BEST, Inc. (BEST) CEO Johnny Chou on Q4 2018 Results - Earnings Call Transcript

About: BEST Inc. (BEST)
by: SA Transcripts
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Earning Call Audio

Best, Inc. (NYSE:BEST) Q4 2018 Results Earnings Conference Call March 5, 2019 7:30 AM ET

Company Participants

Johnny Chou - Chairman and CEO

George Chow - Chief Strategy and Investment Officer

Alice Guo - Chief Accounting Officer and Senior Vice President of Finance

Conference Call Participants

Baoying Zhai - Citi

Ronald Keung - Goldman Sachs.

Scott Schneeberger - Oppenheimer

Eric Zong - Macquarie

David Ross - Stifel

Calvin Wong - JPMorgan

Hans Chung - KeyBanc Capital Markets


Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to BEST Inc.'s Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions].

With us today are Johnny Chou, BEST Inc’s Chairman and CEO, George Chow, Chief Strategy and Investment Officer and Alice Guo, Chief Accounting Officer and Senior Vice President of Finance.

For today’s agenda, Johnny will give a brief overview of the business and operational highlights, then Alice Guo will explain the details of the financial results, following the prepared remarks you’ll have -- we will answer your questions. Please note this call is also being webcast today under investor presentation on BEST Inc’s IR website at A replay of this call will be available on our IR website later today.

Before I begin, I would like to 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 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. Our GAAP results and the reconciliation of GAAP to non-GAAP measures can be found in our BEST Inc.'s earnings press release. Finally, please note that unless otherwise stated, all the figures mentioned during the conference call are in RMB.

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

Johnny Chou

Thank you. Good morning and good evening everyone. Welcome and thank you for joining our fourth quarter and the fiscal year 2018 earnings call. We are very pleased to report that we had an excellent quarter and a fiscal year, driven by solid revenue growth, stronger market share gain and the margin improvement. And an excellent performance in long-term growth initiatives.

The fourth quarter was a milestone quarter for BEST as the group achieved a positive net profit on a non-GAAP consolidated basis. This is an important marker for our business as we continue to achieve fast growth and improved efficiency in our core businesses, while investing in the future.

For the first quarter, BEST total revenue increased by 38% year-over-year to RMB non billing exceeding the top end of our guidance. Gross profit increased by 82% and the gross margin improved by 1.4 percentage points.

Our non-GAAP net profit was RMB20 million compared to a non-GAAP net loss of RMB116 million in the same period of 2017.

Meanwhile, fourth quarter adjusted EBITDA was RMB150 million, compared to negative RMB24 million in the fourth quarter of 2017. For the fiscal year 2018, revenue increased by 40% to RMB28 billion. Gross profit increased by almost 200% to RMB1.4 billion and gross margin improved by 2.7 percentage points.

2018 was the first full fiscal year since our IPO. Building on the significant business achievements, and the successes we have made, we executed our strategies of gaining incremental market share, improving operating efficiency and the productivity, enhancing technology adoption, and the customer engagement for our Express, Freight and Supply Chain Businesses.

At the same time, we continue invest in our Store+, global, new cargo and capital businesses, and furthered our objectives of building a leading Smart Supply Chain platform.

Now let me give you some business highlights. Express delivered a significant growth in the fourth quarter, total volume increased by 47% year-over-year to RMB1.87 billion, which was about 1.8 times the industry growth.

Our market share continues to expand reaching 11.7% in the fourth quarter 2018, compared to 10.8% in the third quarter of 2018 and 10% in fourth quarter 2017. Full year parcel volume increased by 45% year-over-year to RMB5.47 billion which was 1.7 times the industry growth. The reduction in aggregate cost per parcel continues to outpace the decreasing average revenue per parcel, as a result of volume growth, load optimization, operational efficiency improvement and the investment in automation and digitization.

In the fourth quarter, we further reduced the total number of hubs and sortation centers by 27% year-over-year to 106 and added 10 high speed automated sorting and 283 dimension and weight scanning systems.

As a result, gross profit per parcel in the fourth quarter increased by 12% year-over-year to RMB0.17. We believe, Express will continue to outgrow the industry in 2019. Freight had another outstanding quarter and the fiscal year.

Freight volume grew by almost 30% year-over-year to 1.6 million tonnes in the fourth quarter, significantly higher than industry growth. Gross profit margin increased by 5.8 percentage points year-over-year to positive 5.7% as a result of volume growth, focuses on e-commerce related transactions, freight network optimization and the operating efficiency improvements.

We further reduced the total number of hubs and sortation centers by 16% year-over-year to 111. And to better serve our customers, we extended the last mile extensively, increasing the total number of franchisor last mile service stations by 45% year-over-year to about 14,000.

We believe economics of scale network optimization, increasing demand from e-commerce and growth in consumptions will continue to drive freight growth, and margin expansion. Supply chain management continues to serve as an important foundation of our logistics infrastructure, and demand for our integrated Supply Chain management solutions remain strong.

In the fourth quarter, orders fulfilled by cloud OFCs increased by 38% to RMB48 million. We are happy to see better than expected growth from our franchised Cloud OFCs. In the fourth quarter, the total number of orders fulfilled by franchised Cloud OFC increased by almost 70% year-ove-year.

Total gross floor areas of Cloud OFCs increased by 18% year-over-year to 2.8 million square meters as of December 31, of which 1 million square meters were owned and operated by franchised OFCs.

