ZTO Express (Cayman) Inc (ZTO) 2021 Q2 法說會逐字稿

Welcome to the ZTO Reports Second Quarter 2021 Unaudited Financial Results Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Sophie Li, Director of Capital Markets. Please go ahead.

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 the current market and operating operations, 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 upgrade -- 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. (foreign language)

[Interpreted] Hello, everyone, and thank you for joining us today. In the first half of 2021, the express delivery industry demonstrated steady growth momentum. ZTO maintained a consistent strategy to balance the longstanding priority of service quality, volume and earnings while focusing on effective pricing and avoiding unnecessary loss-making volumes. ZTO achieved 5.8 billion parcels and delivered an adjusted net income of CNY 1.2 billion. Meanwhile, our customer satisfaction scores were at the top of the peer group, and our performance in total process timeliness and the 72-hour time definitiveness stood out among the Tongda Operators.

Network stability and network partners' confidence and willingness to invest in long-term growth, or buy down to the growth and the longevity for a franchising model, it is even more critical at times of diminishing profit or even losses given prolonged and deep price competition. ZTO's shared success culture and long-term practice are highly aligned with the recent regulatory interventions aimed to ensure social stability.

We have always relied on our operational efficiencies to deliver best-in-class quality of services and the profitability while consistently empowering our partners to achieve win-win. This is precisely the reason why consecutively for the past several years, ZTO was able to deliver increasing proportion of aggregate Tongda net profit ranging from 45% to as high as 80%, with approximately 25% to 27% volume share, all while maintaining a stable partner network.

Policies supportive of health competition, tangible pricing and fair gain will undoubtedly help solidify ZTO's competitive advantage and allow us to pull further away from the competition. ZTO always focus on being our best self, setting our sights on the future and strengthening our core competencies including infrastructure. We have made further progress on network upgrades, last-mile expansion and brand building during the second quarter.

First, we continue to implement initiatives to support or reform our partners' operations. Through a top-down and grade-by-grade approach, we enhanced the transparency and fairness, boosted trust and confidence to improve network stability. Specifically. For example, we closed or absorbed those leads that were no longer competitive. We identified our leads with growth potential or importance for strategic placement and established the goals for capacity expansion, with added financing support, digital diagnosis, pricing optimization, legal and financial advisory services and equipment and technology upgrades. We ensured capacity and capabilities for pickup and delivery operations are kept at pace with transit and sorting expansion.

In addition, consistent with the regulatory attention to the rise and interest of those in the front line, we increased participation of direct payments of last-mile delivery fee to the couriers. Expanded coverage for couriers' group accidental and employer's liability insurance. We set up a CNY 100 million fund for courier care and we improved the star-level measurement metric that promote career growth. These proactive measures have not only tangibly improved sense of belonging, being phased and achievement across grassroot community but also provided added protection against loss of wealth by our network partners.

Secondly, we raised the development of last-mile to a strategic level for ZTO's growth. Adhering to the shared success philosophy, we designed a partnership structure to promote the deeper integration at operational and ownership level with our network partners, aiming at building a last-mile network with wide and deep coverage of urban and rural area where services tendered and consistent images are maintained.

At the end of second quarter, we have over 70,000 last-mile folks with an increasing lead over our peers. These locations can cater towards diverse needs of our customers. As express delivery network becomes less layered and more streamlined, last-mile network carries great ability that are beyond our imagination.

While accelerating the expansion of last-mile folks, we improved store standardization and explored varied e-commerce opportunities, value-added and neighborhood services to enrich content and improve quality for better experiences and a higher competitive and value proposition for the store owners or operators.

Third, we actively expanded new product experimentation by collaboration and integration with our logistics ecosystem. Drive to establish differentiation in brand awareness and value recognition. According to the objectives we've set in the beginning of the year, we improved connectivity with emerging e-commerce platform, particularly in areas of reverse logistics. We extended distinctive service categories to cover fresh produce, wine and spirits and specialty foods. We explored on top logistic service offerings to deliver comprehensive industrial solutions.

