north on the gross profit level, so are we expecting this segment to turn profitable on the gross profit side in the second quarter, what's the expectation on that? Thank you.

[Johnny Chou:]

Thank you, Vivian. The first question is for parcels. So as I answered to Ronald, we are continually expecting a strong growth but actually it was above 50 or below 50, I don’t have the right confirmation there. But I think we continue to grow very strongly and see the trend but meanwhile we put a major emphasis on the quality improvement customer care fashion. I think the number coming out the next couple of months; you will see all these elements statistics on the quality and [indiscernible] I think will make a very strong driver for that. The next question you had was for the [indiscernible] or micro merchants. Truly, micro merchant has been growing. But from our end I mean what we have seen is that we don’t have any major differences between this quarter 2018 and versus fourth quarter 2017. We have similar kind of mixture right now but we don’t really have exact number as you know we are partner-based or franchise-based network, we gave our partners and franchise the same kind of amountable cost and pricing. As to that, we’re pricing to customers, we don’t really do. So from our end, what our mix is we don’t really know one way or the other we also have more profit or less profit. But if I see the micro-merchant are growing but in our end, we see the first quarter this year and the fourth quarter last year similar kind of mixture, potentially mixture. Exact number I don’t have but I think the -- For the LTL side, you were asking about question about ASP growth. Think last year 2017 I’m sure you’ve been tracking our recent numbers actually our LTL been increasing every quarter, the ASP has been increasing every quarter. That's primarily due to several things, right; one is due to like the network is getting bigger, so you got a much deeper coverage and delivery. So to a much more broader territory and regions, so the long-forward increases, your per charge for the ASP increases, this is one reason. The other reason is that when our network getting stronger and bigger coverage, we actually enjoying a much better pricing advantages, customer wanting to give us the services and businesses even with a little bit of higher price because we can cover a lot deeper and today we get other cannot cover. So we continue to see the trend while we improve the quality of products and services and also deepen our coverage and services, the ASP continue to climb to be a stronger growth compared with last year. On the gross profit side as very well noticed by you, the first quarter we really enjoyed a big improvement in the profitability in the gross margin side. If you notice our last couple of quarter we achieved a similar type of improvement gross profit. For second quarter, we are very much certain the LTL or the Freight business turn to be positive.

[Operator:]

The next question is from David Ross of Stifel. Please go ahead.

[David Ross:]

Yes, good evening. First question is just on the Freight segment again, last-mile service stations more than doubled, the volume growth is only about 25%, could you explain I guess what's going on there is that setting you up for further growth, is that part of the reason that you just mentioned that you’re getting the better pricing and then also in Freight, weight per shipment has been declining, is that a change in mix or is that any kind of economic signal that things are slowing down over in China?

[Johnny Chou:]

Okay, David, thank you for the question. For Freight, first of all the industry is growing at about 13% to 14% actually we are seeing so our growth is still much faster than industry. So the number two is that our, this year's focus on the freight side and we want balancing a fair good growth with improvement in core and as well as the profitability and margin improvement. So as you can see our margin improved by 12 percentage points, we can continue to improve this by second quarter and I’m sure the second quarter our margins will be positive territory and we’re going to make a gross profit positive. So the profitability is getting better and better. So we have enjoyed a very good early start in the network with a continued improvement of coverage and quality and that drives for our high growth as well as the margin improvement. And while as you mentioned about the mix the per order weight has been reducing somewhat which is the same right because really the lower the weight per order actually is good thing because they allow us to charge more money because typically gets a more difficult part to do. If you pick up a really one-time, two times of shipments, less typical to deliver because many other competitors probably can use it, the difficult part is small portion of small things which has developed -- delivered to a much deeper territory. So in the sense we want to drive down this number or the weight per order, hopefully that we are continuing to drive this we both started from couple of years ago now when network started it was about 200 to 300 kilos per order, now down to 140. So every month, we’re making progress to reduce that. Another thing we’ve also reduced the weight is as the LTL of Freight deliver more of e-commerce product for example a jogging machine, a refrigerator, or something like that versus a much more heavier bulgier industrial product. So for long-term we continue to expecting driving down the weight, average weight per order, just like we have done per parcel. So as you know a parcel we also driven down from per parcel weight averaging about five to six kilos now down to about 1.2, 1.3 kilos per parcel. And that is I think that's to do with the product mix that we’re changing. In fact, we’re still seeing a very strong growth in the market. So if you think about 13%, 14% of growth in Freight market which is not better at all. So that is our strategy improved profit with high growth and meanwhile changing the mix of products.

[Operator:]

The next question is from Hans Chung of KeyBanc Capital Markets. Please go ahead.