Gross margin improved by 0.8 percentage points as new projects signed from previous quarters come on line. Leveraging our core competency in Supply Chain to business to consumer technology and application. We continue to grow the BEST Store+ platform and [Indiscernible] for 2018 to improve the quality of membership stores, optimize merchandise selection, grow branded stores and accelerate branded stores integration with Express and Supply Chain, to expand our last-mile service network and reach more consumers.

The number of branded stores, including franchised BEST-Neighbor and self-operated WoWo increase by almost 390% year-over-year to 1,840 as of December 31st. The number of membership stores increased by 17% year-over-year to over 420,000. In fourth quarter, 22% of the total number of stores orders fulfilled was for branded stores. As a result, stores revenue grew by 4% while gross margin improved by 1.4 percentage point year-over-year.

Store+ development has reached a key stage as it has achieved a critical 2B scale, which allow us to invest and move forward into the next phase of building the 2C platform and last-mile service network.

We have launched our membership program as well as online to offline and a community group buy services in selected cities. We are very excited about store prospect business development, and are in the process of involving the business and launching new products and services.

Other services revenue increased by 4.8 times year-over-year in the fourth quarter to RMB574 million primarily driven by tremendous growth of UCargo which was only made available to external customers since March 2018.

In the fourth quarter, revenue generated from external customers on UCargo platform increased significantly to RMB457 million representing a 82% increase from third quarter of 2018.

As of December 31, the number of the registered agents increased to 49 % year-over-year to over 4500 and the number of registered trucks increased 45% year-over-year to over 261000.

We expect the UCargo business will continue its growth trajectory and it makes meaningful contribution to the group in 2019. In 2018, Capital continued to expand its financing offering and solutions to our ecosystem participants while helping our other business units to control transportation cost.

As of December 31, it had provided leasing service to over 8000 trucks, a year-over-year increase of over 100%. Global continued to develop cross-border solutions and broaden service offerings in international markets, to further expand its footprint and to capture the tremendous growth opportunities in Southeast Asia. Global launched it’s Express delivery services in Thailand, Greater Bangkok area in the fourth quarter. As of today, Global has operation center in four major cities to provide affordable, fast, and high quality delivery service across Thailand.

Now let's talk about 2019, as we just detailed, we started the year with solid momentum. And looking ahead, we are confident that the combination of strong growth in e-commerce and consumption, ongoing consolidation within the Express, LTO and the Supply Chain management sectors, and need of largest infrastructure-supported rapidly growing digital economy in Southeast Asia will bring tremendous opportunities for us in 2019.

We will continue to improve execution, focus on market share gain, operational efficiency, technology adoption and customer services. For Express, we'll continue to target a much higher volume growth than industry, while continuing to optimize our networks, investing in automation, reduce costs, and improve profitabilities.

For freight, we aim to solidify our market leading position, higher stronger volume growth and a healthy margin improvement by growing e-commerce related transactions, enhancing customer experience, improving the network, and applying more automation and technologies.

For Supply Chain management, we will continue to invest in service capability and technology and to further integrate with other business units to support Store+, Express, Freight, Global in providing online to offline Supply Chain solutions.

In the meantime, we will continue to invest in our growth initiatives. For Store+ we have made major investments in the past three years, and have built a robust to build infrastructure. We believe that investments for the Store+ business peaked in 2018. Those infrastructure will support our strategy to focus on the expansion of our branded franchised BEST Neighbor stores or the WOWO stores.

Branded stores are integrated with BEST and well serve as our community centers to provide last-mile services to consumers. In 2019, we plan to significantly grow the number of franchised BEST Neighbor stores, and improve the quality of membership stores to enhance profitability.

We also plan to roll out a membership program under offline services, community growth grew by other initiatives services as a product in more cities and to reach more consumers. For Global, our focus will be on Southeast Asia, and the North America. We have already started in Thailand, and are planning entry strategies into Vietnam, Indonesia and other evaluation opportunities in other countries.

The successful launch of our Thailand network was enabled by our SLI [ph] model, technology and industry knowhow, plus our ability and the willingness to collaborate with established local partners.

We are excited by the opportunities in Southeast Asia, and believe we can build a meaningful business there. For UCargo, the demand for online, for truck services is massive. We expected the hyper growth trajectory for UCargo will continue in year 2019. We will enlarge our customer and the drive base, invest in technology to drive for enhance the customer experience, number, and the quality of transactions, while focusing on margin expansions and the profitability.

We also see tremendous synergy between the UCargo platforms and the capital in terms of aftermarket and the financing services. As we scale up the UCargo business, we expect to further integrate UCargo and Capital to create a valuable revenue opportunities between the two.

Looking ahead, the continuous growth of e-commerce and the economy will create tremendous market opportunities for our businesses. We have demonstrated a track record of delivering stronger revenue growth, and a margin expansion through solid execution and strategically investing in new growth initiatives.

We are confident that we will continue this winning path to capture these market opportunities, deliver sustainable high quality growth, and achieve long term value creation for our shareholders.

With that, I will turn it over to Alice, our Chief Accounting Officer and the Senior Vice President of Finance. Alice, go ahead.

Alice Guo

Thank you, Johnny. Hello everyone. We delivered strong results for the fourth quarter and the fiscal year 2018. For the quarter, the revenue increased by 38.3% year-over-year to over RMB9 billion, beating the top end of our revenue guidance by RMB936 [ph] billion due to strong growth across business lines.

