Edited Transcript of BEST.N earnings conference call or presentation 28-May-20 1:00am GMT

May 28, 2020 (Thomson StreetEvents) — Edited Transcript of BEST Inc earnings conference call or presentation Thursday, May 28, 2020 at 1:00:00am GMT

BEST Inc. – CFO

BEST Inc. – Founder, Chairman & CEO

Citigroup Inc, Research Division – VP & Head of the Hong Kong and China Transportation Research Team

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the BEST Inc. First Quarter 2020 Earnings Conference Call. With us today are Johnny Chou, BEST Inc.’s Chairman and CEO; and Jenny Pan, Principal Accounting Officer. Through today’s agenda, Johnny will give a brief overview of business and operational highlights. Then Jenny will explain the details of financial results.

Following the prepared remarks, you may ask your questions. Please note this conference is being recorded. Please also note this call is being webcast on BEST Inc.’s IR website at ir.best/incorporated.com. A replay of this call will be available after the call. 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 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 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 figures mentioned during the conference call are in RMB.

Now I would like to turn the call over to Johnny Chou, Chairman and CEO of BEST Inc. Johnny, please go ahead.

Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [2]

Thank you, operator. Good morning, good evening, everyone. First, I’d like to apologize because the line has some problem. I’m sure some other people are raising problem, too. So a few minutes late, I apologize. Welcome, and thank you for joining our earnings call.

In the first quarter of 2020, amidst the COVID-19 pandemic, we remained nimble, swiftly adjusted our services to meet changing demands and aggressively manage the cost to navigate through these difficult times. We focused on several key priorities, including ensuring and prioritizing the health and the safety of our employees and customers, rapidly resuming operations, ensuring our strong balance sheet and liquidity, position ourselves for a more streamlined business and improving conditions; and finally, committing our resources to contribute globally to the fight against COVID-19.

These efforts could not have been accomplished without extraordinary efforts of our employees, franchisees, suppliers and partners. From the onset of this crisis, we have been focusing as a critical infrastructure business, leveraging our network to keep supply chains fluid.

As far as BEST COVID-19 global relief efforts, I would like to mention just a few of the many examples. BEST Charitable Foundation donated or helped to ship hundreds of thousands of masks to our [hubs and sortation] centers in Thailand, Vietnam and Malaysia. In addition, leveraging our own infrastructure, BEST coordinate a shipment of another hundreds of thousands of medical mask to Malaysia, which was donated by the China Youth Center for International Exchange. Finally, the BEST Charitable Foundation also sponsored the shipments of several hundred thousands of surgical masks to France.

As I just mentioned about Southeast Asia, our delivery business in that region continues to accelerate as we build up momentum in Thailand, Vietnam and expanded to additional countries.

As we enter the second quarter, all of our business lines swiftly returned to normal operations, and I am pleased to report that the demand for our integrated supply chain and logistics services are robust as consumer purchasing habits have shifted deeply online.

Our fundamentals are strong with continued high-growth in e-commerce and an intense focus on increased operational efficiencies, all of which can drive improved profitability in 2020. And as the market continues to recover, BEST is well positioned and ready to help customers resume their businesses.

From a balance sheet and liquidity perspective, our balance sheet remains strong, with cash and cash equivalents, restricted cash and short term investments totaling over RMB 4.2 billion at the end of the quarter.

Now let me share some insights on the business. First, our core logistics and supply chain units. Strategically, we continued optimizing our logistics network during the quarter by further improving transportation efficiency and automation, integrating our comprehensive logistics and supply chain solutions to create revenue and core synergies and enhancing overall quality of services.

For Express, the first quarter is traditionally a short quarter. We have slower growth compared to other Express companies that remained open during Chinese New Year holidays. In the quarter, Express parcel volume decreased slightly by 1.9 percentage year-over-year to 1.3 billion compared to 3.2% market growth, wide growth.

The unforeseen disease was primarily — decrease was primarily due to over 1 month of delay of our workers and franchisees to physically get back to their positions as a result of the pandemic. Extensive efforts were required to reopen facilities and allocate resources, and our operation only started to recover in early March. By end of March, operations had recovered to full capacity and almost all workers and network partners are back on board. Our strategy for Express to generate above-market growth, drive down unit costs, improve network stability and enhance customer satisfaction. We plan to continue investing in automation and applying technology, all in an effort to improve productivity and efficiency and then to ultimately increase volumes and lower costs. In fact, our combined dynamic routing for Express and Freight has already yielded strong cost savings. For the last year, we have combined over 2,000 routes and saved over RMB 130 million.

