ZTO Express (Cayman) Inc. (NYSE:ZTO) Q1 2023 Earnings Call Transcript May 18, 2023

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 : Thank you, operator. Hello, everyone, and thank you for joining us today. The company’s results and an investor relations presentation were released earlier today and are available on company’s IR website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and the 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 statement 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 statement. 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 statement as a result of new information, future events or otherwise, except as required under law.

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.

Meisong Lai: Thank you, Chairman Lai. 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 RMB6.3 billion, up 20.5% 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 RMB1.92 billion, up 82% year-over-year. In the first quarter of 2023, net express delivery industry volume increased nearly 11% over last year. Successfully saving 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 sending regions to reduce their lack; we’ve 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 pointed out the repeatability year-after-year hence effectively alleviate their concerns, so of course had reservations. 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 quality of earnings.

Third, from the perspective of cost. On one hand, we benefited from better economies of scale given higher package volume. On the other hand, we were able to improve the efficiency in isolating operational anomalies and address problems more effectively where processed data are traced to workstation or individual operator, thanks to several standardization initiatives we started in the second half of last year which provided us action, level of visibility and quantification to manage productivity. Fourth, high service quality is a prerequisite for price premiums, network stability and consistent market share expansion. We continued 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 ensure timeliness 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 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 portent works. Number one, drive full implementation of the last mile policies that assures the path through of market pricing into the hands of careers. We’re cultivating a mini platform that sign for all the operators to promote entrepreneurship has increased careers income as well as proportion of the ZTOs retail to the volume.

Number two, strengthen capability of the entire network, particularly empower our network partner and always 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, enhanced capability of delivery to door to improve overall value add and quality of services, our last mile posts. We aim to go from help addressing industry wide challenges in the labor costs and the lightening the workload for delivery personnel to the development of multifaceted 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 stay relevant in promoting fair and equitable sharing of benefits amongst all participants of our business endeavors. Our leading position at presence 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 that everyone under the ZPO brand. If we actually build ever relative success in the industry for the past 10 years to the more effective linkage between headquarter and sortation centers. Then our competitive mode for our next stage of growth and the development would largely be dependent on whether we are able to build cohesiveness and a streamlined connection amongst sorting centers our last mile careers and our customers.

We are confident in the growth prospects of China’s express delivery industry. Staying practical and improving digitization and a data driven process improvements will continuously enhance the ZTO’s competitive edge. Our altruistic 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. The balanced approach and increases in service quality, scale and wage plus higher earnings will bring about meaningful payback to everyone who participates support, and invest in us. With that, let’s welcome Ms. Yan to interpret the financial results and status of ZTO.

Huiping Yan: Thank you, Sophie. Thank you, Chairman. Hello, everyone on the call. As I go through financial, please note that unless specifically mentioned, all numbers quoted are in RMB, the percentage changes referred 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 maintain 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 RMB6.3 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 RMB1.92 billion.

Total revenue increased 13.7% to RMB9 billion. ASP for the core express delivery business decreased 3.7% or RMB0.05 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 RMB6.5 billion, which increased 2.8% because of scaled leverage, and meaningful productivity gain. Overall unit cost of revenue for the core express delivery 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 rate.

Unit sorting costs decreased 11.1% 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% to RMB2.5 billion, because of increased revenues and costs productivity gains, gross profit margin rate increased 7.6 points to 28.1%. SG&A expenses excluding SBC compensation, as a percentage of revenue grew by 0.3 points to 5.9%, demonstrating a stable and solid corporate cost structure. Consistent with gross profit, income from operations increased 74.7% to RMB2 billion and associated margin rate grew 7.6 points to 21.7%. Again, adjusted net income increased at 2.1% to RMB1.9 billion and adjusted net income margin grew 8.1 points to 21.4%.

Operating cash flow grew 147.7% 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. Taking into consideration that current market conditions and our operations, we are raising our annual parcel volume projection to be in the range of 29.27 billion to 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 limitary view, which are subject to change. This concludes our prepared remarks.

Operator, please open the lines for questions. Thank you.

Q&A Session

Operator: We will now begin a question-and-answer session. [Operator Instructions] [Operator Instructions] And our first question will come from Ronald Keung of Goldman Sachs. Please go ahead.