For the fourth quarter, BEST recorded non-GAAP net profit of RMB20.1 million, while the operations generated net cash of RMB729 million. For the third consecutive quarter, BEST had recorded positive EBITDA and adjusted EBITDA. EBITDA was RMB109 million and adjusted EBITDA was RMB150 -- RBM150.1 million. Starting in the fourth quarter, we began separately reporting EBITDA and adjusted EBITDA attributable to Store+ business.

We believe, the additional disclosure would provide investors with more insights into the strength of our Store+ unit and as progress of Store+ development.

The confident issue of non-GAAP measure to a comparable GAAP measures and the relevant adjustments can be found in our earnings press release.

Now I would like to discuss some of the key financial highlights in the fourth quarter. Express revenue increased by 36.7% year-over-year to RMB5.9 billion primarily due to our [Indiscernible] increase in 1% increase in parcel volume.

Gross profit increased by 54.3% to RMB311 million and the gross profit margin improved by 0.9 percentage points. Our ability to reduce the average cost per parcel continues to outpace that decrease in revenue per parcel.

While the average revenue per parcel decreased by 7.1% to RMB3.18, average cost per parcel decreased by 7.9% to RMB3.01 primarily due to the improved economies of scale from a volume growth and the enhanced operating efficiency from the ongoing press form optimization, network planning and the technology application.

As a result, our gross profit per parcel increased by 11.7% year-over-year to RMB0.17. Freight revenue increased year-over-year by 26.2% to RMB1.2 billion primary due to 29.7% increase in freight volume. The average cost per town equates to about 8.4% year-over-year to RMB715, while the average revenue of the towns decreased by 2.7% to RMB758, resulting in an increase in gross profit margin by 5.8 percentage points to a positive 5.7%.

Supply chain revenue increased by 29.5% year-over-year to RMB686 million primary due to 38% increase in the number of orders fulfilled by our Cloud OFCs. Gross profit increased by 62.3% year-over-year to RMB0.7 million [ph] and the gross profit margin increased by 0.8 percentage points year-over-year to 3.9%.

As Johnny mentioned, Store+ focus in 2018 was to improve the quality of the membership store, optimize merchandise selection, for branded store and the accelerated branded stores integration with Express and the Supply Chain to expand our last my service network and then reach more consumers. In the fourth quarter, gross profit margin increased by 1.4 percentage points to 10.5% while revenue increased by 4% year-over-year to RMB615.6 million.

Our Other service lines, UCargo, Capital and Global, are becoming important revenue contributor. During the fourth quarter of 2018, revenue from those service lines grew by 482.5% year-over-year to RMB574 million. This significant increase was primarily driven by UCargo platform starting service to external customers in March 2018. The increase in the number of trucks financed by Capital and Global's ongoing business expansion also contributed to the strong growth of this service line.

Gross profit increased by 74.1% year-over-year to RMB52.6 million. We are pleased with improvements in our operating efficiency, for both selling expense and the G&A expense. Of the major operating expense items, or excluding share based compensation expense, selling expense as a percentage of revenue decreased by 0.6 percentage points to 2.6% compared to the same quarter of 2017.

G&A expenses as a percentage of revenue decreased by 0.2 percentage points, year-over-year to 2.8%. R&D expenses as a percentage of revenue increased by 0.2 percentage points year-over-year to 0.6% primary due to the hiring of additional R&D professionals to support the business unit with new initiatives.

During the fourth quarter of 2018, adjusted EBITDA was RMB150 million up from negative RMB24 million in the fourth quarter of 2017. The improvement was mainly driven by strong revenue growth and that improved operating efficiency.

Breaking down the adjusted EBITDA RMB353 million was [Indiscernible] negative RMB86 million was [Indiscernible] Store+ service line and the negative RMB70 million was [Indiscernible] to unallocated expenses primarily related to corporate and administrative and R&D and other miscellaneous items that are not allocated to individual service lines.

Net cash generated from operating activities was RMB729 million compared to negative RMB9.3 million in the same quarter of 2017.

Cash and cash equivalents, restricted cash and short-term investment in a total were RMB4 billion as of December 31, 2018 compared to RMB3.9 billion as of September 30, 2018. The increase was primary due to the net cash generated from operating activities partially offset by CapEx, the purchase of leased equipment and other investment activities.

Our healthy balance sheet gives us the resources and flexibility to accomplish our business and strategic objectives. We continue to invest in technology and automation to further improve our operational efficiency and the service quality.

In the fourth quarter of 2018, our CapEx was RMB284 million or 3.1% of total revenue compared to RMB254 million or 3.9% of total revenue in the same quarter of 2017. As previously explained, most of the CapEx this year was used to upgrade the automation system in major hubs, for patient centers and the Cloud OFC.

Including investment in high speed automated sorting and the dimension and the weight scanning system. Next, I want to quickly go over some of the fiscal year 2018 financial highlights.

In fiscal year 2018, our revenue increased by 39.9% year-over-year to [Indiscernible]. Express service revenue increased by 38.5 per year to RMB17.7 billion. Freight service revenue increased by 29.1% year-over-year to Billings.

Supply chain management service revenue increased by 29.6% year-over-year to RMB2.1 billion. Store+ service revenue increased by 27.8% year-over-year to RMB2.8 billion. And other service revenue increased by 523.5% year-over-year to RMB1.2 billion.

As we continue with the effort in increasing the operating efficiency and the application of technology, the gross profit margin improved by 2.8 percentage points to 5.2% from 2.4%.

Share based compensation expense in fiscal year 2018 was RMB109 million excluding share based compensation expense, operating expenses as a percentage of revenue decreased to 7.1% from 7.4% in 2017.

We reduced our non-GAAP net loss to RMB452 million from RMB923 million in 2017.

