BEST Inc. (NYSE:BEST) Q2 2022 Earnings Conference Call August 17, 2022 9:00 PM ET
Company Participants
Johnny Chou – Founder, Chairman and CEO
Gloria Fan – CFO
Conference Call Participants
Operator
Good day and welcome to BEST Inc. Second Quarter 2022 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the call over to Johnny Chou, Chairman and CEO of BEST Inc. Please go ahead sir.
Johnny Chou
Thank you, operator. Hello, everyone, and thank you for joining BEST’s second quarter earnings call today. In the second quarter, the pandemic resurged and impact the overall economic growth in China and Southeast Asia. With our operational resilience and the continuous efforts in process improvements and cost reductions, BEST prevailed and it became even stronger.
I’m pleased that in Q2, BEST SCM has achieved the profitability, while BEST Freight has significantly narrowed its losses. In addition, our U.S. operations continue to be profitable for the quarter.
As we refocus on our core business, we are continuing the process of winding down BEST capital and we incurred additional costs as expenses related to this winding down during the quarter. We anticipate the winding down of BEST capital will be substantially completed by the end of this year and we should see a lift to our bottom-line.
Now, let’s take a look at each of our business units. BEST Freight continue to maintain its leadership position in service quality, its on-time deliver rate has improved by 11.4% quarter-over-quarter in Q2. We continue to develop BEST Freight’s e-commerce, business and e-commerce volume had reached 20.4% of the total freight volume of 1.2 percentage points year-over-year.
As the logistic industry was severely impacted by the pandemic during Q2, our total free volume was done by 8.8% year-over-year. However, we have seen a recovery of the free volumes since mid-June.
In Q2, Freight net loss has narrowed substantially by RMB115.7 million compared with the first quarter of 2022 as we further reduce costs and improve operating efficiency.
Going forward, we will continue to improve our service quality and network capability as well as continue our efforts in synergizing with BEST SCM and BEST Global for new business opportunities. We are confident that with the ease of the pandemic restrictions, we are on the path of future growth and profitability.
Moving onto BEST Supply Chain Management. Due to the pandemic and it’s rigid to controls, many of our warehouses were restricted during the second quarter, particularly in Shanghai, which is our main hub for BEST supply chain services. Six main warehouses were shut down for over three months. This has severely impacted number of orders fulfilled by our B2B2C fulfillment network.
The total number of orders fulfilled by Could OFCs decreased 22% year-over-year to RMB94 million in the second quarter, while the total number of orders fulfilled by franchise Could OFCs decreased by 19.4% to RMB58.9 million. However, Supply Chain Management service gross margin improved by 3.9 percentage points to 8.2% compared with Q1 2022.
As a result of our cost reduction efforts and discontinuation of low gross margin accounts, we see a strong growing demand for third-party Supply Chain Management services for both international and domestic companies.
Our SCM remains our key differentiator As it empowers our customers with digitize the end to end logistics solution. For the first half of 2022, we have signed 34 new key account — customers with contracts representing over RMB0.58 Billion in the first year revenue.
Going forward, we will continue to deepening our presence in apparel and fast-moving consumer goods, auto parts, and the pharmaceuticals industry, as well maximize the synergizing BEST Fright and Global as we provide a Global and the transportation services for our existing key accounts.
Now, let me talk about BEST Global. We had a tough quarter with our Global business unit in Q2. The pandemic and it’s rigid controls significantly impact our Southeast Asia e-commerce business and restrained the cross-border activities between Southeast Asia and China.
Global’s parcel volume was 30.8 million in the second quarter, a decrease of 20.6% over year — year-over-year. As a pandemic restrictions ease we have seen a slow recovery on global volume since mid-July.
In addition, during Q2, we significantly improved quality [ph] our Global operations during its on-time delivery rates. Going forward, along with serving its major e-commerce key accounts customers, BEST Global will focus on expanding FME coverage within Southeast Asia by reinforcing our network stability and service quality, as well as improving our franchisees operational capabilities.
We will accelerate our B2B2C and cross-border businesses in PRC, Southeast Asia, and the U.S. by synergizing with BEST Supply Chain Management and Freight. We have established our initial cross-border warehouses in Thailand and the B2B business provides a foundation for expanding our Freight network to Southeast Asia.
We are optimistic about the long-term growth of the Southeast Asia e-commerce business. We’re synergist among Global, SCM, and Freight, as well as our cross-border initiatives, we are confident that BEST Global will return to its growth trajectory by the end of this year.
In summary, we believe information technology-driven and integrated supply chain and the logistics solutions will be in high demand to support the growth of E-commerce and cross-border businesses.
Since implementing our strategic reinforcing plan, we have made significant progress in quality improvement, cost reduction, and improving our financial results. As the pandemic eases, we are confident that our BEST’s strengths in technology, domestic and Global Supply Chain Management and logistics capabilities will allow us to rebound strongly and on the past of possibilities.
Now, I would like to turn the call over to our CFO Gloria for further review of our second quarter financials. Go ahead Gloria.
Gloria Fan
Thank you, Johnny, and hello to everyone. Our second quarter revenue reflected the industry-wide headwinds with revenue declining by 12.5% year-over-year, excluding UCargo and Capital. Our net loss from continuing operations excluding the one-off expenses associated with the capital winddown and the ADS ratio change has narrowed by 27.1% to RMB235.1 million compared with Q1 2022, benefiting from all consistent efforts to streamline our cost and expense structure.
We continue to maintain a strong balance sheet with cash and cash equivalents, restricted cash, and short-term investments of RMB4.4 billion and a net cash position of RMB1.4 billion at the end of the second quarter.
