BEST Inc. (BEST) Q4 2022 Earnings Call Transcript

BEST Inc. (NYSE:BEST) Q4 2022 Earnings Conference Call March 7, 2023 8:00 PM ET

Company Participants

Johnny Chou - Chairman and Chief Executive Officer

Gloria Fan - Chief Financial Officer

Conference Call Participants

Thomas Chong - Jefferies

Operator

Good day and welcome to the BEST Inc. Fourth Quarter 2022 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to the Chairman and CEO, Johnny Chou. Please go ahead.

Johnny Chou

Thank you, operator. Hello, everyone and thank you for joining BEST’s fourth quarter and full year 2022 earnings call today.

2022 was a challenging year. The COVID-19 pandemic and its related controls seriously impacted general economy and this was very particularly hard for the logistics industry. When China lifted its restrictions in the fourth quarter, many of our employees, partners and customers tested positive to COVID and our operation was severely disrupted. However, under such difficult environment, we prevailed. BEST Supply Chain Management beat our internal 2022 budget, increasing its gross margin by 6.3 percentage points year-over-year in the fourth quarter, while BEST Freight annual loss narrowed by 28.5% compared with 2021. BEST Global also started its recovery and growth at the end of the year. After lifting of COVID pandemic-related controls, we have seen a rapid recovery in general economy in our multiple business lines. We are confident to deliver a strong growth in the financial results in 2023. In addition, our Board has authorized an up to 20 million shares repurchase program.

Now let’s take a closer look at each of our business units. For BEST Freight, we focus heavily on digital transformation, cost reductions and quality improvement. As a result, our operating efficiency and service quality has significantly improved. For the fourth quarter of 2022, despite a decrease of 7.6% in total volume, Freight’s gross margin improved by approximately RMB200 million and its net loss narrowed by 69.3% compared with Q4 2021. For the full year, Freight’s volume decreased by 6.1%, but narrowed its net loss by 28.5% year-over-year.

Looking ahead, service quality remains our number one priority. While continuing to improve Freight’s service quality through digital transformations, we are putting a strong emphasis on the synergy between BEST Global and the Supply Chain Management to further reduce our costs and maximize our growth opportunities. We anticipate BEST Freight return to profitability in the second quarter of 2023 and generate positive cash flow throughout the year.

Moving on to BEST Supply Chain Management. Supply Chain Management’s technical know-how and superb service capabilities helped us weather the storm. Despite restrictions and shutdowns from COVID resurgence throughout the year, BEST Supply Chain Management went above and beyond to make sure we provided our customers with top quality services. Customers quickly recognized our efforts and we were rewarded with additional business.

In the second half of 2022, we added 64 new key account customers. Supply Chain Management’s revenue increased by 2.7% and 0.4% for the fourth quarter and full year of 2022 respectively compared with the same period of 2021. Its gross margin improved by 6.3 percentage points to 4.4% in Q4 2022 and for the full year, Supply Chain Management’s gross margin improved by 2 percentage points to 6.1%. The distribution volume for Supply Chain Management also increased by 82.1% for the fourth quarter. Supply Chain Management remains the center of BEST’s synergetic logistics ecosystem by further optimizing its account structures and realizing additional operating efficiencies. We expect BEST Supply Chain Management to be profitable by the second quarter of 2023 and to generate positive cash flow throughout the year.

Finally, let’s take a look at BEST Global. Southeast Asia’s market environment was extremely challenging over the past year. On top of the COVID restrictions in cross-border activities, relaxed pandemic control policy shifted consumptions to offline from the online. And some of the major e-commerce platforms reduced their reliances on third-party logistic services, creating additional challenges for our global business.

As the border opened up in Q4, we immediately adjusted our strategy and realigned our organization in response to the evolving Southeast Asia market. Notably, we greatly elevated our organization’s capabilities, widened our network coverage, we also used our IT know-how to improve our infrastructure and operating capabilities and significantly improved our service quality. As part of our go-to-market strategy, we have been expanding small and medium-sized enterprise coverage to diversify our customer base. The revenue contribution from those customers grew by 13 percentage points to 42.2% in Q4 2022. In addition, we are accelerating our B2B2C and cross-border business to provide additional product offerings. We believe this strategic direction will usher in Global’s fast recovery and profit growth for much improved gross margin and better cash flow for BEST Global in 2023.

In summary, we believe with the ending of COVID pandemic control, the worst is now behind us. During 2022, our focus on digital transformation, service quality and customer satisfaction improvement and cost reduction significantly improved our operating efficiency and increased the customer satisfaction. BEST now is in a strong position for fast recovery and growth in both our top and bottom lines. We now expect both our Freight and Supply Chain Management business to reach profitability in the second quarter of 2023, with each business unit generating positive cash flow and strong profitability growth throughout the year. BEST Global has also proven resilient, and we are seeing promising recurring trends. We expect BEST Global to grow its top line by 40% in 2023 with strong improvements to profitability and cash flow.

With that, I would like to turn the call over to our CFO, Gloria, for further review of our fourth quarter financials. Go ahead, Gloria.

Gloria Fan

Thank you, Johnny, and hello to everyone. 2022 was a tough year. COVID continued to hit the logistics industry particularly hard. Many factors were beyond our control but we adjusted to the environment and BEST has shown solid financial and operational resilience.

BEST Freight and Supply Chain Management narrowed their fourth quarter net losses by 69.3% and 81.3%, respectively, on a year-over-year basis, even though our total revenue, excluding BEST UCargo and Capital, decreased by 15.9% for the fourth quarter and 9.7% for the full year of 2022. We continued to maintain a healthy balance sheet. Our cash and cash equivalents, restricted cash and short-term investments totaled RMB3.2 billion after we used RMB1.4 billion during 2022 to repurchase our convertible senior notes due 2024.

