ZTO Express (Cayman) Q1 2023 Earnings Call Transcript

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May 17, 2023

There are 5 speakers on the call.

Operator

Good day, and welcome to the ZTO Express First Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Sophie Li, Company Secretary. Please go ahead.

Operator

Thank you, operator. Hello, everyone, and

Speaker 1

thank you for joining us today. The company's results and the Investor Relations presentation were released earlier today and are available on the company's IR website at ir.zto.com.

Operator

On the

Speaker 1

call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer and Ms. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights followed by Ms.

Speaker 1

Yan, who will go through the financials and the guidance. They will both be available to answer your questions during the Q and A session that follows. I remind you that this call may contain forward looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on 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 the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward looking statements. Further information regarding this and other risks, uncertainties and factors is included in the company's filings with the U.

Speaker 1

S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward looking statement as a result of new information, future events or otherwise, except as required under law. It is now my pleasure to introduce Mr. Meisong Lai.

Speaker 1

Mr. Lai will read through his Thank you, Chairman Lai. Let me translate first. Hello, everyone, and thank you for joining us on today's conference call. In the Q1 of 2023, our business volume reached RMB6.3 billion, up 20.5 percent year over year and our market share increased by 1.8 percentage points over the same period last year.

Speaker 1

We maintained our industry leading service quality ranking, while at the same time achieved an adjusted net income of RMB1.92 billion, up 82% year over year. In the Q1 of 2023, the express delivery industry volume increased nearly 11% over last year. Successfully seizing market opportunities, ZTO delivered on a set of strong performance results in accordance with our consistent core strategy of accelerating market share growth, while maintaining high quality service and achieving targeted earnings through implementation of the following specific tasks. First, we revised the target setting methodology by referencing the existing market share versus merely based on growth rate, paying particular attention to relatively low standing regions to reduce their lag. We categorized our franchisee partners and designed policies to match their unique business profiles.

Speaker 1

We increased communication effort to explain the intention of the change and pointed out the repeatability year after year, hence effectively alleviate their concerns so as forged ahead without reservation. Secondly, regarding revenue, we refined our volume cost profit analytics and implemented managerial tools across the network to further improve the effectiveness of transit fee pricing to cover associated operating costs. In conjunction with continued effort to optimize KA customer mix, we were able to enhance structure of revenue and the quality of earnings. 3rd, from the perspective of cost, on one hand, we benefited from better economies of scale given higher package volume. On another hand, we were able to improve the efficiency in escalating operational anomalies and address problems more effectively where process data are traced to workstation or individual operator.

Speaker 1

Thanks to several standardization initiatives we started in the second half of last year, which provided us action level visibility and quantification to manage productivity. 4th, high service quality is a prerequisite for price premiums. Network stability and the consistent market share expansion. We continue to refine the design of quality control points to improve standardized execution throughout the whole process of pickup, flotation, transit and delivery, addressing root causes and ensure timeliness and overall customer satisfaction. Entering into the Q2, we observed that the industry's performance was reasonably fair relative to last year's low base.

Speaker 1

With improved consumer confidence and the further recovery of national economy, we believe the express delivery industry will regain steady growth momentum. Meanwhile, ZTO shall maintain internally focused to improve operational safety and network stability. By keeping the pedal to the metal, we will carry out the following important work. Number 1, drive full implementation of the last mile policies that assures the pass through of market pricing into the hands of couriers. We are cultivating a mini platform mat sign for outlet operators to promote entrepreneurship, hence increased couriers income as well as proportion of ZTO's retail 2C volume.

Speaker 1

Number 2, strengthen capability of the entire network, particularly in for direct linkage. Our goal is to increase market coverage and the penetration of our time definite products, which will help improve profitability. Number 3, enhanced capability of delivery to door to improve overall value add and quality of services by our last mileposts. We aim to go from help address industry wide challenges in delivery costs and lightening the workload for delivery personnel to the development of multifaceted products and service solutions for last mile customers. Since its establishment in 2002, ZTO has always adhered to the philosophy of shared success, paid attention to infrastructure development and their efficient utilization to establish our competitive advantage.

Speaker 1

And we have consistently stayed relevant in promoting fair and equitable sharing participants of our business endeavors. Our leading position at present in the Express industry in terms of service quality, scale and the profitability is the result of a common goal and a concerted win win cooperation by everyone under the ZTO brand. If we attribute our relative success in the industry for the past 10 years to the more effective linkage between headquarters and the sortation center, Then our competitive mode for our next stage of growth and development would largely be dependent on whether we are able to build cohesiveness and a streamlined connection among sorting centers, outlets, last mile couriers and customers. We are confident in the growth prospects of China's express delivery industry, Staying practical and improving digitization and the data driven process improvements will continuously encompass ZTO's competitive edge. Our trueistic service mindset will propel us to grow our business big and strong as well as to take on greater responsibility towards the country and the society.