Adjusted EBITDA was negative RMB18 million compared to negative RBM 583 million in 2017, breaking down EBITDA RMB792 million was attributable to excess Store+ service lines, negative RMB375 million was attributable to Store+ service line and the negative RMB436 Million was attributable to unallocated expenses.

Our SLI model allows us to achieve high growth without significant CapEx. In 2018 CapEx was RMB1.08 billion or 3.9% of revenue. Net cash generated from operating activities was RMB637 million.

Finally, let’s discuss 2019 financial outlook. As mentioned from our previous quarterly call, starting from 2019 we will begin providing annual revenue guidance. We expect revenue for full year 2019 to be in the range RMB36.5 billion to RMB37.2 billion. This represents management’s current and the preliminary expectations which is subject to change.

This concludes my prepared remarks and we will now open the Q&A. Thank you.

George Chow

Thank you, operator. Hello?

Question-and-Answer Session


Yes. Thank you. We will now begin the question and answer session. [Operator Instructions] And the first question comes from Baoying Zhai with Citi.

Baoying Zhai

Hey, Johnny, Alice. [Foreign Language]. So, Johnny, Alice, and IR team, congratulations for the very great results this quarter. And my first question is very old but people like to ask this question. The Express delivery ASP, I want to know more about the reasons behind it. So we didn’t disclose last-mile delivery ASP this quarter. And can you disclose that? And if excluding the last-mile delivery ASP, how much the ASP would come down? And after ASP come down what the reasons behind? Can you further provide breakdown such as how much its cost by the lightweight and how much it cost by more subsidies to franchisees? And how would we react to press more this year in 2019 in terms of subsidy budget? This is my first question.

So, my second question is to regarding Store+ business and non-Store + business. This is the first time we see you breakeven EBITDA level by Store + and the non-Store + in results. So excluding Store + and how quarter expenses, we already see other businesses making decent profit. But this is only 2018 onwards compared with 2017 how this number look like? And in 2019 how would balance Store+ and other business growth? So this is my second question. Please say, Johnny.

Johnny Chou

Okay, Baoying, Thank you very much. So, I’m going to answer in English. If anyone wand to translation it will be fine, because of time limited. So, first question is basically regarding to the 2018 fourth quarter, the ASPs as to the last-mile delivery costs and as to the – without it and what ASP look like. So yes – so fourth quarter, we actually increase the last-mile delivery cost by about 6%. So the total last-mile cost is about – average about 1.65 --$1.65 per delivery versus last year probably about $1.55. So we increased about $0.10 for the last-mile delivery.

But our average cost has decreased significantly and in light of the increase of the last-mile delivery. So the ASP without the revenue – without the last-mile delivery – if you take out the last-mile delivery, its actually about $1.53 which is about – so if you take $1.53 and $1.65 that’s $3.18. The cost wise its reduce the more and the total costs without the last-mile, think about the last-mile, the pure cost is $1.37 which is about 21% less than last year same time last year. Last year’s fourth quarter is about $1.72 exclude the delivery – last-mile delivery, $1.72 to cost, but now it’s about $1.37, so 21% reduction.

And you were talking about why is the fourth quarter, some of the ASP has reduced and what was the attribute? Basically it’s various things. Some due to the parcel weight, the reduction which is continue to improve, the weight continue to reduce, but nothing significant. And another part of it is due to the comparable venture -- competitive environment in term of the – for the sales, rebates and all the stuff. So this is a first question and answer.

The second question, you rightly noticed that we have – we have actually taking out the – apparently for the Store+ to be separately listed and basically, if you look at without the Store+, actually the whole year we had about 700 million or so of the EBITDA excluding the Store+. Store+ this year is about 390 million, so close to the 390 million of a loss, and which is more than last year. So consider about what do we have achieved this year, actually the Store+ -- actually we have purposely in third quarter and fourth quarter to control the growth, we’re focusing on more quality of stores and the deliver, and nevertheless as I mentioned in the earning call that has peaked. So actually fourth quarter as you less loss in third quarter and we expecting the next year and after we’ll continue to improve quarter by quarter.


Thank you.

Baoying Zhai


Johnny Chou

Baoying, did I answer your question?

Baoying Zhai

Yes. For the first question, I guess a lot of investors are still very interested to know how would we react to the press more this year? So how about the subsidy budget this year compared with last year?

Johnny Chou

Okay. So, I miss this year’s plan. Okay. So, this year we continue to as we said in the call, that we are confident. We are continue to working on the cost reduction and operational efficiency, and that will help us to drive down the cost – continue to drive down the cost. And as the market goes then we will – as we say, we will continue to adopt the strategy to have a much faster growth than the vendor market.

So, basically what I’m trying to say is that, this year we are still confident that we can be growing much faster than the industry-wide growth continuously and the pricing will continue to monitor the competitive environment and adopt whatever necessary. But we’re confident that we’re continue to drive down..

Baoying Zhai

Okay. Thanks Johnny.

Johnny Chou

Thank you, Baoying.


[Operator Instructions]. And the next question comes from Ronald Keung with Goldman Sachs.

Ronald Keung

Thank you. Hi, Johnny, George, and Alice. Congratulations on the strong results. I want to ask on freight actually after Express. We see a good reacceleration in growth. Just can you share how large is e-commerce contributing to the freight? For example, volumes at this point, and do you see this large-sized items being a key growth driver partly because we do see new entrance over the past two or three – two years that are run by Express companies with the LTL arms. Just thinking how do we position our franchisees versus the rest of some of the new entrance specifically as we talk at this incremental growth in e-commerce large-sized items?