Now let me walk you through our key financial results for the fourth quarter and full year of 2022. Our revenue for the fourth quarter was approximately RMB2 billion compared with RMB2.7 billion in the same period of 2021. Revenue for the full year was about RMB7.7 billion compared with RMB11.4 billion in previous year. The decrease was primarily due to the wind down of our UCargo business unit and the lower Freight and Global volume. Fourth quarter and full year revenue for UCargo were approximately RMB952,036 million compared with RMB350 million and RMB2.8 billion in the same period of 2021.

Our cost control measures drove improvements in our overall gross margin in 2022. For Q4, gross margin improved to negative 3% compared with negative 8.4% in the same period of 2021. Gross margin for the full year of 2022 was negative 3.4%. We also narrowed our net loss from continuing operations in the fourth quarter to RMB366 million with a loss – from a loss of RMB734 million for the same period of 2021. Net loss from continuing operations for the full year was RMB1.5 billion compared with RMB1.3 billion in previous year.

Adjusted EBITDA for continuing operations in Q4 also improved to negative RMB296.9 million versus negative RMB635.2 million for the same quarter of 2021. Adjusted EBITDA for continuing operations for the full year was negative RMB1.2 billion compared with negative RMB927.2 million in 2021.

Next, moving on to key financial highlights for our business units. For BEST Freight, fourth quarter revenue was approximately RMB1.3 billion compared with RMB1.9 billion for the same period of 2021. The decline was primarily attributable to the decrease in UCargo revenue. The fourth quarter UCargo revenue decreased by RMB349 million year-over-year. Gross margin made a significant improvement, up over 10 percentage points to negative 1.3% in the fourth quarter from negative 11.7% in the same period of 2021.

Adjusted EBITDA for BEST Freight was negative RMB115.5 million compared with negative RMB423.9 million in Q4 2021. For the full year 2022, revenue for BEST Freight was RMB4.9 billion compared with RMB8.2 billion in previous year. Excluding UCargo Freight’s revenue decreased by 10.7% year-over-year. Gross margin for 2022 was negative 4.6% compared with negative 3.2% of 2021. Adjusted EBITDA for BEST Freight was negative RMB416.7 million compared with negative RMB610.8 million in 2021.

Revenue for BEST Supply Chain Management increased by 2.7% year-over-year to RMB500.6 million, and its gross margin was greatly improved to 4.4% from negative 1.9% in the same period of 2021. Adjusted EBITDA for Supply Chain Management was negative RMB5.2 million compared with negative RMB62.9 million in the same period of previous year. For the full 2022, revenue for BEST Supply Chain Management was RMB1.8 billion or 0.4% year-over-year increase. Gross margin improved by 2.1 percentage points to 6.1% from 4% in 2021. Adjusted EBITDA for Supply Chain Management was RMB9.6 million compared with negative RMB56.3 million in 2021.

For BEST Global, Q4 revenue decreased by 40.8% year-over-year to RMB195.7 million primarily due to the decreased volume. Its gross margin for the quarter was negative 34.9%, a decrease of 30.1 percentage points year-over-year. Q4 adjusted EBITDA for BEST Global was negative RMB122.8 million compared with negative RMB78.8 million in Q4 2021. For the full year, revenue for Best Global was RMB916.9 million compared with RMB1.2 billion in 2021. Gross margin for the year was negative 18% compared with negative 5.4% in previous year. The decrease in gross margin was primarily due to lower parcel volume.

Adjusted EBITDA for BEST Global was negative RMB386.4 million compared with negative RMB239.8 million in 2021. Our operating expenses, excluding share-based compensation, in the fourth quarter totaled RMB277.1 million, representing 14% of our total revenue. This compared with RMB381.4 million, also 14% of the revenue, in the same period of 2021. For the full year of 2022, our operating expenses, excluding share-based compensation, were approximately RMB1.2 billion, which was flat compared with previous year.

For more of our fourth quarter and full year 2022 financial results, please refer to our earnings press release for further details.

In closing, our Q4 results were encouraging. Our efforts in cost reduction, service quality improvement and business structure optimization are proving effective. Moving forward, in 2023, we believe that our strength in technology, domestic and global supply chain management and logistics capabilities will enable us to capture new business opportunities and deliver a strong profitable growth in 2023 and beyond.

This concludes our financial update. I will now open the call to questions. Thank you. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong

Hi. Thank you, management for taking my question. I have two questions. So first, would you please provide some color about the Q1 performance of Freight, Supply Chain and Global business units since China reopening, and how should we expect the 2023 outlook? And second, you mentioned that BEST Global would achieve profitability in certain countries in 2023. So which country should we expect? Thank you.

Johnny Chou

Okay. The first question regarding to Freight and Supply Chain on the Q1, I assume you are talking about this year. Yes, Q1 is – we’re seeing a fast recovery from a general economy, as well as our business lines. And as the number we are seeing right now, the Q1, the Supply Chain Management is probably positive. And other than the January, the Chinese New Year impact, Freight should be doing really well on February and March as well and the full number we have seen lately. So the performance for February for the Supply Chain Management and the Freight is ahead of our plan, so that’s definitely. The second is you are talking about Global, and we are seeing some very promising trends in terms of our turnaround in certain countries, and particularly strong in Vietnam, in Malaysia. Certain countries we’ve seen a very promising business growth as well as a turnaround in our every operating metrics. So that [indiscernible] to you.

Thomas Chong

Okay, thank you.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would now like to turn the conference back over to Johnny Chou for any closing remarks.

Johnny Chou

Thank you for joining our call. 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 with you soon. Thank you very much. Operator?

Operator

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