Speaker 1

The balanced approach and increases in service quality, scale and the reach, plus higher earnings will bring about meaningful payback to everyone who participates, supports and invests in us. With that, let's welcome Ms. Yan to introduce the financial results and status of ZTO. Thank you, Sophie.

Speaker 2

Thank you, Chairman. Hello, everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB and percentage changes refer to year over year comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website and I'll go through some of the highlights here. In the Q1, ZTO maintained profitable growth, thanks to sound execution of our consistent corporate strategy.

Speaker 2

With industry leading ranking in quality of services, our parcel volume grew 20.5 percent to RMB6.3 billion, expanding our market share by 1.8 points to 23.4 percent compared to the Q1 last year. We delivered a strong adjusted net income growth over 82% to reach RMB1.92 billion. Total revenue increased 13.7 percent to RMB9 1,000,000,000. ASP for the core express delivery business decreased 3.7% or 0.05 dollars resulted mainly from lower average weight per parcel, increase in volume incentives and mix shift due to decrease in Ka volume, all of the above absorbing positive impact from more effective network pricing. As a note, KA revenue includes delivery fees as KA revenue as a percentage of total revenue decreases, ASP decreased because the rest of the revenue is reported net of delivery fees.

Speaker 2

Total cost of revenue was RMB6.5 billion, which increased 2.8% because of scale leverage and meaningful productivity gain. Overall unit cost of revenue for the core Express Lit Rig business decreased 12.8% or RMB0.14 Specifically, line haul transportation costs per parcel decreased 10.6% to RMB0.51 driven by real time data monitoring and analytics to optimize resource utilization, route planning and load rates. Unit sorting costs decreased 11.1 percent to RMB0.32, thanks to continued standardization in sortation procedures and improved productivity with better resource deployment. As a result, gross profit increased 55.8 percent to RMB2.5 billion because of increased revenues and cost productivity gain. Gross profit margin rate increased 7.6 points to 28.1 percent.

Speaker 2

SG and A expenses excluding SBC compensation as a percentage of revenue grew 0.3 points to 5.9 percent, demonstrating a stable and sound corporate cost structure. Consistent with gross profit, income from operations increased 74.7 percent to RMB2 1,000,000,000 and associated margin rate grew 7.6 points to 21.7%. Again, adjusted net income increased 82.1 percent to RMB1.9 billion and adjusted net income margin grew 8.1 points to 21.4 percent. Operating cash flow grew 147.7 percent to RMB2.7 billion. Capital expenditure totaled RMB2.3 billion and we anticipated annual CapEx in 2023 to be in the range of RMB6.5 billion to RMB7.5 billion.

Speaker 2

Taking into consideration the current market condition and our operations, we are raising our annual parcel volume projection to be in the range of RMB29.27 billion to RMB30.24 billion, representing a 20 percent to 24% increase year over year. We remain committed to increase our market share by at least 1.5 percentage points for 2023, while maintaining high quality of services and customer satisfaction and achieving optimal earnings growth for the year. These estimates represent management's current and preliminary view, which are subject to change. This concludes our prepared remarks. Operator, please open the line for questions.

Speaker 2

Thank you.

Operator

And our first question will come from Ronald Keung of Goldman Sachs. Please go ahead.

Speaker 3

Thank you. Thank you for taking my question and congratulations on the strong results. So I have 2 questions. One is about the unit cost that we have done exceptionally well in cutting unit costs down. So can you go through just whether this 10% improvement in the unit cost, particularly in trucking and sorting, whether that could be sustainable, particularly heading into the next few quarters, whether the unit cost improvement will continue?

Speaker 3

2nd is, can you also share how you see the latest competitive landscape that's a great for the industry given the some of the many companies are talking about focusing a bit more on market share this year, not just on the profitability. And therefore, how do we see the competitive landscape when parcel growth is lapsing the easiest low base over the past 1 or 2 months now we're having a slightly less easy base now. So let me translate my question.

Speaker 2

Thank you, Ronald, for your questions. So for the first part, you asked about the unit cost and also the expectation for it to continue. Chairman had described that indeed our performances has been quite well for the Q1. And as we look at the sequential improvements there are also present, but certainly the year over year comparisons is much more significant if you look at the Q1. The Q1 unit cost for transportation and sorting combined decreased by $0.10 year over year.