[Hans Chung:]

Hi, good evening management team and congratulations on good results and so I just have couple of questions. One can you give me some color about your visibility, Supply Chain business in the second quarter particularly for Cainiao warehousing and because we’re seeing some headwind in the last quarter -- in the first quarter last year and this quarter we got some improvement and just want to get a sense of how do you -- are you confident to get back the supply chain gross margin to the big level of last year? And then follow-up question is about the Freight and the gross rate pretty good well above the industry growth rate and now but if you compare that to last quarter that decelerate quite a bit, so I do want to know going forward how should we think about the growth rate trajectory for the year? Should we think about that 35% to 40% is no more or is there any particular to you we will see some growth acceleration from Q1? Thanks.

[Johnny Chou:]

Okay, Hans. Thank you. With regard to the Supply Chain, actually the first quarter we made a pretty good progress, we have win of several major contracts including the D-Mart Supermarket added a few more of fulfillment warehouses. But I think we have a new bookings and several major wins on that. So I think the Q2 you will continue to see our margins will improve and as well as the revenue growth. So Q1 is a bit typical, very typical very long holidays in China for Chinese New Year, so numbers is somewhat not a regular quarter's number. But in summary that Supply Chain we do expecting several things, we do a lot of new wins in the first quarter and I can’t give a specific name but some of the customer is very large international, very large customers. We do have a very new initiative, the eco-side development and this area has been picking off. On the Freight side again the first quarter traditional Chinese New Year take some impact on that but we do see -- we do expecting and see second quarter is going to be growth is going to be accelerating. So I mean it's going to be faster than Q1, I’m not limiting that to talk about the exact number but I can tell you Q3, Q4 going forward the growth is going to be higher than what we achieved on the Q1. That's basically is multiple factors, one factor is that we have the advantage being doing this longer than the others and our network is a much more fulfilled and a more developed and as well as last year we spend a tremendous amount of time working on the quality of service and server and product offerings. So we’re confident that the Q2, Q3 the ongoing growth is going to be picking up. The margins continue to significantly improve and the profit rating for second quarter and third quarter I’m sure is pretty much assured. So I think that will give us a much better approach to develop future of Freight business with a marked high growth, higher quality, and improve the margin and profitability. So I think that’s in good position to grow versus continue to have very high growth but your margins slightly improved a bit on that.

[Operator:]

The next question is from Eric Zong of Macquarie. Please go ahead.

[Eric Zong:]

Hi, good evening management team and Johnny, George, Alice on the team. So first of all congratulation to this quarter excellent results with continuing margin improvement. I have two questions, so my first question is for Express deal for your sector, so basically I noticed subsidy never provided to franchisees broadly increased in the sector in the first quarter, so I was just wondering did you also increase your subsidy to franchisee in the first quarter and the reason is like we have seen industry parcel growth is actually accelerating but however the competition is also getting more intense, so also for the rest of the year do you mind to share your thoughts on subsidy trend. Yes, so this is my first question.

[Johnny Chou:]

Okay. To answer this question, Eric, thank you for questions. If I answer the question correctly, you said we did not release the subsidy numbers but I can talk about the question we have in hand, but I don’t think we have this number released. Basically what we do is that we’re giving our franchisees and the service e-commerce some business development programs. So we have rebate programs for whatever volume they achieve they can certain percentage of rebate. So of course the bigger the volume you get, the bigger rebate you get. So that is one thing, it is not re-subsidy, it’s more about rebate. So you develop your business, you get 5%, if you achieve certain volume; you get 10% you achieve certain volume. So that is the program that we had on hands. So to encourage people that are willing to spend more time with the customer and develop business and get more money on that. If we look at the basic program we had compared with Q1 and Q4, if you compare with last year Q1, yes, it will be slightly higher, the reason is because think last year we quarter-by-quarter we have been increasing the programs for e-commerce and franchise is getting more profitability's and competitiveness. The first quarter we actually don’t really have too much of a big difference at this point compare this quarter versus last quarter, we're just looking at detailed number. So in terms of the compare with the fourth quarter it’s very similar, but compare with first quarter last year yes we will have some little more on that. So going forward, as you said competition is intense and people continue to adding for market share and the position. But nevertheless, I think the market is consolidating I think it's my belief that more consolidated are that we will have less pricing on the pressure on that. But we continue to have the positive program, our program is also depends on the regional, some regions are doing well, they are already being number one, number two in the marketplace, that will reduce the rebate programs. Some of the areas that we are lagging behind and they will probably give little more rebate. So in general, I think the -- you will see all of this has been reflecting on ASP right because the rebate actually picking out from your income. We would still see some kind of reduction as I said last year’s first quarter call, going forward you can still see a reduction in ASP but as percentagewise not as deep as last year. So what do we try to see this year is somewhat a reduction in ASP but a much more stronger decrease in cost that improve your profitability and meanwhile achieve a high growth so it's also balanced right, so we also balance like how we moving quarter-by-quarter have a good growth meanwhile have margin improvement and as well as profitability improvements.

