ZTO Express (Cayman) Inc (ZTO) 2025 Q3 法說會逐字稿

Good day, and welcome to the ZTO to announce third-quarter 2025 financial results conference call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Sophie Li, Secretary for the company.

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, 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 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's 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. (spoken in Chinese)

(interpreted) Hello, everyone. Thank you for joining today's conference call. China express delivery industry experienced steady growth during the third quarter of 2025. While maintaining its industry-leading service quality, ZTO grew its parcel volume by 9.8% year over year to reach 9.57 billion parcels. Our adjusted net income was RMB2.51 billion, which rose 5% over the same period last year.

During the quarter, government advocated for grassroots against evolution and promoted more orderly competition by curbing unreasonable low-price practices. As a result, the overall pricing level across express delivery industry stabilized and began to recover. Adhering to our balanced approach to quality first to growth strategy, ZTO rose to the higher standards for model enterprises and reinforce the principal design to achieve coordinated development with both high volume and high quality. We encourage our network partners to reduce costs and increase income by strengthening last manicured delivery capabilities to become the preferred choice of last-mile market.

ZTO's retail parcel volume maintained strong growth momentum and grew close to 50% year on year. Through optimizing the pickup model and the refined lean process management, we enhanced both service quality and cost efficiency. For transit efficiency, ZTO continued to advance the application of smart technology in transforming standardized cost control mechanism, implementing more effective resource allocation and the performance metrics. The combined unit cost of transportation and sorting decreased by RMB0.05 year on year.

Entering the fourth quarter, overall industry volume growth exhibited some moderation, while uncertainties and short-term challenges in the macroeconomic recovery still expect. The long-term prospects for the express delivery and logistics industry remains positive. We will stay focused on enhancing our product and service capabilities.

In the next phase, we will prioritize the following five areas of work. First, at home service quality as our lifeline, establish a comprehensive end-to-end quality management service system with integrated baton service indicators for performance evaluations, assign clear responsibilities and capabilities, ensuring continued service leadership. Second, deepen last mile capability build-out, expense upgrades of sorting capabilities at [Alis], further implement direct linkage and incorporate local commercial opportunities, hence reduce delivery costs and enhanced last-mile profitability through a higher retail parcel mix.

Third, optimize network policies and incentivized mechanisms, while ensuring steady volume growth enhanced policy transparency and fairness, implement relevant incentive mechanism to cultivate intrinsic motivation. Fourth, advanced end-to-end cost efficiency and synergy leverage cutting-edge technologies and digitization tools to optimize route planning with appropriate match to transit capacity more certificate planned for capital investment and utilization and improved ordination across all stages of operations, help network partners to continuously improve their operational efficiency, reduce last mile pickup and delivery costs and achieve higher earnings.

Fifth, safeguard fairness and grass rooting, improved communication and governance promptly address gene concern and results will issue, protect legitimate rights and the interest of all and careers and maintain trust and confidence in our brand. The express delivery industry i1s currently undergoing a strategic shift from prioritizing high volume towards development in both quantity and quality.

Against today's macroeconomic backdrop, the increasing proportion of low-priced parcel presents unique new challenges for top-tier enterprises like ZTO. Facing this structural change ZTO stayed in course in prioritizing quality of services and winning through efficiency, so continuous product upgrades and refine the process management. We navigated a complex market environment, upheld high quality of service standards and scaled up within reasonable earnings parameters.

In the meantime, our network partners baptized by fierce price competition are actively innovating and forging last-mile capability and business model with more diverse revenue. Better operational efficiency, with higher confidence in the success of operations, the advertising network is becoming even more resilient. Competition is an inevitable growth phase for majority of [industries].

Looking ahead, we firmly believe that by leveraging the best potential of solid growth foundation and vibrance of China's economy, ZTO can perpetuate our unique culture, rely on our robust infrastructure and with our strong operational capabilities and sound financial strength, we are able to seize opportunities in the ongoing development of the express delivery and the largest industry. Together with all our partners, we can create greater value and bring evening to more people through our products and services.

Next, let's invite Ms. Yan to present the financial results and guidance.

