BEST Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 16, 2021

There are 6 speakers on the call.

Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to BEST Inc. 2nd 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 and A Session.

Operator

With us today are Johnny Chow, BEST Inc. Chairman and CEO and Gloria Fan, Chief Financial Officer. For today's agenda, Johnny will give a brief overview of business and operational highlights, then Gloria will explain the details of financial results. Following the prepared remarks. You may ask your questions.

Operator

Please note this call is being webcasted on BEST Inc. 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.

Operator

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 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 statement.

Operator

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 Inc. Earnings press release. Finally, please note that unless otherwise stated, all the figures mentioned during this conference call RMB.

Operator

Now I'd like to turn the conference over to Mr. Johnny Chow, Chairman and CEO of BEST Inc. Mr. Zhao, the floor is yours, sir.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining BEST's 2nd quarter earnings call today. In the second quarter, We continue to press forward with our strategic refocusing plan and build 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 improvements with enhanced service quality. For freight business, it continued its industry leading position and registered net profit for the quarter with emphasis on our e commerce capability.

Speaker 1

Supply Chain Management achieved profitability by serving high margin customers, expanding Cloud OFC's network supported by Smart Logistics Management for BEST operating efficiency. Our global business continued its growth momentum with parcel volume in Southeast Asia increasing 140.7% year over year despite a resurgence of the COVID-nineteen pandemic in the region. Next, I will talk about key developments and our operational performance during the Q2. For BEST Express, We have seen a promising trend in the market benefiting from government's policy on fair market competition. We are optimistic thereby committing to our refocusing strategy to optimize product and cost structure, improved network stability and customer satisfaction.

Speaker 1

We'll be able to improve our financial metrics later in the year and the Beauty is solid foundation for long term growth. In the Q2 of 2021, parcel volume increased by 1.2% year over year to RMB2.3 billion. Gross margin contracted by 11 percentage points due to a decline in ASP per parcel of 18%, partially offset by a decrease in every cost per parcel of 8.5% year over year. Our efforts in stabilizing our network have been fruitful, as evidenced by our low effective complaint ratio published by the state post bureau in June. BEST Freight strengthening its industry leadership through continued operating efficiency, network expansion and enhanced service quality.

Speaker 1

For a return to bottom line profitability in the Q2 of 2021, The average cost per ton remained relatively steady year over year despite higher oil prices in the 2nd quarter and absence of highway toll subsidy compared to 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%,

Speaker 2

contributing 19.2%

Speaker 1

of the total volume. We will remain focused on the e commerce market for freight services and we'll continue prioritizing unit cost reduction to position ourselves for long term profitability. Moving to our BEST supply chain management. In the Q2 of 2021, we remain focused on high margin customers, expanding our cloud OFC's 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 logistics services to further improve their operating efficiency and cost structure.

Speaker 1

The total number of orders fulfilled by Cloud OFCs increased by 8.2% year over year to 120 $500,000 in the 2nd quarter. And total number of orders fulfilled for our franchised Cloud OSCs increased by 36.3 percent to 73,100,000. The number of franchised OFCs increased by 5.8 spend year over year to 345 in the Q2 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 4th fast growing cross border e commerce business in Southeast Asia. BEST Global continued its fast growth momentum in Southeast Asia and has made a significant margin improvement.

Speaker 1

Parcel volume in Southeast Asia increased by 140.7% year over year to 38,800,000 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 economic subscale 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 Q2. 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 continued strong e commerce growth.

Speaker 1

We are optimistic that our strategic refocusing plan will position us for delivering 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 2nd quarter financials.

Speaker 2

Thank you, Johnny, and hello to everyone. In the Q2 of 2021, our revenue was RMB7.4 billion compared with RMB7.8 billion of Q2 2020. The slight decline was driven by lower ASP in expected freight, partially offset by higher volume in both business units. Our net loss narrowed down to RMB457.5 million compared to Q1 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.

