BEST Inc

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.

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

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?