ZTO Express (Cayman) Inc (ZTO) 2020 Q2 法說會逐字稿

Good day, and welcome to the ZTO Express Second Quarter Financial Results 2020 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Sophie Li, IR Director, to read the safe harbor. Please go ahead, Sophie.

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 in our billable-only company's IR webcast 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 Yan, who will go through the financials and guidance. They will all 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 in the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors. All of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties and factors is included in the company's filing 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)

Thank you, Meisong. Now please allow me to translate. Hello to everyone, and thank you for joining us for today's earnings call. As the COVID-19 conditions further stabilized, China experienced a healthy rebound in economic activities and a strong rally in domestic consumption during the second quarter of 2020. As such, China express delivery industry generated 5.24 billion incremental parcels and grew 36.7% year-over-year, which is compared to level of quarterly volume growth in 2017. As the industry leader, ZTO achieved a total of 4.6 billion parcels in the second quarter, representing 47.9% year-over-year growth, and we expanded our relating market share to 21.5%. Meanwhile, we were able to maintain an improvement trend on quality of services and customer satisfaction while achieving high-volume growth.

During the second quarter, we maintained our key strategy, which is to accelerate volume growth, increase our release and continue expanding our market share.

When price competition intensified, we made necessary modifications to our network policies to boost the level of incentives and a show of collaborations between pickup and delivery outlets with fee balancing mechanism.

In addition, we granted low or 0 interest loans to selected network partners through ZTO finance to provide cash flow relief. Amid the comparative pressure, we still buy our network partners to face challenges and look to the future. Our network remains stable.

Meanwhile, we furthered our effort to improve cost of productivity. Subsequent to the first quarter investment, we brought in roughly another 2,100 additional high-capacity vehicles, opened up 500 new line-haul routes and greatly reduced the use of third-party logistic services during the second quarter. The increased use of automation equipment and a continuous functional upgrades allowed us to be less dependent to labor. New initiatives on improving timeliness such as process breakdowns and separate monitoring, enhanced the certainty and stability. As a result, our combined sorting and transportation costs per parcel declined by 17.1%. The continuous improvement in our operating efficiency tempered the impact of price competition. Despite the intense competition, ZTO was able to balance among quality of services, market share and earnings. As a combined result of strong consumption-driven volume growth and cost efficient seeking, which helped to offset the impact from ASP declines. We achieved the adjusted net income of CNY 1.45 billion, which increased 5.6%. We believe in the positive growth prospects of the China express service industry, we also recognize that with the current market dynamics, we are the leading scaled express delivery companies that are relatively close in market share and the competition becomes inevitable. We must focus on what we can do to scale up and wider our competitive lead in order to achieve absolute supremacy. Within the next 2 to 3 years, average daily parcel volume is likely to top over 300 million parcels, and we must maintain a long-term vision and focus on immediate task and work diligently to attain comprehensive revenue.

Going forward, we will continue to focus on strengthening infrastructure across our entire network and improving operational efficiencies through the following: first, developing our infrastructure to be capable of handling over 100 million daily volume in the near future. We will increase investment in self-owned facility and provide financing to support our network partners, who will also increase their processing capability. We will gradually enhance the network structures through delayering and the streamlining, reducing the frequency of aggregation and sortation.

Secondly, improve our operational efficiencies to consistently reduce unit costs in addition to scale leverage, enhance resource planning and dispatch in line-haul transportation and raise the level of digitization and automation for sortation and advance towards building smart technology-enabled logistics part.

Thirdly, lay a strong foundation for multichannel last-mile express plus business model, further implement standard frontline courier fee structure. Cultivate entrepreneurial initiatives on one hand and accelerate development of last-mile post to secure delivery cost advantage and shorten the distance between products and consumers. Last but not least, accelerate design and implementation of innovative products, such as scheduled pickup, on-demand delivery and coaching services either cater towards consumers individualized needs or for few logistic requirements for specialty goods and create differentiated product line and relevant processing capabilities. With brand awareness, develop consumer psyches to improve logistical experience. All above endeavors hold the key to us transforming from a leading express delivery company to an equal advantaged comprehensive logistics service provider. And to accomplish such, technology and data analytics are instrumental.

Apart from delivering results through our daily operations, our business managers are learning to monitor and analyze processes and associated results in order to identify problems and make necessary decisions accordingly. Quality of services, market share and profitability remain our strategic priorities. Sustained growth of our core express business will establish strong mode for ZTO to transform into a world's leading comprehensive logistics service provider. And the development of our ecosystem is our passageway to achieve our mission. We have released the guidance for the full year parcel volume to reach between 16.2 billion to 17 billion. A goal we will endeavor wholeheartedly to achieve. Given our skill today, it will not be difficult to obtain short-term profit. However, we choose to focus on sustainability and balanced interest of all our substitutes for long-term win-win. We firmly believe that the China express delivery industry will continue to progress well. We are confident in our ability to seek opportunity and win this marathon-like race. Perhaps the biggest challenge as well as the mightiest of strength lies with whether we and our partners can stay true to our intention, focused on our common goals and maintain space and confidence and deliver solid execution in every aspect.

