BEST Q2 2021 Earnings Call Transcript

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August 16, 2021

Key Takeaways

  • BEST Express Q2 parcel volume rose 1.2% to 2.3 billion, but ASP per parcel fell 18% and every-cost per parcel declined only 8.5%, driving gross margin down 11 percentage points.
  • BEST Freight returned to profitability in Q2, with freight volume up 9.3% year-on-year and e-commerce freight volume surging 23.1%, despite higher oil prices and subsidy changes.
  • Supply Chain Management turned profitable by serving high-margin customers, fulfilling 120.5 million orders (+8.2%) via Cloud OFCs and expanding its 345 franchised centers (+5.8%).
  • BEST Global saw parcel volume in Southeast Asia jump 140.7% to 38.8 million and gross margin improve by 7 percentage points, driven by scale, network expansion, and cross-border logistics solutions.
  • Overall Q2 revenue declined to RMB 7.4 billion (–5%) and net loss narrowed to RMB 457.5 million, but full-year revenue guidance was trimmed to RMB 28–32 billion amid continued ASP pressure.
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Earnings Conference Call
BEST Q2 2021
00:00 / 00:00

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Operator

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 Johnny Chou, BEST Inc.'s 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. 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.

Operator

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 Inc.'s earnings press release. Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in renminbi. Now I'd like to turn the conference over to Mr. Johnny Chou, Chairman and CEO of BEST Inc.

Operator

Mr. Chou, the floor is yours, sir.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Thank you, operator. Hello, everyone, and thank you for joining BEST second quarter earnings call today. In the second quarter, we continued 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, which enhanced the service quality. For Freight business, it continued its industry-leading position and registered a net profit for the 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 parcel volume in Southeast Asia increasing 140.7% year-over-year, despite a resurgence of the COVID-19 pandemic in the region.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

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 and cost structure, improve network stability, and customer satisfaction, we'll 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% year-over-year to CNY 2.3 billion. Gross margin contracted by 11 percentage points due to a decline in ASP per parcel of 18%, partially offset by a decrease in average 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 State Post Bureau in June.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

BEST Freight strengthening its industry leadership through continued operating efficiency, network expansion, and enhanced service quality. BEST Freight 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 freight services, and we will 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 remained focused on high-margin customers, expanding our Cloud OFCs network, and enhancing operating efficiency.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

In addition, as a pioneer of integrated smart supply chain service provider, we are well-positioned to benefit from the increasing customer's demand for integrated supply chain and logistics 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 CNY 120.5 million in the second quarter. Total number of orders fulfilled for franchised Cloud OFCs increased by 36.3% to CNY 73.1 million. The number of franchised OFCs increased by 5.8% year-over-year to CNY 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 Pingxiang and Kunming, to support 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.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Parcel volume in Southeast Asia increased by 140.7% year-over-year to CNY 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 economic 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.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Looking ahead, given the supportive industry regulatory environment and the continued 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.

Gloria Fan
Gloria Fan
CFO at BEST

Thank you, Johnny, and hello to everyone. In the second quarter of 2021, our revenue was CNY 7.4 billion, compared with CNY 7.8 billion of Q2 2020. The slight decline was driven by lower ASP in express and freight, partially offset by higher volume in both business units. Our net loss narrowed down to CNY 467.5 million, 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 beginning of the year, we have completed approximately CNY 1 billion 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 equivalents, restricted cash, and short-term investments were CNY 3.4 billion at the end of the second quarter.

Gloria Fan
Gloria Fan
CFO at BEST

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. With the intense market environment, our gross profit for Q2 was -CNY 144 million compared to CNY 484.5 million in the same quarter of 2020. Gross margin was -2% compared to 6.2% in the same quarter of last year. Adjusted EBITDA for continued operations was -CNY 253 million compared to CNY 225 million in the same period of 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 CNY 4.3 billion 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.

Gloria Fan
Gloria Fan
CFO at BEST

Adjusted EBITDA for Express was -CNY 215.6 million compared to CNY 212.4 million 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 CNY 1.4 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 CNY 36.6 million, compared to CNY 81.7 million for the same period of last year. Q2 revenue for BEST Supply Chain Management decreased by 5.9% to CNY 479 million due to discontinuation of certain low gross margin key accounts. Adjusted EBITDA for supply chain management was CNY 22.4 million, compared to CNY 5.7 million for the same period of last year. Q2 revenue for BEST Global increased by 63.4% to CNY 314 million, driven by continued growth momentum in parcel volumes in Southeast Asia.

Gloria Fan
Gloria Fan
CFO at BEST

Adjusted EBITDA for BEST Global was -CNY 47.3 million, which was flat compared with Q2 2020. 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 CNY 429 million, or 5.8% of revenue, compared to CNY 370 million or 4.8% of revenue in the same quarter of 2020. The increase in SG&A 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 continued operations was CNY 58 million, or 0.8% of revenue, compared to CNY 39.5 million or 0.5% of revenue in the same quarter of 2020.