Speaker 2

From beginning of the year, we have completed RMB1 1,000,000,000 of financing and the 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 was RMB3.4 billion at the end of the second quarter. Our strategic refocusing plan charts 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.

Speaker 2

With the intense market environment, our gross profit for Q2 was negative RMB144 1,000,000 RMB, compared to RMB484.5 million in the same quarter of 2020. Gross margin was negative 2% compared to 6.2% in the same quarter of last year. Adjusted EBITDA for continued operations was negative RMB253 RMB3 1,000,000 compared to RMB225 1,000,000 in the same period over 2020. Next, Moving on to key financial highlights for our core business units. On a year over year basis, BEST Express revenue decreased by 17% to RMB4.3 billion in the Q2 of 2021, primarily due to an 18% decrease in ASP per parcel, partially offset by a 1.2% increase in parcel volume.

Speaker 2

Adjusted EBITDA for Express was negative RMB215.6 million compared to RMB212.4 million of the same for the same period of last year. BEST Freight continued its leadership position and returned to profitability during the quarter. Its revenue increased by 2% to RMB1.4 billion, primarily due to a 9.3% increase in freight volume, partially offset by a 6.5% decrease in ASP per ton. Adjusted EBITDA for freight was RMB36.6 million compared to RMB81.7 million for the same period of last year. Q2 revenue for BEST Supply Chain Management decreased by 5 point 9% to RMB479 1,000,000 due to discontinuation of certain low gross margin tier accounts.

Speaker 2

Adjusted EBITDA for supply chain management was RMB22.4 million compared to RMB5.7 million for the same period of last year. Q2 revenue for BEST Global increased by 63.4% to RMB 314,000,000 driven by continued growth momentum in parcel volumes in Southeast Asia. Adjusted EBITDA for BEST Global was negative RMB47.3 million, which was flat compared with Q2 last year. Now let's take a look at some major operating expense items of the Q2. Please note, all of these expenses exclude share based compensation.

Speaker 2

Selling, general and administrative expenses for continued operations were RMB429 1,000,000 or 5.8 percent of revenue compared to RMB370 1,000,000 or 4 point to additional bad debt provision resulted from the pandemic and the absence of certain COVID-nineteen pandemic related subsidies that were available in 2020. R and D expenses for continued operations was RMB58 1,000,000 or 0.8 percent of revenue compared to RMB39.5 million or 0.5 percent of revenue in the same quarter of last year. CapEx in the 2nd quarter was RMB174.5 million or 2.4 percent of total revenue compared to RMB424 1,000,000 or 5.5 percent of total revenue in the same period of last year. This concludes the Q2 financial review. And now for our outlook, due to the competitive market dynamics for Express and Freight, We expect our revenue for the full fiscal year of 2021 to be between RMB28 1,000,000,000 to RMB32 1,000,000,000.

Speaker 2

This outlook reflects management's current preliminary estimates based on current market and operating conditions, all of which are subject to uncertainty. As we are moving into second half of the year, we will continue to optimize our cost structure and increased our efficiency. We will also continue our strategic evaluation and are prepared to take appropriate actions to strengthen our balance sheet and liquidity in support of our strategically focusing plan. With that, we will now open the call to questions. Thank you.

Operator

Thank you, ma'am. We will now begin the question and answer session. And the first question we have will come from Thomas Chong of Jefferies. Please go ahead.

Speaker 3

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 at this time.

Speaker 3

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 talk about the landscape is getting more rationalized. But if that's the case, what are how should

Speaker 1

Thank you, Thomas. Yes, so the basically the whole express macro environment on Streetfront, 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 be have a further a few reductions in the pricing.

Speaker 1

Meanwhile, second is that with that the last mile delivery fees. It should be also be stabilized. We don't see a trend to continue to reduced last mile the 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.

Speaker 1

So we will see a pretty robust continued of general market. As you were saying that the guideline guidance was somewhat reduced. So we are looking at it a whole cross border of our business review based on the ASP reduction that we have seen from Q2, even though the 3rd and Q4, we don't be expecting too much of ASP reduction there, as well as the Freight side and Express and the Old Maple side basically. That's where we did a adjustment there.

