Q4 2023 Burning Rock Biotech Limited Earnings Call

Operator: Good day, and thank you for standing by. Welcome to the Burning Rock 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in listening mode. Please be advised that today's conference is being recorded. Before we begin, I'd like to remind you that this conference call contains four forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These four lucky statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, target, confident, and similar statements.

Yeah.

Okay.

Good day, and thank you for standing by.

None: I'll come to the burning rock fourth quarter 2023 earnings conference call.

None: At this time all participants are in listen only mode. Please be advised that today's conference is being recorded.

None: Before we begin I'd like to remind you that this conference call contains forward looking statements within the meaning of section 21 E. Other Securities Exchange Act of 1934 as amended and as defined in the U S. Private Securities Litigation Reform Act of 1995.

None: These forward looking statements can be identified by terminology, such as well expects anticipates future intends plans believes estimates target confident and similar statements.

Yusheng Han: Statements that are not historical facts, including statements about Burning Rock's beliefs and expectations, are forward-looking statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risk, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond Burning Rock's control. Such forward-looking statements involve risk, uncertainties, and other factors that could cause actual results to differ materially from those contained in any such statements. Burning Rock does not undertake any obligation to update any foregoing statements as a result of new information, future events, or otherwise, except as required under applicable law. I would now like to hand the conference over to your speaker today, Mr. Yusheng Han. Please go ahead.

None: Statements that are not historical facts, including statements about <unk> beliefs and expectations are forward looking statements.

None: Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks uncertainties and other factors all of which are difficult to predict and many of which are beyond burning rocks control.

None: Forward looking statements involve risks uncertainties and other factors that could cause actual results to differ materially from those contained in any such statements.

None: Burning rock does not undertake any obligation to update any forward looking statements as a result of new information future events or otherwise, except as required under applicable law.

Speaker Change: I would now like to hand, the conference over to your Speaker today, Mr. New Shanghai Tang. Please go ahead.

Yusheng Han: Thanks, Shannon. This is Yusheng Han, the CEO and founder of Burning Rock. And today you also have our CFO Liu Li and CTO Zhou Zhang online. So, I'm very glad to share the annual financial report with our investors. So let's turn to page three. That explains how we started and how we evolved.

Speaker Change: Thanks Janet.

Speaker Change: Is it that you don't have the CEO and founder of burning rock and today you will also have our our Seattle really.

Speaker Change: Total online.

Speaker Change: So very glad to share the anymore.

None: Financial reports.

None: That's it.

None: So, let's turn to page three bags planes that are how we started and how we can work with.

Yusheng Han: We started from the several views section in 2014. And then, with the development of NGS technology, we expanded our market to early detection, to MRD, and also to biopharma services. Now, let's turn to page 4.

None: We started from the Caribbean traction from our 2014.

None: With that you brought up enough ingest technology, we expanded our.

None: Our market too early.

None: Detection to Marty and all of her two about pharma services.

None: And in now, let's turn to page four.

Yusheng Han: So, you know, with the microenvironment changes in the past three years, we have a make-up strategy dedicated to efficiency gains and driving towards profitability. And we want to deliver in the early last year the result of driving sales efficiencies, improving gross margin, reducing G&A expenses, and also reducing R&D expenses. And all the targets are making the company profitable. And in terms of driving sales efficiency, we're going to, we plan to increase sales productivity, perhaps, and also with the capital market cooling down, we will benefit from a more rational industry coming. And the second is improving the cross-margin.

So you know with the macro environment changes and are in a pass.

None: Three years.

None: We have.

None: Makeup strategy dedicated to.

None: For two days.

None: Again driving towards that appropriate at parity.

None: And.

None: Our we want to deliver.

None: And the early next year.

None: Here, we wanted to deliver that reads out.

None: Right.

None: Driving sales efficiencies improving gross margin.

None: Looking at G&A expenses, and also recruiting R&D expenses in order to target it's making.

Company appropriate Bell first.

None: And in terms of the driving sales at the jetty.

None: We're going to we plan to increase the sales rep productivity.

None: Productivity per head and also.

None: With the.

None: Capital market.

