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spk00: Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Best, Inc.' 's second quarter 2021 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 Jonny 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, and Gloria will explain the details of financial results. Following the prepared remarks, you may ask your questions. Please note this call is 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 Harbor Statement on behalf of Best, Inc. Today's discussion will contain forward-looking statements. These forward-looking statements are based on management's current expectations. They involve inherent 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 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 GAAP results and the reconciliation of GAAP to non-GAAP measures can be found in Best Inks earnings press release. Finally, please note 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 Mr. Johnny Chow, Chairman and CEO of Best Inc. Mr. Chow, the floor is yours, sir.
spk03: Thank you, Operator. Hello, everyone, and thank you for joining us at the second quarter earnings call today. In the second quarter, we continue to press forward with our strategic refocusing plan and built on the encouraging signs we are seeing in network stability, service quality, and cost reduction while adapting to the competitive industry landscape. Notably, Express continued to make progress in unit cost reduction and witnessed significant network improvement with enhanced service quality. For free business, it continued its industry-leading position and registered a net profit for a quarter with emphasis on our e-commerce capability. Supply chain management achieved profitability by serving high-margin customers, expanding cloud OFCs network supported by smart logistic management for better operating efficiency. Our global business continued its growth momentum with partial volume in Southeast Asia increasing 140.7% year over year, despite a resurgence of the COVID-19 pandemic in the region. Next, I will talk about key developments and our operational performance during the second quarter. For Best Express, we have seen a promising trend in the market benefiting from government's policy on fair market competition. We are optimistic that by committing to our refocusing strategy to optimize product infrastructure, improve network stability and customer satisfaction, we will be able to improve our financial metrics later in the year and build a solid foundation for long-term growth. In the second quarter of 2021, parcel volume increased by 1.2 percent year-over-year to 2.3 billion. Growth margin contracted by 11 percent, 11 percentage points due to a decline in ASP per parcel of 18 percent, partially offset by a decrease in every cost per parcel of 8.5 percent year-over-year. Our efforts in stabilizing our network have been fruitful, evidenced by our low effective complaint ratio, published by State Post Bureau in June. S-PRAE, strengthening its industry leadership through continued operating efficiency, network expansion, and enhanced service quality. S-PRAE returned to bottom line profitability in the second quarter of 2021, the average cost per ton remained relatively steady year over year, despite higher oil prices in the second quarter and the absence of a highway toll subsidy compared to the same period of last year. The freight volume for this quarter increased 9.3% year over year, while the volume attributable to e-commerce growing significantly at 23.1%, contributing 19.2% of the total volume. We will remain focused on the e-commerce market for free services, and we'll continue prioritizing unit cost reduction to position ourselves for long-term profitability. Moving to best supply chain management, in the second quarter of 2021, We remain focused on high margin customers, expanding our cloud OFCs network, and enhancing operating efficiency. In addition, as the pioneer of integrated smart supply chain service provider, we are well positioned to benefit from increasing customers' demand for integrated supply chain and logistic services. to further improve their operating efficiency and cost structure. The total number of orders fulfilled by cloud OFCs increased by 8.2% year-over-year to $120.5 million in the second quarter. And the total number of orders fulfilled for franchised cloud OFCs increased by 36.3% to $73.1 million. The number of franchise OFCs increased by 5.8% year-over-year to 345 in the second quarter of 2021. We have also established multiple warehouses as custom clearing centers partnered with local government in the border cities such as Pingjiang and Kunming to support fast-growing cross-border e-commerce business. in Southeast Asia. Gas Global continued its fast growth momentum in Southeast Asia and has made a significant margin improvement. Parcel volume in Southeast Asia increased by 140.7% year-over-year to 38.8 million, driven by 80% and 195.5% growth in Thailand and Vietnam, respectively. Global's gross margin improved significantly by 7.0 percentage points year-over-year, benefiting from economics of scale fueled by increasing market share and network expansion in the region, as well as utilization of our strong supply chain management capabilities and cross-border logistics solutions by leveraging our express freight and supply chain management expertise. In conclusion, our strategic refocusing plan has delivered promising results in the second quarter, as evidenced by Best Express effective unit cost reduction, Best Freight's return to profitability, Best Supply Chain Management's strong performance, and Best Global's fast-growing business. Looking ahead, Given the supportive industry regulatory environment and continuing the strong e-commerce growth, we are optimistic that our strategic refocusing plan will position us to deliver improved operating and financial results in the coming quarters. Now I would like to turn the call over to our CFO, Gloria, for further review of our second quarter financials. Go ahead, Gloria.
