BEST Inc

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Best Inc's first quarter 2021 earnings conference. At this time, all participants are in listen-only mode. Following management's prepared remarks, there will be a Q&A session. With us today are 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 the 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-inc.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 harbour statement on behalf of Best Inc. Today's discussion will contain forward-looking statements. These forward-looking statements are based on management's current expectations. They involve inherent risks, uncertainties, and other factors, all of which are difficult to predict, and many of which are beyond management's control. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or others, except as required under applicable law. Please also note that certain financial measures that the company uses on this call are expressed on a non-GAAP basis, such as EBITDA, adjusted EBITDA, and non-GAAP net loss. The gap results and the reconciliation of gap to non-gap measures can be found in Best Inc's earnings press release. Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB. Now I would like to turn the call over to Johnny Chow, Chairman and CEO of Best Inc. Johnny, please go ahead.

Thank you, Operator. Good morning and good evening, everyone. Welcome and thank you for joining our earnings call. Our first quarter results reflected a mix of both the progress brought about by our November 2020 strategic refocusing plan and the ongoing challenges we are still facing. Our execution of the strategic refocusing plan delivered substantial improvement in freight, supply chain management, and global. as reflected in their top-line growth, along with strong growth margin expansion. We continue to solidify our leading position in the freight market while refocusing our efforts on high-margin accounts for supply chain management. We also gained ground in the Southeast Asian market through global, despite the COVID-19 pandemic. Next, let me go over our quarterly results and the recent developments. For Express, we continue to focus on optimizing product structure, improving network stability and flexibility, as well as enhancing service quality and customer experiences during the first quarter. While the results from these actions are not fully visible from our financial results, we believe they have improved the underlying fundamentals of our network and we will further accelerate our actions to target a return to profitability later in the year. During the quarter, parcel volume increased by 33.6% year-over-year and gross margin contracted by 3.2 percentage points due to a decline in ASG per parcel of 17.6% year-over-year partially offset by a decrease in average cost per parcel of 15.1% year-over-year. While our strategies are on the right track, the rapidly evolving competitive landscape requires us to quicken the pace of our action. Our accelerated measures will focus on networking stability and the service qualities by optimizing the structure of product, customers, and franchisee partners in order to create a clear path to sustainable profitability. Freight, once again, delivered a strong quarter with a higher than industry average growth rate and improving profitability. We continue to emphasize the e-commerce aspect of the freight services. solidify its leadership position and brand recognition, and improve operating efficiency. Freight volume increased by 81% year-over-year in the first quarter of 2021. Average cost per ton and ASP per ton decreased by 20.6% year-over-year and 5.4% year-over-year, respectively. For freight, in addition, our efforts to enhance service quality have produced tangible results. In March, we ranked first in the China Index among all franchise trade networks. Looking ahead, we will keep investing in our network, focusing on service quality and enhancing customer satisfaction while maintaining its strong cash flow generation capabilities. Moving to best supply chain management. The total numbers of orders fulfilled by self-operated and franchised cloud OFCs in Q1 have increased by 11.2% and 30.6% year-over-year, respectively. The Q1 gross margin for supply chain management was 5.4%, compared with 0.8% in the same period of 2020. benefiting from the discontinuation of legacy low margin accounts, as well as improved operating efficiencies. Going forward, we will leverage our express and free operations and target our customer acquisition efforts on leading customer brands, which not only bring incremental business opportunities, but also helps us to strengthen our brand awareness We will also promote value-added services in terms of solutions and management systems. Moreover, cross-border business is another key area that we mainly target on. We have now operated three warehouses in Yiwu, Shenzhen, and Guangzhou, connecting our express networks in Southeast Asia and China. As our strategic refocusing plan firmly took its role, we will remain focused on quality growth and profitability and deliver further improvement in our supply chain business in the second half of the year. Best Global continued to expand both cross-border services and in Southeast Asia Express market with especially strong margin improvement. In the first quarter of 2021, Hustle volume in Southeast Asia increased by 249% year-over-year to $30.8 million. Global growth margin significantly improved by 22.2 percentage points year-over-year due to a better economics of scale. SU Cargo continues to scale its full trucking brokerage model as of March 31, 2021. the number of registered drivers on the Ucago mobile apps increased by 66.2% year over year to 348,000. In the first quarter of 2021, the total number of transactions on the trucking brokerage platform increased by 65.4% year over year to 186,000. In summary, Although we expected the turnaround of spreads to take approximately six to nine months, we have a solid, clear strategic direction targeting sustainable development supported by the attractive growth perspectives of e-commerce and the unique value proposition of our integrated smart supply chain solutions and logistics services. We are fully dedicated to positioning our company to long-term success. I would like to turn the call over to our CFO, Gloria, to walk you through our first quarter financials. Go ahead, Gloria.

