Sources Reset

Citi Trends, Inc. (CTRN) Q4 2021 Earnings Call Transcript

This article was originally published on Alpha Street

Citi Trends, Inc. (NASDAQ: CTRN) Q4 2021 earnings call dated Mar. 15, 2022

Corporate Participants:

Nitza McKee — Senior Associate, ICR LLC

David N. Makuen — Chief Executive Officer

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Analysts:

Jeremy Hamblin — Craig-Hallum — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Chuck Grom — Gordon Haskett — Analyst

John Lawrence — Benchmark — Analyst

Presentation:

Operator

Greetings, and welcome to the Citi Trends 4Q ’21 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.

Nitza McKee — Senior Associate, ICR LLC

Thank you, and good morning, everyone. Thank you for joining us on Citi Trends Fourth Quarter 2021 Earnings Call. On our call today is, Chief Executive Officer, David Makuen; Chief Financial Officer, Pam Edwards; and Vice President of Finance, Jason Moschner. Our earnings release was sent out this morning at 6:45 AM Eastern Time. If you have not received a copy of the release, it’s available on the company’s website under the Investor Relations section at www.cititrends.com.

You should be aware that prepared remarks today made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore you should not place undue reliance on these statements. We refer to you to the company’s most recent report on Form 10-K and other subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements.

I will now turn the call over to our Chief Executive Officer, David Makuen. David?

David N. Makuen — Chief Executive Officer

Thank you, Nitza. Good morning, everyone, and thanks for joining us today for our fourth quarter and fiscal 2021 earnings call.

This morning I will begin by reviewing the continued transformation of our business and highlight our financial and operational results for the fourth quarter and fiscal 2021 before updating you on our progress related to the evolution of our Citi Master Plan, an effort in support of our strategic growth priorities. Then Pam Edwards, our CFO will elaborate on our financial results and a few other items related to our outlook.

Fiscal 2021 was a productive year for Citi Trends with meaningful progress against our transformation strategies as we remained focused on our underlying goals of expanding the Citi Trends brand to many more underserved African-American and Latinx communities. We achieved strong 2021 financial results with some of our highly differentiated specialty value store experience and continued discipline and focus on the execution of our strategic priorities. For the year, we grew our top-line 26.8%, comparable stores plus 22% and increased our earnings per share by nearly 400%, all of these data points are compared to 2019.

Highlights of our accomplishments for the year are; we launched and market-tested our revolutionized CTx new store format. We opened 27 new stores and remodeled 25 during the year. We navigated and managed this challenging supply chain backdrop, while maintaining healthy in stocks and a high level of inventory freshness. We successfully managed store and distribution labor headwinds with prudent leadership and effective staffing solutions. We kicked off investments in infrastructure that includes system enhancements for our Buy team and capacity upgrades for our Move team. We strengthened our diversity and leadership with two new additions to our board of directors. And we returned value to shareholders through our share repurchase program. And finally, and something that I’m probably most excited about, is we launched Citi Life which encapsulates our brand purpose and values and represents the emotional connection that our customers and associates have with Citi Trends.

Our purpose in True North is life is best when you live bold, live proud, respect all. Dedicated to our neighborhoods, Citi Trends welcomes you like a friend and helps you show up for whatever comes your way, empowering you to bring opportunities to life. We make it fresh and fun for the entire family at prices that don’t break the bank. I’m delighted to begin our journey as a purpose-led brand. And I am so proud of our Buy, Move, Sell and Support teams that executed at such a high level in 2021 in the face of what remains a dynamic operating environment.

With our current transformation still in the early innings, it is clear that we are really driving positive change across the business. In addition, we feel really good about the underlying health of our business. After a soft January stemming largely from a decline in traffic felt across retail attributed to the sharp spike in COVID-19 cases from the Omicron variant, February and early March recovered nicely fueled by compelling product content and a continuously improving store experience across our fleet. Our conversion remains high, and the average customer spend per visit continues at levels on par with 2021 and well above 2019.

As ’22 unfolds, this team is operating like a 75-year-old start-up with a modern and agile approach to executing the plan and along the way becoming excellent operators. This means we are continuing exactly what I have consistently shared with you during every quarter, following the plan in accordance with four strategic priorities. Number one, growing our fleet and expanding our customer base. Number two, optimizing our product mix. Number three, reinvesting in our infrastructure. And number four, making a difference within the communities we serve.

I’ll take a few moments and share some high-level updates. First, growing our fleet and expanding our customer base is well underway. The rollout of our new CTx store format is happening as we speak with eight comp remodel stores going live this week. We expect to open approximately 14 new CTx format stores during the first half of the year and approximately 35 remodels during the first half.

Why is this important? Well, it’s a major driver of attracting a diverse multi-cultural customer by offering an upgraded experience that brings our purpose to life, while improving conversion. To quote a portion of our new purpose, we welcome you like a friend to help you show up for whatever comes your way. Customers really do depend on us and appreciate a better experience. One that, quote, gets me feels welcoming and respects me for who I am. After all, 70% of our stores represent the primary neighborhood destination for apparel, non-apparel, and home needs for our customers. As we’ve always stated, we intend to be the bright retail light in our strip centers, positively affecting so many families on our journey to grow from 600 stores to 1,000 stores combined with at least 150 remodels in the next three years.

Our second area of focus, optimizing our product mix, is contributing directly to our 2022 plan and long-term growth. The mayors of our cities or product categories are diligently developing and expanding curated assortments at values that don’t break the bank. Examples include offering missy sizing for the first time in a decade, building an expanded assortment of dresses after years of slow growth, developing new style choices for our expanding multi-cultural customer base in our melting pot markets and so much more. Lastly, we are in the process of completing an upgrade of our buying, planning and allocation systems, something we haven’t done in a decade. With rich analytics and easy to use tools, this system will really advance our capabilities, target specific products to specific store clusters and customers. We can’t wait.

Our third area of focus, investing in infrastructure, will play an important role in the scaling of our operations at brands. We are taking it more seriously than before. To this point, I’m happy to announce after many years of consideration, today we announced that we will begin to monetize our owned distribution centers by completing a sale-leaseback for one of our facilities with an option on the second pending additional diligence. More to come from Pam, but the proceeds generated will provide for additional liquidity as part of our ongoing capital allocation decisions, including share repurchases. We are also on the way to completing upgrades to both of our distribution facilities that will improve the speed of moving goods to stores and increase overall labor productivity.

Lastly, making a difference. It’s how we bring opportunities to life within our neighborhoods. An example of our commitment is our celebration of Black History Month, which was punctuated by our second annual Black History program during which we received [Technical Issue] for a chance to receive one of 10 grants designated from Black [Technical Issue]. This year’s program garnered over 15,000 applicants, double the amount from last year. Just amazing. I cannot wait to reward the recipients and hear about their businesses.

Looking forward, we recognize that it is difficult to predict the first quarter and the full year of 2022 as we were up against last year’s largest government stimulus in March and the lifting of COVID-19 restriction that led to a surge in consumer demand, particularly in the first quarter of fiscal 2021. Keep in mind that during Q1 2021, we posted our best quarter, a very strong year with a positive 35% comparable store sales increase versus Q1 2019.

It’s also important to note that the country is currently experiencing unprecedented inflationary pressures that are [Technical Issue] to our core customers and neighborhoods they live in. Recognizing that these macro factors will create [Technical Issue] and uncertainties regarding consumer demand, we are issuing revised guidance that we believe best reflects the tough lap of Q1 ’21 combined with an anticipated material acceleration in sales in the second through fourth quarters of the year, driven by our remodel program, the addition of 35 new stores and the launch of expanded and new product assortments that will engage customers and drive comp store conversion.

With that, I’ll turn the call over to Pam to discuss our fourth quarter and full year results as well as a few details around our outlook. Pam?

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Thanks, David, and good morning, everyone. In fiscal 2021, we delivered exceptional financial results with both top and bottom line growth, while making meaningful operational progress in all of our core areas of Buy, Move, Sell and Support. In addition, while we certainly saw a benefit from the extraordinary federal stimulus, particularly in the first quarter, we also saw underlying strength from the transformation initiatives we have put in place. And while in the early innings, these initiatives are changing how we operate this business. Specifically, we have made significant improvements in our merchandise, our inventory management, our expense management and the efficiency in which we run the operations of this business.

Similar to our second and third quarter calls, before turning to our results, I want to first address the top of mind topic, which is supply chain. We continue to successfully navigate the supply side environment, which as you know, remains fluid. We have strategically leveraged opportunistic inventory buys from last season and we have more effectively secured in-season goods in response to customer demand. As a result, we feel good about the quality and the quantity of our inventory heading into fiscal ’22 that will help us remain agile in light of the macro volatility.

In addition, while transportation costs are elevated, we have continued to work diligently through what we can control by streamlining and increasing the efficiency of our internal operations and processes. This allowed us [Technical Issue] to manage the impact of disruption to approximately 110 basis points versus 2019. We will continue to monitor this closely as the current environment is expected to persist through at least the remainder of 2022.

Now let’s turn to the specifics of our Q4 financial results. As mentioned in our earnings press release, we are reporting operating results for Q4 ’21 relative to Q4 of 2019 to provide a more normalized comparison of performance due to the uniquely challenging operating environment in Q4 2020. Total sales of $241 million in the fourth quarter grew by 14.2% compared to Q4 of 2019. In terms of the cadence for the quarter, as announced in January at the ICR Conference, we saw a strong nine-week holiday sales results that included a comparable store sales increase of 14.8% when compared to 2019.

However, following the strong holiday selling period, we experienced a decline in traffic attributed to the sharp spike in COVID-19 cases from the Omicron variant. Though our sales softened, our conversion, basket and units per transaction held up, thanks to the strength of our assortment and our store experience. Specifically, growth in the quarter versus 2019 was driven by an increase in the average basket size, the result of growth in both unit retail selling price and higher units per transaction.

We achieved gross margin in the quarter of 40.4%, an increase of 70 basis points compared to 39.7% in the fourth quarter of 2019. A solid increase in our quarterly gross margin rate was primarily the result of strong full price selling and fewer markdowns, offset partially by increased freight expense. SG&A deleveraged 140 basis points versus 2019 to 33.2% and primarily to increased performance-based compensation related to our outsized performance, increased insurance premiums and increased professional freight fees in support of our technology investments in cloud subscriptions. Operating income of $12.6 million grew by $1.3 million versus Q4 of 2019, an income of $9.8 million compared to $9.4 million in Q4 of 2019. Earnings per diluted share of $1.16 increased for 38% compared to $0.84 in Q4 2019.

Turning to a review of our strong fiscal ’21 results, which are also being compared to the full year fiscal 2019. Total sales for the year were $991.6 million, an increase of 26.8% compared to fiscal 2019. We delivered very strong comparable sales for the year of 22% versus 2019. Gross margin was 41.1%, an increase of 310 basis points over fiscal 2019. Operating income was $79.5 million compared to $18.5 million in 2019. Operating margin expanded to 8% compared to 2.4% in 2019. Earnings per diluted share of $6.91 grew 390% compared to $1.41 in the same period of 2019.

Turning to our balance sheet. Total year-end inventory decreased 10% versus year-end of 2019. Inventory increased versus year-end 2020 by 19%, largely effect from the depleted inventory levels experienced at the end of Q4 last year combined with the opportunistic reserve inventory buys made during the fourth quarter. We continue to experience record turns as our inventory management has improved markedly year-on-year, giving us agility and resulting in a record level of product freshness.

The company repurchased approximately 95,000 shares of its common stock at an aggregate cost of approximately $8.1 million in the fourth quarter. In total, for the year, we repurchased close to 1.4 million shares at an aggregate cost of $115 million. We ended the year with approximately $30 million remaining from the existing buyback authorization.