[Eric Zong:]

Hi Johnny, so my second question so I’m just wondering on what's your progress on the last-mile initiatives you mentioned before, so like between like Express and Store+ there is a new format I'll call it BEST labor right, so how is that going and what's the implication to offer margin trend for Express and/or maybe Store+ business?

[Johnny Chou:]

Okay. Thank you for question, Eric. So yes, when we started Store+ program, we’re really looking at two major drivers like one is the B2B business and the traditional convenience mall shop, is not very efficient at all. So looking as a new retail rise in consumption that does seems like this last move to improve there. The second price for the Store+ program is that just as you said, we see a mass growth of parcel volumes but meanwhile the new entry to labor force are decreasing, so how you are going to compensate for reduced labor force meanwhile on the higher growth on the volume side. So we think it will be realized on the last-mile, you can have stores [ph] to improve the consumer experience going to a much more the convenience store meanwhile they can have your parcel delivered and picked up and I thought that’s a good combination attribute. So we started two years ago on this program. Yesterday, we already I think we already achieved a tremendous amount of success in terms of where we want to be, the membership store already have about 375,000 and the store -- the branch store we started last year were up to 452, 450 some stores on that. So you see a -- it takes some time to build up the momentum, so I cannot really give exactly how much parcel delivery gets with that stores as they improve but we're seeing a lot of good progress and I think in coming quarters and we have continued to give you more numbers and in fact to see how this is really going but it’s very encouraging that we’re not just going out to get with the store on but we’re seeing a more adoptions in the convenience stores accepting our services and retail. And meanwhile we see more and more franchisees and also other stores adopting store at their customer service is way off one way for better customer services. So we’re seeing a tremendous improvement there as I said I mean we will give you more numbers in coming quarters, we’re expecting a I don’t know by the end of this year 10%, 20% of our parcel being picked up on store, okay so that’s our goal. But we still have parcels probably from them, yes. So we will try that goal for more and more consumers they can pick up the store, when they are picking the merchandize like and at the same time for the convenience. So I think we are on right track, I'm encouraged with the results and I think second quarter we’re sure we can have better result for you.

[Operator:]

[Operator Instructions]. The next question is from Scott Schneeberger of Oppenheimer. Please go ahead.

[Scott Schneeberger:]

Thank you. Hello Johnny, George and Alice. For my first question, obviously congratulations on a strong Express quarter, the lower transportation cost was impressive, a lot of floatation centers came out and the average number of transit stops per parcel that improvement was impressive, could you please elaborate a bit on the correlation of all these metrics and the progress you think you can achieve over the balance of the year? Thanks.

[Johnny Chou:]

Okay, Scott. Thank you. So as network of growth rise, so we continue to look at the major cost factors. The cost factor major is mainly in three areas, one is transportation, number one, number two is on the labor on the Sortation center and number three is something related to the other mainly [ph] diesel stuff. But mainly the top two is the most important. So as volume grow, what do you want to do is you want to be completely configuring your network. So what that means, that means when the volume is more, our franchisees are very small, typically they have a pickup truck or more then that’s what they have for the business for parcels. So they cannot drive a van or small pickup or vans over a long period, over a 100 kilometers or 200 kilometers, is not economical and also requires lot of money to do that. So as the volume goes up, what you need to do, you want to reduce the number of Sortation centers, so in other words the franchisees has already become a larger enough, they are capable to drive a big truck, a 30 foot truck or even bigger trucks. So they no longer need to go to a regional, a local floatation center and being processed and move to the major bigger Sortation centers and to center nationwide. So for every touch we reduced, right, certainly we improve the timing wise because less [indiscernible] and also improve the cost -- reduce the cost on that. So given that dynamically that’s what our technology and artificial intelligence kicks in, so what do we do, our group we have like 30 engineers with all this operation research and artificial intelligence people that’s been working out for years. So they're every day we do come up with configuration with nationwide network and give to the operation department say hey that is based on what we estimated tonight's volume from nationwide, we think at this level will reduce your money, it will reduce your cost and achieve less touch or less overall touch in the network. So we’ve been doing that since last year, so as a result average of last year I think at the beginning of the year, we were at about 2, 1.8 or 1.9 last year for average touch. So in other words, one parcel rolled out you need to do 1.8 times, so in other words you have 0.8 times of transition in between. Towards the end of last year that would be significantly improved to 1.6 or something and we continue to want to see this block, so in other words every parcel with a minimum amount of touch even between the transit that have improved us, certainly improved us, forget less damage, less loss all this is going to be improved dramatically. So that is the question I think you’re asking a very, very smart question in the sense of what the touch at 1.6. We want to continue to try and get single, single plum [ph] at KPI down should I say 1.5 this year or even lower. All right, so this year if you see we will continue to reduce about another 40 plus hubs, so go down from 140,000 sales we're managing the hubs down to about 110 or something or 100 to 110 continue to reduce that. By taking out all these notes in between the network we actually reducing the cost significantly. So that has to do you nationwide routing network configuration, taken an hour [ph] to tell you how to do this stuff and operational wise they can really perform and execute this plan, having the plan change is very often. So all the route networks being configured dynamically quite often and it’s also a technology and do that. So we’re confident that the cost per transportation often continues to drop. The touch, average touch per parcel continue to drop, that resulting not the lower cost but also service quality improvement, less damage, less delay and everything else.

