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spk04: Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Best Incorporated's third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Following the management's prepared remarks, there will be a Q&A session. With us today are Johnny Cho, Best Incorporated's Chairman and CEO, and Gloria Phan, Chief Financial Officer. For today's agenda, Johnny will be giving 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 webcast on Best, Inc.' 's IR website at ir.best-inc.com. A replay of this call will be available after the call. An investor's presentation is also available on the IR website. Before it begins, I will read the Safe Harbor Statement on behalf of BEST Incorporated. 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 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 reconciliations of GAAP to non-GAAP measures can be found in Best Incorporated'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 Cho, Chairman and CEO of Best Incorporated. Johnny, please go ahead.
spk02: Thank you, operator. Hello, everyone, and thank you for joining Best's third quarter earnings call today. In the third quarter, we remained dedicated to realigning the company around our core competencies. and unlocking value for our shareholders. Let's first talk about our recent transaction with J&J Express China. On October 29, we announced the agreement to sell our express delivery business in China to J&J at a valuation of 6.8 billion RMB. We arrived at this decision after a very thorough evaluation of various alternatives. As you must be aware, the express market in China has been exceedingly competitive, with both leading players and new entrants aggressive in their pricing strategies. The situation has been further compounded by the COVID-19 pandemic. Against this backdrop, we strove to enhance our express network stability and our service quality, as well as optimize the product mix for customers. These efforts led to concrete improvements improvements in our network and services, but it's not taking the business out of loss making. This transaction enables us to focus on our core supply chain competencies and to execute on our strategic roadmap, allowing us to allocate resources more efficiently towards our integrated supply chain logistics, freight, and global supply chain and logistics services. Next, I will take about key developments and our operational performance during the third quarter. With respect to Express, while we continue to improve operating efficiency and enhance customer experience with upgraded service quality, in the third quarter of 2021, parcel volume decreased by 10.9% year-over-year to $2.1 billion amidst a competitive landscape. Growth margin contracted by 7.6 percentage points due to a decline in ASP per parcel of 12% year-over-year, partially offset by a decrease in average cost per parcel of 5.5% year-over-year due to our cost reduction measure, despite the higher oil prices and rising labor costs. Best three, continue to grow. It is e-commerce-related transactions. reduce costs, and invest in network expansion and service quality improvement. However, due to a traditionally low season in the third quarter and macroeconomic growth affected by pandemic, phrase volume decreased by 1.5% year-over-year in the third quarter of 2021, with e-commerce volume accounting for 20.4% of total, up 4.5 percentage points year-over-year. The average cost per ton decreased by 1.3% year-over-year, despite higher oil prices and rising labor costs, thanks to our freight team's dedicated cost control. However, the gross margin was a negative 5.4% in the quarter, 6.7% points lower year-over-year, primarily due to the ASP decline of 7.5% year-over-year. Best Supply Chain Management. In the third quarter of 2021, we remained focused on projects with higher margins and declines with strong credit profiles, while expanding our franchisee's cloud OFC network and implementing cost reduction measures. Its growth margin was 3.6% in the quarter, 0.6 percentage points lower year-over-year as we realize one-off charges related to the closing of lower margin counts. The total number of orders fulfilled by Colorado OFC increased by 1.4% year-over-year to 103.6 million in the third quarter of 2021, of which the total number of orders fulfilled by franchise Colorado OFC increased by 27.1% year-over-year to 68 million. The number of franchise OFCs increased by 1.7% year-over-year to 351. Best Global maintained its robust growth in Southeast Asia with improved margins. Despite the continued impact from COVID-19, parcel volume in Southeast Asia increased by 78.7%. to 37.1 million in the third quarter of 2021, with particular strength in Thailand, Malaysia, and Cambodia, where possible volume increased 123%, 933.2%, and 264.5% year-over-year, respectively. Global growth margin rose by 4.1 percentage points year-over-year, primarily driven by our growing economic scale underpinned by our enriched cross-border service and solutions, as well as our expanded network in the region. Going forward, with our strengthened balance sheets, we will be equipped to increase investment in automation and systems to enhance our services. As a pioneer of integrated smart supply chain and the largest service provider, we will be well-positioned to serve companies that seek to further improve their operating efficiency and to accelerate their supply chain digital transformation. For supply chain management, with advantages at a higher reputation of our services for apparel and the fast-moving consumer goods industries, we continue to expand it in higher-growth module industry, such as auto parts and the pharmaceuticals. We also continue to invest in infrastructures