PACCAR Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 20, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the ZTO Express to announce Second Quarter and Half Year twenty twenty four Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sophie Li, Corporate Secretary and Director of Capital Markets.

Operator

Please go ahead.

Speaker 1

Thank you, Betsy. Hello, everyone, and 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. On the call today from BTO are Mr. Meizong Lai, Chairman and Chief Executive Officer and Ms.

Speaker 1

Weiting Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights, followed by 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 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. Mason Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English. Okay.

Speaker 1

Let me translate for Chairman first. Hello, everyone. Thank you for attending today's conference call. In the Q2 of 2024, ZTO maintained industry leading service quality revenue. And with our parcel volume growth at 10% year over year that reached RMB8.45 billion, We achieved adjusted net income of RMB2.81 billion, which increased 11% over last year, demonstrating continued strong profitability.

Speaker 1

The Q2, despite microeconomic softness, driven by booming development of e commerce promotion, online consumption maintained relatively high growth. Household volume of China's express delivery industry increased 21.3%, exceeding expectations. However, the proportion of low price e commerce parcels continues to trend up and price competition further intensified. While prioritizing service quality, ZTO continued to seek balance among service quality, profits and scale to drive sustainable and healthy development of the entire network. During the Q2, upon further elimination of unprofitable volumes, our market share contracted by 2 percentage points compared to the same period last year.

Speaker 1

At the beginning of this year, across all three of our major metrics, we put greater emphasis on quality. While maintaining a scale advantaged volume level and appropriate level of profit, We directed attention and resources towards upgrading customer mix, refining differentiated products and services and encompassing brand awareness and customer satisfaction. And increasing brand awareness and customer satisfaction. On last mile development, we implemented new initiatives to explore opportunities to reduce last mile delivery costs and improve the profitability for our list and couriers. In the Q2, ZTO's end to end delivery time rapped top among Tonga peers and customer complaint rate continued to decrease.

Speaker 1

Meanwhile, with the improved response time and on demand service capability, the ratio of retail parcels was further expanded. As the optimization of revenue structure partially alleviated unit price pressure driven by price competition. Our ASP was flat. Combined with the cost efficiency gain and a reasonable SG and A structure, both the unit profit and the total profitability remained industry leading. Entering into the second half of the year, the industry volume kept a strong growth momentum.

Speaker 1

Meanwhile, despite the intense price competition in the production we observed a limited room for further price cuts given the typical cost plus pricing model. It's time for the entire express industry to shift from high quantity to high quality development, driving to fulfill social viability and serve capital objectives. DTO's leadership action to transform from high quantity to high quality stemmed from our long lasting focus on being the best we can and achieve balance among quality, profitability and scale. Considering the market conditions, we will put more effort on improving brand awareness and recommendation on the premise of achieving scale advantaged volume level last year's process. In addition, we are committed to actively address the interests and needs of the network partners and carriers.

Speaker 1

Specific actions under implementation include the following: 1st, we will revamp and improve network policies to ensure performance, relevancy, transparency and fairness with clear rewards or recommend effectiveness. 2nd, we will continuously enhance service quality with refined indicators closely tied to performance evaluation. Our tailor made support and improvement for underperforming outlets to drive high quality as well as differentiated services. 3rd, we will firmly advance the last mile profit allocation strategy, promote Couriers' proactiveness to increase the retail parcels ratio and achieve more income. 4th, we will accelerate the expansion of last mile footprint, encourage larger outlets to invest in equipment, establish direct linkage to a lots more post, reducing delivery costs and freeing up delivery personnel to concentrate on servicing lots more customers.