Our Freight business was also impacted in the first quarter. Slowdowns in manufacturing and 2B activities reduced demand in the quarter. Like Express, the network recovered only starting in March. As a result, volume decreased by 15% year-over-year to 1.1 million tonnes. Pass-throughs of toll fee waivers to customers partially contributed to an 18% decrease in ASP. Cost per tonnes remained flat as the high cost incurred during the recovery period was offset by the government toll fee waiver. Since late March, the freight network has recovered and market demand has also picked up as the Chinese economy started to recover, and the e-commerce transactions increased. Therefore, we expect a strong second quarter with much better ASP. Our strategy for Freight is to continue strengthening our market-leading position by focusing on growing e-commerce-related transactions, through which we expect to realize additional synergies with our other businesses.

For BEST Supply Chain Management, while pandemic impacted our 2B business, we saw a pickup in our 2C business due to increased demand for online shopping. The total number of orders fulfilled increased by 34.9% year-over-year. We expect the 2B volume to pick up as the economy continues its recovery.

Strategically, we continue to focus on: one, growing our franchise of Cloud OFC business with higher profit margins; two, accelerate integration with other business units to offer one-stop supply chain solutions to more customers and drive B2C orders growth; and lastly, leveraging our SaaS platform to digitize the supply chain of merchants.

Next let’s discuss BEST Cargo, our fast-growing online full truckload brokerage platform. It was also impacted by the manufacturing activity slowdown and travel restrictions in the first quarter. The number of transactions decreased by 6.4% year-over-year. We are making progress on strategically shifting its business model from key account to channel and in making more transactions directly with drivers through Ucargo app. The total number of drivers on the platform more than tripled to over 209,000 from a year ago. Our goal is to bring many more drivers directly onto the platform in coming quarters.

In summary, our core logistics and supply chain units withstood the impact from the COVID-19 outbreak, and our plan is to stay on track for fast growth as well as further improvement of efficiency, quality of services and integration across business units.

For BEST Store+, as mentioned in prior earnings calls, we are in the midst of conducting a strategic review of the business for its next phase of development. In terms of the operations, we saw an increase in orders fulfilled for franchise and membership stores in the first quarter, which offset the decrease in orders fulfilled for self-operated store. The total number of orders fulfilled decreased by 4.6% year-over-year due to temporary store closures during the pandemic.

Our strategy of focusing on branded stores and high-quality membership stores brought us better order structure and higher margins, enabling us to further leverage our competency in Supply Chain Management and improved operating efficiency. In the first quarter, our gross profit margin improved to 13.3%. As the pandemic changes the behaviors of businesses and consumers, the Store+ model is becoming essential as businesses go online for procurement and consumers rely on it for last-mile services.

For BEST Global, like Store+, we are also conducting strategic reviews of the business to drive its long-term growth and to capture the immense opportunities in Southeast Asia. While our cross-border e-commerce logistics business was impacted by pandemic, Express business in Southeast Asia continued its rapid growth momentum. Parcel volume in Thailand increased by 96% quarter-over-quarter to 5.1 million, while parcel volumes in Vietnam increased by 46% quarter-over-quarter to 3.7 million in the first quarter. We are contracted with top e-commerce platforms in both Thailand and Vietnam to provide cost-efficient and high-quality delivery services which will drive further growth.

In April, we also launched a nationwide Express delivery services in Malaysia and Cambodia. In closing, despite the start of 2020 due to COVID-19, we are optimistic that we will finish the year strong and logistics, Supply Chain Management, become even more critical to business and consumers.

As businesses go online and consumers demand increasing flexibility, they rely more on our smart solutions and logistics services, and we are more confident than ever of the path we are on to digitize and integrate the logistics value chain from end to end.

In the second quarter, we have seen continued improvement in business recovery, which are helping our business segments to grow. We expect to get to improve efficiency and profitability for the second quarter.

Now I would like to turn the call over to our CFO, Gloria, to walk you through our first quarter financials.

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Gloria Fan, BEST Inc. – CFO [3]

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Thank you, Johnny, and hello to everyone. The challenges we faced in the first quarter presented us with an opportunity to take a more critical look at our business and improve our operations. By further streamlining our business, thinking deeper on how to be efficient, finding opportunities for cost savings and further focusing on capital allocation and investing, we have fortified our competitive position and enter this recovery period even better prepared to scale and meet the increasing demand for integrated supply chain and logistics solutions.