Johnny Chou

Okay, Ronald. The freight is primarily driven by two factors; one is that online e-commerce large items, larger ticket items being sold online more and more. And the second is basically the continued expansion of consumption in the tier 3, tier 4, tier 5 cities. So, before move to consumption, we’ll focus Tier 1, tier 2 cities but now we go on to all those tier 3, tier 4, tier 5, the shipment is much more – not in the full truck, but much more in less than truckload. So, these are the primary driving for the market growth.

Now, freight, the traditional is very much of B2B business. So in the past probably we had 90% of the businesses on B2B side. And now we are – since last year we start to notice a very large growth online for a larger bulkier items like furnitures, we see products and refrigerator, jogging machines et cetera online more and more. So, we basically had also turn to focus on a faster growing e-commerce market. As of last fourth quarter we probably have about 14% to 15% which is come from the online larger ticket stuff and purchase – and 85% to 86% continue to be a factor, B2B type of business.

So, we will see – continue to see e online B2C will grow faster, or e-commerce will grow faster and the B2B continue to grow, but it growing at a lesser pace. So, that's why our primarily focus will be on the e-commerce side and how – actually it’s a very big chunk because you deliver a 50 kilo larger item to home is a lot more difficult than you deliver a 1 kilogram of parcel into home. So that’s all the challenge – I think that’s all the values are and the gross where there is, but that’s where I see our gross in fourth quarter last year and we believe we can continue the high growth this year and largely driven by e-commerce growth.

Ronald Keung

Thanks Johnny. So with the improvement in gross margins into the fourth quarter give some expectations or guidance for freight as well for margin, so what you’re expecting for that improvement? It will continue to improve or we kind of focus more on growth in 2019? Thank you.

Johnny Chou

So, freight, we really had achieved a very large turnaround. From last year we – actually the fourth quarter last year our margin is still negative for the freight. And this year fourth quarter we already have about 5.7% positive. So, in general basically we had about 5.8%. As a result the freight actually EBITDA wise everything else is actually positive for three consecutive quarters. And we will see continued margin expansion this year primary due to again the volume expansion. We continue to see – will see a very high volume growth this year for the freight, and we will continue to see as a volume growth to some extent comes in. Actually we’re also adopting some technology for more automation just like we did for the Express. In that we will continue to see improvement in the margin and the possibility on the bottom lines.

Ronald Keung

Thank you, Johnny.


Thank you.

Johnny Chou

So if you want to have – yes, so if you want to have a little bit color on that, so I can give you a little bit colors. The freight, thinking the last-mile delivery this year we have increased from $127 to $151 per ton, so, for every ton we have increased the last-mile cost to pay the fees in the fourth quarter. But meanwhile our cost has reduced significantly. If without the last-mile cost included just operational cost like transportation all that stuff, we’re down about 12%. So, that’s where the expansion. So even though the last-mile delivery we paid more for people to have a better services, to pay them little bit more to do a last-mile services. But excluding that we still have 12% reduction in the last-mile cost reduction. So, overall we probably have about cost reduction by 8%. So that is what is what driving all the volume -- the margin expansion.

Ronald Keung

Great. Thanks.


Thank you. And the next question comes from Scott Schneeberger with Oppenheimer.

Scott Schneeberger

Thanks. Good evening and good morning. Johnny, a big part of BEST’s long-term story is integrating multiple segments with each other, and it sounds you cited earlier that you are investing in that progression in 2019. So, kind of a two-part first question. What percent of revenue should we expect CapEx to be in 2019? Is still in a three to four range? And then my follow-up question on that is could you please elaborate on the investment in integrating the multiple segments that you have planned? Thanks.

Johnny Chou

Thank you, Scott. So the CapEx as we mentioned, we continue to invest about the 3% to 4%. This year it’s in the 3% point. The whole year is about 3.9%. So next year probably we’ll deliver that, so 3.5 percentage growth market for our business unit. So Express still can be a larger CapEx involved. Our second largest CapEx will continue to be on the fulfillment warehouses, the robotics and stuff like that. And third, probably Freight this year, we will invest some of it into Freight sorting centers as that. And other CapEx probably relate to the international. So we’re going to have some international expansion like in Thailand, we’re building like four store centers, warehousing et cetera. So these are about the CapEx.

Business investment into various business initiatives; I think we – as we said, we are balancing the growth and the profitability, so 2019 we will see a continued investment in Store+, but as I said, Store+ investment the infrastructure is pretty much peaked out. So the investment will reduce as revenue continue to growth the bottom mile will improve, but we will adding little bit more money to the international to built up a little bit more before just get started, but I don’t see a huge significant amount of the money will be invest there. And the UCargo actually is a – it’s a platform, it’s a online platform. So its very SLI, it’s not a CapEx, so investment heavy, in fact that we actually – the UCargo actually on the fourth quarter the last year 2018 we’re not losing money. We actually was profitable.

So, UCargo, I don’t see a very big investment in that, but I think the international, we will see some investments and Store+ will continues to see some investment, but not in the scale as we have seen in last couple of years as we said that has peaked out and up. After last three years investment basically that infrastructure is supporting to B2C already there. So we just have to expand it – continue to expand the growth and driving down the efficiencies – driving out the efficiencies.

Scott Schneeberger

Excellent. Thank you. And then just as a follow-up on that. In the Supply Chain segments could you touch on the competitive environment and your ability to differentiate and win business with a covering pricing as well? Thank you.

