BEST Inc

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 management's prepared remarks, there will be a Q&A session. With us today are Johnny Chow, Best, Inc.' 's chairman and CEO, and Gloria Phan, chief financial officer. For today's agenda, Johnny will give a brief overview of business and operational highlights. Then Gloria will explain the details of financial results. Following the prepared remarks, you may ask your questions. Please note that 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 it begins, I will read the Safe Harbor Statement on behalf of Best, Inc. Today's discussion will contain forward-looking statements. These forward-looking statements are based on management's current expectations. They involve inherent risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the management's control. the company does not undertake any obligation to update any forward-looking statement 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, non-GAAP net loss. The GAAP results and the reconciliation of GAAP to non-GAAP measures can be found in Best, Inc.' 's earnings press release. Finally, please note that unless otherwise stated, all the figures mentioned during this conference are in RMB. I would now like to turn the conference over to Jonny Chow, Chairman and CEO of Best, Inc. Jonny, please go ahead.

Thank you, Operator. Hello, everyone. And thank you for joining BEST's fourth quarter and four-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&J 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, integrated supply chain management, and global logistics 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 costs, investing in network coverage, and improving service quality. Further development of Freight's e-commerce rated business proved fruitful. As we continue to build out its offering, e-commerce is becoming an increasing important part of our business and contributed approximately 22 percent 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. This along with the difficulty in express operations impact the freight performance since freight and express share the certain franchisees and suppliers. Freight volume decreased by 8.2% 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 Trade significantly rebounded, narrowing its net loss by 50% on a month-over-month basis. Moving on to Best Supply Chain Management. During the quarter, we continued to prioritize higher margin accounts and grow our franchise of Cloud OFCs network in preparation for new customers acquisition. As a result of discontinuing 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. Out of our total OFC orders, the total number of orders fulfilled by franchised cloud OFCs was $74.4 million, up 11% year over year. The one-off costs incurred by discontinuing lower margin accounts also affected supply chain's 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 bandwidths 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 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 increase of 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 U cargo 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 logistics 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 strengthened balance sheets, we are well positioned to expand our growth by providing our customers better product offerings and improve the service quality. We will continue to invest in advanced technologies and equipment upgrades that further optimize our integrated supply chain-based logistics services. First, for Freight. We will 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, we expect to improve operating efficiency through optimized routing, better utilizing our hubs and sortation centers. along with a further investment in automation. With the express handover largely completed, Freight has regained the network and franchisees stability that provides a firm foundation for the service quality, customer experience, and future growth. We expect 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 discontinue our lower-margin legacy accounts, We expect the revenue from this segment to be relatively flat in 2022 versus 2021. The profitability will improve year over year. As for global, our main focus for 2022 will be on network coverage expansion, service quality, and 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 logistics service among Southeast Asia countries and continue to increase efficiency and reduce costs in global state operations. We expect the global revenue to increase by 45% to 55% in 2022. In summary, while we already realize positive impact from the strategic realignment of our businesses. We're looking forward to even greater gain over time. Each of our business units is gaining growth momentum, operating efficiency, and the realized synergetic opportunities. Looking ahead, we expect our core segments revenue for 2022 to increase by 15 to 20 percent, and we are rounding the corner for profitability for our freight and the supply chain management business segments. The steps we have taken put us on the right path to achieve our next level of growth objectives. As we 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 a review of our fourth quarter financials.