such as the warehouses and the fulfillment centers network and delivery system. To further improve customer experience, we are optimistic that the supply chain and logistics will achieve profitability in 2022. For Freight, we'll continue to solidify our position as an industry leader by further enhancing Freight's business capabilities, serving customers in the e-commerce space, where the pricing is more attractive and the leveraging synergies with our supply chain management. We also expect the freight to be profitable for the full year of 2022. As e-commerce penetration deepens in Southeast Asia and China, Asian cross-border trades grow at a double-digit rate, global will continue to be the growth driver for our company. We will promote further utilization of our strong supply chain management capabilities and provide smart logistic solutions for both local and across border operations in Southeast Asia. In conclusion, conditions around the world has brought to light the vital importance of smart supply chain solutions and logistic services for every business. Looking forward, we will continue to strategically develop and explore synergies among our business units to create value. We are confident that our streamlined realignment and the focuses on our core strengths will enable us to capture the enormous opportunities that lie before us. Now I would like to turn the call over to our CFO, Gloria, for further review of our third quarter
spk03: Thank you, Johnny. And hello to everyone. Revenue for the third quarter was 6.8 billion RMB, a decrease of 14.6% year over year. As macroeconomics and the market dynamics weighs on the volume and average selling price for express and freight. However, Best Global excelled in the quarter, maintaining a strong growth despite the pandemic's lingering effects. and worldwide logistics and shipping disruptions. The strategic transaction with J&T Express China will significantly improve our liquidity and provide us with financial flexibility to reduce leverage and increase investment, laying a solid foundation for us to return to profitability and establish our growth trajectory. Our balance of cash, cash equivalents, restricted cash, and short-term investments were 3.4 billion RMB at the end of the third quarter. Now, let me walk you through our financial results in the third quarter of 2021. Within the intense pricing environment, our gross loss for QC was 505 million RMB compared to 58.5 million RMB in the same quarter of 2020. Gross margin was negative 7.4% compared to negative 0.7%. Adjusted EBITDA for continuing operations for Q3 was negative 481 million RMB, compared to negative 369.5 million RMB in the same period of last year. Next, moving on to key financial highlights for our business units. On a year-over-year basis, best expressed revenue decreased by 21.7% to 4 billion RMB in the third quarter of 2021, primarily due to a 12% year-over-year decrease in ASP per parcel and a 10.9% year-over-year decrease in parcel volume. Adjusted EBITDA for Best Express was negative 348.5 million RMB compared to negative 187.7 million RMB for the same period of last year. For Best Freight, we continue our effort to grow its e-commerce-related business and invest in in network expansion to improve service quality. Its Q3 revenue decreased by 9% year-over-year to 1.4 billion RMB, primarily due to a 1.5% year-over-year decrease in freight volume and a 7.5% decrease in ASV per ton. Adjusted EBITDA for best freight was negative 140.4 million RMB compared to negative 37 million RMB for the same period of last year. Tuesday revenue for best supply chain management decreased by 11.5% year-over-year to 400.6 million RMB. Adjusted EBITDA was negative 16 million RMB compared to negative 26.7 million RMB for the same period of last year. Tuesday revenue for best global increased by 38.1% year-over-year to 298.3 million RMB. driven by the sustained growth momentum in parcel volumes in Southeast Asia. Adjusted EBITDA for Best Global was negative 61.8 million RMB compared to negative 60.7 million RMB for the same period of last year. Q3 revenue for Ucargo and the capital grouped in other segments increased by 6% year-over-year to 767 million RMB. Adjusted EBITDA for others was negative 78.5 million RMB compared to negative 26.7 million RMB for the same period of last year. Our operating expenses excluding share-based compensation totaled 455.5 million RMB or 6.7% of the revenue compared with 466.1 million RMB or 5.8% of the revenue in the same period of last year. Now, let's take a look at some major operating expense items from the third quarter. Please note, all of these expenses exclude share-based compensation. Selling, general, and administrative expenses for continual operations were 396.4 million RMB, or 5.8% of the revenue in the third quarter, compared to 423.3 million RMB, or 5.3%, of the revenue in the same quarter of 2020. R&D expenses for continued operations were 59.1 million RMB or 0.9% of revenue compared to 42.8 million RMB or 0.5% of revenue in the same quarter of last year. Catbacks in the third quarter was 116.9 million RMB or 1.7% of total revenue compared to 484.3 million RMB or 6.1% of revenue in the same period of last year. This concludes the third quarter financial overview. We believe our recent transaction with J&T will open a new chapter for our company. This allows us to become linear and focus on leveraging our technology strength to deliver sustainable and profitable long-term growth. We will continue to explore innovate and invent creative supply chain-based logistic solutions, helping our customers achieve success as the industry moves into the digital era. With that, we will now open the call to questions. Thank you. Operator?
