ZTO Express (Cayman) Inc

HKEX:2057

Earnings Call Transcript 2023-Q1

[Operator]

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

[Sophie Li, executive]

Thank you, operator. 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 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. Yan, who will go through the financials and guidance. They will both be available to answer your questions during the Q&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, out 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 US 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. It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will read-through his prepared remarks in their entirety in Chinese, before I translate for him in English.

[Meisong Lai, executive]

[Foreign Language]

[Sophie Li, executive]

Thank you Chairman Lai and let me translate first. Hello, everyone, and thank you for joining us on today's conference call. In the first quarter of 2023, our business volume reached 6.3 billion, up 28.5% year-over-year and our market-share increased by 1.8 percentage points over the same period last year. We maintained our industry-leading service quality ranking while at the same time, achieved an adjusted net income of RMB 1.92 billion, up 82% year-over-year. In the first quarter of 2023, the express delivery industry volume increased nearly 11% over last year. Successfully facing 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 spending regions to reduce their lag. We categorized our franchisee partners and designed appropriate policies to match their unique business profiles. We increased communication effort to explain the intention of the change and pointing out the repeatability year after year hence effectively alleviate their concerns, so as support had with reservation. Secondly, regarding revenue, we refined our volume, cost of profit, analytics and implemented managerial towards across the network to further improve the effectiveness of transit fee pricing to cover associated operating cost. In conjunction with continued effort to optimize KA customer mix, we were able to in-house structure of revenue and quality of earnings. Third, 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 date are chased to workstation or video operator, thanks to several standardization initiative we started in the second-half of last year, which provided us action level visibility and quantification to manage productivity. Fourth, high service quality is a prerequisite for price premiums, network stability and consistent market share expansion we continue to refine the design of quality-control points to improve standardized execution throughout the whole process of pickup, rotation, transit and delivery, addressing root causes and in short timelines and overall customer satisfaction. Entering into the second quarter, we observed that the industry's performance was reasonably fair relative to last year's low-base. With improved consumer confidence and the further recovery of national economy, we believe the express delivery industry regaining 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 one, drive full implementation of last-mile policies that assures short that pass-through of market pricing into the hands of couriers. We are cultivating a mini platform, [indiscernible] for all the operators to promote entrepreneurship, hence increase couriers income as well as proportion of the ZTO's retail to [indiscernible] volume. Number two; strengthening capability of the entire network, particularly in power of our network partners and all is to establish capacity for direct linkage. Our goal is to increase market coverage and the penetration of our time-definite products which will help improve profitability. Number three, in-house capability of delivery to door to improve overall value-add and quality of services, however last-mile posts. We aim to go from help addressing industry-wide challenges in delivery costs and lightening the workload for delivery personnel to be development of multi-faceted product 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 and we have consistently stayed relevant in promoting fair and equitable sharing of benefits amongst all 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 the concerted win-win cooperation that everyone under the ZTO brand. If we actually build our relative success in the industry for the past 10 years to the more effective linkage between headquarter in sortation centers, then our competitive moat for our next-stage of growth and the development would largely be dependent on whether we are able to build cohesiveness and the streamlined connection among sorting centers albeit last-mile couriers and our 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 while continuously enhance ZTO's competitive edge. Altruistic service mindset will propel us to grow our business base and strong as well as to take on greater responsibility towards the country and the society. The balanced approach and increases in service quality, scale and reach for higher earnings will bring about meaningful payback, so everyone who participates support and invest in that. With that, let's welcome Ms. Yan to introduce the financial results and status of ZTO.