Lastly, today we announced in our earnings release that the company has undergone an extensive review of its owned real estate. As a result, we’ve entered into an agreement to execute a sale-leaseback of our Darlington, South Carolina distribution center for a purchase price of approximately $45 million subject to due diligence and other customary closing conditions. In addition, we also retained an option to enter into a similar agreement for our Roland, Oklahoma distribution center for a purchase price of approximately $35 million, pending the result of a network optimization setting.

It’s the company’s intent to use net proceeds from these transactions to provide additional liquidity, including share repurchase as determined by our board. In connection with these sale-leaseback transactions, the company’s board announced the authorization of an additional $30 million for share repurchases for total authorization outstanding $60 million.

As it relates to our outlook, we remain confident in the underlying health of the business as we are seeing our transformation initiatives take hold. However, as mentioned in our press release, we are up against last year’s extraordinary government stimulus, particularly in the first quarter of 2021 as well as current unprecedented inflation. Specifically, inflation is the highest it’s been in 40 years with store and food prices, historically high gasoline prices and significant economic increases. These macro factors disproportionately impact our core customer.

As a result, we are providing updated guidance, which excludes any impact from the aforementioned sale-leaseback events and to be determined share repurchases. First we are planning for our first quarter total sales decrease of 25% to 30% compared to the significant increase of 39% Q1 of last year versus 2019. This translates to an expected first quarter EPS of approximately $0.15 to $0.40. Combined second through fourth quarter total sales are expected to increase low-to-mid single-digits on top of the 22% increase in the same period in 2021 versus 2019. At the midpoint, this represents a 25% increase versus 2019. EPS for the second through the fourth quarter combined is expected to be $3.90 to $4.20. That brings our fiscal ’22 EPS expectations to $4.05 to $4.60 compared to $1.41 in 2019.

In summary, we’re pleased with our 2021 financial and operational performance. While we are currently operating under many uncertainties and unknowns, we are confident in the strategies and the initiatives we have put in place. And we’re so proud of the excellent execution by the entire Citi Trends team, who remain agile and nimble amidst a dynamic backdrop.

With that, I’ll turn the call back to David for closing comments. David?

David N. Makuen — Chief Executive Officer

Thanks, Pam. As you can hear from today’s call, the Citi Master Plan is really getting traction. With change-maker initiatives in play, we will not only excite our customers, but also importantly, evolve our diverse organization to be excellent operators.

Turning our attention to our longer-term opportunities, I can assure you that our three year growth plan and assumptions are fully intact. In ’23 and ’24, we are confident that the business will generate low-single-digit annual comp growth and double-digit operating income and EPS growth. Once again, we are very proud of our team’s execution in 2021 and very pleased with the results for the year. We’re entering 2022 in a strong position, and we are confident in our ability to continue to execute against our transformation strategy. We look forward to building on our progress in capitalizing on the opportunity we see for our brand this year and beyond.

Before I close, I would like to acknowledge the announcement made on February 2, that Pam Edwards has decided to retire and leave the company on April 1. I want to thank Pam for her commitment and dedication to Citi Trends over the past 15 months. She has built a strong capable finance organization and helped drive our retail transformation. We wish Pam all the best in her future endeavors, and we’re knee-deep in a search for Pam’s replacements.

In closing, I want to reiterate my gratitude to the entire Citi Trends team for their hard work and dedication to our brand purpose and mission of driving long-term profitable growth, while continuing to make a difference in the communities we serve. We appreciate your interest in our exciting growth story. Join us to bring our purpose to life, live bold, live proud and respect all.

With that, Malika, we’re ready to take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from the line of Jeremy Hamblin with Craig-Hallum. Please go ahead, your line is open.

Jeremy Hamblin — Craig-Hallum — Analyst

Thank you. So I wanted to start by getting in a little bit more details around the Q1 guidance. So in terms of the same-store sales figure that’s embedded within that, I don’t know if you’re kind of looking at a kind of down 30% type of figure. But I wanted to see if you could clarify that as well as the share count that’s implied in that Q1 EPS guidance range. And then we also note that in Q4 your gross margins came in significantly better than what you had guided to and where the Street was and it was up about 70 basis points versus 2019. I wanted to get an understanding of what was implied in your Q1 guide from a gross margin perspective and your outlook for ’22 as a whole? Thanks.

David N. Makuen — Chief Executive Officer

Hey, Jeremy. Thanks for joining. Great questions. I’ll take a kind of a 50% crack at things and then I’ll turn it over to Pam. From a high level guidance standpoint on the top and comp line, you’re right, in the zone. We guided negative 25% to 30% for Q1 on a total sales basis and that equates to roughly a 28% to 33% range for comp store sales. So you’re right there.

And then I’ll turn it over to Pam to highlight our share count and a little bit of knowledge and background around the better margin for Q4. Pam?

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Yes. For the share count, we ended the year at roughly 8.6 million shares outstanding. And as we mentioned, we purchased — we repurchased shares at the beginning of the quarter. For the Q1 perspective — I’m sorry, Q4 perspective on what got better, I mean, we stand to our high-30s, low-40s guidance for our overall gross profit and margin. And really the — that came through being able to manage the freight expenses to that low end of the range that we’ve given out before around that 110 basis points result. We also had fewer markdowns than what we had expected in the quarter that also helped drive the gross profit better as well.

So really as we started to see the quarter evolve and come out a little bit lighter than expected starting December week five and through the beginning of the January and started to lap up against the first stimulus from last year, we just started managing the business. We were nimble with our inventory management. Whatever expenses we could manage at that point in time we did. And just manage the business accordingly to account for what we were seeing in the market. So just really maintaining agility across the entire business in light of the slowdown that we saw again in that last month of the quarter.

Jeremy Hamblin — Craig-Hallum — Analyst

And as a follow-up to that point. So it looks like your inventories are down about 11% versus 2019 levels to end the year. Do you feel like, obviously, your customer base is really being impacted by inflationary pressures and just the rapid spikes that we’ve seen in — whether it’s utilities or gas prices or food prices. Do you feel like you’ve managed your inventories to the point here for the next couple of quarters that you can maintain that lower markdown certainly versus where you were a couple of years ago in 2019? Is that a fair assumption?

David N. Makuen — Chief Executive Officer

That’s a good assumption, Jeremy, and let me give a little context. As you know and a lot of the group knows, we started getting really good in inventory management coming out of the opening in summer of 2020. As I think you might remember one of my quotes, we’re never going to look back. And so the team has really pressed hard on how to best manage inventory in good times and tough times, and Pam mentioned that word agility.

We’re getting better and better at [Technical Issue] when it comes to making sure that we’re reading the TVs and that we have enough dry powder and are open to buy and that we can work the best we can with our vendors to move things around and occasionally cancel things and yet still look for opportunities and so on. So it’s a multi-variable game, if you will, in terms of how we manage all that, but we’re really pleased with how it’s going. And it’s our job to give the customer what they want, but knock it over our skis and manage down markdowns and make sure that when it’s out of the box and looking good that we sell through it and bring in the next trend.

So the last point I’d make is this idea of the lifecycle of trend management is just getting better and better. I talked about this when I joined the company, I talked about it in ’21, and I’ll tell you about it today, getting better and better. Our mayors are truly becoming masters of trend management, and that helps mitigate perhaps falling in any rabbit holes when it comes to too much inventory. So we’re excited about what the numbers are telling us. And we will maintain our normal MO, which is gross margin of high-30s, low-40s as we look forward here.

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

The only thing I would — Jeremy, just the only thing I would add to that, just from a quarterly cadence standpoint, we do expect that Q1 will be our most difficult comparison from a margin perspective. And so of that we are planning high-30s for the first quarter with a sequential improvement in the rate from Q2 to Q4. And again, that’s largely an example — a result of last year. We also had prior year strength favorability in our Q1 number that we’re not seeing this year. And then also just additional markdown versus last year.

Jeremy Hamblin — Craig-Hallum — Analyst

Great. Last one for me is, just the change in the unit development for the year, 35 store openings versus 45 in your prior guidance, seems like a prudent change given the way the environment has changed. I wanted to understand the cadence of the openings expected for the year whether or not — how many are you thinking about in Q1, first half versus back half? And then as a follow on to that, how are your CTx stores, and I know you only have a handful, but how are those stores performing versus the rest of the chain? Thanks so much.

David N. Makuen — Chief Executive Officer

Thanks for your questions, Jeremy. Yeah, the 45 to 35, appreciate your point, we think it is prudent. It’s just a little breather this year to get everything in order in terms of rolling out our CTx store format that required a lot of heavy lifting and importing of fixtures from China. And the good news is, it came in right on time, which is an amazing call out to our real estate and construction teams, so kudos to those guys. But we just thought we’ll back off a few, we’ll catch up in ’23 and ’24. That’s not an issue.

And most importantly, if I can go through the quick cadence, we went from saying in the November of last year, 40 remodels in ’22 to January 45 to now it’s 50. So we actually put a little more emphasis, I wanted to make sure you didn’t lose that factoid into the remodel program, which I’ll end with your question about how they’re doing. It’s too early to report on the age that are going live as we speak. But I can tell you, the ones that we went live with last year continue to outperform the chain at a healthy margin. So we’re excited about it. It is really representing a revolution in our experience. And I hope you and others can get into some of these because they’re going to start popping around the country pretty quick here. Thanks for your questions today, Jeremy.

Jeremy Hamblin — Craig-Hallum — Analyst

Thanks so much. Best wishes.

Operator

Thank you. Our next question is from the line of Dana Telsey with Telsey Advisory Group. Please go ahead, your line is open.

Dana Telsey — Telsey Advisory Group — Analyst

Good morning, everyone. And Pam, best of luck in — on your retirement. In terms of inflation and stimulus, two have obviously the macro topics of current events, as you think about stimulus, David, you had called out stimulus each quarter of last year and what the impact was. Anything to remind us of as we go forward this year and the upcoming quarters of how you’re thinking of the framework of it and the impact given that you’re looking for low-to-mid single-digit sales gains Q2 through Q4? Anything we should might be mindful of? And then next just on inflation. What are you seeing in your average price increase? How is that helping or to offset wage increases? And does it differ by category? And how pricing is occurring?

David N. Makuen — Chief Executive Officer

Hi, Dana. Thanks for your questions. I’ll take the first one and Pam can elaborate on the second one. Yeah, from an overall stimulus impact across the year, we look at it almost like a curve that kind of stuff — or let me describe it more as a ski hill. It starts pretty high in March even into a little bit of April, meaning the impact of that March drop, but then it really drops pretty quick on that slope. And we look at the impact of CTC or Child Tax Credit that started dropping in July through December. And so really the lion’s share is what you’re hearing reflected in our Q1 guidance. And then it gets, I won’t say easier, but it gets a lot lower in Q2 through Q4. And then importantly, I want to make sure that you hear this point, many of our initiatives to impact 2022 begin to go live in Q2.

We’ve got a couple of cooking in Q1, but they really start to pump in Q2 and forward. For example, that’s when our missy assortment starts to take hold, that’s when our multi-cultural assortment to capture, for example, more Latinx market share starts to pop into stores, that’s when we start to work and show up with a better dress assortment, which is a significant volume opportunity. And then most importantly, our remodel start kicking in. We’re going to do almost half if not more of the 50 remodels by the end of Q2. So they provide some really nice comp benefit for the rest of the year. And then obviously on the total top-line building our new stores will start to kick in and what we think we’ll build just shy half of those by the end of Q2 as well. So lots of moving good parts coming for the Citi Trends business.

Pam, do you want to comment on our pricing?

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Sure. As we’ve previously shared, our AUR has been steadily increasing due to improvements in quality, trend, curation of assortment and also the lower markdowns due to our tighter inventory management. And so we just continue to monitor it closely and look at it very surgically from our business perspective by category to make sure that we’re measuring elasticity as well as providing that right value equation for our customers. And so while we are seeing a higher AUR out the door price, some of that is due to lower markdowns than what we’ve seen historically, but it’s also due to where we have inched up the quality and the value and the assortment to match a higher price level that our customer can manage.