spk01: Thank you, Jonny, and hello to everyone. In the second quarter of 2021, our revenue was 7.4 billion RMB compared with 7.8 billion RMB of Q2 2020. The slight decline was driven by lower ASP in expression rate, partially offset by higher volume in both business units. Our net loss narrowed down to 467.5 million RMB compared to first quarter of 2021. benefiting from our effective cost control across business units. As part of our refocusing plan, we continue to improve our balance sheet and streamline our asset base. From the beginning of the year, we have completed approximately 1 billion RMB of financing and asset conversion. In addition, we are working a pipeline of financing and strategic initiatives to further strengthen our balance sheet. The balance of cash, cash equivalents, restricted cash, and short-term investments were 3.4 billion RMB at the end of the second quarter. Our strategic refocusing plan charted a clear path for us to achieve sustainable growth and profitability in the long run. I will now provide a brief review of our Q2 financial results. With an intense market environment, our gross profit for Q2 was negative 144 million RMB compared to 484.5 million RMB in the same quarter of 2020. Growth margin was negative 2% compared to 6.2% in the same quarter of last year. Adjusted EBITDA for continued operations was negative 253 million RMB compared to 225 million RMB in the same period of 2020. Next, moving on to key financial highlights for our core business units. On a year-over-year basis, FAS Express revenue decreased by 17% to 4.3 billion RMB in the second quarter of 2021, primarily due to an 18% decrease in ASP per parcel, partially offset by a 1.2% increase in parcel volume. Adjusted EBITDA for Express was negative 215.6 million RMB compared to 212.4 million RMB for the same period of last year. Fast freight continued its leadership position and returned to profitability during the quarter. Its revenue increased by 2% to 1.4 billion RMB, primarily due to a 9.3% increase in freight volume, partially offset by a 6.5% decrease in AFP per ton. Adjusted EBITDA for freight was 36.6 million RMB, compared to 81.7 million RMB for the same period of last year. Q2 revenue for best supply chain management decreased by 5.9% to 479 million RMBs due to discontinuation of certain low gross margin key accounts. Adjusted EBITDA for supply chain management was 22.4 million RMBs compared to 5.7 million RMBs for the same period of last year. Q2 revenue for best global increased by 63.4% to 314 million RMBs driven by continued growth momentum in parcel volumes in Southeast Asia. Adjusted EBITDA for Pax Global was negative 47.3 million RMB, which was flat compared with Q2 last year. Now, let's take a look at some major operating expense items of the second quarter. Please note, all of these expenses exclude share-based compensation. Selling general and administrative expenses for continued operations were 429 million RMB or 5.8% of revenue compared to 370 million RMB or 4.8% of revenue in the same quarter of 2020. The increase in SGMA expenses was primarily attributable to additional bad debt provision resulted from the pandemic and the absence of certain COVID-19 pandemic-related subsidies that were available in 2020. R&D expenses for continual operations was 58 million RMB or 0.8 percent of revenue compared to 39.5 million or 0.5 percent of revenue in the second quarter of last year. CapEx in the second quarter was 174.5 million RMB or 2.4 percent of total revenue compared to 424 million RMB or 5.5 percent of total revenue in the same period of last year. This concludes the second quarter financial review. And now for our outlook. Due to the competitive market dynamics for express and free, we expect our revenue for the full fiscal year of 2021 to be between $28 billion to $32 billion RMB. This outlook reflects management's current preliminary estimates based on current market and operating conditions, all of which are subject to uncertainty. As we're moving into the second half of the year, we will continue to optimize our cost structure and increase our efficiency. We will also continue our strategic evaluation and are prepared to take appropriate action to strengthen our balance sheet and liquidity in support of our strategic refocusing plan. With that, we will now open the call to questions.