With that being said, let's turn to our CFO, Huiping Yan. Please go through our financials.

Thank you, Chairman Lai, and thank you, Sophie. Hello to everyone on the call. As I go through our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentages changes refers to year-over-year comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website, and I will highlight some of the key points here.

Benefited from a strong rebound in e-commerce-driven consumption after the COVID-19 situation has been significantly contained within China. ZTO delivered a strong volume growth in the second quarter. Our parcel volume grew 47.9% to 4.6 billion, and our market share expanded by 1.6 points to reach 21.5%.

Total revenues increased by 18% to CNY 6.4 billion. For core express delivery businesses, the ASP declined by CNY 0.34 or 20.9% for the quarter, better than industry peers. It included CNY 0.28 volume incentives as added support to our network partners in order to maintain and protect market share as well as keeping our network stable. CNY 0.02 related to increased adoption of single-sheet digital waybill, and CNY 0.02 decline due to parcel weight drop.

Gross profit of CNY 1.8 billion, which was relatively flat from last year. Gross profit margin decreased 5 points to 27.6% as a combined result of volume increase, unit price decline, as previously stated, and cost productivity gain.

Unit transportation costs declined 20.4% or CNY 0.12 to CNY 0.43, primarily due to increased number of self-owned high-capacity trailer trucks. The decrease in diesel price and national toll-free policy that ended nearly towards the end of May, also contributed to cost decreases.

Unit sorting costs declined 11.1% to CNY 0.04 -- or CNY 0.04 to CNY 0.27 as a greater number of automated sorting equipment were placed in use, allowing a higher proportion of our parcels to be processed automatically instead of manually.

SG&A increased by 2.3%. Excluding share-based compensation, SG&A as a percentage of total revenue decreased by 0.5 points to 4.9%, demonstrating positive operating leverage from our efficient corporate structure.

Income from operations, excluding SBC, increased by 9.5% and associated margin declined 2 points, which is narrower than the gross profit margin decline because of SG&A leverage and increased other operating income, mainly consisted of government subsidies and tax rebates.

Operating cash flow was CNY 1.252 billion for the second quarter compared with CNY 1.993 billion in the same period last year. The decrease resulted mainly from the increase in financing provided to our network partners in higher prepaid fuel and toll cost driven by larger self-owned fleet.

CapEx for the quarter was CNY 2.25 billion, CNY 1.44 billion higher than the same period last year as we increased investment, such as adding over 2,100 high-capacity vehicles to further strengthen our infrastructure and capacity for anticipated volume increase in the core business.

Now turning to our business outlook. Taking into consideration the current market condition, the negative impact from COVID-19 price competition and the company-prioritized goal to achieve accelerated market share gain while maintaining our target level of earnings, we raised our 2020 annual parcel volume projection to be in the range of 16.2 billion to 17 billion, representing a 33.7% to 40.3% increase year-over-year. And we lowered the adjusted net income for 2020 to be in the range of CNY 4.8 billion to CNY 5.2 billion, representing a 1.7% to 9.3% decrease year-over-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 Instructions) Your first question comes from Baoying Zhai with Citi.

[Interpreted] Two questions. The first question is regarding the second quarter KA business. We actually noticed a sudden acceleration of the KA volume growth in the second quarter, which also leads to the KA costs increased a lot in second quarter. With the reasons behind, it is -- it's as intentional to do the KA business in second quarter or it's due to the pandemic stimulation, which help more online penetration of our KA clients?

The second question is regarding the guidance. (inaudible) to provide more breakdown into the implied ASP assumption and the cost reduction assumption in the second half. And also want to touch on the intention behind the guidance. Actually, we can see the first half, our present strategy was executed very well until some external disruption or it's supposed to see a very good opportunity to clear the landscape among Tongda players. And now we are going to see more complex competition, not only from Tongda players, but also non-Tongda players. We still insist our first half price strategy, what the reason behind?

Thank you for your question. Let me address the KA question, then I'll turn it over to Chairman Lai for the pricing strategy. KA increased. Yes, this quarter we did see surge in the KA. And this is partly proactive and partly not proactive. The decline in the gross margin is in line with the margin activity or margin movement with the express core business other than KA.