In the first quarter of 2020, the broad impact from the COVID-19 outbreak widened our net loss as our business, along with associated costs, was negatively impacted by the prolonged work stoppage and the travel restriction during the pandemic. Despite these factors, our balance sheet remains strong, and we are currently seeing a strong recovery and rebound.

As the impact from the pandemic subside, we are confident in the operating profitability of our core logistics and the supply chain business.

I will now provide a brief review of our first quarter 2020 financial results. Given the limited time on today’s call, I will be presenting some abbreviated financial highlights. I encourage you to read through our press release issued earlier today for further details.

The first quarter revenue was RMB 5.5 billion, representing a 20% decrease from the same quarter of 2019. We incurred a non-GAAP net loss of RMB 712 million in Q1 compared with a net loss of RMB 208 million for the same period last year. Our operating efficiency was also impacted by COVID-19. Gross profit margin was a negative 3.2% compared with positive 4.3% of the same period last year.

Our adjusted EBITDA for Q1 was negative 508 — RMB 580 million compared to negative RMB 79 million of the same period of 2019. Our operating cash flow was negative CNY 1.3 billion primarily contributed by lower revenue resulting in a RMB 712 million loss as well as net reduction of approximately RMB 600 million in receivables and payables. We expect operating cash flow to turn positive next quarter.

Next, moving on to key financial highlights for our business units. On a year-over-year basis, Q1 revenue for BEST Express decreased by 21% to RMB 3.4 billion, primarily due to a 20% decrease in revenue per parcel. The drop in ASP was due to competitive market dynamics and the pass-through of temporary highway toll fee waivers to customers.

Q1 total costs decreased by 16% to RMB 3.5 billion, and the cost per parcel decreased by 14% mainly due to lower last-mile transportation and labor costs, offset by the increase in fixed costs per parcel due to the pandemic. Adjusted EBITDA was negative RMB 198 million compared to positive RMB 100 million of same period of last year.

The first quarter revenue for BEST Freight decreased by 31% to RMB 684 million year-over-year, primarily due to 15% decrease on Freight volumes and 18% decrease of ASP per tonne, which was partially contributed by the pass-throughs of temporary toll fee waivers to customers. Adjusted EBITDA was negative RMB 184 million compared to negative RMB 11 million the same period of last year.

The Q1 revenue for BEST Supply Chain Management decreased by 24% to RMB 408 million due to the lower ASP orders from franchise order fulfillment centers. Adjusted EBITDA was negative RMB 34 million compared to negative RMB 8 million the same period of last year due to increased cost associated with COVID-19.

BEST Ucargo, Q1 revenue decreased by 14% to RMB 381 million year-over-year. Adjusted EBITDA was negative RMB 28 million compared to negative RMB 20,000 the same period of last year.

BEST Capital’s revenue remained flat compared to Q1 2019 while adjusted EBITDA was RMB 21 million as we continue to provide financial solutions to our partners, franchisees, to assist them in accelerating their recovery from a pandemic.

Store+’s revenue decreased by 16% to RMB 463 million, primarily due to temporary closure of self-operated WOWO, membership and franchise stores during the pandemic. Adjusted EBITDA loss was RMB 78 million compared to RMB 75 million in the same period of last year.

Q1 revenue for BEST Global increased by 183% to RMB 116 million. As we continue strong momentum in Southeast Asia, adjusted EBITDA was negative RMB 64 million compared to negative RMB 22 million from the same period last year as we continue ramping up operations in Thailand, Vietnam and launching new operations in Malaysia.

Next, in terms of our major operating expense items. Compared to the same quarter of 2019, selling, general and administrative expenses increased RMB 25 million to RMB 485 million from last year. The increase was due to approximately RMB 27 million of onetime bad debt provision resulting from the adoption of new accounting principle, ASC 326 Estimate Credit Loss; RMB 10 million additional investment in our global operations, partially offset by the decrease of SG&A expenses from our core logistics and the supply chain business.

R&D expense increased by RMB 7 million to RMB 59 million as we continue to invest in technology. Please note all of these expenses excluded share-based compensation. We continue to control our SG&A expense and invest in R&D to improve our operating efficiency, and we expect operating leverage to expand as we recover from the pandemic.

CapEx in the first quarter was RMB 346 million or 6.3% of total revenue compared to RMB 206 million or 3% of total revenue in the same period of 2019.