spk00: Thank you. Thank you, ma'am. We will now begin the question and answer session. To ask a question, you may press star, then 1 on the touch-tone phone. If you're using a speakerphone, please pick up your headset before pressing the keys. If any time your question has been addressed and you'd like to withdraw your question, please press star, then 2. Again, it is star, then 1 to ask a question. At this time, we will just pause momentarily to assemble our roster. And the first question we have will come from Thomas Chong of Jefferies. Please go ahead.
spk02: Hi, good morning. Thanks, management, for taking my questions. I have two questions relating to the express side. One is relating to the macro environment in China. We have seen our guidance is revised revised at this time, and I just want to get a sense about is this mainly due to the macro environment that we are seeing the industry growth is getting affected? And on the other hand, if not, can you comment about the competitive landscape right now? I think in the prepared remarks, we have talked about the landscape is getting more rationalized But if that's the case, how should we think about the ASP trend going forward? Thank you. Thank you, Thomas.
spk03: Basically, the whole express macro environment on the street front, one is that The macro, the government's policy to install the more competitiveness into the market, that will help the market to be able to have less price competition. So pricing, what we see, is kind of eased out. So in other words, it's bottomed out. So we don't expect it to have a further, a few reductions in the pricing. Meanwhile, second is that with that, the last mile delivery fees should also be stabilized. We don't see a trend to continue to reduce the last mile fees cost. That will help to stabilize the network and the customer satisfaction as well as the service quality. That's on the second thing. The third thing is that the economic, e-commerce side of growth are still pretty robust, so we will see a pretty robust continued general market. As you were saying, the guidance was somewhat reduced. We are looking at a whole cross-border of our business review based on the ASP reduction that we have seen from the second quarter. even though the third and fourth quarter, we don't be expecting too much of an ASP reduction there, as well as the phrase side and express and all the macro side, basically. That's why we did an adjustment there.
spk05: Got it. Thank you.
spk00: And next, we have Hans Chung of KeyBank.
spk04: Hi. Thank you for taking my question. Good morning, Johnny and Gloria. Good morning. So I have a couple of questions. First, on Express Business. So I guess I want to say that for the past quarter, we continue to see the SP decline by around like 20% or high teens. And then, however, we saw this kind of slowing growth momentum on the volume side. And so I think as a result, we see the path of cost reductions actually also come down quite a bit. If you compare to the S&P decline to the cost reduction, I think the gap kind of become wider. So my question is like, how do we, achieve probability if the trend proceeds going forward. So in other words, what do we have to do to make a turnaround to come and then going forward? And then that's my first question. And then second question is on freight. So since like freight, also came in below expectation, I mean, from volume or revenue perspective. So I guess maybe my question is, is that because of the increased competition? And then also, can you also update the landscape here? And then what should we think about the industry going forward? Thank you.