(foreign language)

Okay. Chairman says, first of all, our strategy remains. We will focus on prioritizing on expanding our market share and increase our lead. And we will further leverage our advantages to maintain the discipline. What we did see in the second quarter, the price decline more severely as expected. We always believe to ensure our network partners maintain their level of profitability. And also our couriers achieve highest pay in the market, and our team maintain confidence. These are important things for us to uphold. Short-term gains are easily obtained, but we are focusing more on all parties' interest, and we want to be able to allow and ensure our network partners are better off than our competitor -- our competitive peers, network partners. And then we also will insistent -- will be insistent upon making profit on all aspects throughout the whole process of a particular package. So we don't bring in ineffective volumes, as we stated before. With all these thinking, if I may supplement, that we still see in the third quarter, the price competition persisted. And to be prepared for implementing the strategies that Chairman Lai just described, we lowered our profit target to be ready. And also it is a -- so it is a level, it maintains a level comparable to our last year's level for the last 3 quarters. If you noticed that the first quarter COVID-19 impact was severe to the business, but the last 3 quarters, looking forward, we are confident in achieving the targeted level of profit and further accelerate the growth on our market share.

If I further may add, looking beyond this year or looking beyond the next few quarters, is more of our focus because we do look forward to the long-term prospect. But the 3 billion -- 300 million daily volume may arrive sooner than we expect. So we are focusing on our ability to build capacity to be ready. And our capacity, our capability is our advantage so that we can gain more market share and the pricing power will follow.

[Interpreted] So I may follow-up on the cost reduction? Guidance for the next few quarters.

We have -- yes, thank you for your question. We have always been focusing on gaining productivity. As volume increases, we will naturally achieve the scale leverage, but further, in addition to that, we will continue to innovate, continue to modify and improve our network structure, as Chairman had mentioned in his prepared remarks. Delayering and also streamlining our overall network structure will allow us reduce cost, improve efficiency and timeliness of our overall product. So the outlook for our productivity gain on transportation and on sorting are going to be expected.

Your next question comes from Ronald Keung with Goldman Sachs.

Thank you. Let me ask you in Chinese, and I'll translate in English. (foreign language) So we've seen the very high efficiency of how the ASP cuts versus the market share gain that you achieved in the second quarter. And our profit guidance roughly suggests flat to slightly up in profit growth, as you said, versus last year. So should we interpret this strategy as not only in the second half, but actually for the next 1 or 2 years as well until we achieve a scale that we're happy with, which you mentioned before, the 25% market share in 2 years' time? So I want to hear about how do we think about our absolute net profit. Any requirements there that we want to achieve? Or we should -- given high efficiency, which kind of continue this strategy until we reach scalable, at least the 25% scale we talked about?

(foreign language)

Okay. So let me translate. First of all, we believe the express delivery industry has still a long way to go. It is a marathon. The concentration of the market share will continue to -- the market share will continue to concentrate and the stronger will get stronger and the bigger will get bigger. The Chinese market industry cannot contain that many players. Our business, particularly our network is the most stable, and despite the competition, our price, compared to our peers, still has premium. And in fact, we believe in certain areas, the price differential is expanding. That is to say that our businesses is more preferred compared to our other competitive peers.

In the meantime, to anticipate volume increases, we are preparing on many aspects as following: one, continue to, and if not, increasing our investment in infrastructure, not only to improve our facility capabilities but also help and empower our network partners through financing support to help them invest in facilities as well as automation. The overall effort in developing differentiated products, as we mentioned before, including time-definite products or individualized on-demand pickup and delivery as well as coaching. All these, as we mentioned, will help us expand our leadership and ensure our last-mile network partners as well as our couriers achieve the highest profitability and overall capability as well as stability.

Looking to the future, as you asked, Ronald, to reach 25%, price competition of around 2020, we -- our goal is to reach 25%. Price competition may not be necessary, as Chairman said. Even without price competition, our market share will continue to expand because of our core capability of our better managed and higher operational efficiencies as well as the entire network with better quality of earnings. So with that, we believe, again, our focus is on the future, is to achieve -- and one of the items, if I may go back to, is that Chairman described further what it means to delayer. In the past, we win -- we won and we surpassed our competitors through connection or better efficiency connecting our transit supercenters. And gradually throughout the past and going forward, we developed capabilities to connect origination sorting center to destination outlets. Going forward, we would further supplement the capability of our network including connecting between the origination outlets and destination outlets. That is what we said reducing the frequency of sortation and that will further expand our capability so that we could bring in more volume, process it better and deliver it faster and better.

(Operator Instructions) Our next question comes from (inaudible) with [JP JA Securities].

(foreign language) My question is mainly about last-mile. Question one is about short-term. What are the proportions of our different last-mile solutions in the second quarter? Did it change a lot?

