BEST Inc. (BEST) on Q4 2021 Results - Earnings Call Transcript
Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to BEST Inc.’s Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the management’s prepared remarks, there will be a Q&A Session. With us today are Johnny Chou, BEST Inc.’s Chairman and CEO; and Gloria Fan, Chief Financial Officer. For today’s agenda, Johnny will be giving a brief overview of business and operational highlights. Then Gloria will explain the details of the financial results. Following the prepared remarks, you may ask your questions. Please note this call is also being webcasted on BEST Inc.’s IR website at ir.best-inc.com. A replay of this call will be available after the call. An investor presentation is also available on the IR website. Before we begin, I will read the Safe Harbor statement on behalf of BEST Inc. Today’s discussion will contain forward-looking statements. These forward-looking statements are based on management’s current expectations. They involve inherent risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the management’s control. The Company does not undertake any obligation to update any forward-looking statement 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 a reconciliation of GAAP to non-GAAP measures can be found in BEST Inc.’s earnings press release. Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB. I would now like to turn the conference over to Johnny Chou, Chairman and CEO of BEST Inc. Johnny, please go ahead.
Johnny Chou: Thank you, operator. Hello, everyone, and thank you for joining BEST’s fourth quarter and full year 2021 earnings call today. We exit the year with a leaner and a more focused organization, as well as a much stronger capital base to support our sustainable growth and the future profitability. In the fourth quarter, we successfully transferred our Express Delivery Business in China to J&T Express China. Thanks to the collaborative efforts from both parties we are now better positioned to reach our next level of growth with our refined strategies. Our new beginning in 2022 is underpinned by our core competencies in freight, integrate supply chain management and global logistic solutions. Before I dive into our plans for the year in each of these segments, let me first walk you through our recent developments and our operational performance during the fourth quarter. Starting with BEST Freight, here, we remained focused on reducing cost investing in network coverage and improving service quality. Further development of freight’s e-commerce related business proved fruitful. As we continue to build out this offering e-commerce is becoming an increasing important part of our business and contributed approximately 22% of total volume during the fourth quarter, up five percentage points year-over-year. We continue to be impacted by the challenging macro environment such as continuous impact of COVID-19, increasing oil price and other challenges. Just along with the difficulty in Express operations, impact of Freight performance since for Freight and Express share a certain franchises and suppliers. Freight volume decreased by 8.2 percentage year-over-year in the fourth quarter. But this volume for the full year increased by 9.8% year-over-year. With a smooth handover of Express business in China, many of our resources were freed up and we began navigating our clear growth path with significantly improved balance sheet by December. BEST Freight significantly rebounded narrowing its net loss by 50% on a month-over-month basis. Moving to BEST Supply Chain Management, during the quarter, we contributed to prioritize higher margin – continued to prioritize in higher margin accounts and grow our franchised Cloud OFCs network in preparation for new customers acquisition. As a result of discontinuous certain low margin legacy customers, the total number of orders fulfilled by Cloud OFC decreased by 9.4% year-over-year to 123.3 million in the fourth quarter. However, our total OFC orders, the total numbers of orders fulfilled by franchised Cloud OFCs were 74.4 million, up 11% year-over-year. The one-off cost incurred by discontinuing lower margin accounts also affected supply chains gross margin in the fourth quarter, which decreased by half percentage points year-over-year. We are confident that these are the right short-term trade-offs leading to our long-term gains. We have freed up resources and management bandwidth so we can better focus on actively pursuing opportunities that will maximize long-term shareholder value. Turning to BEST Global. We made a solid progress with Global cross border and in the local business in Southeast Asia, achieving continuous volume growth and margin expansion in these geographies during the quarter. Despite ongoing impact of COVID-19, Global parcel volume in Southeast Asia increased by approximately 57% to 44 million with much improved economics of scale from increased market share and continued improvements in service quality and cost control. Global’s gross margin expanded by approximately three percentage points year-over-year. With respect to UCargo and Capital, we are in the process of winding down these business lines as part of our strategic refocus plan to realign our business around our core competencies. With the review of the fourth quarter, let’s talk about our plans going forward. As we progress in 2022, we see growing market demand for integrated smart supply chain logistic services solutions. Here we can provide data enabled and technology driven solutions that efficiently address, different industry pain points and empower customers, business operations. With a more focused organization and significantly strengthen the balance sheets, we are well positioned to expand our growth by providing our customers their products offerings, and improve the service quality. We will continue to invest in advance technologies and equipment upgrades. They first optimize our integrated supply chain based logistic services. First, for