spk03: Thank you, Hans. To express the first one, you were talking about the profitability, how the plan to make it a profitability. First of all, if you look at our cost reduction, actually it's much more significant than 8%. Looking at the, if you look at the transportation costs, transportation costs last year, During the second quarter, because of the recovery from the pandemic, actually, we have government has given a subsidy or waived the whole toll and the bridge toll for the several months. So that has significantly reduced the transportation costs last year. The second is this year, actually, since the beginning of the year, the oil price has increased significantly. from last year. So, if you take this into consideration, our cost actually being improved much more. It's reduced about 16 percent. So, in that sense, we did not put this into consideration. So, cost deductions continue to be there. So, that's the first thing I want to clarify on the cost reduction side. Second, go back to profitability. so basically probability we are about 10 cents uh loss on on the per per um um possible basis uh so what are we seeing that is that so so how you can play the uh uh balancing the uh asp the and and the cost to recover the 10 cents to make it profitable um so the on the asp side we actually seen a market a little bit stabilized More importantly, in the past six months we have, since the beginning of the year, we have been doing a lot of restructuring. For one thing is that we have to continue to optimize our network. Since 10 years ago, when we started getting to this market, express market, our market share was in between 1% or 2%. Ever since the whole team, including the franchisee, has been running very fast, every year 50%, 100% growth, up to about 2019, and we reached about 12% of our market share. In that, a lot of franchisees are a little bit tight on the capital and everything else, and that's what we need to help them. to strengthen their also their customer acquisition capability and all this stuff. So we have seen a good progress in the past six months that our franchisees are getting stronger in the sense that we're helping them to acquire the customers and also helping them to pass this difficult time in the past year since the pandemic happened. That's number one. So that will help in the small and medium franchisees able to acquire the customer better. They typically have a higher ASP because the customer typically are a little bit smaller. The ASP are higher versus a very much concentrated, a large customer based on a few large franchisees, which typically have a very small ASP. So on the ASP side, what we want to do is Three things, right? Network stability to make sure the service quality and customer satisfaction is better. Second, so helping the network franchisees to better health in terms of the money, making money or customer acquisition. And third is that we wanted to have a better customer base instead of just focusing on a larger customer base, but more to the medium and the smaller customer, they will have a typical higher ASP. So that's on the ASP side that we are seeing that gradual upward momentum on the ASP side in our site month by month we're tracking. Second is on the cost side. As you can see, as I just explained before, From the reporting side, we see about 8 percent cost reduction, but actually taking into a lot of other consideration of, you know, toll waivers last year, oil price increase, et cetera. So, actually, the cost reduction is much more than was reported. And going forward, the two areas, three areas that we will be able to further optimize our cost structure. One is hoping that in the later couple quarter, a traditional high season, the volume will increase. The volume will increase for further utilizing our capacities and reduce the cost. Second is that we are doing a lot more of synchronization of the transportation side with the freight. That will reduce the freight costs further. And third of all, that we are actually actively looking at our operating centers or hub centers and to see if there's any kind of spare spaces which we can reduce or sublease out, et cetera, to further reduce the leasing costs on that. So we're confident that in the next couple of quarters, based on the work we already have been done, in the past six months with a more stabilized macro environment, we should be able to back to the profitability. Second, on the freight side, you were talking about the growth and also the freight side actually this year, there is a lot of impact of the severe weather pattern. Unnormal weather pattern, which make a lot of area flood and also second in some area resurgence of the pandemic in certain states and provinces. That also has some kind of impact to our volume on the second quarter. But that's number one. So the macro side is something that the weather, the pandemic has some impact on that. that will reduce the total volume growth in that. Second is that also the cost side and macro side is also competitive, and as you can see that our ASP per ton actually remains quite flat. But we will see Typically, if you see on the past couple years, on the high season, like the third and fourth quarter, starting from late August now to end of the year, that's a high season. The actual pricing will go up, back up a little bit. So, on the macro side, I think freight is still growing in the sense of the general market. However, very competitive. Not as the S&P side, the pressure is not as high as like the express side, but continually still have a fair competition in the general market. That would be some of the input to your questions.
spk04: Yeah, thank you. That's helpful. And then may I have one question? Sure. Yeah, so it seems like recently we have the COVID-19 resurgence across the country. I just wonder, could that have potential impact on logistics or supply chain, et cetera, like we have faced last year? I guess not. I just want to hear your thought here.