spk04: Thank you. We will now begin the question and answer session. To ask your question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Thomas Chong with Jefferies. Please go ahead.
spk01: Hi, good morning. Thanks, management, for taking my questions. I have a question regarding our 2022 outlook for different business segments with regard to supply chain and global. How should we think about the competitive landscape for different segments in the region and our competitive edge and how we stand out from competition and achieve the KPI that we just highlighted? And with regard to the policy from the deal, how should we think about the use of the cash? Thank you.
spk02: Okay, Thomas. Your first question is regarding to 2022 global and supply chains, some landscape in the competitive landscape and as well as our advantages First of all, let's talk a bit more about global. Global basically has driven very fast growth in terms of the Southeast Asia's e-commerce penetration and also a fast growth in a cross-border between China and Southeast Asia in the trade. And both of these, we have a significant advantage. First of all, in the local market in each country, we have spent a few years already, we have been engaging in network development and build up all the infrastructure. In Thailand, I believe we have about close to nine sorting centers and hubs. In Vietnam, it's about 10. In Malaysia, we have done about 7 or 8. So, Singapore and Cambodia. So, these are the infrastructure we have been continuing to invest and build in the past couple years. Second of all, that we had built a fairly covered network, both in all these countries. We have a almost complete 100% of coverage into these, especially in Thailand, Vietnam, in the early entry markets. Third is that the cross-border, we leverage our supply chain business, supply chain capability, and also the network, both spray and express in China. Recently, for example, we had helped one of the major manufacturers in China set up logistic services in multiple Asian countries for both the direct trade with the last mile delivery, warehousing, cross-border, et cetera, door-to-door services. So we continue to see many of larger the China-based companies wanting to enter Southeast Asia needs an entry-end warehouse, last-mile delivery, both in bulky items as well as in parcel services into the market. So I think that gives us a very large advantage in terms of developing these markets. Back to the supply chain. We have been pioneers in supply chain services in China more than 10 years ago. So we're the first one who really rolled out a digital B2B, B2C services in China on the supply chain. In the past, we have done many successful clients based on the macro development. We have been more choosy or selective into our customer base in terms of the in the industry as apparels and fast consumer goods, and this area we concentrate. Recently, we picked up some pharmaceutical, electrical vehicle, manufactured the parts and services. So on the supply chain side, we see quite a strong demand for a B2B, B2C, A4 services, integrated services in the marketplace. focus on on these markets uh supply chain and the global uh into the 2022 along with the uh the freight and they actually had a quite a synergy um because a lot of the uh the uh the supply chain customers uh both requires a uh freight services uh delivered to door delivery to the stores uh to their distributors resellers as well as some of these um companies or customers' aspiration to global expansion. So that will be our 2022 look for the global supply chain. I think it's both a growing, very good future, as well as we have a very good competitive advantage on that. With regard to your second question about use of cash, after the exit from China's express market, the cash will be better used in term of the, for the remaining business, especially in the freight global and supply chain. In the area of multiple area, one is automation, and I think that the freight is also being, using more and more automation to reduce the labor cost, as well as efficiency on the operation side. Global also will have invested some of these in capital expenditures, as well as the expansion to a network. And supply chain is the same thing. We will need more automation on that. So that's one side is more automation, digitization of the network. Some of the R&D development will be further enhanced, our digital transformation, as well as some of the expansion to a network and the customer acquisition.
