BEST Inc

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Best, Inc.' 's third quarter 2020 earnings conference. At this time, all participants are in a listen-only mode. Following management's prepared remarks, there will be a Q&A session. With us today are Mr. Johnny Chow, Best, Inc.' 's chairman and CEO, and Gloria Phan, chief financial officer. For today's agenda, Johnny will give a brief overview of business and operational highlights. Then Gloria will explain the details of financial results. Following the prepared remarks, you may ask your questions. Please note, this call is also being webcasted on Best, Inc.' 's IR website at ir.best.fitinc.com. A replay of this call will be available after the call. An investor presentation is also available on the IR website. Before it begins, I will read the safe harbor statement on behalf of BestAge. Today's discussion will contain forward-looking statements. These forward-looking statements are based on management's current expectations. They involve risk, 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 law. Please also note that certain financial measures that the company uses on this call are expressed on a non-GAAP basis, such as EBITDA, adjusted EBITDA, and non-GAAP net loss. The GAAP results and the reconciliation of GAAP to non-GAAP measure can be found in Best, Inc.' 's earnings press release. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. Now I'd like to turn the call over to Mr. Jonny Chow, Chairman and CEO of Best, Inc. Jonny, the floor is yours, sir.

Good morning and good evening, everyone. Welcome and thank you for joining our earnings call. On today's call, in addition to the third quarter results, we will also discuss our major strategic adjustments to refocus on our core businesses in order to achieve long-term competitiveness and the profitability. But before that, let me first go over our quarterly results. We had a challenging third quarter, aiming to intensify the industry competition. For Express, its execution did not meet the fast-changing market dynamics in both operation and the pricing strategy, which led to a lower volume growth and a margin, possible volume increase by 24.8% year-over-year, representing market share of 10.6 percent during the quarter, which is about 0.1 percentage point lower compared with the second quarter. While its gross margin contracted by 7.2 percentage points, as the average cost per parcel decreased of 15.9 percent year over year, did not completely offset ASP decline of 21.9 year over year. We have since conducted a thorough review of express operations and strategies. And we are in the midst of implementing plans and changes that we believe will make us competitive and maintain our position as one of the leaders in the industry going forward. Our freight business continued its strong growth and achieved a growth rate higher than the industry average. Free volume increased by 30.7% year-over-year in the third quarter of 2020. Its gross margin declined 5.3 percentage points year-over-year, primarily as a result of pricing lag after the government reinstated highway tolls in the second quarter. ASP declined by 17.3% year-over-year, while average cost per ton decreased by 12.6%. year over year. Looking ahead, we are optimistic that Frey will continue to grow in the 30 percentage range and ASP continue to improve and we expect to return to profitability in the fourth quarter. Moving to best supply chain management. In the third quarter, we continue to execute on our strategy of growing our franchise cloud OFC business and focus on projects with higher margins and clients with strong credit profiles. Its gross margin decreased by 4 percentage points year-over-year to 4.4%, primarily due to a high cost structure associated with the legacy key account customers, which are in the process of being terminated. The total number of orders fulfilled by cloud OFCs increased by 18.3% year-over-year to 102.2 million, in third quarter of 2020, of which the total number of orders fulfilled by franchised cloud OFCs increased by 32% year-over-year to 53.5 million. The number of franchised OFCs increased by 23.2% year-over-year to 345. BestU Cargo brought more drivers and SMEs onto the platforms. The number of registered drivers on the Ucago mobile apps increased by 84.5% year-over-year to 288,000. Total number of transactions on the trucking brokerage platform increased by 37.2% year-over-year to 233,000. Best Global continues a strong growth momentum in Southeast Asia. In the third quarter, Parcel volume in Thailand increased by 513.5% year-over-year to approximately 10 million, while parcel volume in Vietnam increased by 932% year-over-year to 10.3 million. The company also made progress in expanding its express delivery services in Malaysia, Cambodia, and Singapore. Best Store Plus executed on a strategy of partnership model and enhancing order quality, improve growth margin and reduce losses. As a result, its growth margin increased by 2.9 percentage points year-over-year to 13.4%, while adjusted EBITDA margin improved by 1.8 percentage points year-over-year. Despite these encouraging results, we recently announced the winding down of StorePlus business except for our self-operated worldwide stores, which is still under strategic review. We believe that by phasing out StorePlus, the company can eliminate the significant cash flow requirements associated with this early stage business, allowing the company to further prioritize capital allocations towards its core business. Let me discuss this core business. The COVID pandemic had a profound impact on our business. The high recovery costs and the subsequent unprecedented pricing competition has depressed our margins and caused unexpected losses. Facing strong industry headwinds, we are taking steps to make major strategic adjustments and organizational change to our business, focusing on our core logistics and supply chain management business, emphasizing service quality, enhancing operating efficiency with a goal of putting us back on a path to profitability. For our express business, we are focused on sustainable long-term growth and profitability by continuing to optimize its product structure improving its operating efficiency, particularly in transportation planning, enhancing services quality and customer experience, and gaining market share. We're putting in place new leadership to lead express business. As previously announced, effective as of November 15, 2020, Mr. Wang Xiaoqin, former general manager of Best Jiangsu Province branch, assumed the position of Vice President, General Manager of Bass Express Service Line, replacing Mr. Zhou Shaohua, who took up a new role in the company. For Frey, we plan to continue to invest into its infrastructure network, solidify our industry leadership position by expanding our market shares, stressing the e-commerce aspect of Frey services, improving operation efficiency, and increasing profitability. For our supply chain management, we will focus on quality growth and profitability, only target projects with high margins and customers with strong credit profiles. We'll continue to implement an SLI model and grow the franchise cloud OFC business. For our non-core business, We announced the winding down of Best Store Plus on November 15th. For the other core non-core business, including Yukago Capital and Global, we're considering all options available with the goal of reducing operation loss and the capital requirements from the company. Additionally, we are implementing company-wide cost-cutting measures that will generate significant savings going forward. Those measures will also help us create a leaner and more focused organization to realign our management team and employees to execute the refocusing plan. As we look forward, we remain confident in the strengths of e-commerce driven demand for our integrated smart supply chain solutions and logistics services. With these strategic adjustments in place, We are committed more than ever to investing in our core businesses and strengthen our market position. We are targeting strong growth for our businesses while focusing on further integration of our business units, enhancing our product structure, the stability and the flexibility of our networks, the quality of services, and overall operating efficiencies, which taken as a whole, will enable BEST to deliver long-term value for our shareholders. Now I would like to turn the call over to our CFO, Gloria, to walk you through our third quarter financials. Go ahead, Gloria.