Speaker 1

Through consolidation of resources, we intend to provide solutions to alleviate delivery cost pressure for the whole industry. 6th, we will further enhance our product mix, increase the penetration of high end products, strengthen collaboration with online platforms and leverage ZTO's logistics, ecological resources to expand capability of comprehensive supply chain, improving brand awareness and customer appreciation 6th, be vigilant and maintain a sense of crisis facing market uncertainties and fluctuations. We will increase effectiveness of communication with our network partners, unify thinking and reinforce confidence and advocate a balance between long term and short term interests, gaining network stability. Despite uncertainties in the micro environment, the express delivery industry has demonstrated resilience across economic cycles by offering robust support for the advancement of digital economy and improving circulation efficiencies. We will see the opportunities in front of challenges including intensified industry competition.

Speaker 1

CTO will focus on service quality, further last mile strategic objectives and enhance profitability for our list as well as careers by establishing unique competitive advantages so as to gradually but steadfastly differentiate ourselves from the rest of TongDai in brand recognition and customer satisfaction, providing more choices for consumers and customers. We're aiming to create value for the country, society as well as employees and shareholders. Now let's hear from Ms. Yan about our financial results and targets.

Operator

Thank you.

Speaker 2

Thank you, Chairman Lai and 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 the year over year comparisons. Detailed financial performances, unit economics and cash flow information are posted on our website, and I'll only go through some of the highlights here. In the Q2, we adhered to the principle of profitable growth and achieved a 10.9% increase in adjusted net income to reach RMB 2,800,000,000 while continuing to improve the quality of services and brand value.

Speaker 2

Our parcel volume grew 10.1 percent to RMB8.45 billion. We continue to fine tune resource allocation to achieve optimal balance between volume and profit in the Q2. ASP for our core express delivery business stayed flat at RMB1.24 as the impact of decline in the average weight per parcel and increase in incremental volume incentives were offset by the positive impact of the volume increase in non e commerce parcels. Our total revenue increased 10.1 percent to RMB10.7 billion. The cost of revenue was RMB7.1 billion, which increased 10.4%.

Speaker 2

Overall unit cost for the core express delivery business increased 0.7% or 0.01 dollars Specifically, line haul transportation costs per parcel decreased 6.8% to RMB0.39 driven by improvements in fleet operations with better resource utilization. Unit sorting costs increased 4.6 percent to RMB0.26 due to increased D and A costs on new equipment and facilities. Unit KA costs decreased RMB0.04 increased RMB0.04 in line with KA revenue increase. Gross profit increased 9.6 percent to RMB3.6 billion and gross profit margin rate decreased 0.1 points to 33.8%. Consistent with gross profit, income from operations increased 11.7 percent to RMB3.2 billion and associated margin rate grew 0.4 points to 30%.

Speaker 2

SG and A expenses, excluding SBC as a percentage of revenue grew 0.3 points to 5.5%. Corporate cost efficiencies remained intact. Operating cash flow was RMB3.5 billion, which decreased 7.5 percent mainly due to dividend tax and increase in financing or loans to our network partners. Adjusted EBITDA was RMB4.3 billion, an increase of 11.7 percent. Capital expenditure totaled RMB1.3 billion for Q2 or RMB2.9 billion for the first half of the year.

Speaker 2

With that, we anticipate annual CapEx in 2024 to come in below RMB6 1,000,000,000 as previously planned. The company has announced an interim cash dividend of US0.35 dollars per ADS and ordinary share for the 6 months ended June 30, 2024, which is a 40% payout ratio to holders of its ordinary shares and ADS as of the close of business on September 10, 2024. Now moving on to our guidance. We stay committed to our balanced approach to sustainable and profitable growth, prioritizing improvements in quality of services and development of differentiated product and services to enhance brand recognition and value. We are reiterating our 2024 volume growth guidance of 15% to 18%.

Speaker 2

These estimates represent management's current and preliminary view, which are subject to change. This concludes our prepared remarks. Betsy, please open the line for questions. Thank you.

Operator

We will now begin the question and answer session. The first question today comes from Ronald Keung with Goldman Sachs. Please go ahead.