Dana Telsey — Telsey Advisory Group — Analyst

Got it. And then on the supply chain side, the 110 basis point impact in the fourth quarter, does that hold similar throughout the rest of the year or is there differences in the upcoming quarters that you’re looking at?

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

We’re pretty much holding, get the cash, Dana, there’s so much uncertainty with transportation costs right now and the rising fuel costs. As David mentioned, we do have some initiatives that well start to take hold in the back half of this year as it relates to our supply chain. But at this point, given the level of uncertainty, we’re pretty much holding at that 110 to 120 basis points versus 2019 as the increase, at least until we get out of 2022 and you can see some stability hopefully.

Dana Telsey — Telsey Advisory Group — Analyst

Got it. And then just lastly. David, you had mentioned dresses. I think you had been also looking at other categories like the big boy sizing, the missy sizing, the junior tops or branded collaborations. What are you thinking about product-wise as we move through 2022 to drive excitement for your core customer?

David N. Makuen — Chief Executive Officer

Great questions and a great memory, all of those things that you’ve cited are also on the list. In terms of how we look at our customer, and frankly the improving and changing landscape and how they’re going out, how they’re returning to the office, in some cases, how they’re coming out of this without a mask and being more social and more free and so on. We think those are all really great tailwinds for the Citi Trends business. But I also think we have an opportunity to open up some new windows. We have this incredible strength with our loyal and deep customer connections on the casual side of life. But what we haven’t done as much and certainly in the last two years, but even in the last three to five is dabble and enter into the more sort of, I’ll call it, dress casual and opportunities to kind of have those day-to-evening looks.

And we’ll still do it in a Citi Trends way, it will still be full of trend and it will still represent living bold and living proud in the way as you present yourself. But it’s a belief, and I strongly support this from Lisa, our Head of Product Allocating and Planning. She sees this happening and we’re testing the waters with a number of initiatives right now and many of them are flying off the shelves and off the hangers. So we’re encouraged by the changing consumer landscape in terms of their apparel needs. And then on the non-apparel front, our business remains stronger than ever. And as you may remember, a lot of our addition of categories or expansion of categories was on the non-apparel side.

So I can tell you that our few line initiative is expanding into more stores and keep the things from growing keeps and bounds. And then we’re working on really existing stuff like jewelry for the plus size women with a bigger footprint, if you will, on her neck or ear, that’s blowing out. I mean, there’s just so many things under the covers of the trends that we’re excited about. And we believe, to your point, we’ll engage the customer. And last but not least, generate strong performance with higher store conversion and higher basket.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

David N. Makuen — Chief Executive Officer

Thank you. Have a great day.

Operator

Thank you. Our next question is from the line of Chuck Grom with Gordon Haskett. Please go ahead, your line is open.

Chuck Grom — Gordon Haskett — Analyst

Hey, thanks. Good morning. You guys have called out that conversion and basket have stayed relatively the same. So I guess, I’m curious, what you’re seeing from a footfall or traffic perspective over the past say 100 days, really since the middle of December?

David N. Makuen — Chief Executive Officer

Hey, Chuck. Good question. Yeah, you’re right, we were encouraged about our conversion levels and our basket levels driven by healthy increases in both our AUR selling price as well as our units per transaction. If I kind of pull back and answer your question from Q4 holiday to now, it’s definitely a see-saw. I think we are typically really strong with our December because our customer tends to shop more last minute.

And so we ended the kind of December week three and four, holding really nicely against ’19. Still not positive against ’19, but better than we had seen throughout the year prior. And then as we know, January got stocked in by people being stocked in from the COVID Omicron variant. And we saw a pretty big deceleration in our traffic. However, as I reported back then, what we didn’t see was any decay in conversion or basket. It was just amazing to see.

So what that tells us is our content is really strong and the stories that we’re presenting to our customers are strong. And then as we enter early Feb, as we also suggested would happen, we saw a pretty nice recovery, meaning our traffic levels started to recover and our basket and conversion stayed true and high. We’re still not above ’19. We’ve had some seesawing weeks based on the end of the cadence of tax refunds and such. But overall, we’re pleased with the progression that we’re seeing in the business and we have that planned to get as soon as we lap Q1 to get better and better between Q2 and Q4.

Chuck Grom — Gordon Haskett — Analyst

Okay, because January was down, I think around 32% and it looks like you’re guiding the first quarter to be down about 30%. So I’m just trying to understand the degree of conservatism in the guide or if you are trending kind of in this down 30% so far quarter-to-date? Is there any way you can shake that out for us?

David N. Makuen — Chief Executive Officer

I think I can give you a little high level. I think what you’re hearing is mainly the March into a little bit of April downturn that will kind of, if you will, quelch some of the increases or improvements we’ve seen in Feb and March to date. As a reminder, the stimulus really started hitting last weekend and it hits last year meaning hit last year this week and the following week. So what I said is true. We’ve seen some recovery in Feb and in early March. We’ll give some of that back when we lap the stimulus. So that’s the color I can provide today. I hope that helps.

Chuck Grom — Gordon Haskett — Analyst

Yeah, okay. And then one for Pam. Just last year in ’21 your EBITDA ratio was over 10%, which is I think consistent with the long-term guide that you guys provided earlier in January. It looks like your EBITDA guide for this year is around, call it, in the low-7% range. Just wondering when you think about it over the next several years, how long do you think it’s going to take for you guys to get back to the level that you were able to produce in 2021?

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Yeah, great question, Chuck. I do believe that the underlying conditions of the business once we get past stimulus and this lapping that we’re doing now and some of this inflation, we’re going to start to see the business get back on track to where we projected in our long-range goals and we can see a double-digit EBITDA by 2024. So again, I think we believe that this is temporary from what we’re seeing in all stimulus-related and feel that that’s still a good measurement of our transformation.

Chuck Grom — Gordon Haskett — Analyst

Okay. And then my last question is, if you think about the $80 million in potential proceeds from the monetization on the DCs, I guess has the board done any consideration to get more aggressive on buybacks if your guidance holds and you could do north of $5 in earnings per share in ’23, your stock is really, really cheap here and the time to execute that buyback maybe now. But I’m just wondering what the consideration I guess would be with those proceeds?

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Yeah. I mean it’s an ongoing and active conversation and certainly share repurchase remains an important part or important pillar of our capital allocation strategy. The board owns this and is actively looking at that as part of the considerations for the proceeds of the sale-leaseback.

Chuck Grom — Gordon Haskett — Analyst

Okay. Congrats again, Pam.

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is from the line of John Lawrence with Benchmark. Please go ahead, your line is open.

John Lawrence — Benchmark — Analyst

Great, thanks. First of all, congrats Pam. Thanks for all the help.

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Thank you.

John Lawrence — Benchmark — Analyst

Secondly, David, would you talk a little bit about — you talked about some of these investments in the systems and you talked about those for several quarters. Could you go a little deeper and talk about what do you really expect to achieve on the merchandising side with these investments and planning systems maybe that you realize you need to a more efficiency there?

David N. Makuen — Chief Executive Officer

Hey, John. Sure, happy to do that. And you’re right, I’ve been previewing this new system and what’s exciting is, it’s now kind of right from, we’ve got many individuals on our teams across Buy, Move and Sell working hard on testing and developing what the ultimate solution will be come later in the summer, and the benefits are vast truly. This represents really the backbone of how our Buy team both places POs all the way through to how they plan and allocate based on the types of stores, the climate of the store, the location of the store, the store, whether it’s an African-American primary store or an African-American and Latinx store and so forth.

So if you pull the lens back a bit, it really says to you, this brand has been operating at a pretty high level without this system, which is a testament on to itself. And with this new system and we’re going to give these guys kind of a race car to be able to go and chase opportunities, spend less time in a manual system, more time in a system that will provide the right KPIs, the right dashboards and the right tool set to go in and say, hey, I want to allocate this particular product to these 72 stores because I know that’s the right thing to do and that’s how I’ll probably maximize sell-throughs and markdowns, and most importantly, make the customer happy.

So the age old, I need more shorts in Florida, which happens almost every year, will largely go away because we will have the smarts and the analytics to say this is when shorts should arrive in Florida, this is when shorts should peak in Florida and this is when shorts should go away in Florida. And all those conversations we tend to do very manually today and a little bit across fingers, if you know what I mean. So these are all — I’m glad about you asked this system enhancement is, it is a change maker for Citi Trends.

John Lawrence — Benchmark — Analyst

And David, when would you expect to have that fully implemented and operating?

David N. Makuen — Chief Executive Officer

We are expecting to have that in play late summer, early fall. And we think it has some immediate impact for the rest of ’22. But really, when it kicks in, is for ’23 and ’24 as the teams get really good at using it.

John Lawrence — Benchmark — Analyst

Great. And can you tell me — digging into the new stores, I know you commented on the new format stores. Can you go into just a little bit of a deeper dive, all of those new presentations of the way non-apparel was sort of is presented in those new stores that we’ve seen. Can you give us a sense of are they stronger than — are they really leading the charge into those solid comps that you presented at merchandise in a different way?

David N. Makuen — Chief Executive Officer

Good question, and I think you’re referring to our really large change to the layout on our new CTx store format for that. We’ll put into all of our 35 newbies this year and 50 remodels. I would tell you John that what pleasantly surprised us is that really all boats rose. We expected the material — or products, excuse me, that we move to the center of the store to be off the charts. The truth is, most of the box is up. I mean, it’s hard to find a business that’s not up.

And so it just really presented this whole new feel good, well live, dynamic easy to shop specialty store experience that we weren’t upholding. We weren’t respecting those — that vision in our legacy and older stores. Nobody’s fault, it just wasn’t something on the agenda for Citi Trends for so long until me and the team got after it last fall — or excuse me, fall of ’20 into launching in spring of ’21.

So at the end of the day, we’re loving what we’re seeing. And I think I’ve highlighted a little bit in the past, what we’re seeing in the lift out of these stores is what we call a proxy for conversion, meaning we’re seeing transactions rise coupled with some nice little gains in UPTs in the basket, but most of the increase is coming from conversion, which tells us, you might have come in and have not been as engaged or as excited about the experience and now you are. And our goal and job is to just become really good operators in operating these stores, filling them up with the great stuff, using that new system when it comes live to get even better in these stores, and I think the performance will follow up.

John Lawrence — Benchmark — Analyst

Thanks. Good luck.

David N. Makuen — Chief Executive Officer

Thanks, John. Take care.

Operator

Thank you. And no further question. I’ll turn it back over to David Makuen. Please go ahead.

David N. Makuen — Chief Executive Officer

Thanks, Malika. Thanks, everybody. I think we can conclude the call for today. Thanks for joining us. We look forward to seeing you next time. Have a great day and week and a great spring. Bye, bye.

Pamela J. Edwards — Executive Vice President and Chief Financial Officer

Thanks, everyone. Bye.

Operator

[Operator Closing Remarks]

The post Citi Trends, Inc. (CTRN) Q4 2021 Earnings Call Transcript first appeared on AlphaStreet.

Should you invest in Walgreens Boots Alliance ahead of earnings?

This article was originally published on Alpha Street

Walgreens Boots Alliance, Inc. (NASDAQ: WBA) has been busy enhancing its capabilities in healthcare delivery lately, through various initiatives including M&A deals. After being hit by the pandemic-related disruption initially, customer traffic recovered as people flocked to Walgreens stores for coronavirus tests and vaccination. The high demand for COVID-related items, including booster dose and at-home test kits, resulted in a record increase in same-store sales.  

The Stock

After slipping to multi-year lows, Walgreens’ stock made steady gains early last year though the momentum waned in the second half. Extending the downturn, the stock mostly traded below the $50-mark this year. Market watchers, in general, are bullish on the stock, which is expected to gain about 15% in the 12-month period, from the last closing price.