Johnny Chou

Okay. So you have noticed that the Supply Chain on 2018, our margin has been little bit struggled compared with what we need, primarily due to the several reasons. One reason is that because of last year, actually our Supply Chain has grown pretty significant, it grown about 30%, 29 some percent. In this kind of Supply Chain, so probably about just to -- growing 29% is a quite lot of investments have been fund, like the warehouses and all of this stuff. So we do have like fourth quarter lot of warehouses were coming on line on lease and – but the customers lagging here. So it had to fulfilled in the first quarter or second quarter this year and others because we spend there like – collected, we increased about over 100 customers and whatever, all have a starting cost and everything else.

But this year we are going to be much more focused on our key objectives. I think as you rightly so to say, where is our competitiveness? I think our competitiveness comes from two areas. One is to do with the fashion, clothing, all the stuff because that’s a typical very hard to do and its pretty much to be integrated and very hard to do because there’s lot SKUs, tens of thousands of SKUs for customers versus some other product maybe only have 10, 20, 40,100 and its like easy to fulfill. So fashion, clothing is going to be one of the area that we think we have dominant expertise and dominant capabilities and advantages.

And second, probably was the FMCG with consumption-related to FMCG and that was matched very well to our strategy for the Store+. So, they will be focusing on supporting Store+ as well as the FMCG as a B2B online, O2O to B2C and also the clothing and fashion.

Scott Schneeberger

Thanks John, Thank you. Congratulations.


Thank you. And the next question comes from Eric Zong with Macquarie.

Eric Zong

Hi, Johnny, George and the team; so first of all, thanks very much for taking my question. Congratulations for the excellent results in the past quarter. So I have a couple of questions. First of all, I want to ask about more details on the new business and the Store+. So for Store+ like what kind of revenue growth rate you are looking at for 2019, because like fourth quarter was quite low, that was by design.

So, should we look at like 20%-ish revenue growth again for Store+ let’s just like what we achieved for full year 2018, and also for the UCargo quite interested in the business, because the revenue growth really in the fourth quarter exceed our expectation? So should we also look at higher growth on a very fast growth for UCargo? And also in terms of profitability you mentioned in the fourth quarter last year it was actually at a breakeven level.

So in 2019 do you expect take rate actually continue to rise like compared with fourth quarter 2018. So, and just a follow-up question for new business is, do you think continues investments in the new business areas like UCargo and Global were resulting into a higher EBITDA loss at a higher quarter level? So this is my questions. Thank you.

Johnny Chou

Okay. Thank you, Eric. As you noticed – you very noticed on the Store+ fourth quarter we are purposely to slowdown and focus on a better quality shipments and to reduce to improve the margin. So margin was improved significantly about over 1% points but while the growth actually slow down. So 2019, we will continue to focus on our branded store. So that achieved very higher margin and also a higher efficiency on the logistics services. So, our growth will be somewhat slower full year than the full year 2018. So we are kind of looking at about 20-ish anywhere between as you will plan at 17% to 18% growth, so little bit shy of 20% that our current view on the Store+.

And so as I said, I mean, the investment peaked on last year and so in the fourth quarter 2018, so I think quarter will gradually improve that even though the growth will be slow down, but that’s -- I think it’s a healthier growth. On the UCargo side, yes, so gross there being very high and driving by the continued demand for a lot of people looking for full truck, a better services on to our platforms. So we’re still expecting a very high growth next year. So just next year we are expecting about 180% to 200% growth, so somewhere around 180-ish -- 180% to 200%-ish growth.

And with a -- some of the things that we’re thinking about we probably we’ll be able to see probably even higher gross on that. So we’re expecting that to be – just to scratch the surface, and we just started a year ago, 2017 we basically created the platform. We just try to sorting, looking for trucks, additional trucks for Express, and the freight for Supply Chain that will require some trucks which they need it on the spot. So the platform actually would very well – the utilization is very high and we see a great resources to be use for, so we just opened a full services for the outside, for external customers, and just for three quarters and we’re having phenomenal growth.

So, I think this next year we actually also planning a fairly higher growth. Now the third quarter you had profitability. As you said, fourth quarter we have achieved non-GAAP positive net income and what happens next year was investment in all this new initiatives, would be [Indiscernible]. So our next target is actually to – continue to improve the EBITDA. So all the things we’re talking about is a consolidated group level. So in consolidated level I think our EBITDA is going to be greater improved over the last year. Last year, overall the whole year still have little bit like RMB10 million or RMB15 million loss for adjusted EBITDA for the whole 2018. But I’m sure in 2019 that adjusted EBITDA on a full year and consolidated basis its going to be a positive. And so is a net, we continue to improve the net. So, we’re not going to see a worsening bottom line, but we should see a surprising pretty healthy growth on the bottom-line as well as a top line.

Eric Zong

Thanks very much Johnny. But just a quick follow-up question on the Express delivery side. So just like what you did in the past quarter, would you mind to share with us some breakdown for unit cost for Express delivery business?

Johnny Chou

Okay. I kind of alluded to this little bit before, so I think I can give you a little quick update on that. Our total cost including the last-mile delivery is $3.01, so 3.01 is a total cost, for which $1.65 is contributed to last-mile delivery, which is about $0.10 higher than last year. But anyway, so if you deduct that, our non-last-mile delivery cost about $1.37 for which about $0.84 is contributed to transportation, $0.28 contribute to sortation center labor cost and lease cost is about $0.09 which is down about 10%. I give you another thing. The transportation was $0.84 down 14% quarter by quarter, from last quarter.