None: Putting down with any of it from a more rational industry competition.

None: And a second half that improving gross margin.

Yusheng Han: So the first thing we do is we have a scale of sales. So we leverage that on that. And also, we delivered our margin improvement project, including cutting various sales and marketing expenses and also cutting the cost of goods by bargaining with the supplier. And third, we reduced GMA expenses. We cut the overhead, lowering the fixed cost base. And the fourth thing is reducing R&D expenses as our major clinical programs, such as multi-cancer early detection complete and the burning rate, are cooling down. And in terms of new investment, we are very disciplined, counting on the NPV carefully. But we're still invested in MRD and also CDFs and also MCD, and we are conservative.

None: So the first person with that we do that we are we have a scale.

So the leverage on that.

None: Also we delivered our margin improvement project, including cutting, whereas our sales and marketing expenses also cutting the cost of goods.

None: Bye bye birdie away that way.

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And third as the reducing our G&A expenses.

None: We cut the over our overhead.

None: Lowering our fixed cost base.

None: And the fourth thing is we're reducing R&D expenses that.

None: Our.

None: Major clinical programs.

None: Such as multi cancer early detection complete and in the Permian without burning rate.

None: According to al.

None: And so in terms of new investment we are counting on the M.

None: PV carefully.

Patrick: Patrick with steel.

None: Hi, Marty.

Marty: And also M C D and <unk>.

Yusheng Han: Page 5 explains how we achieve driving sales efficiency. You can see that in the Q2 of 2022, we reached the highest point of sales expense percentage at 77%. And then from there, we gradually and significantly... [inaudible] took the number down to 38 percent in the Q4 of 2023. So that is a significant change, and we expect it in the coming year. The number will go down further.

None: Okay great.

None: So page five planes.

None: How we would achieve about driving sales efficiency.

None: See that in the Q2 of 'twenty can you tube, we reached our highest point.

None: Also as a percentage to our 77 percentage.

None: And then from there we are.

None: Gradually and significantly.

None: Joe.

None: That number down.

None: Two Q4 up <unk> 23 to <unk> 30.

None: 38%.

None: That is a significant change in the we expected in the coming 2024. The number will go go down further that increased our <unk> status.

Yusheng Han: That increased our sales expense efficiency increased a lot. On page six, the index and our non-GAAP gross profit as a percentage of revenue. We, you know, cost of goods is a significant cost of the NGS industry, especially for colleges. So we continuously replace the true suppliers and also bargain with a shipment and other issues in terms of cost of goods.

None: Efficiency increase a lot.

None: In page.

None: Page six and our non-GAAP gross profit as a percentage of revenue.

None: We.

None: Cost of goods.

None: It's a significant cost of jazz industry, especially for oncology.

None: We continuously to replace tier.

None: To our supplier.

None: And also partnering with shipment.

None: Issues in terms of.

None: In terms of cost of goods. So we can see that the gross margin continuous increase.

Yusheng Han: So we can see that the gross margin continuously increased from 72.5% in 2021 to 74.3% in 2023. And we expect that at that rate, the gross margin will continue to grow in 2024. On page three, I explain how we reduce our GMA expenses. We can see that the major cut is a reduction in headcount and related costs. And then the professional services fees, such as legal fees. And the third thing is the reduction of— [inaudible] close part of the Shanghai office, and also in 2024, I think we can see further reduction by bargaining with the owner of the land to see the reduction in office space. And there's the other reduction as well.

None: From the 72 five percentage.

None: 2021 to 74, 3% percent after 2023, and we expect that that rate. The gross margin will continue to grow in 2024.

None: Okay.

None: In in page three I explained how we reduce our G&A expenses.

None: We can see that the major cut is that reduction in head count.

None: Relative cost.

None: Then.

None: <unk>.

None: Personal services fees such as.

None: Legal fees.

None: And the third thing is that reduction.

None: Yes. It is.

None: We.

Closed part of the Shanghai Shanghai.

None: Office and also in 2024, I think we can see further reduction.

None: By targeting ways to.

None: With the with the owner of the land.

None: To see that.

None: Reduction in office space, and it's either a reduction in that as well so.