As we are recovering from the pandemic and on the path of growing our business again for the rest of the year, we have initiated several cost-efficiency improvement programs to streamline CapEx, reduce expenses and to conserve cash. For example, we started to optimize our capital investment in sortation centers and hubs by enhancing our designs to maximize the usage of existing infrastructure and equipment. I should highlight that automation upgrade remains one of our priorities, and we are on track to expand our automated capacity.

In addition, we continue to consolidate our warehouses, and in the process of enhancing customer credit review procedures to avoid high-risk and low profit business. We target a total saving of RMB 100 million to RMB 100 million (sic) [RMB 150 million] for this initiatives in both CapEx and operating expenses in the next 12 months.

Before we turn to Q&A, I would like to add that as the impact from the pandemic continue to subside, and we enter into the recovery of our sector and affiliated sectors, we have ample liquidity, a strong balance sheet and are keeping our focus on cost management. This fact, coupled with the continued upward growth trend in e-commerce, both in China and globally, give us increased confidence in the long-term operating profitability of our core logistics and the supply chain business.

With that, we will now open the call to Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Baoying Zhai with Citi.

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Baoying Zhai, Citigroup Inc, Research Division – VP & Head of the Hong Kong and China Transportation Research Team [2]

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This is Baoying. So I actually have three questions to follow on. The first question is still on the Express delivery business and mainly on the competition strategy. Cost per mile, recent channel check actually noticed volume growth of — it’s lower than our major peers. It looks to me it’s more like our intentional move, we want to control the growth pace and to focus more on profitability. But I just want to know if this is true, it’s about our strategy of adjustment for this year on competition with others, so to keep bottom line good even at the key priority for Express competition.

And Gloria, I’m sorry, my second question, I didn’t hear very clearly on the OpEx and CapEx guidance. So how much would be the CapEx now because I see we are going to reduce the CapEx plan? And the OpEx is RMB 100 million savings for the next few quarters. I’m not sure about this number.

My third question is regarding — we mentioned there would be a potential spin-off of certain business units. Of course, we talked about this before. It’s about the Store+ business. Just want to know if there is an update on the spin-off plan because this would be very important to our cash flow and also profit. So I just want to have an update to your plan on these two. So three questions.

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [3]

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Okay. So Baoying, I will answer the first question and Gloria probably can answer the second, and I’ll be back for the third.

For the Express, the rate and you also noticed that the market, the competition, it’s also very heavy. So this year, we want to more focus on our quality of services as well as profitability. So you’re absolutely right, we want to maintain a market. In the previous years, many years, some quarters, our growth is always much higher than the market growth. So this year, we want to more focus on the quality of service improvement as well as the cost reduction and make sure the profitability is getting better. So yes, so the strategy is to maintain a market growth instead of a much faster than market growth, but meanwhile, strengthening our competitiveness in terms of the quality cost structures as well as the profitabilities.

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Gloria Fan, BEST Inc. – CFO [4]

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Yes. So Baoying, this is Gloria. So I’m addressing your question about OpEx and CapEx. So just — you’re probably following the company for a while, you know the company has been growing very fast in the past years. So with that such kind of growth, we actually did not have a lot of time or opportunity to review very detail of our operations. This pandemic actually gave us a very good opportunity to really talk about the cost, to review our costs and review detail of operations. So we have initiated several cost reduction or efficiency programs to enhance our operating expenses. So from those programs, we are able to — we actually, we are able to save about RMB 100 million to RMB 100 million (sic) [RMB 150 million] for the next 12 months.

Then in terms of CapEx, investing in automation is still top of our priorities. For this year, we are going to — our plan is to invest RMB 1.3 billion in CapEx.

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [5]

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Yes. So let me just add a little bit more. So if you look at our G&A, SG&A, actually, in the past couple of years, we really have been expanding our cost structure, improving it by reducing the percentage of the spend. So if you look at our SG&A, basically, it’s not really increasing due to the growth in this. So because of the pandemic, then looks like it makes, like, as a percentage of revenue, grow slightly. But in fact, the absolute number is actually not growing. But this year, we’re going to sharpen our pencil again to see — continue to see if we have — able to sharpen more to — on the cost side, OpEx sales and the CapEx.

CapEx still is very important because it’s part of our automation strategy. So we’re still going to spend about CNY 1.3 billion on that to make sure that we can continue to be competitive and also efficiency cost restructure.

The last question you had on the potential of the business reviews, yes, we continue to conducting our business review. You’re talking specific about Store+. Actually, Store+ is, actually, it’s doing pretty good in the last couple of quarters. If you look at the pandemic, actually, our margin has improved from last year, 12% to 13.3%. But meanwhile, we also — as we did a call, mentioned in the last couple of quarters, that we will continue to look at strategically — our strategies. But unfortunately, I cannot give you really at this time, to give you exactly more details until we have further to share in the next couple of quarters.