Thank you, Johnny, and hello to everyone. In the first quarter of 2021, our revenue reached 6.5 billion RMB, increasing 30% year-over-year, while our net loss was 604 million RMB. As our initiatives for Express take time to materialize as a bottom line. Our focus today continues to be on cost reductions across the entire organization, including unit cost structure optimization for Express and Freight, as well as the streamlining of SGMA expenses. As we navigate through the current environment, we are making various strategic evaluations and are prepared to take appropriate actions to strengthen our balance sheet and the liquidity in support of our strategically focusing plan. In particular, we are looking at the financing options in relation to certain of our business units, and we will provide details of necessary or appropriate if any definitive step is taken. We continue to maintain a healthy combined balance of cash, cash equivalents, restricted cash, and short-term investment of 4 billion RMB. What's more encouraging, freight, supply chain management, cargo and capital segments achieved positive operating cash flow during the first quarter, which was the traditional slack season. And our operating cash flow from all segments improved significantly for the same period of 2020. I will now provide a brief review of our first quarter 2021 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 issues earlier today for further details. With the intense pricing environment, our gross profit for Q1 was negative 193 million RMB compared to negative 238 million RMB in the same quarter of 2020. Gross margin percentage was negative 3% compared to negative 4.8% in the same quarter of 2020. Adjusted EBITDA for continuing operations for Q1 was negative 397 million RMB compared to negative 503 million RMB of the same period of 2020. Next, moving on to key financial highlights for our business units. On a year-over-year basis, BEST expressed revenue increased by 10% year-over-year to 3.7 billion RMB in the first quarter of 2021. primarily due to a 33.6% year-over-year increase in parcel volume, partially offset by 17.6% year-over-year decrease in ASP per parcel. Adjusted EBITDA for Best Express was negative 311 million RMB, compared to negative 190 million RMB for the same period of last year. BestRate strengthened its leadership position during the quarter. Its Q1 revenue increased by approximately 71% year-over-year, to 1.2 billion RMB, primarily due to a 81% increase in trade volume. This was partially offset by a 5.4% decrease in ASP per ton. Adjusted EBITDA for batch freight was negative 26 million RMB, compared to negative 185 million RMB for the same period of last year. QI revenue for batch supply chain management increased approximately 10% year-over-year to 448 million RMB, Adjusted EBITDA for supply chain management was 200,000 RMB compared to negative 34 million RMB for the same period of last year. Q1 revenue for Best Global increased by 116% year-over-year to 250 million RMB, primarily due to strong growth in parcel volume in Southeast Asia. Adjusted EBITDA for Best Global was negative 52 million RMB compared to negative 64 million RMB for the same period of last year. We are now grouping new cargo and capital in others segments. Its revenue increased by approximately 119% year-over-year to 911 million RMB. Adjusted EBITDA for others was 3 million RMB compared to negative 15 million RMB for the same period of last year. In terms of operating expenses, we achieved cost savings through operating efficiency improvement. Our operating expenses, excluding share-based compensation, were $441 million, or 6.8% of our revenue, compared with $401 million, or 8% of our revenue, in the same period last year. Next, let's review some major operating expense items. Please note, all of these expenses exclude share-based compensation. Selling, general, and administrative expenses were $390 million RMB, or 6% of the revenue, in the first quarter. compared to 352 million RMB or 7% of the revenue in the same quarter of 2020. The decrease in SGMA expenses as a percentage of revenue was primarily attributable to improve operating efficiency. RMB expenses were 52 million RMB or 0.8% of the revenue in the first quarter compared to 49 million RMB or 1% of the revenue in the same quarter of 2020. Catbacks in the first quarter was 254 million RMB, or 3.9% of the total revenue, compared to 346 million RMB, or 6.9% of total revenue for the same period of 2020. This concludes the first quarter financial overview. Going forward, we will continue to execute on the refocusing plan, align our cost structure with our growth initiatives, and adapt to the evolving competitive market conditions. We are working in earnest on alternative financing options in order to enhance liquidity and the financial flexibility for future growth. With that, we will now open the call to Q&A. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Your first question comes from Thomas Chong with Jefferies. Please go ahead.