[Huiping Yan, executive]

Thank you, Sophie. 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 first quarter, ZTO maintained profitable growth, thanks to sound execution of our consistent corporate strategy. With industry-leading ranking in quality of services, our parcel volume grew 20.5% to RMB 6.3 billion, expanding our market share by 1.8 points to 23.4% compared to the first quarter last year. We delivered a strong adjusted net income growth over 82% to reach RMB 1.92 billion. Total revenue increased 13.7% to RMB 9 billion. ASP for the core express delivery business decreased 3.7% or RMB 0.05 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. Total cost of revenue was RMB 6.5 billion, which increased 2.8%, because of scale, leverage and meaningful productivity gain. Overall unit cost of revenue for the core express delivery business decreased 12.8% or RMB 0.14. Specifically, line-haul transportation cost per parcel decreased 10.6% to RMB 0.51, driven by real-time data monitoring and analytics to optimize resource utilization, route planning and load rate. Unit sorting cost decreased 11.1% to RMB 0.32, thanks to continued standardization in sortation procedures and improved productivity with better resource deployment. As a result, gross profit increased 55.8% to RMB 2.5 billion because of increased revenues and cost productivity gain. Gross profit margin rate increased 7.6 points to 28.1%. SG&A expenses excluding SBC compensation as a percentage of revenue grew 0.3 points to 5.9%, demonstrating a stable and sound corporate cost structure. Consistent with gross profit, income from operations increased 74.7% to RMB 2 billion and associated margin rate grew 7.6 points to 21.7%. Again, adjusted net income increased 82.1% to RMB 1.9 billion and adjusted net income margin grew 8.1 points to 21.4%. Operating cash flow grew 147.7% to RMB 2.7 billion. Capital expenditure totaled RMB 2.3 billion and we anticipated annual CapEx in 2023 to be in the range of RMB 6.5 billion to RMB 7.5 billion. Taking into consideration the current market condition and our operations, we are raising our annual parcel volume projection to be in the range of RMB 29.27 billion to RMB 30.24 billion, representing a 20% 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 lines for questions. Thank you.

[Operator]

[Operator Instructions] And our first question will come from Ronald Keung of Goldman Sachs.

[Ronald Keung, analyst]

So I have 2 questions. One is about the unit cost that we have done definitely 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 few quarters, whether the unit cost improvement will continue. Second is, can you just share how you see the latest competitive landscape, particularly for the industry given 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 compared landscape when parcel growth is lapsing the easiest low-base over the past one or 2 months now we are having less EV base now. So let me let me translate my question. [Foreign Language]

[Meisong Lai, executive]

[Foreign Language] So for the first part you asked about the unit cost and also to expectation for it to continue, Chairman had described that indeed our performances has been quite well for the first quarter and as we look at the sequential improvement there are also present, but certainly the year-over-year comparisons is much more significant, if you look at the first quarter. The first quarter unit cost for transportation and sorting combined decreased by RMB 0.10 year-over-year. 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 begun 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 RMB 0.06 to RMB 0.51 in the sorting cost decreased RMB 0.04 to RMB 0.32. And the reason mainly are some of the things that we've done is with regards to our digitalization and refined management in process of productivity gain. 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, 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 truck routes 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 low rate. In terms of sortation we made the employee management much more scientific. As you know sortation labor costs as a percentage is the largest. On one-hand, we implemented a unit rate compensation. In other words, we pay by the quantity of processing. So you do more work and you earn more to stimulate employees working enthusiasm. On the other hand, we improved labor efficiency through optimized scheduling and utilized more skilled hired worked 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 assessments throughout the entire progress of the package. We use digital intelligence tools to achieve data, so that we are gaining visibility into the actual production process 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. If we disregard the impact of the oil price, the annual cost-reduction target for the full year is between RMB 0.05 to RMB 0.07 for 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 digitalization and our expanded effort throughout the parent network will help us continue to drive productivity, certainly, without over-emphasizing that scale will continue to bring our leverage. That is for the cost side of the question. And then for your second question relating to the market dynamics. Overall is that the market share will continue to be concentrating toward 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. In the industry currently we have seen the continued acceleration of consolidation organically. The leading enterprises have more room for productivity gain and ZTO intend to maintain that leadership. Profitability of each company is also differentiated based on their ability and their results speak for itself. Focusing on our own development with the 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 Qianlei Fan of Morgan Stanley.