Speaker 3

Thank you, management. First is about our profit volume of 10% and slower than

Speaker 1

the industry. So as

Speaker 3

we talked about in the announcement, our volume is not an important as it brings scale leverage. So I want to hear our guidance, the implied second half. Should we expect some fine tuning of our strategy to maximize the scale, part of volume and profitability? And second is for the unit profit, which is mostly stable that implies the underlying unit cost actually has been quite stable as well. Is there further room to improve on operating efficiencies or have we maxed out a lot of the efficiencies that we've done in the past?

Speaker 3

What further could we do to improve the operating leverage of the business? Thank you.

Speaker 2

Thank you, Ron, for your question. So let me translate for the Chairman. First question, indeed, the parcel volume for the total industry has grown and exceeded our expectations. In the second half of the year, we do have the following plan. Our market share decreased 2%.

Speaker 2

The main reason being that first, there are a lot more price competition or price competition intensified. There are a lot more ineffective or we call it even effective. Indeed it is just below the cost. It's priced below the cost. So the overall proportion of non profitable volume has increased.

Speaker 2

So what we do is we very effectively controlled such volume coming into our network because we adhered to our strategy that's set out in the beginning of the year to focus more on quality of services and with that to achieve appropriate level of profit and in turn market share. If we look at in an overall perspective, our capacity and the volume are in tune, they are reasonably matched. In the first half of the year, the results that we achieved is out of the range of our 15% to 18% guidance for the whole year, which means that in the second half of the year, we should at least to achieve 18% of growth in order to come into the range of our previous guidance. And based on the current conditions and current view of our businesses, we have a high confidence of achieving such target. So more from a theoretical perspective, if we want more volume, we can simply reduce the price.

Speaker 2

But we didn't choose to do that, again, because we wanted to focus on profitable growth, while achieving reasonable match between the capacity and our market share volume gain, we should be able to achieve healthy growth on both. Second half of the year, again, we will continue to focus on improving quality of services, developing differentiated product to achieve reasonable level of profit and volume balance. 2nd part of the question, indeed for the entire industry through all these years of fine tuning of operations and investment of automation and so on and so forth, the unit cost productivity gain has been declining. For us, however, in the first half of the year, we exceeded our goal for cost productivity gain for the year. We have invested for over 26 super sorting centers.

Speaker 2

There are ample reserves for capacity release in the future. We do believe that the capacity installed as well as its flexibility in meeting as up to 50% of volume demand, we are still well on track to consistently and gradually release meaningful cost efficiency going forward. Then for the unit profitability based on the overall capacity as well as the reserve, we think that the strategy being consistently carried out, there will be stability in our profit growth on a total level as well as unit level.

Operator

The next question comes from Qian Lei Fan with Morgan Stanley. Please go ahead.

Speaker 4

Thank you, operator. Let me translate to myself. Congratulations on the very resilient profit growth in the same quarter. I have two questions. The first question is about the retail parcel.

Speaker 4

In announcement, company mentioned that we are on track to double our retail parcel volume. And would you please remind us our current daily retail parcel volume, the percentage in of retail volume in our total volume, our target for this year and probably the target to achieve for the next few years? The second question is about cost reduction. We understand that the competition of express delivery business is not only about cost reduction at the line haul, but also about cost reduction at the whole network, especially at the network partners and last mile. So would you help us to better understand our initiatives to help the network and last mile to reduce cost and potential cost room cost saving room in the next few years?

Speaker 4

Thank you.

Speaker 2

Thank you very much for your questions. Currently, our daily volume of non e commerce parcels exceeded 5,400,000 and our year end goal is to achieve daily volume average 6,000,000 packages. You know that in last year, we started off with daily volume about 4,000,000 packages and we are on track to achieve our goal to double that volume because the peak volume would most likely exceed 7,000,000 parcels per day. And this is our goal and we are confident to achieve that. How do we achieve that?

Speaker 2

And Chairman went into the details, so give me some time. I'll go through the specifics with you. First of all, is related to increasing the ratio is what we refer to in our remarks of non e commerce packages as a ratio to our delivery total. So in other words, if I deliver 100 packages and there needs to be at least 6 packages pick up as non e commerce. So one of the things that there are 4 specific strategies that we implemented to improve the portion of non e commerce or what we call it individual parcels or retail parcels.