And the second question is about long-term last-mile price differential because in recent years, last-mile fee has taken more and more proportion in our total cost and cost of different last-mile solutions where allowed. So I was wondering, in the future, is it possible to have different prices for different last-mile solutions?

Thank you for your questions. So far, the last-mile investment and development of ZTO has been benefiting us in handling greater amount of last-mile delivery as well as reducing cost for our network partners. Again, the cost of delivery is -- for the last mile belongs to our network partners. And the volume is somewhere between 40% to 45% of the last mile packages now being handled by non door-to-door delivery.

And you talked about potential differentiation -- or the last mile cost differentiation. And here are some of the thoughts. Last mile is a key fee segment of our business in terms of the 4 segments, so impact -- the pickup delivery of being the 2 ends. The delivery cost going forward with volume increase, you would anticipate an increase if -- without any of the alternative methods such as drop off box or post. So we believe the -- first of all, to address this increase in cost, we started early in 2018, towards the end of 2018, encouraging all our partners to invest in the last mile ability because last mile resources are scarce, and to ensure our presence there, we'll help our network partners to secure the lowest cost of delivery in the future.

Now another second layer, which probably is more related to your question is that because of our last mile presence and our connectivity with consumers, with customers, our couriers are able to achieve better connection and enhance -- bring about potential commercial opportunities. And that is part of what we are currently investing, researching and design and implementing so that we can help our network partners to, one, is the initial investment pressure when they first start the post -- last-mile post operation; and then two, allowing them to gradually ramp up their capabilities of commercial operations. I hope that answers your question.

Your next question is a follow-up question from Baoying Zhai with Citi.

(foreign language) So my question is regarding the payment to delivery guys because Lai Song emphasized that. ZTO actually paid much better to their delivery guys compared with peers to ensure the stability of the network. I actually noticed, there was a program, it's called like the direct payment of the (inaudible) to last-mile delivery guys. Could you please share more details on this program and the target of the program? And how is the feedback so far?

(foreign language)

The design thinking behind this model of directing -- directly connecting with our courier is as such: it's part of our delayering initiatives. As we mentioned before, if I may, that we have started to develop the standard pickup and delivery fee schedule in 2018. And when we are able to make it transparent between what we pay to the network partners and what they pay to the couriers, because we think the business, the platform, the transit and the sortation is strong, but most importantly, the package needs to be delivered, and that's the touch point with our consumers. So therefore, our courier holds a very important key, facing customers. So to help them develop from employee or maybe just a little entrepreneur to truly motivate it to work for their own because they are able to achieve more market-driven as well as a fair pay that is passed through to them through the network partners. And so far what we have seen is that our network partners responded quite well to this model in the fact -- in fact, that they believe their couriers are more stable, are more focused on quality of services to their customers, so therefore, they are bringing in more volumes and bringing in more customers. So it's a win-win for all the parties involved.

So far around 40% of our network partners have signed up and started to implement this model. And our goal is to achieve at least 50%. But by looking at the current trend or current responses, we believe we would may exceed that 50% coverage goal that we said before.

Your next question is a follow-up question from (inaudible) with [JP JA Securities].

(foreign language) My question is about the capital expenditure. The first one is that we noticed that the capital expenditure in the second quarter increased about more than 170%, and will it continue in the second half of the year?

And the second question is about the capital expenditure of our network partners. Both of the capital expenditure, our network partners have the same importance with ourselves. So they have a rough estimate for the proportion of capital expenditure from ourselves and our partner.

Thank you for your question. Indeed, as you stated, this quarter, the past second quarter, we acquired and placed in service a lot of the increment of trucks, vehicles that we invested, it's around 2,100, 2,200. So this is a onetime, but yet, we believe investment in the infrastructure is one of our key strategies to build capacity in anticipation of the high-volume -- income volume.

The overall budget for CapEx spending is around CNY 7 billion for this year. We think that it's somewhere close to what we had previously talked about, CNY 6 billion to CNY 8 billion range. The investment by our network partners, yes indeed, are increasing. As we know, we invest in our own capacity, but because it is pickup, transit, sorting and delivery, all 4 aspects needs to be coordinated and in sync. So a lot of our network partners are expanding their capabilities as well. Some of the figures I could provide you is that we have anticipated over 100 automation lines to be installed by our network partners. And so far, we've already seen the network partners invested over 50 of that. So towards the high season, we think the investment pace will pick up even further. Some of our larger network partners also invest in land. And this is a long-term investment, which, again, demonstrated their belief in -- and the confidence in the future of the business together with us.

Thank you. This concludes our conference for today. I would like to turn the conference back to the company for any closing remarks.

Thanks again for everyone joining us for today's call. Any further questions, we are welcome, and we are looking forward to talk with you soon.

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