BEST Inc.
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to BEST, Inc.'s Second 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. Today's conference 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 second quarter 2018 earnings conference call. With us today are Johnny Chou, our Chairman and CEO; and Alice Guo, our Chief Accounting Officer and Senior Vice President of Finance. For today's agenda, Johnny will give a brief overview of our business and operational highlights. Then, 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 an 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 earnings 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. Good morning and good evening. Thank you all for joining our earnings call today. I'm very pleased to report that we delivered a solid second quarter, we achieved strong revenue growth and the margin expansion across business units. The result reflects continued strong progress on our strategy of delivering strong growth with continuous service quality improvement, market share gains, increasing operational efficiency and margin expansion. We continue to benefit from healthy growth in the Chinese e-commerce industry and the growing specification of our customers. The deep penetration of new retail has made our integrated supply chain and logistics solutions more essential than ever. This quarter, we recorded record revenue of RMB6.7 billion, an increase of 38.6% year-over-year. Gross profit margin for the second quarter improved 3.5 percentage points to 6.2%. An important milestone for our business, we achieved positive EBITDA for the first time this quarter. Adjusted EBITDA for the quarter was RMB42 million and our adjusted EBITDA margin was 0.6%, making stronger progress over probabilities. In the fast moving and competitive landscape, consumers and the merchants today are more demanding than ever. As the competitive market environment continues to push pricing lower, we remain focused on executing against our significant opportunities to drive further operational efficiencies throughout our business. Expand the breadth of our service offerings to drive meaningful margin expansion, achieve solid top line growth and capture more market share. This strategy continues to prove itself in the second quarter, as we choose to win business with integrated solutions and superior services rather than simply competing on price. More customers and merchants are choosing Best to meet the needs and we are continuing to broaden our relationship with existing customers and engaging them with a wider range of our solutions and products. Now, let me share some highlights from the quarter that illustrate how Best is delivering for its customers in each of our business areas. Best Express continued to focus on providing quality services and customer experience, reducing costs and gaining market share. In the second quarter of 2018, we outperformed the industry with volume growth of 39.6%, versus an industry average of 25%. For the first half of 2018, our volume growth was 49.8%, versus an industry average of 27.5%. We have now achieved 10.5% of China's overall express market share compared to 9.4% in the same period of 2017. According to the State Post Bureau, in the second quarter of 2018, Best consistently led major industry players with low effective complaint ratios in April, May and June. Effective customer complaints per one million parcels was 0.35, 0.32 and 0.30 respectively. With increasing consumer classification, we are seeing better service quality and network stability being more market share to Best and expect this trend to continue in the foreseeable future. Having reached a critical scale, and network coverage, we continue to improve operational efficiency of our express services by optimizing our network and deploying better technology to reduce costs. Total number of hubs and sortation centers were reduced by 29.3% year-over-year to 128 compared to 181 as of June 30, 2017. We continue to invest in an upgrade automation systems in our hubs and sortation centers including high speed automated sorting lines and dimension and weight scanning systems. Digital waybill usage rose to 98.4% from 89%. As a result, gross profit per parcel increased over 47% year-over-year to RMB0.18 in the second quarter. Best Freight continued to expand its business and improve its margins by growing and optimizing its network. In the second quarter of 2018, revenue grew by 31.6% year over year, while weight volume grew by 24.7% year over year, significantly higher than the industry wide growth. Gross