Speaker 2

On one hand, the impact of the pandemic in the same period last year suppressed the economy of scale and productivity was not fully demonstrated. On the other hand, since the second half of last year, we have began proactively taking a series of cost optimization measures, which have had sustained effects coming into the rest of the quarter, including this quarter. In Q1, the transportation cost per parcel decreased RMB0.06 to RMB0.51 dollars and the sorting cost decreased $0.04 to $0.32 And the reason mainly on some of the things that we've done is with regards to our digitization and refined management in process productivity gains. In terms of the transportation, for example, we optimized redundant drivers by matching routes with the equipment and the personnel. We implemented standard fuel consumption management to reduce fuel cost.

Speaker 2

As you know that all the data are on the dashboard so that we are able to monitor and compare. In addition, we have developed ability to start to an extent dynamically planning our route, planning our truck route so as to meet the demand in business volume. And as it fluctuates, we are able to also better optimize the utilization of the capacity, hence improving our load rate. In terms of sortation, we made the employee management largest. On one hand, we implemented a unit rate compensation.

Speaker 2

In other words, we pay by enthusiasm. On the other hand, we improved efficiency labor efficiency through optimized scheduling and utilized more skilled hired workers instead of temp workers. Standardization and digitization is certainly another key contributor to our productivity gain. We took the operational process, we broke that apart and quantified indicators and conducted assessment throughout the entire progress of the package. We use digital intelligence tools to realize to achieve data so that we are gaining visibility into the actual production process.

Speaker 2

And by comparing the completion of work and their indicators, we will then reward excellent performances and then reprimand poor performances so as to improve the entire overall efficiency. Regardless of the impact if we disregard the impact of the oil price, the annual cost reduction target for the full year is between 0.05 $0.05 to $0.07 I'm sorry, dollars 0.05 to $0.07 for the cost of sortation and transportation combined. In addition to in the future, the cost effectiveness of our entire connection between sortation and the transportation as well as our expanded effort into productivity gain for our network partners, which will create streamline and enhance our cohesiveness of the entire operation, we believe the continued effort in digitization and our expanded effort throughout the entire network will help us continue to drive productivity. Certainly, without overemphasizing that the scale will continue to bring us leverage. That's for the cost side of the question.

Speaker 2

And then for your second question relating to the market dynamics, Overall is that the market share will continue to be concentrating towards those companies who could operate with the best efficiency, with the best quality of services and the most stable network. So with that, the Chairman mentioned that our overall performance and profitability and our strategy to balance our gain on market share, quality of services and also profitability will remain to be our focus. The industry currently we have seen the continued acceleration of consolidation organically. The leading enterprises have more productivity more room for productivity gain and the CTO intend to maintain that leadership. The profitability of each company is also differentiated based on their ability and their results speak for itself, focusing on our own development with advantage of scale and efficiency and continuously depending on our digitization and process improvement, we should be able to maintain our competitive advantage.

Operator

The next question comes from Kim Lei Fan of Morgan Stanley. Please go ahead.

Speaker 4

Thank you. I'll translate for myself. So there are two questions. The first question is about the capacity plan. So we observed that the company has adjusted up the full year volume guidance and also in the Q1 CapEx has been up year on year.

Speaker 4

So wondering what's the capacity optimized the capacity plan for the next few quarters of the year? Is there any adjustment to your full year CapEx plan? And the same question is about competition. So we observed that the Q1 market share gain is faster than the 1.5 percentage point. Is management happy with the current market share advantage as well as unit profit advantage versus your peers or you think you will be more aggressive in expanding the relative advantage compared with peers?

Speaker 2

Thank you for your question. I'll take the first one regarding CapEx. The full year's guidance is still we are maintaining it at RMB6.5 billion to RMB7.5 billion for CapEx spending. If you look at last year, because of the pandemic impact, volume incoming are weak. So hence we have adjusted our CapEx investment case.

Speaker 2

And in this year, certainly the Q1 based on strong volume expectations, we are adjusting it to be higher. So there are two reasons, one being the low base and then the other is indeed this year we have a higher volume incoming. Preparing for our capacity is important because we want to continuously monitor the best cost point or sweet spot. For example, the Q1 we have reached 85,000,000 and above 1000000 packages per day for part of March. And looking into the rest of the year, we believe there are still increments to where our capacity need to be adjusted up.

Speaker 2

So we are planning for installing more machinery and equipment to replace more costly labor and also some of our older facilities are being upgraded and expanded all gearing towards the busy season that are coming in for the second half of the year. But certainly, we will continue to monitor the growth in the volume so as to maintain an optimal pace in CapEx investment? Let me translate for the Chairman for the second part of the question. The industry growth forecast at present, China's economy is showing signs of gradual recovery and the consumers' confidence level is also expected to continue to recover and rise from March to April due to the lower base effect, the industry's growth are also exhibiting strong rebond. And considering the overall low base of last year and the current market recovery, we have a good we expect that the industry's growth will remain for the full year around 12% to 16%.