Speaker 2

One is to enhance consumers' willingness to send parcels at our post through deliberate marketing effort and the promotions in using of digital tools. So the handheld building your own focused group or targeted group is something that are being implemented. Number 2, training our couriers to improve their awareness of serving customers, increase customer loyalty. So more personalized, more higher quality standards issued to our couriers so that they are able to be recognized having the capability of serving 2 door as well as pickup from the consumers from the customers. Number 3, shifting quality management of the delivery services focus from post event to pre event, so thereby reducing the customer complaints or anticipate any potential problems that could arise, so hence improve the overall experience.

Speaker 2

Number 4, strengthening the cooperation with e commerce platforms, enhancing direct coordination between the headquarters and those platforms. Currently, while we have achieved direct settlement process with Bytedance, Pinduoduo as well as Douyu. Then improving the second part is reducing the cost of the last mile. The initiatives, there are twofold. The first one is relating to the couriers.

Speaker 2

We call it policy or initiatives which started last year. The goal is to increase the income of our couriers. So early on in our remarks, we talked about allowing the couriers to achieve market pricing or gaining the majority share of the market pricing is to incentivize them so that they are motivated to make a special trip to go pick up. The second part of the initiatives relates to improving the outlet's profitability. Last year we have about close to 2,000 outlets installed machinery and equipment that enabled them to provide package that are sorted or directed or destined directly to post.

Speaker 2

Chairman gave an example. In the past, the couriers have to go to the post I'm sorry, go to the outlet help sorting or they have to ride to the post ride to the outlet to pick up the packages that are bound for their delivery service area. So with the installation of those machines, the outlets no longer rely on manual sortation. So the riders or the couriers do not need to travel to the outlets anymore. And instead, they will receive packages directly from the outlet either through autonomous driving vehicles or electrical vehicles that are utilized by the outlet to send those couriers so that the couriers can work within a much smaller and more concentrated service area radius and allowing them more time and more focus on serving to door and also pick up from the door.

Speaker 2

Another aspect of this second initiative relates to the outlet. With the direct sending the packages directly to the couriers as well as sending the packages directly to last mile posts, The outlet owners are able to reduce their delivery cost. For example, in the past, each packages on average would cost the outlet about $0.80 for the couriers to deliver. Now couriers would then put part of their packages into the post, which will share their 0.80 0.40¢ out of that 0.80¢ will go to the post. With that initiative that we implemented, the direct linkage between outlet and the post would allow a greater portion of close to 60% or 40% of the packages going to the post directly.

Speaker 2

So then the outlet does not need to pay the whole $0.80 So we estimated and we calculated of that $0.40 because it still need to be sent to the post. The outlet owners would pay on average between $0.10 to $0.20 to achieve that direct delivery to the post. So with, 1st of all, the $0.40 reduction in payment to the courier and then a cost of about $0.10 to $0.20 to send those packages to the post, the outlets could net about a $0.20 or so saving on the delivery cost. Going forward, we are going to focus on these initiatives in fully implementation, then we will achieve a goal of not only improving the outlet's profitability as well as the courier's earnings. So hence, the long term effect would be for the overall network stability to be established because the profit level will be increased and it will provide support for our overall delivery fee reduction, not only for us, but also potentially as a solution to the whole industry.

Speaker 2

This is not an overnight goal. We are working towards this change in shift from volume to quality to focus on more differentiated product and services so that ZTO could break away from a marginalized price competition and establish competitive unique competitive advantage.

Speaker 4

Thank you very much.

Operator

The next question comes from Luo Yu Jang with Haitong. Please go ahead.