Hi, good morning. Thanks, management, for taking my questions. I have two questions. The first one is about the competitive landscape. Can many humans comment about what we have seen in the first half regarding the dynamics and how we are looking into the second half, if there's any intensified competition on ASP catheter? And my second question is relating to the June 18th marketing campaign. Can management comment about the trend in terms of the parcel volume for the June 18th marketing campaign? Any difference that we are seeing compared to previous years? Thank you.

Okay, thank you, Tom. First question on the landscaping. A landscape, and I assume you are talking about express market. We do see a continued competitive pricing pressures in the first half year. However, there has been much more smooth or much less than the last year. Generally, we continue going to see somewhat of pricing pressures through the full year, even the half year. As to the ASP, we do not expecting too much decrease from what is in the second quarter to the full year. That's what we see. In the market, in general, the pricing pressure is there, but it's less intense compared to the period of time last year. That's on the competitive landscape side. Mankind's campaign on the 6-18, we do see a 6-18, the marketing campaign, as usual. It's significant picking up from the normal parcel volume. However, comparatively through the last year, from what we see, it's slightly less than last year's total numbers as a parcel volume.

Got it. Thank you. Got it. Thank you. May I quickly ask a follow-up question? Is this slightly less in parcel volume? Is it mainly due to the high base last year due to the pent-up demand? Or is it relating to competition? Thank you.

I'm sorry, Tom, can you rephrase your question? I didn't seem to get it very clearly. I'm sorry.

Yeah, sorry. Just a follow-up question regarding the previous comments that the parcel volume in June 18th may be slightly less than last year. Just want to get a sense, is it due to the high base? last year on the pent-up demand in Q2 2020, or is this because there's more competition, which led to slightly less in terms of the passive volume? Thank you.

Oh, okay, I got it. So you're talking about the 618 from what we see. Now, of course, we don't have a total market number in the sense of what exactly it is. From what we see, And, you know, from what we see is that 618, we do have a high volume than, you know, every day. But it is compared to last year, seems a little bit less. As to the reason, it could be multiple reasons. So one is, you know, demand side, it could be a little bit less. Others could be the volume being more spread through the multiple platforms or everything else. That's all possibilities.

Your next question comes from Hans Chung with KeyBank Capital Markets. Please go ahead. Hi.

Good morning, Jonny and Gloria. Thank you for taking my question. So first question, can you just follow up the pricing commentary? I think from regulatory environment, things like the regulator discourage the price war and then also want to assure benefits in the labor side. So just from your perspective, are there any implications to the landscape or the pricing dynamic or cost structure going forward. I mean, assuming we'll see more tightening regulation here. And then second question, just can you provide a little bit more color about the second quarter expressed in terms of the volume growth and ASP or the probability for second quarter? Thank you.