Gloria Fan
Gloria Fan
CFO at BEST

CapEx in the second quarter was CNY 174.5 million, or 2.4% of total revenue, compared to CNY 424 million or 5.5% of total revenue in the same period of last year. This concludes the second quarter financial review. Now for our outlook. Due to the competitive market dynamic for express and freight, we expect our revenue for the full fiscal year of 2021 to be between CNY 28 billion-CNY 32 billion. This outlook reflects management's current preliminary estimate based on current market and operating conditions, all of which are subject to uncertainty. As we're moving into second half of the year, we will continue to optimize our cost structure and increase our efficiency. We will also continue our strategic evaluations and are prepared to take appropriate action to strengthen our balance sheet and liquidity in support of our strategic refocusing plan.

Gloria Fan
Gloria Fan
CFO at BEST

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. To ask a question, you may press star then one on a 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 two. Again, it is star then one to ask a question. At this time, we will just pause momentarily to assemble our roster. The first question we have will come from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong
Thomas Chong
Analyst at Jefferies

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. 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? 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. If that's the case, how should we think about the ASP trend going forward? Thank you.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Thank you, Thomas. Yeah. Basically, the whole express macro environment on three 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 a less price competition. Pricing, what we see is kind of eased out. In other words, it's bottomed out, we don't expect it to have a further few reductions in the pricing. Meanwhile, two is that with that, the last-mile delivery fees, it should also be stabilized. We don't see a trend to continue to reduce the last-mile fees cost.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

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. We will see a pretty robust continued general market. As you were saying that the guidance was somewhat reduced, we are looking at the whole cross-border of our business review based on the ASP reduction that we have seen from second quarter. Even though the third, fourth quarter, we don't expect too much of ASP reduction there. As well as the freight side and express and automatic side, basically. That's where we did an adjustment there.

Thomas Chong
Thomas Chong
Analyst at Jefferies

Got it. Thank you.

Operator

Next we have Hans Chung of KeyBanc.

Hans Chung
Hans Chung
Analyst at KeyBanc

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

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Good morning.

Hans Chung
Hans Chung
Analyst at KeyBanc

I have a couple of questions. First on express business. I guess, I want to say that for the past quarters, we continue to see the ASP decline by around 20% or high teens. However, we saw this kind of slowing growth momentum on the volume side. I think as a result, we see the path of cost reductions actually also come down quite a bit. If you compare the ASP decline to the cost reduction, I think the gap kind of become wider. My question is how do we achieve profitability, right, if the trend persists going forward? In other words, what do we have to do to make a turnaround to come and then going forward? That's my first question. Second question is on freight.

Hans Chung
Hans Chung
Analyst at KeyBanc

Since freight also came in below expectation, from volume or revenue perspective. I guess maybe my question is that because of the increased competition? Can you also update the landscape here? What should we think about the industry going forward? Thank you.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Thank you, Hans. For express, the first one, you were talking about the profitability, how the plan to make it profitability. First of all, if you look at our cost reduction, actually it's much more significant than 8%. If you look at the transportation cost, transportation cost last year, during the second quarter because of the recovery from the COVID-19, actually the government has given subsidies or waived the toll and the bridge toll for several months. That has significantly reduced the transportation cost last year. The second is this year, actually since the beginning of the year, the oil price has increased significantly from last year. If we take this into consideration, our cost actually being improved much more, is reduced about 16%. In that sense, we did not put into the diesel into consideration. Cost reductions continues to be there.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

That's the first things I want to clarify on the cost reduction side. Second, go back to the profitability. Basically profitability, we are about CNY 0.10 loss on the per parcel basis. What are we seeing that is that, how you can play the balancing the ASP and the cost to recover the CNY 0.10 to make it profitable. On the ASP side, we actually seeing a market little bit stabilized. More importantly, in the past six months, since 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 start getting to this express market, our market share was between 1% or 2%. Ever since the whole team, including the franchises, has been running very fast.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Every year, 50%, 100% growth up to about 2019. We reached about 12% of the market share. In that, a lot of franchisee little bit tight on the capital and everything else. That's why we need to help them to strengthen their liquidity, also their customer acquisition capability and all this stuff. 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 help acquire the customers, and also helping them to pass this difficult time in the past year since the pandemic happened. That's number one. That will helping the small and medium franchisees able to acquire the customer better. That typically have a higher ASPs, because the customer typically are a little bit smaller.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

The ASP are higher, versus a very much concentrated large customer base on a few large franchisees, which typically have a very small ASP. On the ASP side, what we want to do is three things. Network stability, to make sure the service qualities and customer satisfaction is better. Second is to helping the network franchisees to better health in terms of the making money or customer acquisition. 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. That's on the ASP side that we are seeing that a gradual upward momentum on the ASP side, on our side, month by month we're tracking. Second is on the cost side.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