profit turned to positive to RMB54 million and gross profit margin increased significantly by 13 percentage points year over year from negative 7.8% to positive 5.2%. We continue to optimize our freight network to reduce the total number of hubs and sortation centers, improve operational efficiency and reduce costs. This resulted in lower transportation, labor, lease costs, and shorter delivery time. We also significantly expanded services coverage by increasing the total number of franchise operated last mile service station by 85% year over year to over 11,000 from 6000 in the same period of 2017. Going forward, we will continue to grow and optimize our leading nationwide LTL platform and a focus on growing e-commerce related transactions for our freight business. Best supply chain management continued to add new customers while significantly growing its franchise cloud OFC business. In the second quarter, we added 46 new corporate customers, including many major global brands, and increased the total number of corporate customers to 561. The total number of orders fulfilled by our cloud OFCs increased 37.7% year over year to 61.2 million, of which the number of orders fulfilled by our franchise cloud OFC increased 73.4% year over year to 20.5 million. This rapid growth and growing roster of top tier customers reflect Best as a leading supply chain solutions provider in China. We continue to invest in Store+ and expanded our network to offer betters services to convenient stores and improved the last mile services for consumers. As of June 30, the number of membership stores reached almost 400,000 and our branded stores worldwide and the Best neighbor reached 748 stores. The number of store orders fulfilled increased by 39.3% year over year to over 870,000, representing over 20,000 SKUs, and total revenue increased by 34.5% to RMB798 million. Going forward, our Store+ strategy is focused on growing the scale of our branded stores, accelerating its integration with Best Express, Best supply chain and Best cloud to offer better services and to reach more consumers. This is a part of a long-term strategy to realize further efficiencies across the supply chain and the buildout of our last-mile services network. Other service revenue also increased sevenfold in second quarter to RMB228 million. This reflects the flexibility of our business model and the synergies between our business units and demonstrates our commitment to investing in fast growth business such as our online tracking brokerage platform, financing and cross border logistics. We are seeing tremendous growth since UCargo opened its platform to external customers in the first quarter of 2018. The number of registered agents on UCargo platform has increased from 1700 to 4000 and the number of trucks on the platform increased from 100000 to over 220000 over the past year. Transaction volumes increased to approximately 96000 from 28000 as the revenue generated from the external customers reached over RMB150 million. We expect to ramp up the UCargo significantly going forward as more merchants and drivers see the value in our platforms. Best Global continue to develop cross border solutions to help facilitate trade between China and the world. As of June 30, Best Global reached 1300 regions, outside the mainland China, including new coverage in Malaysia, Hong Kong and Italy through partners. In May, we launched international parcel services from China to the US and Southeast Asia. In June, we opened our third fulfilment locations in the US to service South Central region. This facility brings our total warehousing space in the US to approximately 800,000 square feet. Best Capital, our financing operation to our ever growing ecosystem entered into strategic agreements this quarter with multiple truck manufacturers to leverage their resources and network to expand its financing offering and solutions to transportation service providers. As of June 30, it had provided financing solutions for the purchase of over 5000 trucks, an increase of 61.7% compared to the end of second quarter 2017. Overall, we delivered strong results in the second quarter of 2018. As we look forward to the second half and prepare for the peak season, we will continue to focus on solid revenue growth, market share gains, services, winning new business with integrated solutions and investing for the future. I'm more confident than ever that we have the right formula for long term success. With that, I will turn it over to Alice, our Chief Accounting Officer and Senior Vice President of Finance. Alice, go ahead.