Thank you, Chairman Lai, and thank you, Sophie. Hello to everyone on the call. As I go through our financials, please note that -- and as specifically mentioned, all numbers quoted are in RMB and percentage changes refer to year-over-year comparisons. Detailed financial and performance information, unit economics and cash flow are posted on our website, and I'll go through some of the highlights here.

In the third quarter, in alignment with government's appeal against evolution, we reaffirmed our focus on quality enhancing our core competencies to advance high-quality development. Our parcel volume reached RMB9.6 billion, which grew 9.8%. Adjusted net income increased 5% to RMB2.5 billion.

ASP for core express delivery business increased 1.7% or RMB0.02, and the breakdown are the following: RMB0.18 positive contribution from increase in KA volume mainly comprised of headquarter contracted reverse logistics products and services. This growth was partially offset by a RMB0.02 decrease due to lower average weight per parcel and a RMB0.14 reduction from higher volume incentives.

Total revenue increased 11.1% to RMB11.9 billion as a combined result of volume and price increase. Total cost of revenue was RMB8.9 billion, which increased 21.4% as a blended result of significant increase in costs associated with non-e-commerce volume relative to the rate of decrease in cost for e-commerce volume.

From the overall unit cost perspective, core express delivery business increased RMB0.09 to RMB0.91. Combined unit cost of sorting and transportation decreased 7.7% or RMB0.05 for the quarter, benefiting from economies of scale and various productivity initiatives. Specifically, unit costs for line haul transportation decreased 11.5% to RMB0.34, thanks to enhanced route planning in conjunction with optimizing fleet operations.

Unit sorting costs remained stable at RMB0.25 due to improved labor efficiency through automation, offset by higher cost from new facilities that commenced operations in the quarter. Unit KA costs increased RMB0.14 and which is in line with KA volume growth. Gross profit decreased 11.4% to RMB3 billion, and gross margin rate dropped 6.3 points to 24.9%. SG&A, excluding SBC, grew 16.2% to RMB633 million, SG&A expenses, excluding SBC, as a percentage of revenue slightly climbed to 5.3% compared to 5% in the previous quarter last year -- same quarter last year, primarily due to higher depreciation and amortization expenses.

Income from operations decreased 15.4% to RMB2.4 billion and associated margin dropped 6.3%, a point to 20.3%. Operating cash flow was RMB3.2 billion for the quarter, representing a 3.2% increase. Adjusted EBITDA decreased 4.2% to RMB3.6 billion. Capital expenditures for Q3 totaled RMB1.2 billion, and we anticipate our annual CapEx expenses in 2025 to be RMB5.5 billion to RMB6 billion.

Now moving on to our guidance. With visibility into the final quarter of the year, we are adjusting down the annual volume guidance to be in the range of 38.2 billion to 38.7 billion parcels, representing a year-over-year growth of 12.3% to 13.8%. Volume is critical to a scale leveraged business and partner network stability is the foundation for sustainable long-term growth of our company. As macro environment continues to evolve and industry dynamics shift towards more orderly competition, we are confident in our ability to execute the overall corporate strategy as well as tackling challenges in the near term.

This concludes our prepared remarks. Operator, please open the line for questions.

(Operator Instructions)

Ronald Keung, Goldman Sachs.

(interpreted) Two questions. One is about the industry structure and outlook. Given that we've seen growth convergence and pricing have stabilized temporarily, but how should we think of the year ahead and the long-term market structure as we are still in a relatively fragmented industry landscape?

Second is about integrated opportunities besides the express delivery, what are we doing on the higher end or overall supply chain logistics offerings to provide a more integrated service to your customers?

(interpreted) Thank you very much for your question. The very first question is really related to the competitive and industry dynamics and where it's going. We believe that the scale and better services as well as higher efficiency, cost effectiveness will lead to greater opportunities. So we have continuously focused on becoming the best of ourselves because the future belongs to the stronger ones.

Looking into the future, we again will continue to focus on now as we look forward. There are several things that we are continuously focusing on. The first one is to strengthen the competitive advantage of our core businesses. And there are three perspective of three areas that we will be paying attention to. The first one is to strengthen the connectivity or relationship between the outlets, the couriers with our sortation center. It's mainly for allocation of interest, allocation of roles and responsibility as well as rewards across these all points with better equity and equality.