Read management/analysts’ comments on Walgreeens’ Q1 2022 earnings

However, it is advisable to wait until the upcoming earnings release before investing. Walgreens has hiked the dividend regularly over the years. It currently offers a yield of 4.2%, which is much higher than the S&P 500 average. Considering the company’s promising long-term prospects and favorable valuation, WBA is an ideal option for income investors.  


Walgreens Boots Alliance Q1 2022 earnings infographic

From Walgreen’s Q4 2021 earnings call transcript:

“Looking ahead of 2022, considering the macro uncertainties, we will continue to take prudent operating strategy as always. From what we have learned from past success, we believe that holding a prudent and steady approach in daily operation is the golden standard for the fintech business when macro uncertainties arise. After all the rectification in 2021, we expect to see a much clearer regulatory framework for the fintech industry in 2022, which should allow industry participants to be more focused on long-term business development.”

Financial Perforamnce

Interestingly, Walgreen reported stronger-than-expected earnings and revenues since the onset of the virus crisis. It started the new fiscal year on an upbeat note, reporting a 53% growth in adjusted earnings for the first quarter. The highlight of the quarter was a 36% growth in the international business, which far outperformed the core domestic segment.

Retail comparable store sales increased in double digits. At $34 billion, total revenues were up 8% year-over-year. The key numbers also surpassed the market’s projections. Buoyed by the positive momentum, the management raised its full-year 2022 earnings outlook. When the company reports second-quarter results on March 31 before the opening bell, the market will be looking for a 10% increase in earnings to $1.38 per share, on revenues of $33.4 billion.

Beyond COVID  

Meanwhile, there are concerns that sales would slow down once the COVID situation improves further and normalcy returns. A pullback in customer traffic would weaken comparable store sales, which does not bode well for the company’s stakeholders.


Costco bets on strong customer loyalty to beat COVID blues


In October last year, the company raised its stake in healthcare management services provider VillageMD to 63% by investing $5.2 billion. The deal will allow it to open Village Medicals units at Walgreens stores. In a similar deal, it acquired a majority stake in health management company CareCentrix

Over the past twelve months, Walgreens’ stock lost about 9%, and traded below its 52-week average on Tuesday. The stock traded slightly lower in the afternoon.

The post Should you invest in Walgreens Boots Alliance ahead of earnings? first appeared on AlphaStreet.

Urban Outfitters (URBN): These are the retailer’s expectations for the coming year

This article was originally published on Alpha Street

Shares of Urban Outfitters Inc. (NASDAQ: URBN) have dropped 12% year-to-date and 36% over the past 12 months. The company saw strong demand across all its brands, which fueled sales growth for its most recent quarter, but its profitability was plagued by inflationary pressures. These trends are anticipated to continue over the upcoming fiscal year as well.

trending stocks high volatility

Demand and sales

During the fourth quarter of 2022, Urban’s total sales increased 14% to $1.33 billion compared to the same period in 2020. This growth was driven by a 15% increase in the retail segment but was partly offset by a 22% decline in the wholesale segment.

The company saw strong demand in Q4 and it remains optimistic that this momentum will continue through spring. During the first four weeks of the first quarter, total retail segment comp sales increased over 20% versus Q1 2022 and Q1 2020.

The company is seeing consumer spending remain resilient despite the impacts from inflation, pandemic-related restrictions and other challenges. People are anxious to go back to their normal lives and they have resumed traveling, dining out and going to entertainment venues with family and friends.

Shopping has gained traction due to these activities and customers are paying more attention to fashion than price. This is driving strong, full-price sales of dresses, shoes, pants and blouses. Dresses were the fastest growing category for the Anthropologie brand in February. Customers are buying heels and dressy sandals both online and in store and as weddings are being planned again, there is a positive response to the wedding gowns designed under the BHLDN brand.

Urban expects first quarter 2023 total company sales could come in up mid-teens versus the same period in 2022. Retail segment sales could land in the mid-to-high teens while sales in the wholesale segment could be approx. flat.

Profitability

For the fourth quarter of 2022, Urban reported adjusted net income of $41 million, or $0.41 per share which was down 16% from Q4 2020. The company prioritized inventory deliveries during the holiday season which led to higher-than-expected inbound transportation costs. Inflationary pressures from inbound freight, delivery expense, raw materials and wages took a toll on profitability during the quarter.

Adjusted gross profit rate decreased 222 basis points to 27.6% due to lower initial merchandise mark-ups and an increase in delivery and logistics expenses. Urban currently estimates that gross profit margins for Q1 2023 could be down more than 100 basis points versus FY2022 due to the ongoing supply chain challenges.

Capex and store fleet

Capital expenditures for FY2023 are estimated to be approx. $225 million. Urban Outfitters plans to open around 46 new stores and close around 14 stores during the year. The company plans on opening 16 FP Movement stores this year and its goal is to build the FP Movement brand to one billion in sales.

Click here to read the full transcript of Urban Outfitters Q4 2022 earnings conference call

The post Urban Outfitters (URBN): These are the retailer’s expectations for the coming year first appeared on AlphaStreet.

ANI Pharmaceuticals, Inc. (ANIP) Q4 2021 Earnings Call Transcript

This article was originally published on Alpha Street

ANI Pharmaceuticals, Inc. (NASDAQ: ANIP) Q4 2021 earnings call dated Mar. 15, 2022

Corporate Participants:

Judy DiClemente — Investor Relations

Nikhil Lalwani — President and Chief Executive Officer

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Analysts:

Brandon Folkes — Cantor Fitzgerald — Analyst

Greg Fraser — Truist Securities — Analyst

Elliot Wilbur — Raymond James — Analyst

Presentation:

Operator

Good day, everyone, and welcome to today’s ANI Pharmaceuticals, Inc. Fourth Quarter 2021 Earnings Results Call. [Operator Instructions] Please note this call may be recorded, and I will be standing by, should you need any assistance. It is now my pleasure to turn today’s program over to Judy DiClemente.

Judy DiClemente — Investor Relations

Thank you, Brittany. Welcome to ANI Pharmaceuticals’ Q4 2021 Earnings Results Call. This is Judy DiClemente of In-Site Communications, Investor Relations for ANI.

With me on today’s call are Nikhil Lalwani, President and Chief Executive Officer; and Stephen Carey, Chief Financial Officer of ANI. You can also access the webcast of this call through the Investors section of the ANI website at www.anipharmaceuticals.com.

Before we get started, I would like to remind everyone that any statements made on today’s conference call that express a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company’s future performance may be considered forward-looking statements, as defined by the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to ANI Pharmaceuticals’ management as of today and involve risks and uncertainties, including those noted in our press release issued this morning and our filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. ANI specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law. The archived webcast will be available for 30 days on our website, anipharmaceuticals.com. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on March 15, 2022. Since then, ANI may have made announcements related to the topics discussed, so please reference the company’s most recent press releases and SEC filings.

And with that, I’ll turn the call over to Nikhil Lalwani. Nikhil?

Nikhil Lalwani — President and Chief Executive Officer

Thank you, Judy. Good morning, everyone, and thank you for joining the ANI Pharmaceuticals call today and for your interest in our company. I hope you, your families, friends and colleagues continue to stay safe and well. I’ll start with commenting on the overall 2021 performance.

In 2021, ANI delivered revenues of $216.1 million and adjusted non-GAAP EBITDA of $64.8 million. Our adjusted non-GAAP diluted earnings per share of $0.54 reflects the increased number of shares outstanding. During this period, we continued to face increased competitive intensity and resulting pricing pressures in the generic side of our business as well as the impact of COVID on prescriptions for both the established brands and generics businesses. I am proud and appreciative of the hard work of all of our employees, customers, partners and suppliers as we continue to deliver high-quality medications to patients in need.

In 2021, we also achieved important goals against the key pillars of our growth strategy to drive ANI past an inflection point in our evolution towards becoming a leading biopharmaceutical company. First, on January 24, 2022, we announced the full-scale commercial launch of the lead asset of our rare disease business, Purified Cortrophin Gel. Bringing Cortrophin Gel to market was a victory for ANI and, more importantly, for patients, as Cortrophin Gel has the potential to help patients with certain chronic autoimmune disorders, including acute exacerbations of multiple sclerosis and rheumatoid arthritis and excess urinary protein due to nephrotic syndrome. These patients are forced to cope with a devastating disease on a daily basis.

Multiple evidence-based treatment guidelines indicate that corticotropin, or ACTH, may be considered for patients who require additional treatment beyond standard of care, which often includes steroids. A claims-based epidemiology analysis suggests that less than 10% of patients who are steroid-resistant and refractory across primary indications receive ACTH therapy. The ACTH market in 2021 was approximately $600 million in revenues, reflecting the significant impact of the COVID-19 pandemic on the only competitor in the class. The alleviation of the COVID impact is visible in the growth seen in the ACTH market between Q3 and Q4 of 2021.

The reintroduction of Cortrophin Gel for select indications gives prescribers another ACTH therapy, which can mean a greater chance for an effective treatment for some patients. As we share more about the Cortrophin Gel launch, please bear in mind that we have held back information to not reveal our plans to our competitor.

We have invested significantly in building a world-class rare disease team and the infrastructure needed to drive a successful launch. Our rare disease leadership team, led by Chris Mutz, has experienced over 20 rare disease product launches. Recent additions to the leadership team include Dr. Mary Pao as Chief Medical Officer and Elizabeth Powell as Chief Compliance Officer and Head of Legal. Our winning sales force will be approximately 50-person strong and led by their inspirational leader, Holly Zickler. Our clinical account executives have an average of over 12 years of successful sales experience in the rare disease and specialty areas, including with leading rare disease-focused biopharmaceutical companies such as Alexion, Horizon, Alnylam and Gilead. Nearly 75% of the sales team has won a President’s Club or equivalent top 10 sales award in recent years.

In preparation for launch, this experienced team went through comprehensive clinical and product training to fully prepare them to hit the ground running on day one of launch. We have also in place strong functional teams, including medical, marketing, market access, commercial operations, analytics, finance and compliance. In addition, we have secured the U.S.-based distribution footprint and supply chain. Cortrophin Gel is now available through a network of specialty pharmacies and distributors for appropriate patients, health care providers and submit a prescription and initiate access to treatment to a specialty pharmacy by visiting www.cortrophin.com.

We’ve also established and updated our manufacturing processes and ensured a sustainable U.S.-based supply for key starting materials, API and finished goods. ANI is committed to supporting meaningful patient access to Cortrophin Gel and to bringing a more affordable ACTH therapy to government and commercial payer plans, prescribers and patients. We are very encouraged by our ongoing conversations with payers as well as the pharmacy benefit managers, or PBMs.

As part of our commitment to establishing meaningful access to Cortrophin Gel, we’ve created Cortrophin In Your Corner, a dedicated program for patients and their caregivers throughout the treatment journey that includes one-on-one access, reimbursement support, financial assistance for eligible patients and nurse-provided injection training. Cortrophin In Your Corner also provides access and reimbursement support for health care professionals and their staff.

Finally, we are very pleased with the early physician response we have seen for Cortrophin. It’s perfect timing as most physicians are ready for in-person visits. We’re confident that seeing the strong weekly trend for prescriptions and new patient case initiations continues to accelerate over the past six weeks as our sales force is meeting with physicians in our initial focus specialty areas.

Overall, the Cortrophin Gel launch is off to a very good start, and we continue to expect Cortrophin Gel to be a significant growth driver with commercial longevity. While we are not yet ready to provide specific Cortrophin guidance in this early-stage launch, we are encouraged by the early traction we are seeing.

Turning now to the second pillar of our growth strategy, to strengthen our generics business with enhanced R&D capabilities and increased focus on niche opportunities. In November, we completed our acquisition of Novitium Pharma, bringing a high-performance R&D engine to ANI. The R&D engine continues to deliver with 8 new product launches since deal closure and 5 new ANDA filings already in 2022. Today, ANI has over 30 ANDA files pending with the FDA and over 25 applications and multiple 505(b)(2) products under development. Equally important, ANI’s R&D engine strengthened its track record of bringing limited competition products to the market with the largest number of competitive generic therapy, CGT, approvals.

