ZTO Express (Cayman) Q1 2024 Earnings Call Transcript

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May 15, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the ZTO Express First Quarter 2024 Financial Results Conference Call. All participants will be in listen only mode. Please note today's event is being recorded. I would now like to turn the conference over to Sophie Li, Head of Capital Markets. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for Investor Relations presentation were released earlier today and are available on the company's IR website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer and Mrs. Huiping Yan, Chief Financial Officer.

Speaker 1

Mr. Lai will give a brief overview of the company's business operations and highlights, followed by Mr. Yan, who will go through the financials and 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.

Speaker 1

Such statements are based on management's current expectations and the 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. S. Securities and Exchange Commission. The company 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 law.

Speaker 1

It is now my pleasure to introduce Mr. Meisheng Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English. Please allow me to translate for Chairman.

Speaker 1

Hello, everyone. Thank you for joining today's conference call. In the Q1 of 2024, ZTO maintained its industry leading service quality ranking with a parcel volume of 7 point 17,000,000,000, which grew 14% year over year, we achieved adjusted net profit of 2,220,000,000, representing a year on year increase of 16%. In the Q1 of this year, parcel volume of the express delivery industry The booming development with frequent promotions by new live streaming e commerce and social networks retailing helped stimulate online consumption and fueled the growth of express delivery volume. On the other hand, it also contributed to an increase in the proportion of low priced e commerce parcels.

Speaker 1

We firmly believe that the ultimate purpose of a business is to create value. ZTO insisted on healthy and sustainable growth and chose to let go on profitable parcel volume on the premise of base level volume necessary for scale leverage. In the Q1, our market share contracted by 1.9 percentage points compared to last year. However, our leading level of earnings among industry peers further widened. ZTO's consistent strategy is to maintain balanced in three aspects of growth including service quality, profitability and scale.

Speaker 1

At the beginning of 20 24, we shifted our focus to service quality, while maintaining a healthy level of volume and achieving optimal profit. We placed more attention and resources on developing differentiated products and services to meet the diverse and personalized needs of customers, which will enhance ZTO's brand awareness and the recognition. In the Q1, we further improved our leading position among Song Dot peers in the end to end team. The responsiveness of to door and on demand service capability of last mile have improved and the increasing reverse and retail price competition. We focused on our own expanded higher value customer base, increased the proportion of retail parcels and enhanced revenue structure.

Speaker 1

In the Q1, our core Express ASP decreased to $0.04 year on year, which was significantly lower than the industry. Thanks to further implementation of lean management initiatives, our combined sorting and transportation costs per parcel decreased by $0.06 compared to last year. And in combination with a stable corporate cost structure, both profit per parcel and total profit have increased. Entering into the Q2, the industry volume demonstrated strong growth momentum. Meanwhile, price competition remained fierce particularly in major regions.

Speaker 1

ZTO remained firm on our strategic focus and execution surrounding the following main tasks. 1st, improve transit efficiency, taking innovative approach towards a mature and established operating framework, rely on digitization and data analytics to drive process management and the problem solving, focus on safety production, time guarantee and resource utilization throughout the entire team to improve quality and efficiency and reduce sorting frequency. 2nd, enhance product mix, diversify and enrich express delivery services, increase market penetration of distinct products such as ZTO hao kai, synergistically leverage ZTO logistics, ecological resources, develop capabilities for comprehensive supply chain management, refine differentiated product and services in order to increase brand awareness and recommendation. 3rd, effectively address press competition. Stay tuned into marketing intelligence and take clear account of our own resources.

Speaker 1

Improve precision of pricing policy to become more case specific as well as fair and transparent. 4th, strengthen last mile presence, drive firm implementation of last mile profit sharing strategy and increase the intake of retail parcels, increased direct linkage between sorting center and lots more outlets, lots of courier, freeing up delivery personnel to concentrate on servicing LASMOW customers, improve capabilities and cost competitiveness of LASMOW posts and offer solutions to serve non video volume, in turn promote healthy development of the industry. Introducing commercial opportunities to existing express equipment delivery traffic so as to enhance last mile economics. 5th, empower franchisee partners, improve communication, unify thinking, advocate balance between long term and short term interests, protect the rights and interests of outlets and couriers, ensure fairness of network policies, develop useful technology tools to help improve visibility to operational data as well as convenience to conduct day to day. The shift from quantity driven to growth in both quantity and quality for China's express delivery industry is inevitable.