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Baoying Zhai, Citigroup Inc, Research Division – VP & Head of the Hong Kong and China Transportation Research Team [6]

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Okay. So one more follow-up on the Express. So it’s kind of, I can’t really — so we will keep the bottom line positive, at least in the next 3 quarters for Express?

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [7]

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It wasn’t very clear. Can you say one more time? I can’t hear you very clearly. You’re talking about bottom line?

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Baoying Zhai, Citigroup Inc, Research Division – VP & Head of the Hong Kong and China Transportation Research Team [8]

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Yes, the key priority for Express is to at least keep the — because of the competition, it’s quite intensive there. If we follow the peer’s, say, competition strategy, our earnings will be hit heavily. So if we won’t keep the bottom line positive, which we may sacrifice the volume growth a little bit, but the key priority is to keep at least the bottom line or the EBITDA line positive for Express.

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [9]

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Yes. So if you look at last year and 2019 release on the quarter, we actually had a very good bottom line for the Express even with the Chinese New Year on the first quarter. So first quarter, second quarter, third quarter, fourth quarter on the 2019, first quarter is also positive on the bottom line. And before the pandemic, we did have a very high expectation that the 2020 first quarter is going to be even better this first quarter. Last year, first quarter, we actually had about — adjusted EBITDA about RMB 100 million positive.

So — but because of pandemic, the first quarter we’re we actually net to margin, so instead of a positive margin. Last year with positive margin of about 3%, and this year, it was about negative 3.7%. So you have — in and out, and you actually have about 7 — no, 6.7 percentage your net — the margin there. But looking at the second quarter of April or May, the month — the quarter today, then we are looking at recovery fairly quickly, posting volumes and profitability. So we’re expecting second, third, fourth quarter, it’s going to continue to improve back to the expectation of what we had planned for the last year. So full year, yes, Express definitely going to be — by itself is definitely going to be positive.

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Operator [10]

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Our next question will come from Thomas Chong with Jefferies.

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Thomas Chong, Jefferies LLC, Research Division – Equity Analyst [11]

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My question is on the Express side. Can management comment about how we should think about the trend in ASP and cost per parcel in the next couple of quarters, given the fact that we are seeing increasing price more, but we’re also improving our efficiencies? So just want to get some qualitative color about the trend going forward.

And my second question is about the overseas business. Can we talk about how the overseas online shopping is trending, given the overseas virus is breaking up?

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [12]

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Yes. Okay. Thank you. So on the Express side, as I was just mentioned to Baoying’s question, so the second, third and fourth quarter, we are continuing to improve the margin. As you know, the last year, 2019, the full year, the Express for the second, third and fourth quarter grow consecutively from second quarter, third quarter and the fourth quarter, margin will be improving for 2019. We should be expecting to see a similar kind of trend this year.

So basically, the price, yes, as everybody know, the pricing is very competitive, but also we have a lot of rooms continue to drive on the cost. Specifically, on transportation side, we can drive down more costs as volume increase, and we’re reducing some of the hubs and rerouting and combining the resources with great routing. That should give us a more cost reduction as well as more infrastructure investments. CapEx investment will also will improve our efficiency to the much higher level.

So basically, we will see a continued cost reduction probably around 10% to 15%, and we also will see the pricing also are coming down. So what I’m trying to say is that we try to maintain similar or higher margins than last year from second quarter onwards, basically driving — by — from balancing the pricing as well as the cost reduction to make sure that the margin and everything intact. That’s the first question.

The second question you were asking around about the overseas business. Yes. In Southeast Asia — and we see a tremendous opportunity because the e-commerce is growing very rapidly, especially during this pandemic. Actually, our business is growing in these countries because people are getting more online. And in fact, the infrastructure is still somewhat lacking now like in China that, like, in the past 10 years both Supply Chain, Express is holding very well developed.

So there’s quite a big opportunity there. So if you look at our Thailand, we basically — as I said, we grow about 90-some percent quarter-over-quarter from last December, fourth quarter. Typically, fourth quarter is it’s a high season. So even within the pandemic, our first quarter is about 90-some percent. Our Vietnam, same thing, we also grow about 47% quarter-over-quarter. So they’re growing very rapidly.