Most recently, ANI received CGT designation and the associated [Technical Issues] most recently, ANI received CGT designation and the associated 180 days of exclusivity for the launch of betaine anhydrous solution in addition to receiving approval of our first 505(b)(2) product. Our R&D efforts across New Jersey Bodac Novo [Phonetic] are now fully integrated under the leadership of Samy Shanmugam, along with Chad Gassert, who leads our portfolio strategy and corporate development functions, we are focused on increasing the productivity of our R&D teams and strengthening our product pipeline to bring much-needed quality affordable medications to patients in need and to increase the sustainability of our generics business with new product launches.

As you would expect, we had in place a clearly defined 100-day integration plan across key functions such as commercial, HR, operations, quality, supply chain and finance. Our teams continue to execute well against these plans, with a dual focus on ensuring continuity of business operation and capturing synergies from the combination.

The eight new product launches, consistently high service levels and positive feedback from our customers highlight the effectiveness of our integration. Our synergy capture efforts cover procurement savings, distribution and operational efficiencies and enhanced R&D productivity, as mentioned earlier. Overall, the Novitium Pharma acquisition is off to a great start.

The third pillar of our growth strategy is to maximize value from established brands through innovative commercialization strategies and strong business development, which has been a long-standing strength of ANI. In 2021, we successfully acquired and integrated four dermatology brands from Sandoz. We continue to evaluate accretive asset acquisition deals in this area and further augment our unique commercial and organizational capabilities.

The fourth pillar of our growth strategy is to expand our CDMO business, leveraging our North America manufacturing footprint and certain unique manufacturing capabilities. Several of our customers here are facing the pricing headwinds from increased competition. We continue to explore opportunities with the addition of the Novitium site in New Jersey and new customers that Novitium serve bring.

I’d like to close by sharing three elements of ANI’s strong foundation that enables us to deliver sustainable growth and become a leading biopharmaceutical company serving patients in need.

First, ANI’s new capital structure comprised of the recently completed $75 million equity raise and the closure of the new $300 million Term Loan B, $40 million revolver and $25 million pipe gives the company significant flexibility in ensuring a strong Purified Cortrophin Gel commercial launch, supporting the integration of Novitium into ANI and propel the next phase of growth for ANI.

Second, we have in place high-performing leadership and teams with a nest of experience and expertise across our diversified businesses.

Finally, we’re cultivating an ANI united culture to serve our patients and physicians in need by continuing to identify patient populations that are underserved and medicines that can help them.

Now Steve will provide the details behind our Q4 2021 financials. Steve?

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Thank you, Nikhil, and good morning to everyone on the call. As Nikhil just mentioned, the company completed numerous strategic initiatives in the fourth quarter of 2021, most notably, the FDA approval of Cortrophin, the close of our acquisition of Novitium, the corresponding refinancing of our debt structure and a secondary public equity raise. These events have had significant impacts on our fourth quarter financial statements.

On October 29, we received FDA approval for our purified Cortrophin Gel product. In response, we proceeded with the final prelaunch spend necessary to fully build out our rare disease sales and marketing team.

During the fourth quarter, we finalized marketing plans and field force materials, rounded out recruitment of key home office personnel and fast-tracked recruitment of our clinical account executives in advance of our January 24, 2022, full-scale launch. These efforts resulted in $9.2 million of Cortrophin-specific fourth quarter spend, which has continued to be added back to our non-GAAP metrics as prelaunch expenditures. Beginning in the first quarter of 2022, we will reflect the full Cortrophin SG&A spend in our non-GAAP metrics.

On November 19, we closed our acquisition of Novitium. And as such, Novitium’s results for the final 41 days of the year are reflected in our consolidated results. Our preliminary purchase price allocation is reflected in our December 31, 2021, balance sheet and reflects GAAP fair market value of consideration of $206.2 million, intangible assets of $139.2 million and goodwill of $24.3 million. We incurred approximately $9.4 million of transaction costs, which were expensed as incurred and are reflected in SG&A in our GAAP financial statements and have been added back for our non-GAAP measures.

In conjunction with the close, we refinanced our previous Term Loan A credit agreement with a $300 million Term Loan B and a $40 million revolving credit facility. The new debt was utilized to fully repay $200.1 million of Term loan A debt and to partially finance the Novitium acquisition. The new Term Loan B bears interest at LIBOR plus 6%, with a 75-basis point LIBOR floor.

In addition, we issued approximately 2.5 million restricted shares of common stock to selling shareholders of Novitium. These shares contain restrictions on their post-close transfer ranging from there to 24 months following the completion of the acquisition.

Lastly, we placed a $25 million of Series A convertible preferred stock to Ampersand Capital in a PIPE transaction. The preferred shares accrued dividends at a rate of 6.5% per year and are payable either in cash or in kind. These shares are recorded as mezzanine equity on our December 31, 2021, balance sheet.

In November, we placed $75 million of common stock in a secondary public offering, resulting in the issuance of 1.5 million common shares and net cash proceeds of $69.7 million after cost of issuance. The culmination of these activities and financing efforts resulted in $100.3 million of unrestricted cash on our balance sheet as of December 31. This balance, along with our $40 million revolving credit facility, which remains undrawn, places us in a strong position to support the Cortrophin launch, fund the integration of Novitium and allow the company to explore product-level tuck-in acquisitions during the course of 2022.

Now we will turn to fourth quarter financial results. Despite ongoing industry headwinds, including significant generic price pressure, ANI has continued to grow through incremental revenues from the Novitium acquisition, with net revenues for the fourth quarter of 2021 of $60.9 million as compared to $57.3 million posted in the fourth quarter of 2020 or a 6% increase. Novitium contributed $7.7 million of net revenues during the initial 41 days of the consolidation of results.

Net revenues for generic pharmaceutical products were $41.6 million during the three months ended December 31, 2021, an increase of 8% compared to $38.7 million for the same period in 2020. The net increase was primarily due to the November 19 acquisition of Novitium and the third quarter 2021 launch of Nebivolol, tempered by sales declines for Tolterodine and Vancomycin and a decrease in the average selling price of generic products.

Net revenues for branded pharmaceutical products were $14.7 million during the three months ended December 31, 2021, a decrease of 7% compared to $15.8 million for the same period in 2020. The change was a result of fewer units sold of Arimidex and Inderal XL, partially offset by the second quarter 2021 launch of brand products acquired from Sandoz.

Contract manufacturing revenues were $2.8 million during the three months ended December 31, 2021, an increase of 26% compared to $2.2 million for the same period in 2020, partially due to Novitium-related CDMO gains. Operating expenses on a GAAP basis increased by 49% to $84.7 million for the three months ended December 31, 2021, up from $56.9 million for the prior year period.

Cost of sales, excluding depreciation and amortization, increased by $9.4 million, with $33.9 million in the fourth quarter of 2021 compared to $24.5 million in the prior year period, primarily as a result of increased volumes. The increase also includes a charge of $3.7 million to recognize the excess of fair value over cost for assets acquired as part of the Novitium transaction and a $1.9 million litigation settlement, which was recorded to royalty expense. These items were partially offset by a $1.6 million of decrease related to sales of products subject to profit-sharing arrangements.

Excluding stock compensation and these impacts on a non-GAAP basis, cost of sales as a percentage of revenues was 46.2% compared to 42.6% on a like basis for the fourth quarter of 2020. The 3.6 point reduction in margin is principally the result of price compression in our generic product offerings and negative mix.

Research and development expenses declined from $3.7 million to $3.1 million, a decrease of 15% primarily due to the timing of generic R&D projects and the completion of the R&D phase of the Cortrophin recommercialization project.

Selling, general and administrative expenses increased by $16.3 million in the fourth quarter of 2021 to $30.7 million compared to $14.4 million in the comparable quarter in 2020. The increase primarily reflects $4.3 million of transaction expenses related to the Novitium acquisition, $9.2 million in sales and marketing expenses related to Cortrophin prelaunch activities and increased head count costs, including those associated with Novitium subsequent to the acquisition.

Depreciation and amortization expenses were $13.7 million for the three months ended December 31, 2021, an increase of $2.8 million compared to the same period in 2020. The increase is primarily a result of the initial amortization of intangible assets acquired in the Novitium transaction.

Adjusted non-GAAP EBITDA for the fourth quarter was $16.2 million compared to $17.2 million for the fourth quarter of 2020, a decrease of 5.8%. Our adjusted non-GAAP diluted earnings per share was $0.54 for the quarter compared to $0.80 for the fourth quarter of 2020. It is worth highlighting that fourth quarter non-GAAP EPS metrics reflect 14.2 million diluted shares, representing a partial quarter of additional shares outstanding related to the Novitium acquisition and the fourth quarter equity raise.

During the year, we generated $3.3 million of cash flow from operations. And as of December 31, we had $100.3 million of unrestricted cash and cash equivalents. Cash flow from operations during 2021 was constricted by approximately $10.5 million of cash-settled Cortrophin prelaunch activities, $9.4 million of Novitium transaction costs and $8.4 million of cash settled litigation settlements. These items were tempered by approximately $13 million of cash collected in the second quarter related to the final Yescarta-related royalties.

Total net debt utilizing the face value of debt, net of our cash on hand as of December 31, was $199.7 million, an increase of $12 million from September 30, 2021, driven by incremental debt incurred with the Novitium acquisition as tempered by the additional cash on the balance sheet, principally resulting from the public equity raise. Net leverage was 3.1 turns on a trailing 12-month basis as of the balance sheet date.

Now turning our attention to forward-looking guidance. For the projected 12 months ended December 31, 2022, ANI is providing guidance on ex-Cortrophin net revenue and ex-Cortrophin adjusted non-GAAP EBITDA, total company research and development expense and Cortrophin-specific SG&A. The following summarizes 2022 guidance. For total company ex-Purified Cortrophin Gel, we currently anticipate net revenues of between $260 million and $275 million, representing approximately 20% to 27% growth as compared to 2021, and adjusted non-GAAP EBITDA of between $70 million and $75 million, representing 8% to 16% growth as compared to 2021.

On a total company basis, we expect research and development expense of between $16 million and $18 million. And relating specifically to Purified Cortrophin Gel, we anticipate direct selling, general and administrative expenses of between $42 million and $46 million.

In addition, we currently project between 16.9 million and 17.3 million shares outstanding and an effective tax rate of approximately 24% prior to any federal tax reform.

With that, we’ll now open up the call for questions. Operator, please go ahead with the instructions.

Questions and Answers:

Operator

[Operator Instructions] And we will take our first question from Brandon Folkes with Cantor Fitzgerald. Your line is open.

Brandon Folkes — Cantor Fitzgerald — Analyst

Hi. Thanks for taking my questions. Maybe just two from me. I guess — I know that you may not be willing to answer this at this stage, but I guess, on the Cortrophin launch in 1Q, are you willing to just talk about where you are seeing initial reception there? And then maybe just on Novitium, can you just remind us in terms of what you said about that acquisition being accretive, should we think of it being accretive in 2022? Just I see you’ve recorded a net loss of $1.4 million from close to December 31. So just any way how to think about Novitium being accretive in 2022 and its impact on operating cash flow going forward? Thank you.

Nikhil Lalwani — President and Chief Executive Officer

Yes. Thanks, Brandon. Good to hear from you. Steve, why don’t I take the first question and then you can tackle the second? Sounds good?

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Sounds good.

Nikhil Lalwani — President and Chief Executive Officer

All right. So regarding early traction of Cortrophin, as you rightfully pointed out, we want to be thoughtful about what we share given our competitors. The early stage of our launch, and our competitor may be listening, and so what we’re willing to say at this point is, look, it’s been perfect timing for us as most physicians are ready for in-person visits. We’re seeing a strong weekly trend for prescriptions and growth week-on-week and new patient case initiations. And so while we are not yet ready to provide specific Cortrophin guidance in this early stage of launch, we’re very encouraged by the early traction we’re seeing. Steve?