At present, the time of definite service has been made available in nearly 100 cities with determinable routes, advanced phone alerts and other customized for human guarantees. These new initiatives are generally well received by our customers and test groups.

The coaching business under our ecosystem has launched time-definite services across its newly formed nationwide network where regional operation teams are being quickly assembled. We are further advancing and deploying resources to lay the foundation for a future capable of universal, inclusive and well-integrated multi-products and services.

We believe the express delivery industry will maintain a medium to high speed of growth in the next 2 to 3 years. The industrial landscape has clearly been dividing, not only in volume or quantity, but also in quality, such as overall operational strength and the profitability. The very nature of express delivery, plus the partner network model requires long-term accumulation of capabilities, including our assets, deep know-how and network coherence in which the capabilities in all 4 segments of pickup, rotation, transportation and delivery must continuously improve and stay in sync.

Moreover, as volume continues to grow, the structure of the network must also involve and become more agile as -- so as to continue to generate cost productivity while maximizing scale advantage.

With the approaching daily volume of 400 million or even 500 million parcels, ZTO will maintain its consistent and effective strategy by suitable expansion of its transit and sorting platform, reduced overall frequency of transit and rely on digitization and data-driven decision-making to enhance connectivity and efficiency.

Meanwhile, we pay close attention to the appropriate and in-time expansion of our network partners' capacity, last-mile network development and seize express plus commerce opportunities. We will steadily develop our ecosphere and build competitive advantages with comprehensive products and services that are differentiated for brand value and recognition.

Now let's ask Ms. Yan to take us through results of our financial performance.

Thank you, Sophie. Thank you, Chairman. 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 comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website, and I will go through some of the key points here.

In the second quarter by executing our consistent strategies, we achieved profitable volume growth and grew parcel volume by 25.6% and to 5.8 billion while attaining CNY 1.3 billion adjusted net income. Our leading market share was 21% for the quarter. Total revenue increased 14.4% to CNY 7.3 billion. ASP for the core express delivery business declined 5.9% or CNY 0.08 with approximately CNY 0.04 related to volume incentives and another CNY 0.04 from parcel weight drop. Average weight per parcel declined 8% to approximately 0.92 kilo.

The cost of revenue increased 22% to CNY 5.7 billion. Overall unit cost of revenue for the core express delivery business increased 1.7% or CNY 0.01. More specifically, line-haul transportation costs per parcel increased 10.2% to RMB 0.48; unit sorting costs increased to 0.4% or CNY 0.01, normalized for onetime benefits such as ETC toll road fee waivers, lower oil prices and social welfare exemption, we benefited last year during the COVID outbreak. Combined transportation and sorting cost per parcel generated positive productivity gain over last year still.

Gross profit decreased 5.4% to CNY 1.7 billion. Gross profit margin rate decreased 4.8 points to 22.8% as a combined result of price decline, increased cost against a lower base due to onetime benefit during last year's COVID-19 outbreak.

SG&A increased 26.1% to CNY 394 million from increases of compensation and benefits, office expenditures, depreciation and write-offs of obsolete assets. Income from operations decreased 11.6% to CNY 1.5 billion. Associated margin rate declined 5.8 points to 19.9%, mainly driven by that 4.8-point decrease in gross margin. Adjusted net income decreased 12.5% to CNY 1.3 billion. Adjusted net income margin declined 5.3 points to 17.4%.

Operating cash flow increased 54.3% to CNY 1.9 billion. CapEx outlay totaled CNY 2.2 billion. As we further strengthen our infrastructure in preparation of increasing demand for the core express business as well as resource planning for development of our ecosystem, our annual cash flow -- or CapEx is expected to be around CNY 9 billion to CNY 10 billion.