We see similar trends. The country we have also been in operation now in Malaysia and Cambodia. So the demand for e-commerce online and the last-mile delivery and services supply chain are quite high. And the competition is not as severe in China, so there’s a lot of opportunity there.

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Operator [13]

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Our next question will come from Ronald Keung with Goldman Sachs.

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Ronald Keung, Goldman Sachs Group Inc., Research Division – Executive Director [14]

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Two questions from my side. First, I want to see how your business recovery pace is going so far. I mean the State Post Bureau numbers for parcel have been encouraging, nearly — over 30% possible growth for the industry in the month of April, so very strong overall industry improvement. Just as you commented that your target is to grow in line with the industry, just want to hear is our recovery pace so far already back to kind of industry growth levels? Or is that a plan for the rest of the year as we target to grow back in line with the industry? So there’s some higher frequency trends of how you’re seeing the recovery part so far.

And then the second is on your cost reduction and unit costs. So I could see that you’re unit trucking costs have come down significantly, actually, to the lowest level that we’ve seen at around CNY 0.69 of transportation cost. So that’s actually quite similar to even industry leaders during the first quarter. Have we done — just want to see what have we done in our trucking and our route planning that have brought rather good results in unit cost reductions even despite the parcel kind of small decline over the quarter? And should we expect this level — new level of transportation cost cuts to continue for the rest of the year, which would be very encouraging?

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [15]

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Thank you. Ronald, the — yes. So the business recovery, we’re already in line with the market plan is basically this year, we wanted to focus on operational — the core of it, like you said, the cost reductions, [services quarterlies] and efficiency side. Yes, so far, the recovery is in line. Hopefully, the first quarter was a little bit lower because a lot of our peers, they did not close, rest for the Chinese New Year holiday, and that makes them — recovery is much easier because they will never close, there was operation in service during the holiday.

But nevertheless, we and other contacts, traditionally, we all close for Chinese New Year. So with the pandemic, recovery is a little bit difficult to reopen the facility, which was shutdown, people travel, et cetera, it was more difficult. So first quarter was impacted, and I hope in second, third, fourth quarter, we will recover and in line with the market development. And that certainly is our plan. And that’s, so far, we have been keeping pace on that.

Second on the unit cost side. The unit cost, the first quarter is actually a little bit the numbers are a little bit skewed, so it cannot really be used as a — because the number is lower, but — it doesn’t reflect it. For one thing is that in the first quarter since late February to March, government basically has set up a rule so they pass the toll fee for free, basically toll fee for free. And toll fee is quite a big chunk of the transportation costs. That will, overall, lowering the transportation cost.

Nevertheless, the reduction is also — despite the toll fee pass, actually, the cost for transportation during the first quarter is higher. The reason is that you cannot find a driver for the car — to drive the car or this. So we basically pay it twice or 3x sometimes. So in long term, like, if you’re looking forward to about the second quarter, which since — at beginning of May, the toll waivers already resumed the toll collection. So we will see the — but continually, we see our transportation cost also much lower, around about CNY 0.60. So the cost reduction is real due to as I said by multiple things, right, because while the volume increased, others, the rerouting techniques that we are using, we have some projects going on right now to see how we can improve the timing of delivery as well as reducing the cost of transportation, which is kind of related.

So yes, so through the year, we can see continued transportation cost, but the number you’re talking about CNY 0.59 or whatever, so we should see about close number on that on the second quarter. And so the fourth quarter, it should be below that. We should see continued improvement on that.

Unit cost on the labor side, we are quite low already. If you look at our fourth quarter last year, it was about CNY 0.21. I’m expecting it to be somewhat lower this year with more volume increase as well as the more CapEx and automation improvement on that. Other fixed costs were also coming down a little bit. So in line, I think we are confident in 10%, 15%, at least, cutting in the operating cost side on the Express side.

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Ronald Keung, Goldman Sachs Group Inc., Research Division – Executive Director [16]

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And is there a number of sorting hubs that you have now the latest target for end of this year?

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [17]

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Yes. We’ll probably — we kind of completed last year. So right now, we have about 88 — 90 sorting hubs, another 18 or 20 is managed by our partners. I would — we will cut down our self-managed to 82. So some of the — like Shanghai, right now we have 3. We’ll probably reduce to 2 this year, and maybe next year, we’ll reduce to 1, just maintain 1. Right now, [Changsha] with 3 centers. And Beijing, 2. Beijing we have — before we have 2, now we’re cutting that to 1. And so — and some areas we’ll continue looking at it. That will help us to actually make a better routing for transportation, reduce the costs, also timing as well.