As you can see, as I just explained before, from the reporting side, we said about 8% cost reduction, but actually taking into a lot of other consideration of toll waivers last year, oil price increase, et cetera. Actually the cost reduction is much more than was reported. 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 increase will further utilizing our capacities and reduce the cost. Two is that we are doing a lot more of synchronization of the transportation side with the freight, and that will reduce the freight cost further.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

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 or et cetera, to further reduce the leasing cost on that. We are confident that in the next couple quarter, 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, and abnormal weather pattern, which make a lot of area flood. Also second, in some area, resurgence of the pandemic in certain states and provinces.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

That also has some kind of impact to our volume on the second quarter. That's number one. 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 is actually remained quite flat. 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 year, that's a high season. The actual pricing will go back up a little bit. On the macro side, I think freight is still growing in the sense of the general market. However, are very competitive.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

On the ASP side, the pressure is not as high as the express side, but continuing, still have a fair good competition in the general market. Just that would be my some of the input to your questions.

Hans Chung
Hans Chung
Analyst at KeyBanc

Yeah. Thank you. That's helpful. May I have one question?

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Sure.

Hans Chung
Hans Chung
Analyst at KeyBanc

Yeah. 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 in last year? I guess not, but just want to hear your thought here.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

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. The most of the pandemic restrictions is going to be under control. The impact to our business is going to be as what we're seeing, probably a little bit on the second quarter and the third quarter, of course, July and August for the pandemic. As we are seeing that this is less a factor now. I'm sure that will be in control very soon.

Hans Chung
Hans Chung
Analyst at KeyBanc

Okay.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

I think, which in January, to our business, I think short-term will have some impact. I don't see moving forward from now will have a more severe impact on that.

Hans Chung
Hans Chung
Analyst at KeyBanc

I see. Thank you. That's all I have.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Thanks.

Operator

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

Ronald Keung
Ronald Keung
Analyst at Goldman Sachs

Thank you. Hi, Johnny Chou and Gloria Fan. 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-over-year basis, just wanted to know how many new customers did we gain during the process? Have we kind of kicked out some of the lower quality customers, and hopefully these newer are higher quality customers. In that, you talked about improved service quality. Are there metrics like end-to-end delivery time or other metrics that we track, which could show our gap has been narrowing or improving versus, say, the leaders in ZTO in delivery time? 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.

Ronald Keung
Ronald Keung
Analyst at Goldman Sachs

We actually have flat volume. 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.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Thank you, Ronald. On the first question on the Express, talking about the flat volume, certainly in this kind of environment, we want to make sure that we want balancing the bottom line as well as the volume growth. In this competitive market, we choose to continue to service a better customers in the sense that has a higher ASPs versus some of the customers on parcels, which is purely money losing. In the process, as we said, we were helping the franchisees, especially in the middle layers, small and medium franchisees. They can serve a smaller customers, with a higher ASP rather than a purely concentrated, a high volume customers, which typically has a very severe pricing pressure on that.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

On the quality side, if you look at the June government post, the State Post Bureau government's release of statistics, we actually ranked two in terms of the customer complaint ratios and everything else. Two, I am talking about the BEST, two side. We tracking, of course, a lot of these metrics in terms of the customer satisfaction, completion ratios, delivery time, et cetera. We continue to see, especially on the delivery time side, and we have some quarter-over-quarter improvements. Of course, to compare with, like you said, the top of the player, like ZTO, we still have some of the distance. If we compare with ourself and the rest of the players, and we continue to make a pretty good progress on that. Secondly, talking about the market dynamics or market structure.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

In general, if you look at the market structure, where you're seeing that the same, some of the other players, new entrants has a fairly rapid growth. Which if you look at the number in the past six months, I didn't think it was as the case, but had some broad progress, but I don't think it's the rapid progress. I think really what we need to do from a BEST point of view is that we need to really focus on our own strategy. Focus our own strategy is 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.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Number one focus for us right now, short-term wise, is really to try to put our house in order, to make the franchises stronger, make our service quality, delivery time, customer satisfaction better. Meanwhile, to completely or modify or optimize our customer profiles, to make it a better ASP customers in that sense. I think Are we confident that in with the six months in the whole year that we have been doing on the each provinces we see, the network itself is much healthier now. The franchisee are stabilized, and service quality can be improved. In that sense that we think that we have a much better competitive capability in the coming quarters to do that.

Ronald Keung
Ronald Keung
Analyst at Goldman Sachs

Thank you.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

Ronald?

Ronald Keung
Ronald Keung
Analyst at Goldman Sachs

Thank you, Johnny. That's very useful.

Operator

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.

Johnny Chou
Johnny Chou
Chairman and CEO at BEST

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

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.

Executives
    • Gloria Fan
      Gloria Fan
      CFO
    • Johnny Chou
      Johnny Chou
      Chairman and CEO
Analysts
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