[Qianlei Fan, analyst]

[Foreign Language] I'll translate for myself. So there are 2 questions. The first question is about the capacity plans. So we observed that the Company has adjusted out full year volume guidance. And also in the first quarter, CapEx is being up year-on year. So wondering what's the optimized capacity plan for the next few quarters of the year. Is there any adjustment to your full year CapEx plan. And the second question is about competition. So we observe that the first quarter market share gains 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'll be more aggressive in expanding the relative advantage compared with peers.

[Huiping Yan, executive]

I'll take the first one regarding CapEx. The full year's guidance is still we are maintaining at a RMB 6.5 billion to RMB 7.5 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 pace and in this year, certainly the first quarter based on strong volume expectations, we are adjusting it to be higher. So there are 2 reasons, one being the low-base and then the other is, indeed, this year we have a higher-volume incoming. Preparing for our capacity, it's important because we want to continuously monitor the best cost point or sweet-spot. For example, first quarter we have reached 85 million and above packages per day for a part of March and looking into the rest of the year we believe there are still increment to where our capacity needs to be adjusted up. 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 are gearing towards busy seasons 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.

[Meisong Lai, executive]

[Foreign Language] Let me translate for the Chairman, for the second part of your question. The industry growth forecast at present, China's economy is showing signs of gradual recovery and consumers' confidence level is also expected to continue to recover in rise from March to April due to the lower base effect, the industry's growth are also exhibiting strong rebound and considering the overall low-base of last year and the current market recovery, we expect that growth will remain for the full-year around 12% to 16%. Our market share growth target is still to be no less than 1.5% gain. This strategy I think for our overall growth in terms of the policy we setup certain indicators based on the original market share that each of the region currently have and then with our new methodology to set growth goals, we focused on-market share instead of a 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 let more focused on going-forward market and maintaining quality of services and so on so forth. And then in terms of the policy promotion, we also paid more attention to the outlets that truly it need help as they shortened the gap compared to either our national average or regional average so that they could catch-up. The digitalization 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 providing the guidance in where the problems might be. As far as what we are going to do in 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 3 including quality of services, market share and also profitability, all these are part of the performance measure metrics, we drive for a balanced development. Services quality is the pre-requisite 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 carriers as well as the better allocation sharing of the benefit of the growth and the profit is going to help ZTO further our competitive advantage going-forward.

[Operator]

The next question comes from Lu Xu of Citi.

[Lu Xu, analyst]

[Foreign Language] 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 longer-term how the management build the ASP trend for next year. And also if we look at the earnings growth, is the company still confident to achieve a larger earnings growth than the parcel volume 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 inflation rate and how could it improve on the current level. Is there a feeling for that.

[Meisong Lai, executive]

[Foreign Language] ASP for first quarter and full year, ASP for the first quarter decreased RMB 0.05 and so 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 minus is some optimization of RMB 0.03 offset part of what I have described earlier is negative impact. It is expected that unit price will remain relatively stable throughout the year. ZTO has always been quarter of stable pricing and reasonable market pricing in the past and we'll continue to do so. After the first quarter results in the future, what we will plan on doing is continue to do policy-making in our product structure improvements to bring up our pricing where possible. Digitization, as mentioned earlier, helped us to make better pricing to cover cost. The pricing is done on a more granular level at ground-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 innovation is expected to come and this will also go hand-in-hand with our initiatives to pass-through market price to couriers, so that they are encouraged to bringing more non e-commerce packages, hence to see packages. As we continue to focus on better-quality of services in maintaining the level of customer satisfaction, we will be able to secure our premium at the marketplace. Through every segments of process improvement, we will be able to maintain such quality of services going forward. [Foreign Language] The next part of the question relates to our last-mile posts. Since 2021, the company formed Touche and we quickly expanded our footprint through a partner network model and we have developed a reasonable set of footprint as well as capability for services with standardization. The goal of Touche 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 our 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 enhance capabilities at the last-mile, including delivery to door and also our pickup at door. The services that are going to be gradually developed that is 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 through our customers through the services of our network carriers. I'm sorry. The comments for the growth comparisons. We have our profit growth in this quarter faster than our volume growth 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, growth of our revenue growth of our bottom-line faster than the topline.

[Operator]

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

[Sophie Li, executive]

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.