Thank you, Ann. The regulatory environment and obviously the government has noticed last year's pricing on the express market has been declined significantly. As a result, many franchisees and also delivery network across industry has been not very stable in terms of the work services and service stoppage and everything. So I think, first of all, we are very welcome the regulatory putting on the efforts to limit or minimize the pricing downturn. That will help in the long term for the industry's service, improve the service quality, and also protection of the delivery voice or deliver people's So in a sense, that's welcome. I think most people in the industry will welcome that, and we certainly do. With that, I think the second quarter or the rest of the year, on the pricing side, we should see less of a downturn because of this effort by government to try to putting to a kind of a standard into the various fees and as well as the pricing, the floors and stuff like that. So that's all welcome, I think. Should be good news for the whole industry as a whole. With regard to your second question about second quarter volume growth and pricing side, et cetera, I think we continue to balancing our growth needs as well as the bottom line profitability needs. In that, we probably will, you know, in our pricing strategy, we'll probably be more focusing more on the, you know, reduce the losses, improving the profitability side. So the growth will be there, but it will be less than we would like to see. However, our effort is to try to balance it and make sure that we have a healthy, sustainable growth in the long term.

May I have one more question? Sure. Regarding the liquidity, if I just calculate the, if I just make out the short-term debt, right? And then it seems like we have around just about 1 billion cash. And then I know there are still, there are about around like 500 million, the health for sale assay. And then, but other than that, and I think, We have, I mean, based on Q1 burn rate, we have about over 500 million, the outflow of operating cash. So I just want to get an idea, like, do we have any plan to raise more capital or do any type of capital, the structure or activity in the near term?

This is Gloria. Thank you for this question. Basically, currently, you are absolutely right. We have about $1 billion cash on the balance sheet. At the same time, we also have about $300 million short-term investment, which we will easily convert into cash. The fee cash is about $1.3 billion. We are really focusing our effort evaluating any other strategic financing alternatives. Once we have more definitive decisions, then we will share our decision with you.

I'd like to add something more on that. As you have noticed on our last release, on our news release, we have actually, we still have about, let's say, over two billion IMB assets in our capital. Basically, that's from the leasing, from the factoring and loan and this kind of asset. We still have about two billion companies' total assets there. We already have converted about $500 million to $600 million of that to cash in the first quarter. So we're still looking at about $2 billion that's usable asset conversion. So by transfer to other investors like to have this asset. In fact, a lot of people are interested in this asset because it's actually a very healthy liquidity asset there. That's first of all. I mean, in addition to the cash reserve we have, we do have another $2 billion of a financial best capital asset there. The second, like you said, we are looking at the various ways to raise more capitals to supporting our turnaround efforts in the next six to nine months. As we, a lot of things are going on, and as the time comes, we will announce that. So basically we look at all meanings of fundraising tools.

I see. Okay. And actually just one last question from me. Yes. Just can you, so in Q1, the global thing is very strong and just wonder what drove the upside. And then I think we, we have seen the significant close acceleration from last quarter. So just any color about what's the underlying driver and then how should we think about these business, like say for the Q2 or the whole year? Thank you.

Okay. Okay, so our global... The first quarter was particularly strong through all the countries we are operating in. So mainly it's in Southeast Asia. In Southeast Asia, as everybody knows, there's quite a large population and also the penetration for e-commerce is relatively low still. However, the growth on the e-commerce is pretty high. COVID-19 pandemic even though brings a lot of challenges for our operation because many countries are shut down and many countries are put in quarantine and everything else. However, the demand is actually quite high. That's on one side. Demand is quite high. Second is that we actually enter these countries, Thailand, Vietnam, Malaysia particularly, build out the whole nationwide network. That allows us to continue to provide strong services to meet our customers' needs. The growth volume comes from platforms such as Lazada, Shopee, and many other local platforms and social media are quite strong. We still upgrade our capacities and build out the Even with the capacity we have now, it's somewhat challenging because travel, everything is restricted. However, we continue to invest and build more capacity, improving our quality of services. Secondly, we do see a very strong cross-border activities associated with our supply chains as well as our global efforts. So there is a lot of cross-border transactions from China to Southeast Asia. Basically, consumers in Southeast Asia buying from platforms in China, such as Taobao or or any other platforms. And we'll get them together and we'll ship them to the Southeast Asia, such as Malaysia, Singapore, Thailand, et cetera, and use our local network to distribute it to the consumers. On the supply chain side, for example, we do have, like we set up and operating three, what we show is the collection points in Yiwu, Shenzhen, Guangzhou. So basically we're collecting all the buyers from the Thailand and Southeast Asia, whatever they buy from China or sellers in China, we put all these merchandise together and we ship it through the air or land or sea. Particularly, the supply chain side, we also set up two cross-border ports, one in Guangxi. We're working with government, local government, and set up a clearing house on the customer clearance, and use the land transportation, land transport, through China across Vietnam to the rest of Southeast Asia, that will also see a tremendous growth there. So basically driven by both domestic local market demands as well as cross-border demands for services. And that is looking forward to global. We still continue to anticipate a fast growth in terms of volume as well as improved financial numbers in terms of the margin improvement and as well as the reduced losses on the bottom line. We do anticipate certain countries towards the end of the year probably will reach into operating the bottom line to a net zero or probability base. Expecting next year, we will see a much better, more supposing growth in bottom line improvements.