[Alice Guo:]

Thank you, Johnny. Hello, everyone. The second quarter results were a milestone for Best in terms of reaching positive EBITDA and adjusted EBITDA. This demonstrates our commitment to achieving favorable long-term profitability for our investors. Adjusted EBITDA was RMB42 million and adjusted EBITDA margin [Technical Difficulty] respectively in the same period. Moreover, we have reduced our non-GAAP net loss significantly to RMB56 million with non-GAAP net margin improved by 3.3 percentage points to negative 0.8%. Reconciliation of non-GAAP measures to comparable GAAP measures and the relevant adjustment can be found in our earnings press release. I will now go through a few key points on second quarter financial performance. On a year over year basis, Best Express revenue increased by 25.8% to RMB4.2 billion, primarily due to a [Technical Difficulty]. Gross profit increased by 105.6% to RMB229 million. Gross profit per parcel increased by 47.3% to RMB0.18 as average revenue per parcel [Technical Difficulty] increased by 2.7% [Technical Difficulty] and average cost per parcel decreased by 4.6% to RMB3.08. The decrease in cost per parcel is primarily due to improved economies of scale from volume growth and enhanced operating efficiency from ongoing platform optimization, network planning and the technology application. In our highly competitive pricing environment, we remain disciplined in our pricing strategy. Our focus on service quality and network stability allowed us to stay above pricing competition and achieve high volume growth and the capital market share while maintaining our commitment to margin improvement. Best Freight revenue increased by 31.6% to RMB1 billion primarily due to a 24.7% increase in freight volume and a 5.5% increase in average revenue per tonne. The increase in average per tonne was primarily due to price increase and ongoing product optimization. Average cost per tonne decreased by 7.2% due to improved economies of scale from volume growth and the enhanced operating efficiency from ongoing platform optimization and the network planning. Gross profit turned positive for the first time [Technical Difficulty]. Gross profit margin increased significantly by 13.1 percentage points to positive 5.2% compared to negative 7.8% in the same quarter of 2017. Best supply chain revenue increased by 32.7% to [Technical Difficulty] primarily due to 37.7% increase in the number of orders built by our cloud OFC. Gross profit increased by 7.4% to RMB38 million and the gross profit margin decreased by 1.8 percentage points to 7.6%, primarily due to onboarding of new projects that incurred upfront costs in lease equipment and labor and overall investor pricing pressure. We continue to invest in our Store+ business. Best Store+ revenue increased by 34.5% to RMB798 million, primarily due to a 39.3% increase in the number of store orders fulfilled in connection with the ongoing expansion of our Store+ network. We continue to invest in expanding our last mile network and the continuous optimization of merchandise selections and offering and the deepening engagement with the existing brands and branded stores. We expect to maintain a similar rate of investment in the third quarter to further enhance our presence and the control over the operation. Our other service lines, Best UCargo, Best Capital and Best Global are becoming important contributors. Revenue from those service lines increased by 708.8% to [Technical Difficulty]. This significant increase was primarily due to UCargo's opening of its platform to external customers this year and its ongoing scaling of the platform which saw the number of transactions increase by 240% to 96,000. It was also due to a 61.7% increase in number of tracks financed by Best Capital and the Best Global's ongoing business expansion. Gross profit increased by 141.3% to RMB33 million. We are proud of the progress we made in this quarter to improve efficiency, which is reducing costs and having a positive impact on our margins and measures of profitability. Of the major operating expense items, all excluding share based compensation expenses, selling expenses as a percentage of revenue decreased by 0.3% to 3% compared to the same period of 2017. This improvement was primarily due to enhanced operating leverage across business units. General and administrative expenses as a percentage of revenue increased by 0.3 percentage points to 3.6%, primarily due to investments in the growth of company's operations. Research and development expenses as a percentage of revenue increased by 0.1 percentage point to 0.7% primarily due to the hiring of additional R&D professionals. Net cash generated from operating activities was RMB432 million compared to [Technical Difficulty]. Our cash and cash equivalents, restricted cash and short term investments was RMB4.3 billion or USD657 million as of June 30, 2018 compared to RMB4.7 billion as of March 31, 2018. The decrease is primarily due to the BEST repayment, CapEx, investment activities and partially offset by positive cash flow from operations. We continue to invest heavily in technology and automation. In the second quarter of 2018, our CapEx was RMB230 million or 3.4% of total revenue compared to RMB220 million or 4.5% of total revenue in the same period of 2017. Most of the CapEx this year is to upgrade of major systems in major hubs and sortation centers including investments in high speed of major sorting lines and dimension and weight scanning systems. Finally, I would like to discuss financial guidance. The high growth across other business units and the fast moving competitive market landscape have led to continued adjustment in our business strategy as we move quickly to capture new opportunities and respond to changing dynamics. While we continue to adjust quickly from the operational standpoint, we remain steadfast on our long term strategy and commitment to achieving margin expansion and the profitability. For these reasons, beginning in year 2019, we expect to adjust our guidance to provide revenue expectations and are considering other options to have investors follow the progress of our business. We expect to provide updates on this during our fourth quarter earnings call. For the third quarter of 2018, we expect to revenue to be between RMB7 billion and RMB7.2 billion and for the full fiscal year 2018, we are providing preliminary guidance of RMB26.6 billion to RMB27 billion. This concludes my prepared remarks. And we will now take your questions. Thank you.