Speaker 2

Our market share growth target is still to be no less than 1.5 percentage gain. The overall the strategy, I think, for our overall growth in terms of the policy, we set up certain indicators based on the original market share that each of the region currently have. And then we with our new methodology to set growth goals, we focused on market share instead of year over year percentage comparison. This alleviated a lot of the concerns from our network partners so that they will be more focused and less worried about the repeatability and more focused on going forward to market and maintaining quality of

Speaker 3

services and so on and so forth.

Speaker 2

And then in terms of the and we also paid more attention to the outlets that truly need help as they shorten the gap compared to either our national average or regional average so that they could catch up. The digitization tools, we are also extending that to provide visibility to our network partners so that they are able to closely see what we have that measure them upon and in providing the guidance in where the problems might be. As far as what we are going to do relative to our competitors, we will continue to focus on our own what's within our own control. Our consistent strategy has been that all three including quality of services, market share and also profitability. And all these are part of the performance measure metrics.

Speaker 2

We drive for balanced development. Services quality is the prerequisite of our market premium to help us propel forward with greater market share, performance services as well as quality, including our empowerment to our network partners and couriers as well as the better allocation sharing competitive advantage going forward.

Operator

The next question comes from Lu Zhu of Citi. Please go ahead.

Speaker 4

Let me translate my question. So first question is regards to the ASP trend. So what are the management expectation on the ASP trend going forward this year? With the decline trend continue throughout the year? And in a longer term, how the management will build the ASG trend for next year?

Speaker 4

And also if we look at the earnings growth, is the company still confident to achieve a larger earnings growth than the parcel volumes growth rate? And the second question in regards to the last mile network development. What's the current number of the last mile post station and the inbox or in station rate? And how could it improve on the current level? Is there a feeling for that?

Speaker 4

Thank you.

Speaker 2

ASP for the Q1 and full year, the ASP for the Q1 decreased $0.05 and it's as I explained earlier due to combined impact of package per parcel weight decline, Ka as a percentage of revenue decline and then volume incentive increases. All these altogether, plus or minuses, is some optimization of RMB0.03 offset part of what I have described earlier as negative impact. It is expected that unit price will remain relatively stable throughout the year. ZTO has always been the quarter of stable pricing and reasonable market pricing for in the past and we'll continue to do so. The Q1 results after the Q1 results in the future, what we will plan on doing is continue to do policy making and our product structure improvements to bring up our pricing where possible.

Speaker 2

The digitization, we had mentioned earlier, helped us to make better pricing to cover cost. The pricing is done on a more granular level at the route level. Another thing specifically the Chairman mentioned that we are focusing on through our standardized timeliness product improvements in design, we will further introduce new way of going to market and providing differentiated products and services to our customers. More products and innovations is expected to come and this will also go hand in hand with our initiatives to pass through market price to the couriers so that they are encouraged to bringing more non e commerce packages, hence, to see packages. We as we continue to focus on better quality of services and maintain the level of customer satisfaction, we'll be able to secure our premium at the marketplace through every segments of process improvements, we will be able to maintain such quality of services going forward.

Speaker 2

The next part of the question relates to our last mile post. Since 2021, the company formed Tuxi and we quickly expanded our footprint through a partner network model and we have developed a reasonable set of footprint as well as capabilities for services with standardization. The goal of Tuxi is to develop a infrastructure platform, which is also open to public, open to all the express delivery companies focusing on solving the problem for the industry in terms of cost for delivery and at the same time improve the shortcomings of the last mile services, we have set our goals for this quarter to develop further enhanced capabilities at the last mile, including delivery to door and also pickup at door. The services that are going to be gradually developed that are individualized to meet customers' individualized demand is part of our effort, but the main focus is to first establish ability to bring the cost of delivery down because volume are continuously increasing. And then from there, we are able to then produce opportunities or create opportunities for us to provide other services including with our direct link between our destination outlets to our customers through the services of our network couriers.

Speaker 2

I'm sorry. The comments for the growth comparisons, we have our profit growth in this quarter faster than our volume growth. And going into the future, as we anticipate the level of revenue development and also our continued effort in cost productivity gain, we believe we are able to maintain for a period of time the growth of our revenue growth of our bottom line faster than the top line.

Operator

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 2

Thank you again for everyone to join us. And we have put together some of the answers for you today. And we hope to answer more and have more discussions with you in the future. Thank you again.

Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.

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Earnings Conference Call
ZTO Express (Cayman) Q1 2023
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