spk03: Oh, yeah. Good news is that the resurgence on the COVID-19 is actually well under control. I believe that in the next couple weeks, most of the pandemic resurgence is going to be under control. So the impact to our business is going to be, as what we're seeing, probably a little bit on the second quarter and third quarter, of course, July and August for the pandemic, but as we're seeing that this is less effective now, I'm sure that can be in control very soon. So as a result, I think in January, to our business, I think a short-term will have some impact, but I don't see a moving forward from now will have a more severe impact on that.
spk04: I see. Thank you. That's all I have. Thanks, guys.
spk00: Again, as a reminder, if you'd like to participate in today's Q&A, please press star, then 1 on a touch-tone phone. Again, that is star, then 1 to ask a question. The next question we have will come from Ronald Kong of Goldman Sachs.
spk05: Thank you. Hi, Johnny and Gloria. I have two questions on the Express side. I would like to seek your thoughts on those. First is with our roughly flat volumes on a year-on-year basis, just wanted to know how many kind of new customers did we gain during the process? Have we kind of kicked out some of the lower quality customers and hopefully these newer, higher quality customers? And in that, you talked about improved service quality. So the metrics like end-to-end delivery time or the metrics that we track, which could show our gap has been narrowing or improving, versus, say, the leaders in ZTO in delivery time. And then my second question is, any comments on the market structure? We know J&T has been growing very rapidly while we are taking more on building ourselves in service and not as aggressive in terms of our market share. We actually have flat volumes. So, how do we see the competition with these newer entrants and the market structure that we see the industry may evolve to based on your best estimate. Thank you.
spk03: Thank you, Ronald. On the first question on the express talking about the FRAP volume and certainly in this kind of environment, we want to make sure that we want balancing the the bottom line as well as the volume growth. In this competitive market, we choose to continue to service better customers in the sense that it has higher ASPs versus some of the customers and apostles, which is purely money losing. In the process, we were helping the franchisees, especially in the middle layers, small and medium franchisees. They can serve smaller customers with a higher ASP rather than a purely concentrated, a highly out-of-bottom customer, which typically has a very severe pricing pressure on that. On the quarterly side, if you look at the June post-bureau government's release of statistics, we actually ranked number two in terms of the customer complaint ratio and everything else. I'm talking about the best number two side. So we're tracking, of course, a lot of these metrics in terms of the customer satisfaction, completion ratios, delivery time, et cetera. So we continue to see, especially on the delivery time side, and we have some quarter-to-quarter improvements. Of course, to compare with, like you said, the top of the player, like CTO, we still have some some of the distance, but if we compare with ourselves and the rest of the players, we continue to make pretty good progress on that. Second, you're talking about the market dynamics or market structure. In general, if you look at the market structure, what you're seeing is that some of the other players' new entrants have a fairly rapid growth, which if you look at the number in the past six months, I didn't think it was that the case, but it has some progress, but I don't think it's the real progress. But I think really what we need to do, from the best point of view, then we need to really focus on our own strategy. Focus on our own strategy, so first as we said, we really need to make a much more stabilized a better service network rather than purely just lower the price and have fighting on the market share side. So number one focus for us right now, short-term-wise, is really to try to put our house in order to make the franchise stronger, make our service quality, the real-time customer satisfaction better. Then meanwhile, to compete, reach completely or modify or optimize our customer profiles to make it a better ASP customers in their sense. So I think if we can, you know, are we confident that with the six months or in the whole year that we have been doing, each promises we see The network itself is much healthier now. The franchisees are stabilized and service quality can be improved. In that sense, we think that we have a much better competitive capability in the coming quarters to do that.
spk05: Thank you, Johnny. That's right.
spk00: At this time, we'll go ahead and conclude today's question and answer session. I would now like to turn the conference call back over to the management team for any closing remarks.
spk03: Thank you all 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.
spk00: And we thank you, sir, and to the rest of the management team for your time also today. The conference call has now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care and have a great day.
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