Freight, we’ll further solidify our industry leading position. Our ongoing emphasis on e-commerce related business offers better pricing and leverages natural synergies with our supply chain management. We are focused on improving our service quality and growing our volume. Specifically respected to improving operating efficiency through optimizer routing, better utilizing on hub consultation centers, along with the further investment in automation. With express handover, largely completed freight has regained the network and franchise stability that provides a firm foundation for the service quality, customer experience and future growth. We expected to achieve revenue growth of 15% to 20% for freight in 2022. Next on the supply chain management is where we started and continue to be one of our core competencies. In 2022, we will focus on expanding our supply chain services to high quality customers and to higher margin industry including pharmaceuticals and auto parts. At the same time, we will continue growing our Cloud OFC network and cloud distribution capabilities. While we discontinuing our lower margin legacy account, we expect the revenue from this segment to be relatively flat in 2022 versus 2021, but profitability will improve year-over-year. As for global, our main focus for 2022 will be on network coverage expansion, service quality and the market share growth. We will continue to build out our networks to improve coverage and utilize our supply chain management expertise to expand our Cloud OFC capability for e-commerce business. We will also enable cross border end-to-end logistic service among Southeast Asia countries and continue to increase efficiency and reduce costs in global state operations. We expect global revenue to increase by 45% to 55% in 2022. In summary, while we are already realized positive impact from the strategic realignment of our businesses, we’re looking forward to even greater gain over time. Each our business units is gaining gross momentum, operating efficiency, and realized synergetic opportunities. Looking ahead, we expect our core segments revenue for 2022 to increase by 15% to 20% and we are re-rounding the corner for profitability for our freight and the supply chain management business segments. The stress we have taken put us on a right path to achieve our next level of growth objectives. As continue to grow, we see a bold future for BEST, our customers, partners, teams, and investors. Now I would like to turn the call over to our CFO, Gloria for further revenue – review of our fourth quarter finance financials.
Gloria Fan: Thank you, Johnny, and hello to everyone. The fourth quarter cap of a critical year of decisive business adjustments, we are on the strength of our main business pillars. We have paved the way for BEST’s future growth. We completed our transactional J&T, which has significantly improved our balance sheet. We now have a lower debt level and a sufficient cash allowing us to focus on developing our core business. As of December 31, 2021, our cash, cash equivalents, restricted cash and short-term investments were approximately RMB5.5 billion. I will now provide a brief review of our fourth quarter 2021 financial results. Given a limited time on today’s call, I will be presenting some abbreviated financial highlights. I encourage you to read through the – our press release issued earlier today for further details. Please note, as we completed the sale of our China express business, we are excluding that express’s financial results in our financial reports and our year-over-year comparison. Our revenue for the fourth quarter were RMB2.7 billion down about 20% year-over-year. But for the full year, the total revenue was RMB11.4 billion, up 8.5% year-over-year. The revenue decline in the fourth quarter was primarily due to the winding down of UCargo business and the decrease in freight revenue partially offset by the growth of Global’s revenue. Again, the backdrop of macro environment obstacles, along with the while of costs, we incurred transitioning to a linear organization, our growth loss for continuing operations was RMB228 million, compared to a loss profit – compared to a gross profit of RMB115 million in the same quarter of 2020. Gross margin percentage was negative 8.4%, compared to 3.4% in Q4 last year. Adjusted EBITDA from continuing operations was negative RMB635 million compared to negative RMB167 million in Q4 2020. Moving on to the key financial highlights for our business units, as Johnny has mentioned in the fourth quarter, that freight was affected by the challenging macro environment. And there is a difficulty in express operations since freight and express share certain resources including franchisees and the suppliers. But we are encouraged by the quick and strong recovery in December after the express turnover was largely completed. BEST Freight Q4 revenue decreased by 7.4% year-over-year to RMB1.5 billion primarily due to a 8% year-over-year decrease in freight volume, but it’s volume for the full year increased by 10%. Adjusted EBITDA for BEST Freight was negative RMB248 million, compared to a positive RMB27.5 million for the same period of last year. Q4 revenue for BEST supply chain management decreased by 10% year-over-year to RMB487 million due to discontinuation of lower margin accounts. This fourth quarter gross margin decreased by 0.6% primarily due to one off cost incurred by discontinuing such accounts. But the full year gross margin increased by 0.6% to 4%. Adjusted EBITDA for BEST supply chain management was approximately negative RMB63 million improved from negative RMB67 million for the same period of last year. Q4 revenue for BEST Global increased by 30.5% year-over-year to RMB331 million driven by the continuing possible volume growth in Southeast Asia. Adjusted EBITDA for BEST Global was negative RMB78.8 million, compared to negative RMB54.7 million for same period of last year. Q4 revenue for our others segment increased by approximately 