On the franchisee managing the hub and sorting center, right now there are about 20-something. We’ll cut down by half, so by end of the year. So totally, we will cut maybe about 15. 10 by — 5 managed by ourselves and maybe about 10 managed by our franchisees.

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Operator [18]

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Our next question will come from Eric Zong with Macquarie.

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Eric Zong, Macquarie Research – Senior Associates Analyst [19]

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So this is Eric from Macquarie. So I have a couple of questions. So first, regarding Express delivery business. I want to ask about your capacity now, right, so do you mind to share with us what’s the optimal level of your capacity, like in terms of daily parcel volume right now in the second quarter? And like how do you think that will actually continue to change towards the end of the year? So — and also what’s the average rate in the first quarter? And how does the trend look like in the second quarter compared with the last year second quarter?

And my second question is regarding freight, right, so if you look at a freight parcel ASP, that was down by 18% year-on-year. If we exclude the last-mile delivery fee, the decline will be more than 20% year-on-year. So I’m just wondering if this is a similar story to like Express line of business. So all is just a temporary change due to COVID. So what’s the second quarter trend look like for freight ASP?

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [20]

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Yes. Eric, thank you. As for capacity, all the company, actually, the Express company or to the — because we’re used to every year such a high growth, so every year, we’ll prepare for more capacity to aim for high season like fourth quarter, especially Double 11 and Double 12. So every year, we will — and we’ll continue to say, actually, it’s a normal procedure of the work. Every week, we have forecasting, planning to basically see which sortation center and hub will be running out of capacity that need to be rebuilt. So we have a plan.

So every year, we kind of outfit 40%, around 40%, 30%, 40% around these facilities, so to make it either expanded or maybe make a bigger space.

So as a capacity right now — but certainly, our capacity right now, it’s — withstood last year’s Double 11 and Double 12. So it’s based on the current level of operations, so we still have room, maybe at least another 30%, 40% of the capacity. But with the whole year from beginning of the year to end of September, October, we were adding on another additional capacity to service on the November 11 and Double 11 and Double 12 time.

So to answer short, that particularly we have about 70% to 80% capacity, so continue to build capacity by expanding our facility, adding more automations. Some hubs, we have to move and making bigger rooms on that. So by — so this is the exercise we’ve been doing for past 5 years, 6 years at the beginning of the year, every week, every quarter to see what’s up. So answer short, 70% right now to — but by end of the year, we will continue to maintain about 70% to 80%. So we spiked by another 6 months, we will add up another maybe 10,000 — 10 million capacities and for the Double 11 and then also for the early part of next year.

As for freight, you — like you well noticed, the first quarter, the ASP for the freight is lower than — much lower actually. The reason is that as soon as the government announced the toll fee pass, the waiver of the toll fee, most of the company has reduced the cost and passed along this to the saving to the franchisees and helping them to recover. And as a result, some of them may pass to the end customer as well. So that’s why we see first quarter, the ASP is a little bit lower.

Fortunately, the freight industry is not as — right now, at least right now, the — is more and more concentrated, concentrated on top few companies. And pricing was not as severe as the Express because economic scale is not so obvious in the transportation. In the Freight business, we’re still using a lot of forklifting and manual labors versus a high automation systems for the Express business.

So for the second quarter on, I think from the second quarter on, you will see a continued recovery on the ASP side. And it might have, by the end of the fourth quarter, by the later part of the year, second part of the year, it may have some drop from last year, but it’s not going to be this obvious from the first quarter. So first of all it’s low due to some special situation, COVID-19, as well as some policies. But later part of the year, you will see ASP trend upwards. So we’ll — as [we’ve] said, the second quarter will turn upwards. But nevertheless, it’s going to be slightly lower than last year.

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Eric Zong, Macquarie Research – Senior Associates Analyst [21]

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Okay. Okay. So just a follow-up on the weight for Express business side. So…

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [22]

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Yes, sorry. First quarter weighs about 1.25 to — 1.29 to be exact. Because the first quarter, typically, it’s going to be a little bit heavier than the other quarter. The reason is before Chinese New Year, people buy a lot of things, the parcel and packages typically are heavier. So the lowest weight time probably is like the third quarter, summer time, the parcel are smaller. And towards the fourth quarter, end of the fourth quarter and the first quarter, the weight is higher. So first quarter, we have about 1.29.

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Eric Zong, Macquarie Research – Senior Associates Analyst [23]

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Okay. Sorry, about the second quarter trend, so are you observing for the second weight…

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [24]

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Second quarter trend, you’re talking about weight per parcel?