Our labor cost down by 33% from $0.42 to $0.28, so which is about $0.28. Yes. These costs down about 10%, so it’s about $0.10 to $0.09 and other cost miscellaneous or other cost is down about 30% from $0.21 to $0.15. So, total cost is about $0.30. And we believe we continue drive down these costs.

Eric Zong

Okay. Thank you, Johnny. Very helpful.


Thank you. And the next question comes from David Ross with Stifel.

David Ross

Yes. Good morning. Good evening. I want to talk little bit about the growth outside of China. You mentioned growing in the Thailand, Vietnam et cetera buildings some warehouses. As you think out over the next few years how does that business look? Is it focus mainly in Supply Chain? Do you have expressed? Do you have freight? Do you have UCargo type model there? And then, are they separate country operation or you building out more of a cross-border network?

Johnny Chou

Thank you, David. We are primary – we think a great opportunity global wise. I have been collaborating for last three weeks. I just came back actually a week ago. So I went to many countries, Vietnam, Thailand, Indonesia, U.S. and et cetera. First of all, we have primary focus of probably in the two regions, North America and Southeast Asia. North America, everybody knows we already have a pretty big presence there. We have a Dallas operation, L.A. operation. We have New Jersey operation, so about close to 80,000 or 100,000 square meter warehouses or supply stores there.

So we’ll have a fairly big presence there and we’ll continue to scale up some of the capability, primary to B2C, but mainly as to see and also for the cross border. I think the opportunity I’m getting more excited is Northeast Asia country-side, Thailand, Vietnam, Indonesia, Malaysia, Philippine, et cetera for multiple reasons. One is that e-commerce being growing tremendous driving by younger population, poor offline infrastructure, but lot of people want to have pent-up demand to getting merchandise but they couldn’t get offline.

So everybody having the mobile phone and they buy on the Facebook. They buy on lot of these website, Alibaba etcetera, Lazada etcetera, Shopee etcetera. So these are growing very rapidly. But their infrastructure is very poor. As we look at the infrastructure both basically for fulfillment like warehouses and everywhere we go and people want to see can you help us on doing this, and also the last-mile delivery. Now, in China in the past 10 years this infrastructure has been developed quite a well. In current it had driven five of the digital growth and significant e-commerce growth and vice versa and basically they help each other to grow.

But in Southeast Asia what we see is that lacking of the infrastructure and actually the demand is there for e-commerce. So what we’ll do there is not just put up warehouses and doing a fulfillment, I think its [Indiscernible] but the total part is we’re doing a much more integrated service not just fulfillment but the Express and the Freight. In fact in Thailand, Vietnam, I see a tremendous opportunity for Freight, for UCargo and for Express. But of course we’re not going to do one -- everything on one shot. So we can do it in a step by step investment basis and to make sure that our balancing, the actual profitability, higher profitability and also the long term initiative can be balance.

So in Thailand we’re basically starting with the full coverage of the Thailand for Express delivery as these are being growing rapidly, and also the fulfillment. And I think in the next step maybe we will working there for a freight now, for UCargo type of services. I think that’s all in huge demand. Basically you can consider these countries about 10, 15 years ago China and the infrastructure should be to be upgraded. It’s economy just in high speed of growth, but nevertheless it’s still being a smaller scale. So they need to come services that we had in China and to the – and given that Southeast Asia had about 600 billion people, younger populations. I think that is a really reasonable business. I think we can do very meaningful and proper business with them.

David Ross

Excellent. Thank you very much.


Thank you. And the next question comes from Calvin Wong with JPMorgan.

Calvin Wong

Hello. Hi, can you hear me?

Johnny Chou

Hi, Calvin.

Calvin Wong

Hi, Johnny, George and Alice. Firstly, congratulations on a very impressive set of numbers. So my question is primarily related to what we're seeing kind of year-to-date on the ground especially for Express? So, I mean we're ready in March. Right. So we've had a couple of months of operations so, just in terms of industry growth, there was previously some concern about some potential macro headwinds and slowdown on on consumption. So what are we seeing on that size? And on pricing, are we seeing fairly stable or is are things kind of picking up especially during the off peak season in the first quarter right now?

And just on Express volumes, we mentioned that we're looking to continue to gain market share this year. Do we have kind of a rough target with respect to volume growth, you know previously we had given sort of a multiple, of rough multiple guidance versus industry. So that's kind of what I wanted to ask about?

Johnny Chou

Okay, look at 2019, I can't give you exact number because that quarter has not ended yet. But I can roughly say based on the first set of -- first two months set of number, we are on target. So we are on our target actually slightly ahead of our target in terms of the Express side. We do see some pressures on the ASP side, on the general market side, as people come out last year's fourth quarter peak season, has built a lot of capacity, and I mean every year, you know we will see some pressure there as the market goes.

But in general, we’re still seeing a fairly good recovery from Chinese New Year after we come back from functions, New Year after a long holiday. And we are still seeing a target movement development in the first two months. In general, but I think that this year we as I mentioned on the call, that we will continue to focus on now will be improvement, quality improvement, driving down the cost to meet any challenge from the market. So I think we are confident that the team able to focus on the cost reductions focus you know the market development and network optimization and to continue to have a strong growth there in some kind of market.

Calvin Wong

Understood, thank you. Just the quick follow-up, just wanted to get a quick comments from your side, so we have seen effectively all the other major players also set targets to gain market share this year. Do you think that that could trigger some increase in pricing pressure or do you think there is actually room for pricing to remain fairly stable or rational in terms of the competition? And at the same time we all kind of continue to drive incremental consolidation in the market?