60% year-over-year to RMB403 million primarily due to the winding down of all UCargo and the Capital business units. Adjusted EBITDA for others was negative with RMB212 million. Our Q4 operating expenses, excluding share based compensation for continuing operations totaled RMB381 million or 14% of the revenue compared with RMB239 million or 10% of the revenue in the same period of last year. Let’s review some major operating expense items in the fourth quarter. Please note all of this expenses exclude share based compensation. Selling, general and administrative expenses for continuing operations were RMB334 million or 12.3% of the revenue in the fourth quarter compared to RMB301 million or 8% of the revenue in the same quarter of 2020. The increase was primarily due to the disposal of certain fixed asset at BEST Capital and expenses incurred in transitioning our China express business. R&D expenses for continuing operations were RMB47.1 million or 1.7% of the revenue compared to RMB38 million or 1.1% of the revenue in the same quarter of last year, primarily due to additional expense incurred in transitional China express business. For more of our 2021 full year financial results, please refer to our earnings release for further details. Moving forward, we will continue to focus on improving our operating efficiency by maximizing our cost synergies among all business units, as well as optimizing corporate spending. And now for our business outlook based on current operations and the market conditions, we expect to 2022 revenue for our core business rate, supply chain management and the global to be between RMB10 billion to RMB12 billion. This represents our current and preliminary estimates, which are subject to change. We are excited to start fresh and the transition to a year of growth in 2022 guided by our clear strategic roadmap, sufficient capital and efficient organization. This concludes our fourth quarter financial update. We will now open the call to your question. Thank you. Operator, we are ready for our first question.
Operator: Thank you. We will now begin the question-and-answer. Our first question will come from Thomas Chong with Jefferies. Please go ahead.
Thomas Chong: Thanks management for taking my question. I have two questions. So first, how should we think about the competitive landscape in the domestic freight and supply chain market? Or do we have any market share and other share. And my second question is how should we affect the cost and margin considering the high oil price? Thank you.
Johnny Chou: Okay. Regarding to the freight, I think freight has been growing in many years of faceting economics basically driven by several things, one is continued growth on the e-commerce that that the larger bulky items that traditionally being used for the traditional transportation now is being in the freight. So driven by the e-commerce and Tier 3, Tier 4, Tier 5, the lower tier cities growth they will all drive for the freight. The other is that we have seen the last year or two the concentration on the volume – on the business to a top tier players. So the economical skills has been showing and this actually we see the landscape for the last year, especially for the later part of the first quarter and pricing has also coming back gradually that that partially due to the concentration on the top players on that. So we have – BEST has been – we are the one of the most – the earliest players for this segment or this market. We started on 2012. So we still maintain a very good leading position in this market. So we’re expecting, we will continue to grow faster than the market. So as we said, we are expecting about 15% to 20% growth there. On the supply chain side, the general, right now the development of e-commerce are more fragmented, more and more the direct streaming, broadcast which is streaming everything else, and customers are require a more integrated solutions. In that we see a more outsourcing for manufacturers and brands of their supply chain and logistic needs. They’ll provide us a pretty good strong drive for the new customer base for people that – for brands that want to have more outsourced integrated services. On the cost and the gross margin side, and the cost actually on one side that the general trend is the cost is being increasing, specifically on the – number one on the oil price. Actually in 2021, the oil price has also increased significantly from the 2020. And again, this year, right now, we’re seeing a fair increase in oil price. Second is the labor cost. As the industry getting more and more mature and also the microeconomics actually the labor costs is also being increased somewhat. And it’s harder to find the more workers on that level. To compensate for that and there’s a few things we need to do. One is that as we can see that this year, especially I have seen the January to March now, the pricing – the ASP has increased somewhat. Number two is that we have to use more of the automation. And this year we have a plan for 50% of – more than 50% of our major sorting center will be partially semi-automated to increase the efficiency reduce the labor cost. The other side is that we will – this year, we will be using more of our self operate fleet to reduce the transportation cost. Overall, I think we will have to balancing the pricing on ASP side, as well as the cost reduction measure, especially in the labor cost, as well as the transportation cost.
Thomas Chong: Thank you a lot.
Operator: As there are no more questions, this concludes our question-and-answer session. I would like to turn the conference back to Johnny Chou for any closing remarks.
Johnny Chou: Thank you, operator. Thank you for joining our call today. As always, we appreciate your support. Please reach out to our investor relations team if you have any further questions. We invite you to watch our progress, and we look forward to speaking to you soon. Thank you very much.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