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Eric Zong, Macquarie Research – Senior Associates Analyst [25]

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Yes, weight. Yes, weight per parcel.

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [26]

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Yes, the weight is about 1.15 to 1.12 — 1.15 to 1.2, I’m sorry.

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Operator [27]

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(Operator Instructions) Our next question will come from Hans Chung with KeyBanc.

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Mon Han Chung, KeyBanc Capital Markets Inc., Research Division – Research Analyst [28]

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I’ll ask 3 question. Yes. So first one, it seems like the recovery looks good, right, in second quarter and then — but why we still don’t provide guidance? And then I know there might be some uncertainty, but exactly where do you see the uncertainty come from majorly in the near future?

And then my second question would be the store business, and then as we have seen the procurement moving to online. And then I just wonder, is that a structural change because of the COVID-19 or it’s kind of temporary? And what was our observation, like particularly into the April or May, does the people still procure online versus offline?

And then last one is the Global business. Is there any near-term impact on the Global side? Because I think the COVID-19, it’s kind of — I mean, the worst-case is kind of later than the China — I mean outside China region. So I don’t know if there could be some near-term impact in the second quarter. And then longer term, what kind of margin profile for that business? And then what kind of trajectory to profitability? For example, like we now see in 1Q, we have the negative over 30 million gross profit. And then is that — are we going to see the narrowing gross profit? Or on the margin percentage level or just it could be — continuing to be larger?

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [29]

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Yes. Okay. Thank you. The first question is the guidance. We — the second quarter has — recovery is strong. But nevertheless, we’re still seeing some of these market dynamics in terms of pricing and all these still will be there. So we really want to be more comfortable to give a good guidance. So you probably will see in next quarter, some will probably give a — it seems more settled, probably we’ll give — currently, just like you asked, I think the uncertainty mainly due to like market dynamics and also recovery, even though strong, but we still see some uncertainties there. So yes, so we will try to give a guidance as soon as we feel that things are getting to control and everything else is on the better certainties.

And move on to Store+. At Store+, actually, we had, overall, had to reduce the cost and more is moving online as, in fact, we’re seeing a lot of the traditional resellers, the distributors, and they’re also working with us and try to moving their business online as well. That’s where we see a pretty strong movement on the Store+ side integrating the last mile in the supply chains, both for the warehousing delivery as well as procurement. So on that — in fact, our release, our first quarter Store+ actually has a negative loss than last year, even though we said that we had 78 million, but 78 million actually we put like R&D and all the other functions, HR, finance, all functions, the expense into that. Versus last year, we did not separate these expenses. So if you look at an apple-to-apple comparison, there’s actually a lot less losses for the Store+.

So the moving online to — is real. We see more and more the merchants on the end to be — percentage of the retail is generated online. So also the orders is online. So that is — looking at global on the COVID-19 impact, yes, our cross-border business was down 50%. So cross-border business, that meaning is that we — shipment to the U.S., shipment to the Middle East and Europe, and that’s all these business are being impacted in and out. But when — but we see a strong domestic expansion.

Domestic expansion, when I look at the Thailand, for example, Vietnam or Malaysia — actually during the first quarter and even April, May, now, online is going fairly strong. So as in China, people staying home, so they buy more and more things online, and that’s where our business lie. The cross border is impacted because we didn’t have a lot of business in cross border, to shipping things, import and [out port] for the supply chain materials to the — globally, and that’s impacted, yes. But the local — but right now, our strategy is really — global business strategy is to really focus on developing the local service network like we did in China for Express and these services.

So on the margin side, as you can imagine, you enter into a new country, initially, you would have to spend some money to build a sortation center, build all the infrastructure and everything else will be. But if you look at Thailand, I look at the Vietnam, in fact, the second quarter, the margins are improving much better than the first quarter. So as the volume goes up, we can see similar trends like in China, margin is going to improve, yes. So we’re confident the margin improvement, as the volume goes up, we’ll be breakeven in the next couple of years.

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Operator [30]

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So we’re showing no further questions at this time.

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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [31]

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Okay. So thank you very much. That’s our — with that, the — we will now — thank you very much for joining our call, and we’ll talk to you very soon. And hopefully, if you have any more questions, you can contact our IR teams to get more colors on that. Thank you very much.

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Operator [32]

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And we thank you, sir, and to the rest of the management team for your time also. 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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Shao-Ning Chou, BEST Inc. – Founder, Chairman & CEO [33]

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Thank you, Operator.

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