Operator

And next we have Hans Chung of KeyBanc.

Speaker 4

Hi. Thank you for taking my question. Good morning, Johnny and Gloria. Good morning.

Operator

So I I have a

Speaker 4

couple of questions. First on Express Business. So I guess, I won't say that for the past quarters, we continue to see the ASP decline by around like 20% or high teens. And then, however, we saw this kind of slowing gross momentum on the volume side. And so I think as a result, we see the cost the path of cost reductions also come down quite a bit.

Speaker 4

If you compare it to the ASP decline to the cost reduction, I think the gap kind of become wider. So my question is like how do we achieve probability, right, if the trend persists going forward. So in other words, What do we have to do to make a turnaround to come and going forward. And then that's my first question. And then second question is on freight.

Speaker 4

So since that freight also came in below expectation, I mean, from volume or revenue perspective, So I guess maybe my question is that because of the increase the competition? And then also can you also update the landscape here? And then what should we think about the industry going forward? Thank you.

Speaker 1

Thank you, For 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 Q2 because of the recovery from the pandemic, actually we have government has given a subsidies to hold the toll and the bridge toll for the several months. So that has significantly reduced the operation the transportation costs last year. The second is this year, actually since the end of the year, the oil price, oil price has increased significantly from the last year.

Speaker 1

So if you take this into consideration, Our cost actually being improved much more is about reduced about 16%. So in that sense that we did not put into the GSO into consideration. So cost deductions continue to be there. So that's the first things I want to clarify on the cost reduction side. 2nd, go back to the profitability.

Speaker 1

So basically probability, we are above $0.10 loss on the per parcel basis. So what are we seeing that is that so how you can play the balancing the ASP and the cost to recover the $0.10 to make them profitable. So on the ASP side, we actually seen a market a little bit stabilized. More importantly, in the past 6 months, we have since been a year, we have been doing a lot of restructuring. For one thing is that we have to continue to optimize our network.

Speaker 1

Since 10 years ago when we start getting to this market, express market, our market share was in between 102%. I have seen the whole team including the franchise has been running very fast every year 50%, 100% growth up to about 2019 and we reached about 12% of the market share. I think that A lot of franchisee kind of a little bit tight on the capital and everything else. And that's what we need to help them to strengthen their liquidity, also their customer acquisition capability and all this stuff. So we have seen a good progress in past 6 months that our franchisees getting stronger in the sense that we're helping them to help acquire customers and also helping them to pass this difficult time in the past year since the pandemic happened.

Speaker 1

In the past year since the pandemic happened. That's number 1. So that will helping The small and medium franchisees able to acquire the customer better. They typically have a higher ASPs because of the customer typically a little bit smaller, the ASP are higher versus our very much concentrated large customers 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.

Speaker 1

Network stability to make sure the service qualities and customer satisfaction is better. 2nd, so helping the network franchisees to better health in term 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 larger customer base, but more to the medium and the smaller customer that will have a typical higher ASP. So that's on the ASP side that we wish we are seeing that gradual upward momentum on the ASP side in our side month by month we are tracking. 2nd is on the cost side.

Speaker 1

As you can see, As I just explained before, from the reporting side, we said about 8% cost reduction, but actually taking into lot of other consideration of toll waivers last year, oil price increase, etcetera. So actually the cost reduction is much more than the was reported. And Going forward, the 2 areas, 3 areas that we will be able to further optimize our cost structure. One is hoping that in the second in the later couple of quarter, a traditional high season, the volume increase will further utilizing our capacities and reduce the cost. 2nd is that we are doing lot of more of synchronization of the transportation side with the freight that will reduce the freight costs further.