Speaker 1

We have modified our strategic focus to prioritize service quality. The goal is to build new engines of growth and innovate greater competitive advantages with which to forge strong mode for ZTO's longevity. Standing at the turning point of industry transformation, everyone under the ZTO brand, including network partners and carriers will work together to maintain aspiration and confidence, shore up competitive strength and ongoing relevance team. Through our comprehensive end to end capabilities and leadership role with inclusiveness. We intend to promote healthy competition and growth of the industry, maximize last mile resource utilization, synergize common interest, hence creating value for industry participants, investors and ultimately the society.

Speaker 1

Now let's hear from our CFO, Ms. Yan about our financial results and targets.

Speaker 2

Thank you, Tianan Lai and thank you, Sophie. Hello to 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 comparison. Detailed financial information, including unit economics and cash flow are posted on our website and I'll go through some of the highlights here. In the Q1, while we paid more attention to quality of services and brand value improvements, we adhered to the principle of profitable growth and achieved a 15.8% increase in adjusted net income to reach RMB2.2 billion.

Speaker 2

Our parcel volume grew 13.9 percent to RMB7.2 billion, representing a market share of 19.3%, which decreased 1.9 points compared to the Q1 of last year. The increase in the proportional share of lower priced parcel driven by frequent and deep discounts offered by e commerce platform including live streaming and social network retailing that stimulated consumption prompted us to recalibrate effort and resource allocation between volume and profit. We limited the amount of incremental volume incentives for the quarter and the ASP of our core express delivery business decreased 2.5% or 0.04 dollars which is well below the volume weighted average ASP decrease of about 0.20 dollars for the top 4 TongDao players. Our total revenue increased 10.9% to RMB10.0 billion. Total cost of revenue was RMB7 1,000,000,000 which increased 7.7%.

Speaker 2

Overall unit cost for the core express delivery business decreased 5.3% or RMB0.06 Specifically, line haul transportation cost per parcel decreased 7% to R0.47 dollars driven by improved resource utilization and route planning. Unit sorting costs decreased 5.4% to RMB0.30, thanks to continued standardization in sortation procedures and improved labor and automation productivity. Gross profit increased 19% to RMB3 1,000,000,000 and gross profit margin rate increased 2 points to 30.1%. Consistent with gross profit, income from operations increased 16.2 percent to RMB2.3 billion and associated margin rate grew 1.1 points to 22.8%. SG and A expenses excluding SBC as a percentage of revenue grew 0.1 points to 6 percent given a stable and sound corporate cost structure.

Speaker 2

Operating cash flow was RMB2 1,000,000,000 which decreased 25.8 percent against a high base amount for Q1 2023. In Q1 last year, receivables collection increased during the process of KA accounts optimization. In addition, KA accounts for Q1 of 2024 included newly established headquarter level platform customers who enjoys longer receivable terms. Our retail parcel volume grew over 40 percent year over year under the initiatives to increase higher value parcel. Adjusted EBITDA was RMB3.7 billion.

Speaker 2

Capital expenditure totaled RMB1.7 billion and we anticipated again annual capital expenditure to be below RMB6 1,000,000,000. Now moving on to our guidance. We estimated the overall industry growth to be around 15% to 20% for the year. And we reiterate that our parcel volume for 2024 is expected to be in the range of RMB34.73 billion to RMB35.64 billion, representing a 15% to 18% increase. We remain committed to our balanced approach for sustainable and profitable growth.

Speaker 2

We have prioritized improvements in quality of services and development of differentiated product and services to enhance brand value and recognition. Under the near term market dynamics, we aim to reach our earnings goal and then attain appropriate level of volume share. The above estimates represent management's current and preliminary view, which are subject to change. Now this concludes our prepared remarks. Operator, please open the lines for questions.

Speaker 2

Thank you.

Operator

Thank And today's first question comes from Kuehnli san with Morgan Stanley. Please go ahead.

Speaker 3

Thank you, operator. Let me translate for myself. Thank you for taking my questions, Mr. Lai, Ms. Yan and Sophie.

Speaker 3

Congratulations on the very strong earnings growth. I have two questions. The first question is about what Mr. Lai has mentioned. In this year, we have strategically given up some loss making volumes.