[Operator:]

[Operator Instructions] And the first question comes from David Ross with Stifel.

[David Ross:]

Can you talk a little bit about the growth at Best? It's obviously a very fast growing company and you guys are still gaining market share, but growth might have been less than some people expected in the quarter. Is there a reason for that specifically in terms of either a renewed focus on profitability? Is the market growth slowed? Anything you can talk about to add color there would be helpful?

[Johnny Chou:]

Okay, David. Thank you. Yeah. So as we stated, we are - our strategy is to continue to strive for strong top line growth, but meanwhile, we have to be able to drive for that efficiency and quality. So this year, we've pit a lot of efforts on our quality initiatives as well as the efficiency of the operation. So somehow, that with the market competitive pressure, we did not really wanted to just buy with limited price. So if you look at from our statement and release, you can see the growth is still about 37%, 38%, so very high. But as we look at our parcel revenue, we actually did not mentioned on last quarter, so somehow the quarterly revenue is not really - ASP has not really dropped significantly, because we are holding the line. But meanwhile, you can see the margin being grown significantly across the business line, including the parcel and the freight. I think the supply chain will have a little bit of pressure due to the some of the news that we had 46 new customers coming, so we're prepared for some of these labors and upfront investment, et cetera. But in general, I think we continue to strive for high growth on top line, through our business lines, gaining market shares as well as the profitability improvement and efficiency improvement.

[David Ross:]

And then another question that comes up from time to time in looking at the market share growth you've had, specifically in the Express side of things, is Best buying market share in the China Express and freight markets? And if so, is it sustainable? Do you plan to change strategy at some point? Any color you can give about your freighting philosophy?

[Johnny Chou:]

Okay. I think from our financial number, at least, you can see our second quarter ASP, it's really not much different from the last year. It was about 1% or 2% difference from last year. So as we stated, our strategy this year is to continue to maintain a similar type of ASP. ASPs still can be fluctuated from month to month, quarter to quarter, but it's not going to be significant, you're not talking about a large number of fluctuation there. But you will see continuous improvement in the margin improvement and efficiency and the bottom line. So if you look at the freight, same thing, if you look at our freight, our freight growth is 31 some percent, much higher revenue growth of 31 some percent, much more higher in the market. Our ASP for the freight has also increased from last year because of the volume increase only about 24 and the top line increased to 31. So actually in freight, we actually not have maintained the pricing, but we actually increased the price from last year same time and that as a result, we improved our gross margin by 13 percentage points from the last year. Last year, it was negative 7 some percent and this year it was positive 5 some percent. So, you can see a tremendous turnaround in the freight. Volume, top line still growing very healthy, much faster than the market. And the pricing is going up as a resulting a net - the profit - the margin improvement of 13 percentage points. So these are all, if you look at all the other, like the supply chain, same thing, I mean, we had a 37% of growth. Margin is very lower. It's one point some percent lower than last year, but still maintain about 7.5% margins. In general, still be profitable. So if you look at the express, our freight, our supply chain business, they're all positive, not just on the EBITDA level, but in general, they are all positive on the business. So other business, we are still doing on top of that, like the store+ and still going to have some time to come before turning to profitability. To answer to you is no, we're not buying the market share, but we will reasonably facing the market pressure, pricing pressure, but we no longer be competing on the price, but we are more competing on the efficiency, quality. If you look at our internal tracking number, our parcel - per parcel touch number being improved dramatically. So touch is how many times people touching to this parcel from the definition to the - from the beginning to the end. SO being improved delivery times, being improved across all our businesses.