Liu Li: So overall, in 2023, we can see that the G&A expenses are reduced in terms of RMB of around over 60 million. So on page 8, let's see, page 8, from page 8 to page 9. I will hand over to our CFO, and our CFO Liu Li, to explain the chart and numbers. Liu, please.

None: All in 'twenty to 'twenty, three we can see that the G&A expenses reduced.

None: In terms of RMB.

None: Around.

None: Over $60 million.

None: Yeah.

None: So in.

None: In page eight let's see page eight.

From page to page 10, I will hand to our CFO and a two hour sample literally. Please go ahead claimed the charter numbers, we hope with <unk>.

Jinxiang Li: Sure. Thank you, Yusheng, for taking us through the initiatives we've taken and how that has translated into the P&L alliance. On page eight, we're trying to supplement that by starting with our operating profit and breaking that down into what is the commercial aspect versus the investment in R&D and also what's cash and non-cash. So on page eight, we start with our reported operating profit of a negative 166 million RMB. We first add back our R&D expenses of 73 million RMB. This is to separate what's already at the commercial stage versus what's in the investment. So first, we take our R&D expenses. Then we take out non-cash items.

CFO: Thank you for taking us through the initiatives, we've taken through and what has that translated.

CFO: Into the P&L lines on page eight we are trying to supplement that by.

CFO: Starting from our operating profit and break that down.

CFO: Into what is the commercial aspects versus the investments in R&D and also watch some cash and noncash. So on page eight we start with our reported operating profit of a negative 166 million RMB. We first add back our R&D expenses of 73 million RMB. So this is to separate.

CFO: What's already at commercial stage.

CFO: It's what's in the investment and so for US we take how R&D expenses.

CFO: And then we take out noncash items. The three major items are share based compensation depreciation and amortization of our fixed assets and lastly, the provision of receivables and contract assets. So.

Jinxiang Li: The three major items are share-based compensation, depreciation, and amortization of fixed assets, and lastly, provision for receivables and contract assets. So these three we actually expect to decrease going forward, but here just for illustrative purposes, we take out these three non-cash items and get to where we are on the commercial business excluding R&D expenses and non-cash provisions, and on that measure, we are at a positive 4 million RMB for the fourth quarter of 2023. So, on that basis, excluding R&D and excluding non-cash costs, we are Page nine talks about our cash position. So this is a slide that we have been going through on each of our quarterly calls. At the end of the year 2023, we ended with a cash balance of 615 million RMB. In the year, we had a cash outflow of about 265 million RMB.

CFO: So at least three we actually expect to decrease going forward by here just for illustrative purposes, we take out these three noncash items and gets to where we are.

CFO: On the commercial business, excluding R&D expenses and noncash provisions and on that measure we are at a positive 4 million RMB for the fourth quarter of 2023, and so on that basis, excluding R&D and excluding noncash costs. We are at profitability already in the fourth quarter of 2023, and we expect this to further improve.

CFO: As we head into 2024.

CFO: Page nine talks about our cash position. So this is a slide that we have been going through on.

Each of our quarterly calls.

CFO: At the year at the end of the year 2023, we ended with a cash balance of 615 million RMB in the year, we had cash outflow of about 265 million RMB. This is a significant reduction compared to the cash outflow of 532 million RMB in a year of 2022, so a lot.

Jinxiang Li: This is a significant reduction compared to the cash outflow of 532 million RMB in the year of 2022. So a lot of what Yusheng described did deliver results and had a positive impact on reducing operating cash outflow for the year 2023. Going forward, there are still a few very selective investment areas that we want to keep on going.

CFO: You Shouldnt has described.

CFO: Ever to results and positive impacts on reducing operating cash outflow for the year 2023.

CFO: Going forward there are still a few.

CFO: Selective investment areas that we want to keep on growing.

Jinxiang Li: And we expect the commercial operation to reach profitability in the first half of 2024. So these two factors combined, we expect an outflow in a range of 150 to 200 million RMB in a year in 2024. We expect this outflow to further decrease in a year after 2024.