Thank you, Johnny, and hello to everyone. The fourth quarter kept off a critical year of decisive business adjustments. Built on the strength of our main business pillars, we have paved the way for a better future growth. We completed our transaction with J&T, which has significantly improved our balance sheet. We now have a lower debt level and sufficient cash. allowing us to focus on developing our core business. As of December 31st, 2021, our cash, cash equivalents, restricted cash, and short-term investments were approximately 5.5 billion RMB. I will now provide a brief review of our first quarter 2021 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 issue earlier today for further details. Please note, as we completed the sale of our China Express business, we are excluding Best Express's financial results in our financial reports and our year-over-year comparison. Our revenue for the first quarter was 2.7 billion RMB, down about 20% year-over-year. But for the full year, the total revenue was 11.4 billion RMB, up 8.5% year-over-year. The revenue decline in the fourth quarter was primarily due to the winding down of your cargo business and a decrease in freight revenue, partially offset by the growth of global revenue. Against the backdrop of macro environment obstacles, along with the while-off costs we incurred transitioning to a linear organization, our growth loss for continuing operations was 228 million RMB, compared to a lost profit compared to a gross profit of 115 million RMB in the same quarter of 2020. Gross margin percentage was negative 8.4 percent compared to 3.4 percent in Q4 last year. Adjusted EBITDA from continuing operations was negative 635 million RMB compared to negative 167 million RMB in Q4 2020. Moving on to the key financial highlights for our business unit. As Jonny has mentioned, In the fourth quarter, Best Freight was affected by the challenging macro environment and the difficulty in express operations, since freight and express share certain resources, including franchisees and suppliers. But we are encouraged by the quick and strong recovery in December, after the express handover was largely completed. Best Freight's Q4 revenue decreased by 7.4% year-over-year to 1.5 billion RMB, primarily due to an 8% year-over-year decrease in freight volume. But its volume for the full year increased by 10%. Adjusted EBITDA for best freight was negative 248 million RMB compared to a positive 27.5 million RMB for the same period of last year. Q4 revenue for best supply chain management decreased by 10% year-over-year to 487 million RMB due to discontinuation of lower margin accounts. Its fourth quarter gross margin decreased by 0.6 percent, primarily due to one-off costs incurred by discontinuing such accounts. But the full-year gross margin increased by 0.6 percent to 4 percent. Adjusted EBITDA for best supply chain management was approximately negative 63 million RMB, improved from negative 67 million RMB for the same period of last year. Q4 revenue for Best Global increased by 30.5% year-over-year to 331 million RMB, driven by the continuing possible volume growth in Southeast Asia. Adjusted EBITDA for Best Global was negative 78.8 million RMB, compared to negative 54.7 million RMB for the same period of last year. Q4 revenue for our others segment decreased by approximately 60% year-over-year to 403 million RMB, primarily due to the winding down of our new cargo and the capital business units. Adjusted EBITDA for others was negative 212 million RMB. Our Q4 operating expenses, excluding share-based compensation for continuing operations, totaled 381 million RMB, or 14 percent of the revenue, compared with 339 million RMB, or 10 percent 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 these expenses exclude share-based compensation. Selling, general, and administrative expenses for continuing operations were 334 million RMB, or 12.3 percent of the revenue in the fourth quarter, compared to 301 million RMB, or 8.8 percent of the revenue in the same quarter of 2020. The increase was primarily due to the disposal of certain fixed assets at best capital and the expenses incurred in transitioning our China Express business. R&D expenses for continuing operations were 47.1 million RMB or 1.7% of the revenue compared to 38 million RMB 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 our business units, as well as optimizing corporate spending. And now for our business outlook. Based on current operations and the market conditions, we expect 2022 revenue for our core business, freight, supply chain management, and the global to be between $10 billion to $12 billion RMB. This represents our current and preliminary estimates, which are subject to change. We are excited to start fresh and transition to a year of growth in 2022, guided by our clear strategic roadmaps. sufficient capital, and an efficient organization. This concludes our fourth quarter financial update. We will now open the call to your questions. Thank you. Operator, we are ready for our first question.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Thomas Chung with Jefferies. Please go ahead.

Thanks, Benjamin, 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? Do we have any market share data to share? And my second question is, how should we expect the cost and the margin considering the high oil price? Thank you.

Okay. Regarding to the freight, I think freight has been growing in many years faster than economics. Basically, it's driven by several things. One is continued growth on the e-commerce, the larger, bulkier items that are traditionally being used for the traditional transportation as being in the freight. 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, too, the concentration on the volume on the business to a top-tier players. So, the economic skills has been showing, and this actually, we see the landscape for the last year, especially for the later part of the fourth quarter, and pricing has also coming back gradually, that partially due to the the concentration of the top players on that. So we have, Bestbrate has been, we are 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 positions in this market. So we're expecting, we're continuing to grow faster than the market. So as we said, we're expecting about 15 to 20% growth there. On the supply chain side, the general, right now the development of e-commerce are more fragmented. The more and more the director, streaming, broadcast, streaming, everything else, and customers require more integrated solutions. In there, we see a more outsourcing for manufacturers and brands. of their supply chain and logistic needs. That will provide us a pretty strong drive for the new customer base, for people that, for brands that want to have a more outsourced integrated services. On the cost and the gross margin side, and the cost actually, on one side, the general trend is the cost 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 bit of increase in oil price. Second is the labor cost. As the industry is getting more and more mature, and also the microeconomics. Actually, the labor costs are also being increased somewhat, and it's harder to find more workers on that level. To compensate for that, I mean, 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 ASG has increased somewhat. Number two is that we have to use more of the automation. And this year we have a plan for 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 this year we will be using more of our self-operated fleet to reduce the transportation cost. Overall, I think we will have to balance the pricing on the ASP side, as well as the cost reduction measures, especially in the labor cost, as well as the transportation cost.

Thank you a lot.

Again, if you have a question, please press star then 1. As there are no more questions, this concludes our question and answer session. I would like to turn the conference back to Johnny Chao for any closing remarks.

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.

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