[David Ross:]

Yeah. I'm sure that's helped on the low complaint ratios. So thank you very much.

[Johnny Chou:]

Yes. Thank you, David.

[Operator:]

And the next question comes from Scott Schneeberger with Oppenheimer.

[Scott Schneeberger:]

Just kind of following up on David's question. Johnny, with the price in Express, the guidance through the end of the year, is what you just said what - how you're thinking about your strategy for pricing, regardless of what happens in the industry? Will you keep a disciplined focus? Or will you react more to what's occurring in the market to balance the volume and the price?

[Johnny Chou:]

Of course, we will track the market situation very closely, because it's our business, right? We track every day on the markets. But our first priority is really try to improve the quality. I think pricing is, I think, is low enough. And you're going to have some room to move, but I'm not going to say absolutely here, saying, we're not going to change at all, but I'm saying that our priority number one is to, through the operational efficiency to improve the quality, improve the customer experience to gain the market share rather than try to be pure low price player. So that's number one. Number two I would say is that, if the price does change dramatically in the marketplace, we would respond to somewhat in to that degree, but as I said, we don't expect a significant difference from last year. I mean the last year, I mean significant drop or change compared with last year. Last year, we do have a fairly large adjustment from beginning of the year to the end of the year and this year, we're going to be more disciplined about that. So - but I am a little confident, we are still going to be growing this much faster than the industry. That's the goal. Market share is continuing to improve. Profitability continues to improve. That's our - I'm confident on that. So if a market, just a few percentage points, it's possible, just like you see on the second quarter and it's possible, but what you can see as a result is that the probability of margin is going to improve more and the profitability will improve more.

[Scott Schneeberger:]

Thanks very much for that. Yeah. And it was a very impressive quarter on the complete ratio and congratulations on the EBITDA profitability. I'm curious on - this is a question for both Freight and Express, where do you see - could you give us an update on how much further you can reduce the hubs and the sortation centers and discuss a little bit about the leverage you expect to get there? Thank you.

[Johnny Chou:]

Thank you. Yes. So right now, we have approximately about 125 hubs and sortation centers for both Express and the Freight. Our target is to reduce down to about 110 by end of this third quarter, in October, our target is about 110. Next year, we will continue to reduce to about 90. Now, reducing all this stuff has a pre-contact and the reason is that because the scale was getting big enough, the scale is getting big enough that some of this nodes no longer needed. So we can just take them out. And by taking them out, you actually reduce the labor costs, because you actually reduce the transaction or the touch points, right. So reduce the labor cost, reduce transportation cost and you also improve the efficiency and the time of delivery. So it's all good, right. So to answer your question is that, we still think that there is about 20% or 30% to go this year down to about 110 for both freight and Express and next year, we can further reduce down to about 90. Now about 90, I think that's about right number going forward.

[Operator:]

And the next question comes from Vivian Tao with Citi.

[Vivian Tao:]

I have two questions. The first question is on the revenue. Recall at the fourth quarter, the management guided the revenue for the second quarter will be 7.1 billion to 7.3 billion and we came at 6.7 billion. Can you quickly give us more details, like on which subsegment or where the revenue came below the expectation we had a few months ago. This is my first question.