Thank you.

Once again, if you have a question, please press star then one on your touchtone phone. Your next question comes from Ronald Kim with Goldman Sachs. Please go ahead.

Thank you, Johnny and Gloria and team. So I just have two questions. One is you talked about the turnaround for Express in six to nine months. Just want to hear what is the assumption behind and what is the target for that? Does that assume the current pricing competitive environment or irrespective of that, we just have this turnaround, uh, in profitability or in kind of more operational turnaround. Um, so when, what, what would be, will market share be more of a result of that or that's also part of the six to nine month target? Um, because as, as you mentioned, um, in the second quarter, maybe our market share could have been coming lower. So are we mainly just focusing on profitability in that six to nine month, uh, turnaround time? And then, uh, My second question will be on how we talked about our different strategic evaluations, financing options. Just want to hear what has been mostly the challenges over the past, say, months or quarters or quarters in looking into those options. Because we have seen companies like A&E filing to be listed. There are freight matching platforms that also have filed for listing. So it seems like at least Comparable peers, say, of Freight or of Best New Cargo, these people are tapping the capital markets through these times. So I just want to hear what has been maybe some of the challenges and how do we see the progress or future options ahead. And are we open to maybe even partnerships with any other competitors? Thank you.

Thank you, Rondo. It's good to hear from you again. The first question on the turnaround, yeah, so as you can see, if you see our express development, I mean, we're basically from when we started on 2011, we started from about a less than one percentage of market shares And all the way up to fourth quarter 2019, we're actually at about 12.4%. And because we just had a board meeting, I just look at the number, 12.4. But 2020 is a particularly challenging year, right? So, I mean, we were on the 2019 fourth quarter, end of 2019, we will feel like, you know, we can do another great year for 2020. But the sudden the pandemic, as well as a new entrance into the market with a particularly low pricing and everything else, it does really did a major challenge to us in 2020 and through the 2021. The challenge is basically in the past four or five years, we have been running up the The market share particularly grows much, much higher than the market. When the microenvironment is okay, the pricing wasn't that low, and that strategy works because basically you're still going to have a pretty good – you can focus on the growth. Meanwhile, your bottom line is not that much impacted. Pricing is still okay. They allow you to run fast. But when the pricing is coming down so much, 25% versus your – your costs are only going down 12%, 15%, and there's a big gap there, then a lot of assumptions and the way of doing it should need to have a major challenge there. When we say turn it around, particularly in four areas, one area is about organization. We really need to restructure some of the organization as we have been doing that, things I mean, we have changed a lot of leadership positions, and we want to see if there's something that can be solidified and improved. So organization is something that needs to be more beefed up. Second is more about a franchisee side. We want to make sure that our franchisee are able to survive healthily. They can also contribute to the growth of the market. In the past, the parcels are very much concentrated into a percentage, a less small percentage of franchisees. So in other words, top 20, 30% probably, the franchisees probably had 80, 90, even 95% very higher part of shares. But now, with that, we really need to have a small or medium size of franchisees. They are capable to acquire more customers, doing better services, et cetera. So in that sense, we need time to basically to help establish, to nurture more middle-level, middle to small-level franchisees and make sure Under this kind of pressure level, they can still apply to customers and provide better services. In the past, certainly, into the last year, especially the second quarter, the second half of last year, a lot of the smaller franchisees actually get into trouble because they've been running very fast in the past five, six years. And, you know, all of a sudden, environment change, they have, you know, basically has challenge or difficult to survive or difficult to basically provide better services. So that's the thing that we really need to helping them, giving time to do that. And third is basically