Speaker 1

And third of all, that we are actually actively looking at our operating centers or hub centers and to see if there's any on a spares basis, which we can reduce or sublease out or etcetera to further reduce the leasing cost 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 6 months with a more stabilized macro environment, We should be able to back to the profitability. 2nd 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 and our normal 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 Q2, so that's number 1. So the macro side is something that we the weather, The pandemic has some impact on that.

Speaker 1

That will reduce the total volume growth in that. 2nd is that the also the cost side and macro side is also competitive. And as you can see that our ASP per ton is actually remained quite flat. So, but we will see typically if you see on the past couple of years on the high season like the 3rd and Q4 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.

Speaker 1

However, are very competitive not as the ASP side, the pressure is not as high as like the Express side, but continually still have a fair good competition in the general market. That will be my some of the input to your questions.

Speaker 4

Yes. Thank you. That's helpful. And then May I have one question?

Operator

So

Speaker 4

it seems like recently We have the COVID-nineteen resurgence across the country. So I just wonder would that Could that be potential could that have potential impact on logistic or Supply chain and etcetera like we have faced in, I mean, last year. I guess not, but just want to hear your thought here.

Speaker 1

Yes. Good news is that the resurgence on the COVID-nineteen is actually well under control. I believe that in next couple of weeks, the most of the pandemic restrictions 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 Q3 of course, July August for the pandemic. But as we're seeing that this is less effective now.

Speaker 1

I'm sure that So as a result, which in January, yes, to our business, I think Short term will have some impact, but I don't see a moving forward from now, we'll have a more severe impact on that.

Operator

The next question we have will come from Ronald Keung of Goldman Sachs.

Speaker 5

Thank you. Hi, Johnny and Gloria. I have two questions on the Express side. I would like to seek your kind of 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 that we gained during the process that we kind of kicked out some of those lower quality customers and hopefully these newer higher quality customers.

Speaker 5

And in that you talked about improved service quality. So, are there 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 and T has been growing very 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.

Speaker 5

Thank you. Thank you, Ronald.

Speaker 1

On the first question on the Express talking about The flat volume and certainly in this kind of environment, we want to make sure that we are balancing the bottom line as well as the volume growth. So in this competitive market and we choose to continue to service a better customers in the sense that has a higher ASPs versus some of the customers on Sun Apasos, which is purely money losing. So in the process, we will as I was said, We were helping the franchisees, especially in the middle layers, small and medium franchisees, they can solve a smaller customers with a higher ASP rather than a purely concentrated a high volume customers which has a typically had a very severe pricing pressure on that. On the quarterly side, so if you look at the June government post the post bureau government's release of statistics. We actually ranked number 2 in terms of the customer complaint ratios and Number 2, I'm talking about the BEST number 2 side.

Speaker 1

So we're tracking of was a lot of these metrics in term of the customer satisfaction, completion ratios, delivery time, on Inc. Etcetera. So we continue to see, especially on the derivative comp side and we have some quarter to quarter improvements. Of course, to compare with like you said, top of the player like CGL, we still have some of the distance. But if We'll compare with ourselves and the rest of the players and we continue to make pretty good progress on that.

Speaker 1

2nd, you're talking about the market dynamics or market structure. In generally, if you look at the market structure. What you're seeing is the same some of the other players, new entrants has a fairly rapid growth, which I if you look at the number in the past 6 months, I didn't think it was as a case, but has some broad progress, but I don't think year. That's the rep progress. But I think really what we need to do from BEST point of view and we need to really focusing on our own strategy.

Speaker 1

Focusing on our own strategy is the first as we said, we really need to make a much more stabilized, a better service network, while again 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 for our housing order to make the franchise stronger, make our service quality, the real time customer satisfaction better. There are meanwhile to complete or modify or optimize our customer profiles to make it a better ASP customers in their sense. So I think the if we can we're confident that with the 6 months in the whole year that we have been doing, Each provinces we see, the network itself is much healthier now. The franchisees are stabilized and service quality can be improved in the sense that we think that we have a much better competitive capability in the coming quarters to do that.

Operator

Management team for any closing remarks.

Speaker 1

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.

Operator

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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