Thank you, Johnny, and hello to everyone. Amid the intensified competitive market, our third quarter performance reflects both the challenges and the resilience of our business. Our revenue was 8.7 billion RMB, relatively flat to the same period of last year. while our gross margin contracted 5.4 percentage points year over year due to a challenging pricing environment that offset our volume growth across multiple business units, resulting in a net loss of 640 million RMB. Despite the net loss, we generated operating cash flow of 115 million RMB during the third quarter and maintained a healthy balance of cash and cash equivalents, restricted cash, and shortened investments of 4.8 billion RMB. I will now provide a brief review of our third quarter 2020 financial results. Given the limited time on today's call, I will be presenting some abbreviated financial highlights. I encourage you to read through our press release issued earlier today for further details. Our gross profit was 38 million RMB compared to 507 million RMB in the same quarter of 2019. Gross margin was 0.4% compared to 5.8% in the same quarter of 2019. Adjusted EBITDA for Q3 was negative 438 million RMB compared to 114 million RMB of the same period of last year. Q3 adjusted EBITDA for core logistics and the supply chain management business was negative 278 million RMB compared to 267 million RMB for the same period of 2019. Next, moving on to key financial highlights for our business units. Our year-over-year basis, best expressed revenue decreased by 2.6% year-over-year to 5.1 billion RMB in the third quarter of 2020, primarily due to a 21.9% year-over-year decrease in ASP per parcel. partially offset by a 24.8% year-over-year increase in parcel volume. The decrease in SP is primarily attributable to competitive market dynamics. Adjusted EBITDA for Best Express was negative 211 million RMB compared to 192 million RMB for the same period of last year. Best Freight QC revenue increased by 8.2% year-over-year to 1.5 billion RMB primarily due to a 30.7% year-over-year increase in freight volume, partially offset by a 17.3% year-over-year decrease in ASP per ton, which was primarily due to a pricing lag after the government reinstated the highway tolls in the second quarter. Adjusted EBITDA for best freight was negative 45 million RMB, compared to 42 million RMB for the same period of last year. Q3 revenue for Best Supply Chain Management increased by 0.1% year-over-year to 453 million RMB. Adjusted EBITDA for Best Supply Chain Management was negative 27 million RMB compared to 6 million RMB for the same period of last year. Best Yukago's Q3 revenue decreased by 1.9% year-over-year to 689 million RMB, primarily due to discontinuation of several key account customers to minimize credit exposure. Adjusted EBITDA for Best Chicago was negative 30 million RMB compared to negative 6 million RMB for the same period of last year. StorePlus' revenue decreased by 16.8% year-over-year to 717 million RMB, primarily due to efforts to enhance order quality to improve margins. Adjusted EBITDA loss for StorePlus was 68 million RMB compared to a loss of 98 million RMB for the same period of last year. Q3 revenue for Best Global increased by 125.9% year-over-year to 216 million RMB, primarily due to strong growth in parcel volumes in Southeast Asia. Adjusted EBITDA for Best Global was negative 61 million RMB compared to negative 31 million RMB for the same period of last year. Next. Let's look at the major operating expense items. Please note, all of these expenses excluded share-based compensation. Selling, general, and administrative expenses were 581 million RMB, or 6.7% of the revenue in the third quarter, compared to 470 million RMB, or 5.4% of the revenue in the same period of 2019. The increase in SGMA expenses was primarily attributable to accrued provision for certain trade receivables and the losses on disposal of fixed assets due to upgrade of Express's equipment. R&D expenses decreased by 11 million RMB to 51 million RMB, which was primarily attributable to capitalization of certain R&D expenditure to intangible assets, as well as reduction in travel expenses. As part of the company-wide strategic refocusing plan, we are optimizing our SGMA and R&D expenses to focus our resources on our core business. We anticipate and estimate cost savings of approximately 200 million RMB by the end of 2021. The savings will create a linear and more focused organization by prioritizing spending and optimizing operating efficiencies across the company. CapEx in the third quarter was 487 million RMB, or 5.6% of total revenue, compared to 523 million RMB, or 6% of total revenue for the same period of last year. That concludes the third quarter financial overview. Before we open the call to questions, I'd like to briefly provide a summary. After conducting a thorough analysis of our business, We are already underway in the process of creating a more streamlined organization that can simultaneously trigger further growth and improve profitability. The market headwinds we were facing, along with a recognition of our needs to more favorably align our operations as a company, had led to this decision. We believe through the strategic re-evaluation of our non-core businesses, meaningful cost reductions, and the allocation of resources that can better advance its core portfolio in order to deliver consistent and long-term value to our shareholders. With that, we will now open the call to Q&A. Thank you.