spk01: Thomas? Got it. Very clear. Thank you.
spk04: As a reminder, if you have a question, please press star then one to bring Jordan to the queue. The next question comes from Ronald Kung with Goldman Sachs. Please go ahead.
spk00: Thank you, Johnny and Gloria. Can I ask a few questions? Firstly, is the Best Express $6.8 billion of consideration? You mentioned earlier that it is $3.9 billion in cash. I just want to make sure Would the rest, which is the remaining kind of $2.9 billion, is that kind of in debt? And will that kind of pass through in the Best Express entity that will pass through the J&T? So we're still getting the whole benefit of the proceeds consideration of Best Express at $6.8 billion RMB. And then my second question, can we go through some of the freight volume trends? We see it's a slight decline in the third quarter. Is that something more due to the COVID situation? Are we seeing any improvement back to at least positive growth in recent one or two months? And my last question is actually thinking about your global and cross-border. Are we thinking of any freight forwarding aspects or business that we could do alongside our global network that is building up.
spk02: OK. OK, so first of all, on the expected transaction, yeah, so the total consideration is 6.8 enterprise value. When we say that we will have a cash reception expected approximately about 3.9, the remaining basic is paid on some of the debt. on some of the Express, the carry-on, the working capitals, the debts and everything else. So that is the... So basically, on the Express company's book, they still have some unpaid working capital or some of the debts, including of the transportation payment and some of the other payments that we still need to settle. So that will be deducted from that 6.8. So 6.8 is basically a clean cash back to the group. Second is about the freight. The freight, basically, the third quarter is actually a little bit tough based on the three things, right? One is that The pandemic was flaring up somewhere, and when it flared up, and it basically will impact some of our hubs and will be closed and also being a lot of area we cannot deliver or also receiving the goods. That will impact our business. the volumes. Second is, as you probably heard, some of the electricity curve and all the other stuff that have been happening that will also have some impact into our volume side. And third is, traditionally, third quarter is always light. Third quarter, especially during the summertime, June, July, August, is always a light month in the past. and also macros, pandemic, electricity curve, and everything else compounded with some of this. But we do see an improvement on the fourth quarter already. I think the electricity curve has been eased, but recently also the pandemic, the COVID-19 has also filled up a little bit. In fact, in October, November so far, especially during the past W11, we see our freight volume has recovered significantly. So I'm expecting a gradual recovery on the freight side. On the third question you had on global side about freight forwarding, we are not actively looking into that right now because we just want to focus on One is that the local network development. But local network development, like in Thailand, in Vietnam, we start to combining an express with a freight type of a network. So in other words, in China, if you look at the express, the parcel typically quite small, maybe less than 10 kilo. But in Vietnam and Thailand, we can go up to 50 to 100 kilos. So that will help us to make a very competitive market and give us more service products. So we'll be looking at more of coverage. And the second is a cross-border. We'll be looking at more of the cross-border with some of the large clients in China wanting to expand in Southeast Asia. And supply chain, last-mile supply chain, warehouses services that we will be concentrated on the 2022 in next year. Freight forwarding, we've been looking at it, we'll be talking about it, but we don't have an active plan right now.
spk00: Okay. Can I follow up with one more question is for the Best Express disposal, how are we with the regulatory approval process and our expected completion?
spk02: We have filed and we're still waiting for the result. I don't have any comments on the expected time. Thank you.
spk04: Once again, if you have a question, please press star then 1 to be joined to the question queue. That's star then 1. This concludes our question and answer session. I would like to turn the conference back over to Johnny Cho for any closing remarks.
spk02: Yeah, thank you. 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 any further questions. We look forward to speaking to you soon. Thank you very much.
spk04: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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