Johnny Chou

Yes, I think both. I think the expectation for the several major players are expecting to have a higher growth in the market and the gaining market share. I think they're primary from several things. One is that had few companies and the concentration on the marketplace continue to increase. So in other words, the companies are continuing to consolidate the market shares from a Tier 2 or Tier 3 players.

So in other words, the concentrating -- continue to concentrate on the top few companies. Second is that the -- as a result, I think price competition and the pressure is going to be there. As I said, we will be focused on our execution, reduce the cost and optimize the network to make sure the networks are stable, the customer services is, well. I think we are confident that we are continuing to be able to perform or execute as we stated goal.

Calvin Wong

Okay. Thank you very much.

Johnny Chou

Thank you, Kevin.


Thank you. And the next question comes from Hans Chung with KeyBanc Capital Markets

Hans Chung

Hi, good evening, Johnny, George and Alice. Thank you for taking my question. So I'll follow up on the Supply Chain business and Johnny, you mentioned earlier, 4Q seems the -- the gross margins are little bit soft and that's because we have a new capacity and because of new customers.

So can you give more color around how many new customer we added in the fourth quarter, and then maybe any few one that worth mentioning? And then also what will be the trend for the first quarter in 2019? So I actually means like do we expect the gross margin to start to recover in the near-term? And then also what will be the longer term targeting model for the Supply Chain?

Johnny Chou

Okay. First of all, thank you for that questions, so people do have some -- I'm glad you asked that question, so I can clarify little bit. Actually, the fourth quarter 2018 actually the margins improved from fourth quarter 2017. When I say the margin was little bit soft. I was referring to the whole year. So first quarter we actually recovered a little bit.

So, first quarter actually was about 0.8% better than the last year first quarter. But typical first quarter margin is always little bit soft. Reason is that Double 11, huge ramp up of volume in a week or two then you have to get a lot of people, labors and you have to get lot of equipment and the warehouse ready just for a peak of seasonal sales.

So typically, that margin would be low because the efficiency and the labor force efficiency, everything else is going to be lower but nevertheless, this year, first quarter is better than last year first quarter. However given that the full year, last year we achieved about 6.1% as a full year of 2017 and this year whole year is only about 5%. So this is a little bit late upon whether we like to see.

But this year we actually gained a 100 plus customers, but so we are -- what we were doing is that we are being -- starting on the fourth quarter, we start to focusing on three things, right. One is focusing on the industry what I'm working on, so as I -- as was mentioned before that we will focus on more of the clothing, fashion, the garment side of it, the apparel.

And that actually is hard to do because SKUs are lot and typically the volumes are higher. So we prefer this kind of -- margin is also higher.

And second, we are focusing on FMCG because we're doing a lot of FMCG to supporting the Store+ and network together and we tried to make the whole Supply Chain of consumption related especially FMCG better. So we are focused on that. So this is the first opportunity -- first things we -- actually are different from the last year, a year before, and we probably will do lot more various customer base and factors than we are focusing. That will surely improve the margin significantly.

Secondly is that, we are looking at more of a customer base because we focus on the strategic factors and some customer [Indiscernible] probably we have to let it go. So, we are choosing customer to be more suited for our growth strategy. So as a result, in long term, I think you will see 2019, we will see an improvement of the Supply Chain, in fact they're not just higher in this year, they should be higher than 2017 to go over to about the 6% to 7%.

So that's our -- so I think the Supply Chain, as the time goes as we're consolidating the position in our Supply Chain leadership, we actually, I would reiterate too, we are the one of the BEST Supply Chain fulfillment Company. As we solidify this lead, our margins continue to improve.

So I think in long run, I think that this should be about at least a low-teen percentage of the business versus now a single digit business. So I think it's really a double-digit business. But that will probably take a year, two year or three years to get there. So 2019, you will see significant improvements over this year and should be better than 2017 as well.

Hans Chung

I got it. Thank you. So just a quick follow up on Express, so what do you think the trend for last-mile fee this year and also what would you expect the cost of reduction excluding last-mile fee. We have done 20% year-over-year reduction last year. So what would you think about this year?

Johnny Chou

Okay. I think the last month the last-mile delivery fee will be - -- ease out a lot. I don't think this year, we will see a strong upward push for the last $65 year cost. Given by $65 it’s pretty good already. And second it is because – had said that average weight for parcel was actually decreasing. So that will also give us a last month delivery on someone to relax of the fee.

So I think the last-mile course you will not see a significant increase like we said, we did on 2018 t last year. We love to maintain the last-mile. There is the quantity and so we just increase the fees and make sure that people will have a better service.

On the cost reduction side. I think, as we said, excluding the last-mile delivery cost and the total cost of operation, total cost of Express rotation and operation were down by 21%. And we would still see a low teen cost reduction in the next couple of years also.

So I think primary driven down by -- there is more room there on transportation, there is some more room on the sorting cost on the labor cost and the lease costs, there is some room there, the other costs will have some room there. So we will see about you know low teen 10%, not 21%, just high teen, but I think we'll just see low teen type of cost reductions.

Hans Chung

Thank you.

Johnny Chou

Thank you.


Thank you. And this concludes our question and answer session, so I'd like to return the conference to Johnny Chu for any closing comments.

Johnny Chou

Thank you for the -- thank you for joining our call, and we appreciate your support of BEST. Please reach out to our Investor Relations team if you have any further questions. We look forward to speaking to you soon. Thank you very much.


Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.