CFO: And we expect the commercial operation to reach profitability in the first half of 2024. So these two factors combined we expect an outflow in a range of 150 to 200 million RMB in the year 2024.

CFO: We expect this outflow to further decrease in a year after 2024.

Jinxiang Li: So, on that basis, we have very good visibility on our cash runway for at least three years. Thus, reducing operating cash outflows, an ample cash balance, and continued progress towards profitability. That's what we're trying to show by numbers here on page 9. Then page 10 breaks down our P&L in more detail. Just looking at the top line, which is at $121 million in aggregate. And by the different segments, first, central lab had a substantial decrease.

CFO: So on that basis, we have very good visibility on our cash runway for at least three years, so reducing operating cash outflows ample cash balance.

Continued progress towards profitability that's.

CFO: Well were trying to.

CFO: Show by numbers here on page nine then page 10 breaks into our P&L in more detail first looking at the topline.

CFO: She is at $121 million in aggregates and by the different segments first Central lab had a substantial decrease this is our active efforts going away from Central lab, but also industry change that we saw starting July in 2023, so fourth quarter for the Central lab, it's pretty much.

Jinxiang Li: This is our active effort going away from central lab, but also an industry change that we saw starting July 2023. So, the fourth quarter for central lab is pretty much a continuation of the trend that we described on our previous earnings call. So, we expect in-hospital to take a greater and greater share going forward. For the in-hospital line, we did have one-off adjustments in the fourth quarter. That's described in detail in the footnote.

CFO: A continuation of the trends that we described on our previous earnings call. So we expect in hospital to take greater and greater share going forward for the in hospital line. We did have one off adjustments in the fourth quarter that is described in detail in the footnotes and if we take out that one off.

Jinxiang Li: And if we take out that one-off adjustment, we are pretty much flat or negative 1% growth in the fourth quarter of 2023 compared to the fourth quarter of 2022. And even for the adjustment, if we look at the two hospitals related to that adjustment, the underlying demand remains robust and roughly stable. So we're not seeing deterioration in underlying business demand, but it's mostly to do with one-off adjustments. Our pharma segments grew very well in the fourth quarter. It grew double digits in the fourth quarter, and it grew double digits in the year of 2023.

CFO: Mens we are pretty much flat or negative 1% growth in the fourth quarter in 2023 compared to the fourth quarter of 'twenty 'twenty 2022, and.

And even for the adjustment if we look at the two hospitals related so that adjustments there underlying demand remains robust and roughly stable. So we're not seeing deterioration on the underlying business demand, but it's mostly to do with one off adjustments.

Our pharma segments grew very well in the fourth quarter. It grew double digits in the fourth quarter and it grew double digits in <unk>.

Jinxiang Li: It grew 59% in the year of 2023, and we expect continued growth for that line going forward. Now, on operating expenses, we have taken time to go through that in the previous slides. I'm not going to walk through them in detail.

CFO: Year of 2023 grew 59% in the year of 2023, and we expect continued growth for that line going forward.

CFO: Now on the operating expenses, we have taken time to.

Go through that in your previous slides, so I'm not going to walk through them in detail and finally to note here I think on the operating cash outflow side, we have seen improving operating cash flows quarter over quarter and that is the result of what you shouldn't have described of a number of projects and initiatives that we have taken through and our operating cash outflows have improved.

Jinxiang Li: And finally, to note here, I think on the operating cash outflow side, we have seen improving operating cash flows quarter over quarter. And that is the result of what Yusheng has described of a number of projects and initiatives that we have taken through. And our operating cash outflows have improved significantly throughout the year in 2023.

CFO: Significantly throughout the year in 'twenty three.

Operator: So that concludes our prepared remarks. For any questions, please feel free to reach out to us. And that will conclude the call here today. Thank you everybody for joining us today. This concludes today's conference call. Thank you for your participation. You may now disconnect. Yusheng Han, Alexis Yan, Zhihong Zhang, Burning Rock Bio

None: So that concludes our prepared remarks for any questions. Please feel free to reach out to us and that will conclude the call here today. Thank you everybody for joining us today.

None: This concludes today's conference call. Thank you for your participation you may now disconnect.

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