Turning to business outlook. Based on the current market and operating conditions, the company maintains its previously stated annual guidance of 35% to 40% increase year-over-year for the volume. Our annual parcel volume is estimated to be in the range of CNY 22.95 billion to CNY 23.8 billion. These estimates represent our current and preliminary view and is subject to change.

This concludes our prepared remarks. Operator, please open the lines for questions. Thank you.

(Operator Instructions) The first question comes from Ronald Keung with Goldman Sachs.

(foreign language) I have 2 questions. First is on the competitive landscape and how we think about the second half, particularly as our full year parcel volume guidance would imply a broadly 27% to 35% implied parcel growth rate for the second half. So that will be faster than the second quarter. So I just want to hear as we balance profitability and growth, which we did very well in the second quarter, as we currently expect, based on the guidance, some faster growth in the second half, would that be overall industry acceleration that we're expecting? Or would there be any fine-tuning of our strategies in pricing and market share gains in the second half?

And then my second question will be on cost productivity. As Ms. Yan talked about the positive productivity once we take out the one-off factors. So on a unit cost perspective, particularly as we head into the second half, how do we see the room to further cut on our unit cost, particularly on sorting and trucking?

[Interpreted] Our strategy maintains and the expectation for the second quarter -- second half of the year's growth is stable and maintaining or perhaps there's a chance of below second quarter growth. And as we continue to seize opportunities and rely on our own capability to gain market share, we want to point out to you that fourth quarter, typically in the past, the market share of us is below the second and the third quarter. This is largely driven by seasonality.

And the second question, we -- after excluding the onetime effect for the COVID-19 benefits, second quarter's per parcel cost is positively better than -- the productivity gain is still there. What we expect the second half, as we rise -- as we achieve a higher level of volume because of the seasonality and reaching closer to our optimal production level, the cost productivity will still be there, and our current estimate is around 5% to 6% gain per parcel year-over-year. Thank you, Ronald.

The next question comes from Eric Jiang (sic) [Ellie Jiang] with Macquarie.

This is Ellie calling from Macquarie. So I have a question with regard to the management comments in the opening remark with regard -- the potential to opening up more channels towards the emerging e-commerce channels. So I would assume that includes a lot of the short-form video channels. So could you provide some color in terms of the channel mix for the parcel volume. And for these emerging channels, would it be more negative impact or positive towards the overall ASP trend since they might have lower weight overall? So that's one question.

And the second, just quickly on the recent regulatory overhang. So we've seen government issuing guidelines saying some price control in the kind of last mile. Do we -- could we think we are now kind of in an inflection point where the overall price war should be reaching more of a stabilizing stage. So from now on -- or second half, we should be seeing, at least on the competition side, this should be continuing from now on. (foreign language)

Ellie, thanks for your question. The first question, we have been expanding our penetration into all these new e-commerce channels. And typically, what happens is as we take on these new parcel activities, we are usually represented as the largest share, some as high as 25% and above.

Now this entirety is still our attempt to enrich our product mix or to improve our product mix because we are typically traditionally relying more on the traditional e-commerce. With the new development and innovation taking place in the marketplace, we are keen in making these connections with new up-and-coming channels. And the results have been very positive. Now still, I would say the total volume with respect to our core express business catered more towards e-commerce is still not large, but the trend is very promising.

The second part of the question regulatory intervention is indeed helping the stabilization of the entire express delivery operations. Price bottom is that because the sufferings typically is more felt at the last totem pole of the chain, i.e., the grassroot level of operators and particularly so including couriers.

So what we believe the price stabilization is a continued trend. Again, as we mentioned, this is very consistent with ZTO's long-term practice in supporting our network partners. And in some cases, we may even provide more support because we set our sights on the longer term. The ups and downs in the marketplace shakes the confidence and also the hope for the future. But yet at the same time, we believe it is critical for us to maintain confidence across the network where our network partners would be willing to invest.

So with our strong corporate earnings, we are willing to provide more support than the market practice, at the same time, maintaining the profitability, quality of services as well as market share gains.