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Thanks, Brandon, and good morning. Yes, so on Novitium. Novitium is generating a modest growth overall for our overall brand — I’m sorry, our overall generic business. However, right, our base business, we do expect to have continued pricing erosion. So as we’ve talked a lot about in the past, on the generic side of the house, right, it’s a game of having our generic launches outpace the erosion in our generic-based business. And so we do see our generic business posting growth in 2022.

In the overall guidance, however, remember that on the established brand business, that you would continue to have erosion in that portfolio. And as typical and consistent with past practices, our guidance does not reflect any assumptions around business development. And as I said in my prepared comments, right, ANI does expect, now that Novitium is closed, we do expect to continue to look for product-level tuck-in acquisitions as we’ve done historically in the past. And so in the guidance that’s reflected, we do have reductions on the brand, the ex-Cortrophin side of the house. So I think that’s what you’re seeing in the overall guidance.

And a comment, I think — yes, Brandon, last point. And as I was speaking to my prepared comments, right, on the expense side, I think you alluded to GAAP net loss in the fourth quarter. There’s obviously, in the fourth quarter, a very significant amount of transaction-related expenses, whether it relates to the Novitium transaction, the debt refinancing and the equity raise. And so I would point everyone to the press release and the tables to the press release, where, we not only have the reconciliation to get to the non-GAAP EBITDA metrics, but we also provide a reconciliation for some of the key functional expense areas. And so particularly on the SG&A side, I would point you to those non-GAAP reconciliations.

Brandon Folkes — Cantor Fitzgerald — Analyst

And if I can just follow-up there. I’m talking about Novitium operations, in particular. Just looking in the K here, I think they recorded a net loss of $1.4 million for that sort of 1.5 months. Should we factor those?

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Yes, if — you’re picking that up from the pro forma disclosures in the K, yes, Brandon?

Brandon Folkes — Cantor Fitzgerald — Analyst

Correct. Just ahead of the pro forma, yes.

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Yes. And so [Speech Overlap]

Brandon Folkes — Cantor Fitzgerald — Analyst

And Novitium generates 7.7 —

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Right. In that GAAP footnote disclosure, that’s done on — inclusive of all of the purchase accounting adjustments and overlays that GAAP has — you do in business combinations, so that would have amortization of intangibles, inventory step-up assumptions, etc. And so yes, so that’s on a fully baked GAAP basis.

Brandon Folkes — Cantor Fitzgerald — Analyst

Okay. That’s very helpful. Thank you. Can I just sneak in one more, coming back to Acthar, I mean, Cortrophin, I beg your pardon. But on the Acthar market, your competitor did put out numbers this morning. And Nikhil, you did touch on this, that decline, and you mentioned you are seeing it reverse. Any way you can help us frame how you’re thinking about the Cortrophin market in general in terms of how much it could reverse in 2022 given, hopefully, with COVID lifting?

Nikhil Lalwani — President and Chief Executive Officer

Yes. Look, at this point, I think a couple of things — a couple of data points to share. I think you — I think we all know what the ACTH market was in, in 2020, I believe it was $770 million-ish, right? So that’s one data point. You also know that this is in the public domain that the only other player has taken a price increase recently for this product. And that the other data points that I shared, right, the claims-based epidemiology analysis suggested that less than 10% of patients who are steroid-resistant and refractory across primary indications receive ACTH therapy. So I think just those three data points, we’re willing to share at this point. And that’s what drives our understanding of the tremendous opportunity in this product and to benefit patients in need.

Brandon Folkes — Cantor Fitzgerald — Analyst

Okay. Thank you very much to both of you.

Nikhil Lalwani — President and Chief Executive Officer

Yes, thanks, Brandon.

Operator

We will take our next question from Greg Fraser with Truist Securities. Your line is now open.

Greg Fraser — Truist Securities — Analyst

Good morning, folks. Thanks for taking the questions. Following up on the comments on the generics business, can you provide some color on how you’re thinking about price erosion for the base business in 2022? And can you also comment on how much erosion you saw in Q4 for the base business?

Nikhil Lalwani — President and Chief Executive Officer

Sure, Greg. So I’ll take the first part, and I’ll let Steve chime in for the second. Look, as many of the larger players have reported earlier, I think that we see the erosion in our base business to be in the high single digits, low double digits. Obviously, it varies. There is increased competitive intensity, as you have heard a lot about, more approvals for products that already have three to four players. We’re counting on the portfolio that we’ve — and the pipeline that we have from the Novitium acquisition from ANI New Jersey to sort of bounce and drive growth and achieve growth from these new launches. So that’s where I would sort of orient you in terms of erosion. Regarding Q4, Steve?

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Yes, Greg. Yes, in Q4 actuals, we experienced base generic erosion in the low double-digit range prior to product launches. So our fourth quarter experience is essentially in line with the planning assumptions for ’22.

Greg Fraser — Truist Securities — Analyst

Got it. Okay. And then on the SG&A spend for Cortrophin, how much of that is temporary launch spend that will wind down over time? Or should we think about that $42 million to $46 million as a base level of spend that you’ll ramp up necessary to drive demand as the product grows?

Nikhil Lalwani — President and Chief Executive Officer

Yes. No, good question. So look, as mentioned before, we’ll limit what we’re sharing to not hand over important information. As far as our spend of $42 million to $46 million, just to give you a bit more color, first major spend bucket, obviously, is people a bit more and have to spend this on the people. We can divide this into two groups. We have an almost 50% strong sales team. As we mentioned earlier, our clinical account executives are highly experienced in rare disease, over 12 years of experience from the leading rare disease companies such as Horizon, Alexion, Alnylam and Gilead. 75% of them have won President’s Club or equivalent in recent years. So please factor that in your understanding, as if you think of cost to company per rare disease sales rep. So that’s one.

In addition, we’ve had to bolster organizational infrastructure in key areas such as marketing, medical, market access, compliance, operations and analytics. And then to your point, there’s also a significant spend on commercial and operational infrastructure, some of which is a setup expense, as a lot of this we’ve had to build from scratch. These include infrastructure and system for the sales team, including Veeva, the CoverMyMeds hub, other operational and data and analytics systems and services.

Finally, there are other key areas of opex that are typical for a rare disease launch across marketing, medical, compliance, etc. Again, we prefer to steer clear of the specifics of these — of our programs and the mix, but that hopefully gives you a bit of color on the SG&A. And I guess, overall, directionally, I think that this would be the ballpark. Of course, as we expand our coverage, you can see that increasing, but not significantly. I think this would be in the range of what we are planning for year-on-year, going after the indications that we currently are pursuing.

So we hope to see, I guess [speech overlap] sorry, Greg, just one last thought. So we will see the leverage in the years going forward, right? So yes.

Greg Fraser — Truist Securities — Analyst

Yes. Understood. On payer coverage, you made some comments. Curious where coverage stands? If you can comment on that in terms of covered lives and how you expect coverage to evolve this year. If you have a target for covered lives by year-end, just any additional color there would be helpful. Thanks very much.

Nikhil Lalwani — President and Chief Executive Officer

Yes. Greg, as you’re aware, this is an important and critical area. And we’re having — we’re committed to supporting meaningful patient access and to bring this more affordable ACTH therapy to both government and commercial payer plans, prescribers and patients. We are in ongoing discussions and are encouraged by the discussions we’re having with payers as well as the pharmacy benefit managers, or PBMs. And we look forward to sharing more details in the future.

Greg Fraser — Truist Securities — Analyst

Thank you.

Operator

And we will take our next question from Elliot Wilbur with Raymond James. Your line is now open.

Elliot Wilbur — Raymond James — Analyst

Thanks. Good morning. First question or questions for Steve. Getting a lot of inbounds in terms of clients asking us to help sort of bridge the gap between EBITDA run rates, top line run rates exiting 3Q and 4Q and the initial 2022 guidance. And the simple question is this. When the Novitium deal closed, you guys talked about a pro forma EBITDA run rate for the first nine months of around $66 million, which would work out to about almost $90 million on an annualized basis. And then the full year guide for 2022 is $70 million to $75 million. I’m having a little bit of difficulty bridging those two numbers, even allowing for step-up in erosion in the base business. So can you just sort of help reconcile those two numbers for me and think about what some of the various moving parts may be?

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Yes. Sure thing, Elliot. Good morning. Yes. So just to refine the back-of-the-envelope math that you’ve done, on a pro forma basis, the company is producing about $86 million of EBITDA. And if I look at the fourth quarter run rate and kind of do the times format, right, that I think many of your clients are probably doing, it really comes down to the couple of factors that we’ve discussed. One is continued pricing erosion in the generic space. The environment is absolutely tougher today than roughly this time last year when we announced the Novitium transaction.

So that pricing impact on the company’s plan and the results and the guidance is more significant. And then, again, just the continued erosion in the established brands business. Those two factors together, right, when you have — they combine for a pretty significant negative mix — negative price and negative mix because the generic business is growing and the established brand business is declining.

And so we’re seeing meaningful compressions in the gross margin percentages. That really is the bulk of the story. On the expense side of the equation, when I look at the fourth quarter pro forma run rates compared to guidance, we’re essentially projecting relatively flat spend, both in SG&A and R&D. So it really is that gross profit effect on the EBITDA line.

Nikhil Lalwani — President and Chief Executive Officer

And just to build on what Steve said that with the full year number, I think there was nonrecurring events in 2021, which is the Yescarta royalty and certain nonrecurring milestones for Novitium CDMO business that were substantial, and that’s what’s reflected in the overall full year number.

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Right. So if you — yes, great point, Nikhil. If you adjust for those items, Elliot, the combined pro forma business would be in the low 70s for EBITDA generation for ’21.

Elliot Wilbur — Raymond James — Analyst

Okay. So not — not the mid high 80s, right, mid-70s?

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Yes. So remember, in the $86 million, right, remember the ANI in the fourth — in the first quarter of last year had $11 million pickup from the final Yescarta royalty closeout. So that takes $86 million to $75 million. And then in the Novitium portfolio, remember, they have a bit more of CDMO arrangements that are more focused on the development side of the equation as the base ANI CDMO, which is kind of more plain vanilla manufacturing portion. So in the Novitium portfolio, when you look at quarterly performance, there can be a little bit of chunkiness in terms of milestone achievement and certain triggers for revenue on their CDMO side of the house. So if you were to adjust for a couple of those events, you would take that $75 million down into the low 70s, probably 72-ish.

Elliot Wilbur — Raymond James — Analyst

Okay. Understood. I guess I just wasn’t making those adjustments. The follow-up question, with respect to Cortrophin and formulary placement and initial coverage, I understand that this is still kind of in the early stages here, Nikhil. But maybe you could just help us think a little bit about your expectations in terms of formulary placement. I mean, you’re starting to see various coverage policies appear. And honestly, they’re kind of all over the place. I mean, we’re seeing Cortrophin placed on Tier 3 with prior authorization required similar to Acthar. And then we’ve seen it all the way down to where it’s actually bumped Acthar from formulary altogether. Or where the payers are requiring step-through therapy with Cortrophin before patients can eventually get on Acthar, assuming that they do, which, obviously, is quite favorable for you guys. But I’m just — I’m trying to think about like where — as all these coverage policies evolved and enter the public domain, like sort of what’s a reasonable expectation, I guess, in terms of where you expect the majority of coverage to kind of fall for Cortrophin?

Nikhil Lalwani — President and Chief Executive Officer

Yes. Thank you, Elliot. Look, we are committed to supporting meaningful patient access that’s reflected in the more affordable ACTH therapy that were — that we’ve brought to both government and commercial payer plans. And as I said before, we’re very encouraged by the ongoing conversations. I prefer to steer clear of the details, but I understand the ask, and I look forward to sharing more about the specifics of lives covered, what formulary status have we achieved and giving you more specifics in future conversations.