Speaker 5

First of all, congratulations to company for achieving good performance in the second quarter. My question is about the capital expenditure plan for the years 2024 and 25 and the longer periods. I'd like to know which areas the investments will allocate it to and how we make the capital expenditure plan? Our second question is about the cost reduction plays about the whole process in the future. Thank you.

Speaker 2

Thank you very much for your question. Well, we the first question is about the CapEx. In the past, we've been consistently investing in CapEx mainly to build sortation centers and establish transit capabilities. Till today, most of our super sorting centers were self owned and above 90% to be specific if I may supplement. So going forward, we won't be in need of expanding our CapEx spending.

Speaker 2

Based on the economic development, some areas or weaker areas, we have also reserved space, 200 to 300 hectare acres, for example. If our volume demand increases onefold or even twofold, we have sufficient reserve already there. So we don't need to spend capital to acquire further more significant land use rights. We just need to either develop them or upgrade them. The consideration, however, do need to be given to our initiatives in the longer term, developing comprehensive logistic capabilities, for example, warehousing or in warehouse processing, LTL businesses, all those ecosystem businesses do rent spaces from us so that they are able to form a comprehensive and higher efficiently co located product and services by utilizing our capacity.

Speaker 2

Going forward, it is very clear that acquisition for land use rights, building supercenters are going to be very minimum. The growth of our or putting in line of services, putting services, the capacity is very much directed or matched with our anticipated demand of capacity in the sortation, transportation and all the segments of our operations. We are able to foresee with a very clear visibility that going forward we will be able to generate increasing free cash flow. We talked about giving back return to our shareholders. It's based on the fact that the cash generation will continue to be healthy and the CapEx spending will be stable or reducing going into 2,004, 2025, so that our overall return to the shareholders will increase.

Speaker 2

The second part relates to the question on how we are able to continue to reduce the operating cost. Indeed, as you look into the past, even though ZTO have been leading this effort, but for the whole industry, it has been continuously achieving high cost efficiencies. In the past, what we've been doing and what we've been able to achieve greater results or ahead of everybody is that our connection between the outlets and the sortation center has been more advanced or more ahead of everybody. Now going forward, as we continue to rely on lean operations, looking into greater visibilities of each of the segment of our operations, we are still able to as volume increases as our productivity gain continue to release, we still believe there are plenty of opportunities for us to achieve scale leverage as well as on a unit level continued cost efficiency. And then the second consideration, which is more of a long term, but steady visibility to us is that because of the route planning, we talked about in the past the tri layer throughput concept.

Speaker 2

As again, we said earlier, we were able to improve the connectivity between the outlets and sortation center. Going forward, as volume increases, we are able to establish greater connectivity between origination outlets to destination sorting center or the 3rd layer being the origination center to the destination outlets or the origination outlets to destination outlets. All these is simply put an effort to reduce the number of sortation. In the past, we were at the level of 2.5 per parcel. We are reducing it now to 2.09 and continue to decrease because of better route planning and volume increases.

Speaker 2

We estimated for each one time reduction of the sortation, we are able to reduce about $0.25 being $0.10 in sortation and $0.15 for transportation. With that, we have clear room for the future to further reduce our unit level cost because of this trilayer throughput concept. Market share, as we looked at the first half of the year, declined 2 points. This is still matched relatively well with our capacity or capacity in services. Anywhere outside of that range will not generate as effective economy of scale and will cause us to have increased marginal cost with diminished marginal benefit.

Speaker 2

So we are, as you asked the question, how we plan our capital investment and deployment. It's very much a science related to what we are able to serve, what are the capacity build up and what we anticipate to come with the most optimum volume and optimum cost. Thank you for your question.

Operator

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

Speaker 2

Thanks again for your continued Our strategy shift in the beginning of the year has been very effective for us, specifically in improving the non e commerce packages. It's reflected in our bottom line. Balanced approach will continue to be our future focus, including the last mile initiatives. We believe we are building long term competitive advantages so that we are differentiated from the rest of TongDao. We look forward to speaking with you in the future, and thanks again for joining today's call.

Operator

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

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