[Johnny Chou:]

Yes. So I guess everybody noticed that. So we were guiding on the 7.1 to 7.3 on the last call. We were looking at the market and assuming that the market condition is not going to be much different from the first quarter, but since the later part of the quarter, we do see a pressure on the marketplace. So we adjusted down and the - we had down to about 6.7.The main reason honestly is one is the volume for the parcel is lower than we expected, than we planned. We were planning a much higher growth on the parcel side. We're expecting about 50% or something or 45%, but actual result is about less than 40, it's about 38%, 39%. SO that is one side, revenue growth on the Express side, because volumes are lower. Freight side, same thing. We wanted to - freight was actually losing money, negative margin. But we think it's the right time right now looking at our competitive advantage, we think we're very strong in the competitive position, we no longer need to really go through our using a lower price to getting more market share. In fact, our prices are pretty high compared with the market. So the volume, about 24 percentage points was, which is lower than the plan. That's part of the reason why the gross margin has improved so much. And the same thing for Store+. Same thing, we wanted to be able to not just on the GMVs, and total number fulfilled or the revenue, but we wanted to making sure that the quality of the stores, the deliveries, the cost and everything is being controlled and improved. So we did a delivery plan, delivery choice to say, hey, look, we may be getting hurt by lower the revenue, but in general, I think it's for the company, it's better in this kind of environment to focus on the quality improvement, focus on the efficiency improvement. So that's the main reason. So in a nutshell is that cross border on the freight, express and store+ side, we have achieved lower than expected revenue growth. But we have achieved - maintained despite a competitive market pressure, we achieved bottom line and also the plan, also on the margin plans. So that was the reason.

[Vivian Tao:]

So my second question is just on the store business, you touched on that while you answered my first question. You mentioned store business, that has been focused more on the quality and also operational efficiency and I recall like previously, the 90 million also you spent on the store focus, you have put much less focus on the number of stores, but more focused on like the merchandise to focus on the high value merchandise in the store. However, under that strategy, I noticed the average order value in second quarter this year actually has declined versus that of last year and the number shows like, for this year, to average, for second quarter, the average order, average value per order is like RMB917 and last year, the second quarter, it was over 1000. So I just wondered what was the reason behind, because I thought again the company is focusing on sending more higher value merchandising store, so I will expect the average order value to increase in the second quarter.

[Johnny Chou:]

Okay. Very good question. The first answer is that in the second quarter last year, we acquired WOWO convenience chains. WOWO convenience chains order number is very high. It was about 3000. So the WOWO, so last year, the number is slightly higher, because it's less - other orders are less, right. So this year, WOWO's incremental order has not increased mathematically, because WOWO is coming as storage chain. We did not open much more store on that. So as a result, the non-WOWO or mom and pop shops, or other orders has increased. And that has slightly lower per order revenue. So as branded, it takes down the average order numbers. You got that? So moving forward, we continue to see Best neighbor stores actually being - branded stores actually being increasing and that is a result actually will help to move back the per order number. In fact, the number I see in the last couple of months, last month is increasing. So the first initial reaction is that last year, we have 6000, 7000 orders per day and that was for which WOWO is a higher order, but now about 10000, 11000 for orders per day that WOWO incremental is not as much as the store. And so branded average goes down.

[Operator:]

Thank you. [Operator Instructions] And the next question comes from [indiscernible].

[Unidentified Analyst:]

I have two questions. Firstly on Express, you mentioned about the sort and hub number coming down, ultimately to around 90. So that would put us really close and similar to the current DTOs and ITO, so just wanted to get your feel on where did you see out sort of target profit of parcel will be, once sorting hub structure will be quite similar to our peers and versus our recent second quarter, we are already doing RMB0.18 of gross profit per parcel. And so our peers are doing roughly 60 to 70. So should we expect our profit per parcel to expand quite strongly after we normalize our sorting hub numbers. That's the first question. On the second question, could you share a bit on UCargo, given the growth has been phenomenal, particularly from external customers, can you share about how this pure track matching platform, some take rates or some gross margin metrics that you can share, because what we see from the other revenue line, the other segment line that the gross margin for the other businesses had fallen. I think partly on maybe cross border, but the UCargo business, I would think would be quite a high margin business. So we would like to hear some of the metrics that you could share?