we need to looking through our strategy, our pricing on the products, right? In the past, probably, you know, when the environment is all good, Any kind of pricing, you can bring the customers, bring the parcel, that's good. Even if you don't make money, but at least you don't lose that much money. But now, if you bring all the parts of the parcel, regardless of the pricing, then you will find out that you are unsustainable because your loss is getting bigger. So in a sense, we really need to go to tune up our pricing strategies as well as the product mix and everything. something we had to give up and something we had to do more, that into such a large network across our country will require some time to change a lot of things. But I would like to point out that actually I was happy to see the progress we had made. We did a lot of things, right? push out a more regulated delivery fee structure instead of a more ad hoc and randomly for each provinces. But now we have a more structured, a lot of delivery fees based on the product mix and things like that. We also push it out more of product new pricing structures, which will help to improve the margins and profitability. But these through the oil network to change the to nurture the more franchisees to be more competitive, to make sure that our product mixing are more, you know, gross margin and bottom line balancing. That's all the power to have some time. So that is something that we're looking at. We're not just looking at, you know, cost-based. our cost actually coming down a lot. If you look at our first quarter number, our cost actually went down about 15%, which is significant because basically, I look in the second quarter again, the number of the cost coming down, also very significant compared with last year. So yeah, of course we don't focus on the operating metrics or operating efficiency, but more importantly, we change the whole network structure the product mix, all our structure, and to a much more concise, much more mixing the optimized solutions. So that's the topic we're talking about. Your second question was really talking about financing side. You're absolutely correct. If you look at our business, Aside from the Express, which everybody has been focusing on, if you look at our freight, freight is doing extremely well, not just in the industry market position, but as well as its profitability, growth, everything is doing extremely well. Looking at the supply chain, we have over 10 years of experience. We actually were the pioneer on the supply chain on this wall, integrated B2B, B2C services with over 700 Fortune 500 global and the China Fortune 500 customers. So we built up a lot of expertise into the area as well. But in the past, we have a store plus. We are doing a lot of things that try to support the last mile distribution, but it was too, you know, defocused. So within cutting down all this, you can see our supply chain side actually, you know, all the metrics have improved, right? The margin has improved. We actually, our first quarter, we lose money on February because of Chinese New Year. January and March, supply chain is actually positive, actually making money. And so is, I think, the second quarter. They're looking good, too. So supply chain has lots of value in terms of moving forward into, if you look in China's economic growth and the structure change into the economy, supply chain, third-party logistics, and all this stuff is going to be very well needed, and our supply chain is in a really good position. If you look at, like you said, our Yukago. At Yukago, we actually have very few people. We only have about 150, 200 people in the whole group, but they're actually profitable. Maybe the first quarter had some legacy issues from last year, but they're actually profitable into the first quarter. to the January and February, March certainly is the second quarter. So nevertheless, their scale is still a little bit less, right, compared with the trading express. And looking at global also, right, so yeah, so if you're looking at that, we are looking at multiple ways to raise capitals and also beef up our liquidity. By all means, by, you know, the raising funds for a particular business or, you know, working with other partners. We're looking at all the options and make sure that how to create a shareholder's value and, you know, best for the company to grow. And we're looking at all these venues. Thank you.

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

Thank you for joining our call, and we appreciate your support of BEST. Please reach out to our investor relations team if you have further questions. We look forward to speaking to you soon. Thank you very much.

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