Speaker 3

What has triggered this strategical focus shift? What's your expectation on the industry consolidation dynamics going forward? My second question is about unit profitability. It's encouraging to see unit profit has increased year on year and quarter on quarter. If we assume competition strategy from peers to stay largely unchanged for the rest of the year, is it reasonable to expect unit profit expansion on a year on year basis will continue for the rest of the year?

Speaker 3

Thank you.

Speaker 2

Thank you very much for your question. Yes, indeed, we readjusted our focus on all three of our priorities. It is the reason for that change is because we want to focus more on longer term profitable growth given the market dynamics as of now. Specifically, if I may supplement that the mix or the structure of the parcels in the marketplace included a greater portion of lower valued items, which in a way is a pressure or challenge to the profitability of all express delivery businesses. And yet on the other hand, our goal is to maintain profitable growth.

Speaker 2

So the strategy shift on one consideration is to avoid unnecessary volume. We increased our retail volume. We increased what we call effective volume to maintain our profit focus. And also in the same time for the longer term view, quality of services is not just certain measurements, but more for recognition within our consumers' mind as they think about DTO. Differentiated product and services is something that we must and we need to develop going forward instead of the marginalized competition.

Speaker 2

On the second part of the question, we will continue to maintain our balanced growth. We there is a saying in our business that loss making parcels are avoided or strategically speaking if it's unnecessary, we do not want to take in loss making parcels. The overall industry growth is continued shifting towards quality and quantity. Our goal is to maintain or improve our professional share on the earnings side as well for the future

Operator

growth. Our next question comes from Liwei Zhang with Haitong Securities.

Speaker 3

How much has the proportion of the individual parcels increased in the Q1 of the company compared to the same period last year? How does the company view the prospects of the individual parcel market? What specific measures does the company take if it wants to increase penetration rate in the individual platform market, including self owned and reverse logistics? Thank you.

Speaker 2

Thank you very much for your question. First of all, as we mentioned earlier, our Q1 retail volume grew over 40%. Our daily average as of now is 5,000,000 parcels and included which 3,000,000 is our own and then the rest about 2,000,000 is reverse logistics. One of the key initiatives through which we hope to increase and continue to see result is the way to free up our couriers. We installed certain machinery at our outlets once they reach certain level of daily volume, we require such equipment to be used so as to free up our couriers.

Speaker 2

Typically in the past, couriers have to go to their station or go to their outlets to help sortation and then take their own parcels, their own meaning the region that they serve, take those parcels back to conduct delivery services, which is very time consuming for the 1st step in order to get those parcels for themselves. So with those machinery installed, the couriers are able to focus around delivery and providing 2 door services including pickup as well. This year we have a goal to increase our retail volume to 6,000,000 parcels, last year was less than 4,000,000. Our ultimate goal is to continue to raise this proportion and through mainly 2 initiatives. 1 is to ensure our couriers receive the front end pricing benefit so that they could certainly truly differentiate pickup and delivery fee income.

Speaker 2

2, we want to improve the what we call it direct linkage as I described earlier, so that the couriers can spend more time working within a shorter radius in their service area to help improve quality of services including on demand 2 door delivery and quicker response to pickup, so that they can improve retail ratio.

Operator

Thank you. And our next question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Speaker 4

Thank you, Laiduong, Yanzhong and Sophie. Two questions. One is to think about the eventful express delivery industry landscape. If we're focusing more on profitability in the near term, but then less on expanding market share in the near term, how should we think about in the next 3 to 5 years, will China's Express delivery industry become more like a 3, 4 players at similar scale consolidating to those 3, 4 players or will we still expect it to be a 1 major leading player followed by 2 to 3 smaller in the 2, 3, 4? So some thinking and how our strategy may evolve over the next 3 to 5 years.

Speaker 4

And second is, as the China market matures, how are we in our progress or thinking about expanding beyond China and going global? Any progress there or new strategies or thinking? Thank you.

Speaker 2

Thank you for your question. First question relates to our strategy and specifically relates to our market share. As you know, we always focused on our balanced approach of all three focus area, meaning quality of services, earnings and also volume. We still believe our goal of achieving 15% to 18% growth is appropriate given the current market environment. We're not to say that we don't want volume.

Speaker 2

We're only recalibrating the focus because we think for the longer term the brand recognition in our customers is more important for the long term sustainable volume growth and profitable growth. In addition, the increase in retail volume or hence improvements in our revenue structure will help improve the profitability of outlets and couriers. We believe after a period of time of our initiatives to improve their earnings capability, it will further stabilize our network and preparing for the longer term growth. In a longer run, we believe we will continue to focus on our own affairs, I. E.