[Johnny Chou:]

The Express hub, first question is that, our model is slightly different from other peers. In the last 2011 to 2016, we basically got back about 256 cities. So we spent about RMB650 million to buy back what is right, 256 cities for operation. So as a result, our international is going to be more. Self-operating hub is going to be more. But when you see our peers, it basically is going to be more than that, because a lot of the hub is partly operated by the franchisees and large cities. They do not like us, have been buy back or operate ourselves. So as we go down to about 90, I think that the reducing in cost is associated with multiple factors. One factor of course reducing the hub will increase and will reduce the cost, definitely. But that's part of it. The second part of it is a volume gain, right. So you know the volume the bigger and then the others is going to be bigger. And number three is very important that as disclosed that you can improve efficiency through the hub automation and everything else. We do spend significant amount of money in the CapEx from the second quarter to third quarter to improve that. So as a whole branded, I think the per parcel cost is still going to be coming down. So let me just give you a quick number on that. I mean, we are right now, if you look at our labor costs, right now it's about RMB0.35. So if you look at last quarter, last year, it was about RMB0.49. So we basically reduced from 49 to 35. I still think there is tremendous amount of room to go down. Lastly, transportation cost is over RMB1, RMB1.03 to be exact and the second quarter is only about 0.86. Okay. On the lease and dis cost, last year, it was 0.15, this year was 0.11. Other cost also was significantly reduced from $0.25 to $0.17. So we look at all these numbers. We continue to be able to drive down these. So your question is about, what is long term. I'm not at liberty to talk exactly what that number is, but I can say if I'm making sense, quarter-by-quarter, it can continue to improve. So as we continue to increase the market shares, the volumes increase the reduced hubs and also improve the investment in automation technology and all the stuff. We continue to drive down the cost and improve the per parcel margins. This is number one question. Number two question is about UCargo. Okay. So our UCargo model is very different from the others, right. So, our model is not just a platform, doing a membership fees or doing a matching. But we're actually providing services, more like in the US, the company called C.H. Robinson. So similar type of model. So what we do is that, we have platform, instead of open platform, have a merchants or freight owners talking to the truck driver themselves on the platform and try to negotiate deal, we basically doing the pricing, bidding on the back hand. We provide a price to the customers. The benefit of that is that customer does not need to deal with [indiscernible]. So we are actually acting as agent in the bid. So we are actually doing the business in front through the customers that give us the load to us. We are charging them the fee based on the best price we find on our network. So the customer does not need to go to the top to the individual drivers, which they never met to try to strike a deal. Okay. So this number one, the model site. So now, you are talking about margin. Okay. So margin initially on that is going to be lower. The reason is that, we basically are doing a middleman, right. We basically sell the best of freight cost to the people wanting the load. And typically right now, there is a few percentage point. But I think as the network is getting bigger, order getting more, we think we can get a lot more bigger margins. So actually, if you characterize, margin on the UCargo is low. But they don't lose money, because they don't really have like a freight or Express or anything else. They have significant investment into the infrastructure or the network. So just the platform and people to manage that. So probability wise, I think, in short term, they don't lose money. Okay. And we try to build the more frequency of usages and the more popularity through the truck, able to find the load on network and our customer do shipping. So long term wise, I think that gross margin is going to be higher, but right now, we're seeing a very low single point. Yeah. So it's a platform, which providing the services and that is different. So what you see 115 million, it's not really just the brokerage fee, introduction fee, but the platform basically we do the service. And in the meanwhile, the biggest value add for this platform in the future is value added services. For example, working with Best finance through doing the leasing and truck leasing and the purchasing, insurance, factoring for the financial style, et cetera. I mean, I think that is the major income in the future. But right now, they're part of the small they're just beginning. But I see a tremendous amount of opportunity and also growth in the areas. Because China has about 20 million, 30 million truckers, drivers and every day, they're looking for job, they're looking for load on their truck. And we are acting as an intermediate to help them to do that.

[Operator:]

Thank you. And the next question comes from [indiscernible] with JPMorgan.