Ronald Keung: Thank you. Thank you for taking my question and congratulations on the strong results. So I have two 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 there’s 10% improvement in the unit costs particularly in tracking and sorting, whether that could resist sustainable, particularly heading into the next few quarters whether the unit cost improvement will continue. Second is can you also share how you see the latest competitive landscape 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 company landscape when passive growth is lapsing the easiest low base over the past one or two months now we’re having a slightly less EV-base now. So let me let me translate my question.

Meisong Lai : Thank you, Ronald for your question. 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 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 costs for transportation and sorting combined decreased by RMB0.10 year-over-year. On one hand, the impact of the pandemic in the same period last year suppressed the economies of scale, again, 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 costs per parcel decreased RMB0.06 to RMB0.51, the sorting cost decreased RMB0.04 to RMB0.32. And the reason mainly are some of the things that we’ve done is with regards to our digitization and refined management and 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 a standard fuel consumption management to reduce fuel costs. 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 the ability to start to an extent dynamically planning our route 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 and improving our low rate.

In terms of sortation, we made the employee management much more scientific. As you know sortation, the labor costs as a percentage is the largest. On one hand, we implemented a unit rate compensation in other words, we paid by the quantity of processing. So you do more work in you earn more to stimulate employees working and [indiscernible]. 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.

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 RMB0.05 to RMB0.10 or RMB0.05 to RMB0.07, I’m sorry, 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 their continued effort in digitization and our expanded effort throughout the entire network will help us continue to drive productivity certainly without over emphasizing that the scale will continue to bring us leverage.

That’s for the cost side of the question. And then in 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 private enterprises have more productivity, more room for productivity gain and the 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 advantage of scale and efficiency and to 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. Please go ahead.

Qianlei Fan: 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 the full-year rolling guidance and also in first quarter CapEx has been up year-on-year. So wondering, what’s the capacity 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 will be more aggressive in expending the relative advantage compared with peers?

Huiping Yan: Thank you for your question. I’ll take the first one regarding CapEx. The full year guidance is still we’re maintaining it as RMB6.5 billion to RMB7.5 billion for CapEx spending. If you look at last year, because 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 a 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 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 increments 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 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 volume so as to maintain an optimal pace in CapEx investment.

Meisong Lai : Let me translate for the Chairman for the second part of the question the industry of growth forecast, at present China’s economy is showing signs of gradual recovery and 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 rebound. 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%. 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 — with our new methodology to set growth goals we focused on market share instead of year-over-year of 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 a market and maintaining quality of services and so on so forth. And then in terms of the following — in terms of the policy promotion, 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 measured them upon 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 — 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 matrix. We drive for balanced development. Services, quality is the prerequisite our market premium to help us propelled forward with sheer performance services as well as quality, including our empowerment to our network partners in couriers as well as the better on location sharing of the benefit of the growth in a profit is going to help the to further our competitive advantage going forward.

Operator: The next question comes from Lu Xu of Citi. Please go ahead.

Xu Lu: So let me translate my question. So first question is regards to the ASP trend. So what are the management expectations on the ASP trend going forward this year, with the decline trend continue throughout the year. And in the longer term how management’s view 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’s growth rate? And the second question is regards to the last mile network development. What’s the current number of the last mile posts station and the inbox for in station rate. And how could it improve on the current level is there ceiling for that? Thank you

Meisong Lai : As for the first quarter and full year, ASP for the first quarter decreased RMB0.05. And 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. And all these all together plus or minuses there is some optimization of RMB0.03 of that part of what I had described earlier as negative impact. It is expected that unit price will remain relatively stable throughout the year. ZTO has always been a supporter of stable pricing and reasonable market pricing for — in the past and we’ll continue to do so. The first quarter results — after the first quarter results in the future what we will plan on doing is continue to through policy making and 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 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 innovation is expected to come. And this will also go hand in hand with our initiatives to pass through market price to the courier 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 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 an 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 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 our 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. 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 gains, 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.

Sophie Li: Thank you again for everyone who 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 is now concluded. Thank you for attending today’s presentation. And you may now disconnect.