[Operator:]

The next question is from [indiscernible] of Neuberger Berman. Please go ahead.

[Unidentified Analyst:]

Hi Johnny, George, and Alice so I have two questions. The first question is a follow-up on transit stops because I remember in ITO we were talking about the average transit stops is around the two-tenths right because I believe it will be to the origination foundation and the destination foundation. So --

[Johnny Chou:]

Boeing, sorry, can you speak a little bit louder we have little bit hard time to hear you.

[Unidentified Analyst:]

Hello, hi.

[Johnny Chou:]

Hi, can you speak a little bit louder?

[Unidentified Analyst:]

Sure, yes. So my first question is regarding the transit stops, so I remember back to the ITO we were talking about the average transit stops to what about two something right, because we have the origination Sortation and destination Sortation, so the transit stops reduced from 0.8 to 2.65 is not that comparable to that number?

[Johnny Chou:]

Yes, yes, go ahead. That’s your first question I can answer you later. The second question is --

[Unidentified Analyst:]

Okay. The second question is regarding the breakeven target obviously you hit the breakeven target in the third quarter of this year, so if the Excess delivery industry becoming -- the competition becoming more intense, we may provide more subsidies or more rebate to our franchises we’ll get delay our breakeven target, so this is my second question.

[Johnny Chou:]

Okay, thank you Boeing [ph] I think the first question on the transit claim, I think it's a little bit confusing but I think we talk about the same stop. So we are talking about a parcel from a embarking point, the point of pickup to a point that we drop off how many Sortation center it go through. So if you think about the starting Sortation does not just go from starting Sortation to the end Sortation direct, so you can say two, you can say one but in our current definition we say is one. So in other words I go from present pickup stop to the destination Sortation center is one. Now if I have to go to Sortation Center in a destination is intermediate I will transfer in another city, so I have to go from A to B to C that’s two. Okay, in other words, in average we do a 1.A meaning that some of them are from A to C directly, some have to go from A to B to C, so the average is 1.8. Now reduced to 1.6, so you definitely not wrong may be the number people are just using different destinations sometimes. But just to clear in the future, we're going to stay, from destination -- from the picking up of points to destination it's a pull-through one transportation hub and that we count as one, so if you have to go another one to go to transfer that’s two. So 1.6 is basically is averaging about 1.6 so more than 1, so that's one explanation. The second question it's also very good and two I mean we also see a very good strong competition from a very good players and their margin also been improving and also they’ve been growing very rapidly too as well. So yes so but we still maintain, so that’s what question being asked several times as to what is our strategy moving forward going forward to keep super hyper growth or what. I mean so our position states we want to continue to have a very good growth compared with industry but meanwhile we wanted to also go back to say we also have margin to improve and also profitability to improve, so we want balancing both on that as it’s the third quarter. Yes, so if we are looking the whole year and in certainly I think in the third quarter group as a whole we should be in a fairly good position, we should be in a breakeven position by third quarter at that time. So yes we’re confident we are all trying for this goal and hopefully we will continue to do better then what we have planned. Every quarter we go back we review our strategies and see how to continue to create value for shareholders but meanwhile how do we drive for the market positions as well as efficiency in operations and improve the margins.

[Operator:]

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

[Johnny Chou:]

Okay, thank you everyone. Thank you for dialing into the call. We’re very focused on executing our strategies and we are appreciated your support for BEST. Please reach out to our Investor Relations as you have any more questions. We’re looking forward to speak to next quarter. Thank you very much.

[Operator:]

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