Elliot Wilbur — Raymond James — Analyst

Okay. And then just maybe last question in terms of — just a quick clarification question. So with respect to first quarter 2022 financials, fair to assume that you’ll recognize revenue for all Cortrophin shipments into the distribution channel?

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Yes, Elliot, that’s correct.

Nikhil Lalwani — President and Chief Executive Officer

That’s correct.

Stephen P. Carey — Senior Vice President and Chief Financial Officer

Yes.

Elliot Wilbur — Raymond James — Analyst

Okay. Those are my questions. Thank you.

Operator

We have no further questions on the line at this time. I will turn the program back over to Nikhil for any additional or closing remarks.

Nikhil Lalwani — President and Chief Executive Officer

Yes. Thank you. So thank you, everyone, for joining us on the call this morning. We appreciate your support as we move forward on our path of bringing high-quality medicines to the patients who need them and delivering shareholder value. While 2021 was a momentous year for ANI, it’s only the beginning. Thanks again, and stay well.

Operator

[Operator Closing Remarks]

The post ANI Pharmaceuticals, Inc. (ANIP) Q4 2021 Earnings Call Transcript first appeared on AlphaStreet.

360 DigiTech Inc (QFIN) Q4 2021 Earnings Call Transcript

This article was originally published on Alpha Street

360 DigiTech Inc (NASDAQ:QFIN) Q4 2021 Earnings Call dated Mar. 10, 2022.

Corporate Participants:

Mandy Dong — Investor Relations Director

Haisheng Wu — Chief Executive Officer and Director

Alex Xu — Chief Financial Officer and Director

Analysts:

Yada Li — CICC — Analyst

Richard Xu — Morgan Stanley — Analyst

Ethan Wang — CLSA — Analyst

Thomas Chong — Jefferies — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech Fourth Quarter and Full Year 2021 Earning Conference Call. Please also note today’s event is being recorded.

At this time, I would like to turn the conference call over to Ms. Mandy Dong, IR Director. Please go ahead, Mandy.

Mandy Dong — Investor Relations Director

Thank you. Hello, everyone, and welcome to our fourth quarter and full year 2021 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Xu, our CFO and Director; and Mr. Zheng Yan, our CRO.

Before we begin the prepared remarks, I would like to remind you of our safe harbor statement in our earnings press release, which also applies to this call. We may refer to forward-looking statements based on our current plans, estimates, and projections.

Also, this call includes discussions of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP ones. Last, unless otherwise stated, all figures here are in RMB.

I will now turn the call over to our CEO, Mr. Wu Haisheng.

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] Hello, everyone. I’m very happy to report another solid quarter that capped off a strong year. In 2021, total loan facilitation through our platform reached RMB357.1 billion, up 45% year-on-year. This beats the midpoint of our raised full-year guidance. In Q4, total loan facilitation reached RMB96.9 billion, up 4-0, 40% year-on-year. Outstanding loan balance reached RMB142 billion, up 45 — 54% year-on-year. Our business overcome multiple challenges related to macro economy uncertainty, through erratic outbreak of COVID and the fast-changing regulatory environment in a rather volatile year of 2021. We delivered the growth while maintaining stable asset quality and further demonstrating the resilience and the flexibility of our business.

[Foreign Speech] Now let me walk you through some updates for Q4.

[Foreign Speech] Regulation remains an area that draws a lot of attention. So let me first share some updates here. The overarching theme of the government policy for 2022 is very clear, which is to achieve steady economic growth by driving consumption, suggesting more supportive to the development of consumer finance. We expect the policymakers to introduce additional measures to drive consumption and support SMEs as China’s State Council has made the above-mentioned policy theme as their higher priority. For example, in municipal level 14th Five Year Plan for the financial industry report, City of Chongqing supports the expansion of consumer finance industry through a proper loosening of financing restrictions for consumer finance companies. At the central government level, PBOC has acknowledged the value of fintech in its fintech development plan for 2022 to 2025. There are tremendous opportunities for financial institutions and the tech companies to work together and contribute to the digital transformation of financial sector. In addition, the PBOC and other national regulators are promoting innovation in financial standardization outlined in the 14th Five Year Plan for the financial standardization. We actively participate in policy design-related discussion organized by a regulator and contribute our industry know-how to support efforts.

[Foreign Speech] In Q4, we started to implement rectification measures in accordance with the regulatory requirements. We have enhanced our corporate governance structure and further focus on our core business. At a recent briefing, Guo Shuqing, Chairman of CBIRC stated that the self-check part of rectification work has been largely completed. Overall progress of rectification has been smooth so far and are confident to complete the rectification work very well. Based on the regulatory guidelines and our own business needs, we increased the registered capital of our micro-lending subsidiary in Fuzhou to RMB5 billion. This enhanced our capabilities to serve users and manage risks going forward. We will continue our strategy on both direct and indirect loan service.

On one hand, we will offer loans through our micro-lending company directly to target customers and industries. On the other hand, we will work with credit agencies and help financial institutions better serve consumers. We believe that financial regulators will continue to work on the implementation of the previously released general regulatory principles, such as financial service can only be undertaken with proper financial license. We will focus on the execution of the rectification plan and the regular monitoring of the progress. We are entering the late-stage of many rectification process and waiting for the review and the certification by the regulators.

[Foreign Speech] In Q4, we also made progress in a few other compliance-related areas, average API who are long facilitated through our platform declined 2% from previous quarter, effectively brought down the cost for our borrowers. In terms of the data-related compliance, we continue to increase investment in data security and data protection. The China Cybersecurity Review Technology and Certification Center, CCRC, awarded its security certification to our flagship product, the 360 Jietiao APP, adding another national certification for privacy protection to our products.

We also obtained the ISO 27701 certification, Privacy Protection Management System issued by SGS, a well-known international standard certification organization. This is the second important international standard certification in privacy and information protection area we received following the ISO 27701 Information Security Management System a few months ago. In addition, the Cybersecurity Management Bureau under the Ministry of Industry and Information Technology, MIIT, issued a written commendation of our excellent performance in the special content for app users’ privacy protection.

[Foreign Speech] In Q4, we also achieved excellent results in several operational areas.

[Foreign Speech] On the product front, our consumer loan business achieved a high-quality growth throughout the year. Our SME loan product, which we launched last year grew rapidly and delivered a satisfactory results in Q4. Total amount of new approved credit lines for SME loans accelerated and grew by, 1-6, 16% sequentially to RMB9.3 billion. As of the end of 2021, the outstanding loan balance of SME loans accounted for, 1-3, 13% of our total loan book. Meanwhile, we continue to refine SME products and expand to better quality customer group by offering larger ticket size products, targeting specific SME group off-line. For example, we expanded our collaboration with banks to access corporate credit record. This allows us to offer bigger ticket size credit products and attract more high-quality SME borrowers.

Another effective approach is that, we offer customized products to the tobacco and alcohol retail borrowers during Chinese New Year when their funding needs surged and turnover increased. To capitalize such opportunities, we simplify approval procedures and increased direct sales for the e-commerce group. In December, credit line granted to the tobacco retail borrower acquired by our direct sales team accounted for more than 20% of the total SMEs and the transaction volume increased by, 1-0-6, 106% on a monthly basis. Meanwhile, starting off this year to offer differentiated service to SMEs and consumers and to improve efficiency, we will serve SME users through an upgraded app separate from 360 Jietiao. In addition, on top of the credit service we currently provide, we will actively explore other service and products to better support SMEs business operations.

[Foreign Speech] In collaboration with financial institutions, we leverage our technology advantage and expanded partnership with stronger financial institutions. This enabled us to further optimize the mix of our financial institution partners and establish a more balanced and resilient partner network. Newly added financial institution partners has brought renewed coverage, strong risk management capability and a diverse business line. Moreover, our ICE products offers passive add to better fitting the compliance requirement of some banks. This will enable us to develop standard solutions to work with more banks in the future. Meanwhile, we continued ABS insurance in Q4 with a total of RMB1.1 billion at a low coupon rate of 5.7%. This brought our total ABS insurance for the full-year to RMB6.5 billion, up by 282% year-on-year. Our overall ABS funding cost for 2021 was 5.47%.

[Foreign Speech] As for our customer base, the overall quality of newly acquired customers gradually improved coming along with lower pricing. The value of those high-quality customers will be gradually released over the life cycle. As price declines, we note some key indicators of user quality improved significantly, such as the ratio of user with multi-platform credit lines, user with mortgage and car loans, user with a stable income and users with tangible assets based on the A/B group test we conducted, the drawdown ratio and the retention rates are both higher for borrowers at lower pricing. We expect these customers will generate higher LTV as well.

[Foreign Speech] In Q4, we also made a noticeable progress to enhance our tech capabilities on multiple fronts as we remain committed to become a tech-empowered loan facilitating platforms, serving our financial institution partners and borrowers. We leverage our AI and big data tech to effectively identify customer risk profiles and then match borrowing needs and funding resource-based massive data inputs.

[Foreign Speech] First, we made major upgrades to the framework of our smart marketing system. This significantly improved our ability to better identify users and enlarge our processing capacity. Our average user quality was up by over 20%. Our efficiency in user acquisition was also improved by over 20%. The scale of our identifiable user base increased by threefold. Second, we continue to make key innovations by deepening integration of AI application with our Argus Risk Management System in the areas of community detection, hierarchical federated learning and risk management strategy automation. These have strengthened our ability to identify potential borrower and manage risk. Third, as for AI-powered operation technology, our proprietary production diagnostic platform provides one-stop smart diagnostic service, which enhance the effort experience into automated tools. These tools ensure the stability and accessibility of our service. The platform can identify problems within 30 seconds and boost our diagnostic efficiency by 99.0%.

[Foreign Speech] Looking ahead of 2022, considering the macro uncertainties, we will continue to take prudent operating strategy as always. From what we have learned from past success, we believe that holding prudent and steady approach in daily operation is the golden standard for the fintech business when macro uncertainties arise.

[Foreign Speech] After all the rectification in 2021, we expect to see a much clearer regulatory framework for the fintech industry in 2022, which should allow industry participants to be more focused on long-term business development. We will prioritize our technology-driven strategy and continue to invest in R&D, further pursuing innovative solutions and business models for our 2B business will explore more diverse products and service for different financial institutions. Meanwhile, we will collaborate with stronger financial institutions to optimize the mix and the quality of our partnership network and ultimately to boost our services sustainability.

For 2C business, we will continue to upgrade our technology and models to better identify high-quality borrower and optimize our user base matrix. We will roll out more products catering to these high-quality customers. This will bring higher customer LTV and retention rates as well. We will bring very positive change in our business following all the hard work we did last year, thus, we are quite looking forward to the year ahead.

For our on-balance sheet loan business, we have increased the registered capital of our licensed micro-lending subsidiary to RMB5 billion. This is a crucial strategy resource that we definitely will capitalize on.

[Foreign Speech] With these structural upgrades and improvements, I believe we will serve our customers, partners and society more efficiently in 2022, making us a healthy and more resilient and more sustainable company. This will enable us to better serve the real economy and contribute to China [Technical Issues] strategy for steady economy growth.

[Foreign Speech] Now, I will turn to our CFO, Alex for more financial details.

Alex Xu — Chief Financial Officer and Director

Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our quarterly earnings call. As Haisheng mentioned, despite facing multiple macro challenges, we delivered solid Q4 results in both operations and financial fronts, and finished 2021 with a series of record-setting annual numbers on the book. During the quarter, we saw continued healthy consumer demand for credit, while asset quality was fluctuating in Q4 mainly as a result of [Technical Issues] we are glad to see improvement in the new year as funding becomes ample.