The next question comes from Lin Chen with JPMorgan.

(foreign language) I have 2 questions. So the first question is that we noticed that the company's market share has declined a little bit in second quarter, but the price decline is actually modest among Tongda players. So my question is that whether it is short term change of strategy or more like a longer-term strategy? And is the company still committed to the 25% market share target in year 2022?

And then my second question is about the social security payments. I understand that some employees have signed the contract with the third-party agents. So I would like to know how many employees have signed these kind of contracts. And since the government encourage the direct employment of employees, so has the company has any plan to transfer these employees into permanent head count? And what will be the impact on the cost?

[Interpreted] Our consistent strategy is to achieve targeted profit goal, maintain high quality of services while growing volume and market share. The temporary decline in market share for the quarter resulted from our emphasis on profitability without taking unnecessary losses. And also it's under the positive influence of the regulatory intervention so that we can allow our network partners to be less burdened by price competition, maintaining stable operations and restore confidence for their future.

Prolonged and intensified price competition in recent years had threatened the very survival of outlet operators and couriers. Their legitimate rights and interests are under siege because they often suffer the most. Raising attention to social stability, the relevant regulatory agencies has issued several policies and procedures this year intended to promote fairness and healthy growth of this industry. And we have said earlier that this has been consistent with our long-term tiered success philosophy as well as practice.

ZTO is regarded as the industry leader to uphold government policy and help maintaining overall stability. So not only because of our shared success philosophy and long-term practice is to achieve win-win with our network partner, but also because we strive to achieve optimal balance among quality of services, volume growth and profitability, we were being more prudent pricing practice and choose to let go loss-making volume during the quarter. So our market share retreated slightly.

Again, as Chairman mentioned earlier, it takes real competitive edge to win, and the express delivery business relies largely on scale and efficiency. So we believe with a stable market operation and competition returning to sensibility, our competitive advantage will become even more apparent.

We all have noticed the clear division in the market dynamics. So looking forward into an environment where growth is stable and also the market dynamic shifts could very well take place in any time, we are still hopeful and we will continue to drive to achieve our goal in volume growth and market share gain.

The second question relating to the social welfare. Indeed, our 100% compliance is being closely monitored as well as upheld. Including the outsourced employees, outsourced labor force, their social welfare are well established. And we welcome practical solutions or planning on even better support the grassroot communities to protect their rights and interest going forward.

The next question comes from James Teo with Bloomberg.

(foreign language) Maybe I'll translate my question. My question is regarding the ASP drop. There was CNY 0.08 mention, of which CNY 0.04 was due to the lower parcel weight per parcel. I would like to know what is the reason and whether this trend would continue.

Great. Thank you for your question. The CNY 0.04 decline relating to the parcel weight, we have actually observed that trend. And the reason being that the e-commerce itself is also evolving, where, particularly also because of the COVID, people learned to shop online and they learned to shop more sporadically. Whenever there is a demand or need for a good purchase, they would go online and they will do the shopping. So on one hand, we believe the efficiency and also the timeliness of express delivery business provided and supported that shopping behavior. So we believe that decline is a trend and it's a natural trend.

Now I think the concern might be -- this is the way I'm offering more explanation to your question. The concern may be that as the we continue to decline, the price will continue to drop. Actually, we do have a minimum weight requirement, and so anything below that would be a flat rate. And as we continue to observe how the weight changes, I believe the industry, in order to cover its fundamental cost which is there either heavier or lighter, will make necessary changes to the pricing structure. Hope that answers your question.

The next question comes from Parash Jain with HSBC.

And I was just wondering if you can talk about your CapEx guidance, where would we expect your second half CapEx to be deployed? And also, if we can talk about the prospects of non-express businesses, where do you see the most opportunity, whether it's cross-border or whether it's freight forwarding? And would you approach organic growth strategy or the focus would be to grow through acquisitions?