[Unidentified Analyst:]

So I got a couple of questions here. First is, I would like to see if you can give a little bit more color with respect to, on the profitability front, right. I think we all see that the improvement and everything's kind of moving in the right direction, but in terms of the pace of improvement, now that we're seeing maybe a little bit of pressure on the Express side, just in terms of reaching that net profit breakeven, right, I think we've had discussions on this before. Do you think that there is now expectations that this could be pushed back a little bit. I think if I'm looking at street numbers, for example, broadly speaking, 3Q quite a lot of people believe that we could start hitting that point. So wondering if you could provide a bit of commentary there first.

[Johnny Chou:]

Okay. Additional market pressure, definitely. It's - competitive market is always the case before. If I may just give a little bit of color on there. When you ask Express on this, so Express, if you look at the CIA, so top 8 players by the government, state bureau, you can see that concentration to the tier 1 players is getting more and more. So in other words, the concentration of parcel is concentrated on top few companies right now, the government has provided top 8 companies. But if you look at the [indiscernible] the number is significant, it's been increasing every month. So in other words, this parcel is going to be more and more concentrated in the top two companies, 5, 6 companies. This is number one. Number two is that you're talking about profitability. So despite of this market pressure and we still think that we can shift, market share growth, much higher growth rate than the industry and continuing improvement bottom line. As to the trajectory or the potential when it's going to be viewed, I think this year, we are still going to maintain that we're going to be hosting profitable. As to the third quarter or fourth quarter, fourth quarter definitely, third quarter, we're still working on the current strategy. So I think very likely that is a number that we providing and strategy we're working on. We'll achieve the goal that we stated. So the fact is that the top line may have limited pressure on that, because you want to maintain a slightly better margins and not to engage too much in pricing wars. But I think the bottom line improvement is real and we are positive, we are confident to see that happen.

[Unidentified Analyst:]

And secondly is, I think broadly speaking from prior conversation, stores is one of the key drags, whether it be EBITDA or net profit still. We are still in a fairly high investment stage, we are kind of building for the future, but I don't know if you can give a little bit of color in terms of how big that drag is, because if I'm looking at supply chain management for Freight and Express, the profitability of those - there is improving quite meaningfully and I think we can see that. Just want to get a sense of how much - what the profits might look like if the stores wasn't as big of a drag at least on a consolidated basis.

[Johnny Chou:]

Yeah. So if the store is not in the picture, is not consolidated, then hope, it is positive. So if the store is not a in consolidation on the second quarter. So, but store is a very important part of our strategy. So this is going to be, I think if people give me few minutes, I will explain to you a little bit more. The store business is basically right now, we are focusing on more branded stores. The branded stores basically give advantage of three things. One is we're taking this, so they have more predictable order patterns. So they order things and we order number two, every order are typically larger. Third, they are more using our power system and everything else, so we can inject in the parcel services and all the stuff into the store, which we have to see a significant intake and tremendous amount of interest from the store owner to injecting into the other parcel delivery, pick up and also the delivery part of the business. But nevertheless, this is going to be, we're changing the landscape, we're changing the industry, we're changing a lot of things that going to have lot of tough work. I agree. But just believe me, as I was doing the freight work 5, 6 years ago, a lot of people questioned why you're doing the freight, focus on just one or two industries, one or two services. But I see a freight to be an important part of the integrated services. The same for a store, I think that is a very important part of our strategy moving forward. Short term, we're being punished or being pressured or whatever you call them, but I still think that that's the right strategy and very soon, in the next couple of years, you can see the fruit of that. I'm still very confident and steadfast the strategy that we're taking on is correct and short term, we may have some doubt, have some pressures, but in long term wise, it's a right thing to do.

[Operator:]

Thank you. And that concludes our question-and-answer session. So I would like to return the call to Johnny Chou for any closing remarks.

[Johnny Chou:]

Okay. All right. Thank you for joining our call and we appreciate your support for Best. Please reach out to our investor relation teams if you have any further questions. We look forward to speaking to you soon. Thank you very much.

[Operator:]

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