Speaker 2

Any point in time, we will focus on when we want quality of services. We also seek profitability. And most importantly, the healthy growth depends on our business brand recognition. As a matter of how many are going to remain in the marketplace or what are the proportional share taken by each players is not something that we are able to determine right now. But we are sure of what we are sure of is our own goal and focus.

Speaker 2

We want to continue to enhance and develop growth engines and enhance our competitive advantage. We believe it is those who are with scale, quality of services and profitability that will grow continuously and sustain in a much longer term. The second part of your second question is relating to our international business. Throughout the years, ZTO has formed a rich cross border product layout with business types including import, bounded, direct mail, freight forwarding, warehousing, export, dedicated line, etcetera. In Southeast Asia, including Cambodia, Laos, Myanmar, and Africa, Nigeria, Kenya, Uganda, Egypt, South Asia, including Pakistan and some of the other regions have all developed local express services on the ground.

Speaker 2

Given the rebounding international business recently due to standardization in our cross border market price, the smooth expansion of new specialty line services are some of the things that we are exploring. The company will further attempt to develop international individual and boutique services while strictly controlling cost efficiencies seeking cost efficiencies, so that we are expected to further expand that part of our strategy of future growth. Thank you.

Speaker 1

Thank

Operator

you. And our next question comes from Fiju Wu with Chongqing Securities. Please go

Speaker 5

ahead. Thank you for giving me this opportunity to ask these questions. The first question is perhaps most concerning and why is the topic in market right now? Can the express delivery industry structure be optimized? We have always believed that the express delivery industry has economies of scale and the strong will remain strong in the future.

Speaker 5

However, the gross rates of packaged volume last year and the Q1 of this year do not seem to support this judgment. We found that the share of second tier companies have increased significance and cost optimization seem to be accelerating. We would like to ask how you view the pattern in the applications of the express delivery industry and whether market share will still be the true goal in the next 5 to 10 years, the service quality of profits are more important than market share? And where is the bottom line of our employees' market share? The second question is, how long does our employees expect to take achieve consumer awareness and product upgrades.

Speaker 5

What are the goals we want to achieve in the long term of the future? Thank you.

Speaker 2

Thank you very much for your question. First, relating to the market share dynamics going forward, it is important to view a a express delivery company or any express delivery company on all three aspects, not just only on market share. Those all three aspects are volume, certainly, profit and importantly, quality of services, because we are looking at the express delivery business growth as a marathon. Our shift in the focus of our among all three is specifically for the purpose of a longer term growth. Indeed, our Q1 market share has decreased, but yet we are also looking at a healthy level of our quality of earnings and including the quality of earnings of our network partners.

Speaker 2

We think the longevity of our business depends on balanced growth of all these three areas and focusing more on our own capability for much longer future growth, including developing consumers' awareness of our brand and the value recognition will help us achieve greater market presence with healthier earnings and hence richer product and services. So this goes into the second part of the question. We are continuously leading in the quality of services. We hope in the future that we will become one of the top choices among the players of industry, including Xuanfeng and Jingdong. Our goal is to pull apart or pull away from the hormone genius competition, specifically only for pricing among the Tonga players.

Speaker 2

With our balanced growth in our own business, it's not to say that we don't want volume. Volume is important, especially for a scaled business model. Our Q1 and including today's daily volume is between $95,000,000 to $100,000,000 so that our scale leverage and cost productivity gain will continue to demonstrate. The entire industry with its current growth and what we anticipate for the future, which is going more towards quality and quantity together. The profitability will gradually release.

Speaker 2

As you know, compared to developed country, the GDP cost of logistics as a GDP percentage of GDP is still not as efficient as those developed countries. With our countries focused on going into the factory, going into rural area, as well as going overseas, there are huge opportunities represented towards comprehensive logistic growth. Express Living Industry with its scale and network resources already in place has huge advantage under such development scenario of the future. So we believe we will continue to focus on our own balanced approach and growth, taking shares where we need to and must, but focus more on quality and quantity together will be a sustainable growth in the future.

Operator

Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to management for any closing remarks.

Speaker 2

Thank you again everybody for joining today's call and we look forward to speak with you offline when you have further questions.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
ZTO Express (Cayman) Q1 2024
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