Thank you, Parash, for your question. The first part of the year, we deployed CNY 2.2 billion. And our plan for the whole year on a cash outlay basis is CNY 9 billion to CNY 10 billion. About 70% of these are towards acquisition of land use rights and development of our infrastructure, some of which are designed for comprehensive logistics service capabilities. And that shall be the similar proportion going forward for the second half of the year. As you know, the land use rights and development of facilities take cycles, and there are pipelines that are visible to us, so the CNY 9 billion to CNY 10 billion is what we are currently estimating.

The second part of question relates to our development of the ecosystem. We -- you mentioned cross-border as well as coaching that we have talked about in our prepared remarks as well as those already operation for several years, including the cloud warehouse business, the freight forwarding or the freight LTL business. All these are, in its totality, coordinating and also addressing up-and-coming and evolving demand in the marketplace.

Now if you compare to the Western countries where large-scale and also professional logistics service providers, they are very geared towards specialty services. And for ZTO, because our express scale, unprecedented, and also in China market only, it has a better chance of evolving into specialized logistics services. And that is why we have planned our entire ecosystem's development to be that. The special requirements, for example, temperature control needed freights, cross-border as they continue to develop are all a part of our overall strategy.

The timing is most important. For example, international activities, while we do have growth developing in -- we have delivery network developing in the Southeast Asia Pacific countries, their structure are also limited because of their size and because of their local e-commerce conditions. Across the board going into Africa, going into Europe, we are currently in the stage of planning resources. So it is a very staged approach. Not necessarily immediately spending and investment across the board because, again, our philosophy and our practice in the past is prudent and profit-seeking.

So it's inevitable. The planning is there. All the ecosystems we only need to be working together. The cloud warehouse business provides one solution where in-house processing and also delivery pickup are connected with our LTL business, with our express business. And now we are connecting coaching business to it as well. So it is from one focal point and adjacency combined holistic solution to be provided to our customers.

Perfect. That's very, very clear, Ms. Yan. And if I can squeeze one more question. And you have addressed that in part in earlier questions. When we talked about competition and consolidation, and there are moving parts where some of the provinces are trying to create a floor to ensure that probably the system is not stressed out.

But does it mean that some of the rather subscale player may -- the consolidation may delay as a result of it because the stress on their cash flow may not be immense as a result? Other way to think about it is that it will give an opportunity to better service provider like yourselves to gain market share as a result because competition will shift from price to the service quality. And in that respect, how do you see the competition evolving outside Tongda players?

Sure. Very good question. Again, as we mentioned that the growth of express delivery business rely largely on its infrastructure, and it takes years to accumulate. And not immediate quick fuel by the capital or a largely concentrated customer base would mean that much in our scenario where we are, indeed, servicing the entire country, and the e-commerce platforms are also evolving with multichannels. With all that, I believe the smaller players have been exiting the scene or are not able to sustain because they are lacking the operating efficiency and lacking the scale advantage or leverage.

The M&A considerations in that regard, we believe the quality of service, the value of the brand, the customer base, all these taken into consideration on top of whether they are profitable or not has always been our gauge in whether to consider M&A or other types of merge.

In the past, I believe the Chairman has described a very interesting analogy where we don't need to acquire the brand or acquire the entire business. But because of the operations on the ground, naturally gravitates to those that are with higher brand awareness, stability as well as long-term prospects. So we believe in the current market dynamics, we are not willing to pay for a brand, even though at the operational level there has been consolidation taking place.

The smaller players, they need to grow, I think specifically with a company perhaps starting with the latter J. Its growth is very unique, and it's our capital structure, the cash utilization and the pricing strategy approach is an anomaly in our understanding. And certainly, we will continue to simply focus on what we can do in growing our business with a long-term objective and maintained.

I hope that answers your question. If not, we can certainly have an offline discussion.

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

Thank you, operator. In closing, on behalf of the entire ZTO management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please feel free to reach out to Capital Markets Department. Thank you for joining us today. This concludes the call.

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]