Net revenue for Q4 was RMB4.4 billion versus RMB4.6 billion in Q3 and RMB3.3 billion a year ago. Revenue from credit-driven service capital-heavy was RMB2.71 billion compared to RMB2.62 billion in Q3 and RMB2.56 billion a year ago. The year-on-year and sequential increase was mainly due to growth in on-balance sheet loans and releasing guarantee liability on previous loan balance, more than offsetting the decline in capital-heavy facilitation volume and revenue take rate. The take rate decline was as expected as the average prices of our loans were lowered by 200 basis point during the quarter, while the offsetting factors yet to kick in. Revenue from platform service capital-light was RMB1.71 billion, compared to RMB1.99 billion in Q3 and RMB780 million a year ago. The strong year-over-year growth was mainly driven by a significant increase in capital-light loan volume. The sequential decline was due to a decrease in capital-light loan volume, along with a modest decline in revenue take rate in Q4.

During the quarter, capital-light and other technology solution contribute roughly 54% of total loan volume. Capital-light loan volume was negatively impacted by seasonal shortage of overall funding supply as well as the 24% rate cap related tightening from traditional funding sources. At least for the first half of 2022, we expect capital-light percentage contribution to our total volume to remain fluctuating around current level as the industry gradually adjust to the new rate cap. At the core of our long-term growth strategy, we will continue to pursue tech-driven business model. After this transitional period in 2022, we expect capital-light to become a larger portion of our business in the long run.

During the quarter, average pricing of our loan portfolio dropped by 200 basis points. And by the end of 2021, average interest rate of loans on our platform were already below 24%. The 200 basis point cut in Q4 was faster than previous trajectory and we did it proactively. We believe this will give us a great flexibility in Q1 and Q2 of 2022 to be in compliance with the regulatory requirements and ultimately hit our target — rate cut target by mid-year deadline.

During the quarter, on a blended basis, average customer acquisition cost per user with approved credit line was RMB319 compared to RMB305 in Q3. As we elaborated in last quarter’s earnings call, we continued to focus on attracting high-quality borrowers those with much larger credit lines and relatively low risks. The average ticket size of these customers typically run between 150,000 to 200,000 compared to average of 10,000 for our regular borrowers. The unit cost to acquire those high-quality customers are justifiably much higher than the regular borrowers. So to compare things apple-to-apple, excluding large ticket size customers in both consumer and SME markets, average cost per approved credit line of regular borrowers was approximately RMB246 in Q4 compared to RMB249 in Q3. As we discussed in the past, average cost per approved credit line is a calculated number with limited value in our internal decision-making process. We will continue to use lifecycle ROI and LTV as key metrics to determine the pace and scope of our customer acquisition strategy. Throughout 2021, we have maintained healthy ROI and our LTV trend, which in turn drives stable net take rates.

As overall risk metrics fluctuating in Q4, we continue to take prudent approach in booking provisions against potential credit loss. New provisions for contingent liability for loans originated in the quarter was approximately RMB1.6 billion. Meanwhile, approximately RMB400 million of provisions from contingent liability of previous period loans was written back as actual performance of those loans was better than expected.

Effective tax rate for Q4 was approximately 14.8%, which brought full-year ETR to approximately 17.3%. Going forward, we expect ETR to normalize to around 15%, which will be sustainable in the foreseeable future based on our current tax planning schedule. With strong operating results and stable contribution from capital-light model, our leverage ratio, which is defined as a risk-bearing loan balance divided by shareholders’ equity remain at a historical low of 4.3 times in Q4 compared to 6.6 times a year ago. We expect to see rather stable leverage ratio for the time being until capital-light contribution resume growth in the future.

We generated RMB2 billion cash from operations in Q4, compared to RMB1.8 billion in Q3 and RMB1.2 billion a year ago. Total cash and cash equivalents was RMB9.6 billion in Q4, compared to RMB7.6 billion in Q3. Non-restricted cash was approximately RMB6.1 billion in Q4 versus RMB4.2 billion in Q3. The meaningful increase in cash was in part due to the timing of the registered capital increase for our micro-lending subsidiary, which results in large cash balance sitting in bank accounts at the year-end as opposed to being deployed in normal course of the business. As always, a significant portion of our cash would normally be allocated to support our on-balance sheet loans and security deposit with our institutional partners. As we’ll continue to generate healthy cash flow from operations, we believe our current tax position is sufficient to support the growth of our business to invest in key technologies, to satisfy the potential regulatory requirements and to return to our shareholders. If you’ll recall, our Board of Directors approved a quarterly dividend policy in Q3, allowing us to distribute approximately 15% to 20% of quarterly net income after tax in the form of cash dividends on a recurring basis. In accordance with this dividend policy, we declared another quarterly dividends of USD0.26 per ADS for Q4. This cash dividend represents approximately 20% of our Q4 earnings.

Finally, let me give you some update about our outlook for 2022. As we communicated to the market previously, we believe 2022 will be a transitional year for the industry as the participants are adjusting to the new regulatory settings, as well as some macro uncertainties. As such, we expect total loan volume for the year to be between RMB410 billion, RMB 450 billion, representing year-on-year growth of 15% to 26%. We view this transitional year as an opportunity was to optimize our operation, strengthen our technology platform and upgrading our customer base to build an even stronger foundation for future growth. As always, this forecast reflects the company’s current and preliminary views, which is subject to material change.

With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

Questions and Answers:

Operator

Thank you management. [Operator Instructions] Our first question is Yada Li from CICC. Please go ahead.

Yada Li — CICC — Analyst

[Foreign Speech] Okay. Now I will do the translation. The first one is, I’d like to know the progress of the pricing adjustments. What’s the proportion of loans in 4Q ’21 that are priced under the 24%? And how much this proportion can reach up to for the first quarter this year? And when the pricing going downward and the target customers sort of get strong, I was wondering how are we shifting our customer acquisition strategy? Thanks.

Alex Xu — Chief Financial Officer and Director

Sure. Thanks Yada. I would take the first part of the question and then Haisheng will do the second part. So in the fourth quarter, over 70% of our customers are priced below 24%. And as I mentioned in the prepared remarks, by year ending, the average price is already below 24%. And this quarter, in Q1, we’re expecting even larger portion of customers being priced below 24%. And we are pretty confident that we will get the targeted rate cut goal by the mid-year deadline. Haisheng?

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] Yes. Let me translate for our CEO. As for your question, the customer acquisition strategy to access the higher quality customer groups, we will leverage three approaches. Number one, further increase more — invest more in R&D to improve our tech and the AI models to better identify the customer risk profiles. What is the roadmap in Q4? Second approach, we address our API customer acquisition approach with our capital enhancement study within the off-line trend, which historically showed is a much better approach, especially for the high-quality customers.

Operator

Our next question is Richard Xu from Morgan Stanley.

Richard Xu — Morgan Stanley — Analyst

[Foreign Speech] Basically, my question is on the funding front. There has been increasing in ADS also the small loan company. Capital injection that’s also completed. So want to see whether there is a credit line with the banks where cooperation with the banks is still expanding. And what will be the long-term mix in terms of the funding between capital-light, capital-heavy and then their different funding sources? [Foreign Speech]

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] Yes, to answer your question, Richard, you are very correct. First, we will continuously expand our number of financial institution partners by introducing stronger banks. As this comes along, we can offer larger ticket size to better quality customers. Second, as for the capital-light volume, we will explore more diverse products catering to different needs of financial institutions. Their needs include marketing surveys, risk management surveys and loan collection surveys.

Alex Xu — Chief Financial Officer and Director

I just want to add one point. So from a longer-term perspective, the capital-light contribution, as I mentioned in the prepared remarks, will be moving higher from current level. If you recall, in the past, we were at some point targeting like two-thirds or 70%. I think from a longer-term perspective, that’s probably still be the target. This year, we’ll be fluctuated around this current level just because the whole industry is adjusting to the new environment. And when we’re done with this adjustment, the trendline will start to move to the higher direction for capital-light.

Operator

Our next question is Ethan Wang, CLSA.

Ethan Wang — CLSA — Analyst

[Foreign Speech] Okay. I have two questions. Firstly, a quick follow-up. Just wondering the funding cost for the fourth quarter and the management view on funding cost for this year. And second question is on the market concern on tightening regulation for the local financial institutions or causing financial institutions. And so, for the regional banks who are collaborating, just wondering whether they are having concern on this front, and whether that’s going to impact our business. And for the guarantee companies, does that mean there were set up various institutions across the country, so we can cooperate with them to lend nationwide? Thank you.

Alex Xu — Chief Financial Officer and Director

Okay. Thank you Ethan. I will take the first part again and then Haisheng will be taking care of the second one. So for the funding costs for the Q4, it was approximately 7%. And the Q4, as you know, it’s always been a very tightening period from money supply perspective in the financial system. So normally that’s reflecting the funding costs. And for moving into this year, as we sort of gradually transition to new institutional partners, the overall funding supply, we’re getting more sufficient. But during this transitional period, we are expecting a rather stable funding cost around 7% and after we’ve done with this transitional, we’ll probably start to see a gradual, although modest kind of decline in funding cost in the long run. Haisheng?

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] Yes, Ethan, to answer your question, number one, your question comes from the very early requirement that the online loan business for urban commercial banks, this is quite early regulation and the regulator gives a rather long grace period for all the market participants. The cutoff date issue is January 1 this year. Currently, all our financial institution partners are within the compliance. Secondly, looking at the metrics of our financial institution partners network, most of them are national wide operations. Therefore, we have very limited impact from this regulation.

[Foreign Speech] Yes. The second part of your question, the regional restriction for guaranteed companies, guarantee company can set local branch national wide to satisfy these requirements. It’s comparatively easy compared to the banks to cover national wide.

Operator

Our next question is Thomas Chong from Jefferies.

Thomas Chong — Jefferies — Analyst

[Foreign Speech] I have two. My first question is about the SME strategies. Can management comments about how we should think about the contribution over the future as well as the borrowing cost and the loan size going forward, together with the industry categories that we are working with? And my second question is more about the macro headwinds that we are facing these days, and outbreak of COVID. Are we seeing any changes in terms of the consumer behavior in terms of the use of the proceeds? Thank you.

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] Well, first, regarding your question about SME business, the average ticket size for SME products, the overall is about RMB50,000, for some tax loans, which is larger ticket size, usually we provide products over RMB250,000. For the tax loan, we estimate the marketing expense is around 2%. Secondly, for your question about the use of loan, as most of our consumers were in the industry that are less impacted around the COVID and the macro economy, we are seeing their use of loan is consistent with previous.

[Foreign Speech] I want to add more color for our operating strategy for SME business line, even under the tremendous demand from SME borrower and the supportive policy from government, we take a very prudent strategy in this business. We focus on those industries that are less impacted by the macro economy such as manufacturing and retail. This year, we do not expect to accelerate potentially in these businesses line. Again, we will take very conservative role. Also, we like to explore more capital-light and the more tech-driven solutions for financial institutions in this SME business.

Operator

Thank you. This is the end of our question-and-answer section. Now, I give it back to the management for closing remark. Thank you.

Alex Xu — Chief Financial Officer and Director

Okay. Thank you for — again, for participating in the call. And if you have any additional questions, please contact us off-line and we’ll discuss then. Thank you.

Operator

[Operator Closing Remarks]

The post 360 DigiTech Inc (QFIN) Q4 2021 Earnings Call Transcript first appeared on AlphaStreet.

IHS Holding Limited (INFO) Q4 2021 Earnings Call Transcript

This article was originally published on Alpha Street

IHS Holding Limited (NYSE: INFO) Q4 2021 earnings call dated Mar. 15, 2022 Presentation: Operator Good day, and welcome to the IHS Holding Limited Results Call for the three-month period……

stock earnings conference call transcript

This content is for members only. Visit the site and log in/register to read.

The post IHS Holding Limited (INFO) Q4 2021 Earnings Call Transcript first appeared on AlphaStreet.