Now, let me walk you through our financial results of the second quarter of 2022. Our revenue for the second quarter was RMB1.9 billion compared with RMB3.1 billion last year. The decrease was primarily due to the winding down about our UCargo business units. UCargo’s Q2 2022 revenue was approximately RMB215,000 compared to RMB860 million in Q2 of last year.
Due to the higher oil prices and additional costs resulting from the pandemic, our gross loss for Q2 was RMB93.8 million compared to a gross profit of RMB86.2 million for the second quarter of 2021.
Gross margin was negative 4.9% compared to a positive 2.8% last year. Net loss from continuing operations for the quarter was RMB337.1 million compared to RMB146.9 million last year.
Importantly, we narrowed our net loss by RMB42.8 million from Q1 2022. Excluding the one-off expenses associated with the capital winddown and the ADS ratio change that took place in May, we achieved a net loss reduction of RMB87.5 million or 27.1% compared with Q1 2022.
Adjusted EBITDA for continuing operations was negative RMB267.3 million compared to negative RMB50.6 million for the same quarter of 2021.
Next, moving on to key financial highlights for our business units. For BEST Freight, second quarter revenue was approximately RMB1.2 billion compared with RMB2.3 billion for the same period of last year. The decline was primarily due to the decreased UCargo revenue of approximately RMB816 million.
Excluding UCargo, Freight’s revenue decreased by 13.6% year-over-year, primarily due to 8.8% decrease in Freight volumes and a 5% decrease in ASP. Freight’s gross margin was negative 7.8%, 10 percentage points lower year-over-year, due to the higher oil prices and additional costs associated with the pandemic.
Adjusted EBITDA for BEST Freight was negative RMB34.5 million compared with RMB41.4 million for the same period of last year. Compared with Q1 2022, the net loss of Fright was narrowed about RMB115.7 million resulted from a continuous efforts in excess controls and operating efficiency improvement.
Q2 revenue for BEST Supply Chain Management decreased by 6% year-over-year to RMB451 million, primarily due to the disruption caused by the pandemic. However, Q2 gross margin has increased by 3.9 percentage points to 8.2% compared with the prior quarter as we continue to focus on high margin accounts, and the used digitized information system to improve our efficiency.
Adjusted EBITDA for Supply Chain Management was RMB23.2 million compared with RMB22.4 million in the same period of last year.
For BEST Global, Q2 revenue decreased by 23.3% year-over-year to RMB241.2 million. primarily due to the market challenges resulting from the pandemic. Its gross margin was negative 14.7% decreased by 10.3% year-over-year.
Q2 adjust EBITDA for BEST Global was negative RMB97.7 million compared to negative RMB47.3 million for Q1 last year. Operating expenses excluding share based compensation totaled RMB348.5 million RMB or 18.1% of the revenue compared with RMB280 million or 9.1% of revenue in the same period of last year.
Our Q2 operating expenses included one-off charges associated with capital winddown and ADS ratio change. Excluding such one-off expenses, our operating expenses would have been RMB253.7 million, which was a 3.2% year-over-year.
Selling, general, and administrative expenses for continuing operations, excluding capital winddown and ADS ratio change expenses were RMB212.8 million in the second quarter, which was an approximately 2% decrease year-over-year, reflecting the effectiveness of our cost control measures.
R&D expenses before continuing operations were RMB40.9 million or 2.1% of the revenue compare with RMB45.4 million or 1.5% of the revenue in the same quarter of last year.
To close, we are encouraged by the improved financial results for BEST Freight and Supply Chain Management. As we drive quality and value for our customers by consistently enhancing our capability in Freight, Integrated Supply Chain Management, and the Global Logistics solutions, we are confident that we are on the right path to deliver future sustainable growth and profitability.
With that, we will now open the call to questions. Thank you. Operator?
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions]
And our first question will come from [indiscernible] with Northeast Security Company. Please go ahead.
Unidentified Analyst
[Foreign Language]
Johnny Chou
Okay. So, to repeat the questions — thank you for your questions. Repeat the question is that you’re saying that pandemic and the general macro is under pressure. And the question is how is the Freight business on the future — on the Freight business and what is our core competency? That was a question.
So, the answer is that yes, certainly the macro pressures from the pandemic down in some of the economic growth will impact the Freight business. The Freight is basically very much of manufacturing and consumption-driven business. However, on transportation channel logistical [indiscernible] about over RMB1 trillion — over [indiscernible], the transportation is about more than RMB5 trillion to RMB6 trillion.
So, the freight business we’re doing now is a very small segment of the total transportation business is we’re doing a less than truckload and very small truckload — less than truckload the business. So, as the economic growth to the third and fourth tier cities and as well as multi-channel marketing and consumption channels, more and more the transportation will be towards the less than truckload — the Freight business.
So, in overall we are still seeing overall market and total size will still grow for the Freight because of the general the trend of the consumption and/or as well as the — from the full truckload to less than truckload.
So, that is the our believe that the Freight business has three or four — the four major benefit; one is the still enlarge the pool of the business. Second, is as an express business, the concentration of the business will be more as time goes. So, as we already seen that top players has been gradually taking more and more market shares and improve there.
Third is also a — business, it’s very much of the volume-driven economic upscales, is also very, very obvious. Not as obvious as Express, but still as the volume goes, then you should have a lower cost structures into in terms of your labor, the rental space, the as well as the transportation cost.
So, I guess, our — I’m confident that our major competency and our core competency industry business is from few areas. One is that we started this business very early. So, we accumulated a very well established know how in terms of the technology information technologies, the core network layout as well as our franchisee networks. So that is one of the — our core competencies in some of the outgoing forwards. Thank you.
Unidentified Analyst
Okay, thank you. Thank you.
Operator
As there are no more questions, this concludes our question-and-answer session. I would like turn the conference back over to management for any closing remarks.
Johnny Chou
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 with you soon. Thank you very much.
Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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