The second part is express delivery is mainly serving the 2C consumers we leveraging the installed base will have an opportunity to solve -- bring solutions for greater logistics market. Currently, we have express delivery, we have LTL business, co-chain in a warehouse cloud operation as well as last-mile outlets. We believe the competitive landscape will shift towards comprehensive capability focused.

We will not only serve to see. We will also serve modern manufacturing, agriculture as well as more specific scenarios such as bringing products and services from factory directly to consumers, bringing agriculture products out of the field directly on to people's dinner table. So for all these specific scenarios, we will participate with higher quality, higher efficiency and this will lead to a differentiated competitive advantage in the future for us.

Qianlei Fan, Morgan Stanley.

(interpreted) I have two questions. The first one is about the anti-evolution. So do you have any comments on the anti evolutions potential impacts, specifically on the outlook for market pricing. We have noticed that the company's guidance on volume for the fourth quarter of this year implies a quite wide range of growth look what's the consideration behind this outlook? Specifically, in just mentioned, there are some considerations of term challenges, what's these near-term challenges and what's the outlook for next year?

And my second question is about recent news talking about that regulators had a conversation with ZTO's management on its network management. So is there any details that could be shared? And is there any potential impacts we should be expecting?

(interpreted) Thank you very much for your question. So sustainability of the entire excessive competition policy, I think it was related to your first question. Since August of this year, the anti-evolution policy has been progressively rolled out across most regions nationwide aiming at rational recovery in pricing, and this policy directly addressed the pressure caused by excessive price competition since earlier this year. And it calls for the industry to turn towards orderly competition and healthy development. So we expect this trend to continue and the effort will also continue to take effect.

As the anti-evolution guidance continues to take effect, industry overall attention is shifting from high-volume growth focused to combined effort in high-quality development as well as high volume, with greater emphasis on service quality and sustainable long-term viability. Once the assessment period concludes we think market rates are expected to stabilize above at least the cost levels, promoting healthier competition.

We also believe that the regulatory focus will continue to advocate high-quality development and disciplined market practice. On one hand, policies will continue to encourage companies to build competitive advantages through innovation, technology, effective managerial skills and services. On the other hand, regulators will remain vigilant and to deem as needed to seize practices that could harm as through interest or disrupt social stability, protecting sustainable long-term growth.

As an industry leader, ZTO's quality-first and balanced development strategy is fully aligned and we are engaged with the regulatory guidance. We view it as a growth opportunity and will take proactive steps to provide model effect for the sector. First, we will continue with investments in automation and digitization to strengthen our operational capabilities. Second, we will pay close attention to constructive feedback from outlets and couriers to strengthen network stability. Third, we will pay strategic focus to benchmark -- to provide a benchmark effect for higher quality development for the industry.

As to the recent consultation by relevant government agencies, we believe that the recent regulation consultation is consistent with the entire evolution policies as well as our intention. It also is related to certain isolated cases arose from the network complaints. The express delivery industry is shifting from high volume growth. to high-quality development at the same time. And this is the overall guidance with anti-evolution policy as well as the specific consultation. It requires all participants, especially ZTO as a leading player in this industry, to provide exemplified model effect.

In the short term, we think that these consultation events serve as an important reminder for us as well as, we believe, stress tests for our managerial attention and capabilities. We have taken the feedback constructively and seriously and are treating it as a catalyst for further improvements internally. We have thoroughly reviewed our system in feedback as well as providing greater visibility and timely feedback in addressing specific issues.

In the long run, we believe that proactively embracing and leading this high-quality transformation not only is consistent with our regulatory and market expectations, but also builds (technical difficulty)

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And pardon me, everyone, this is the operator. We've reconnected to the speaker location. Please proceed with your answer.

Thank you. So I'll rewind just slightly where we got cut off.

In the longer term, we believe the proactively embracing and leading the high-quality transformation will not only be consistent with the regulatory intention and the market expectations but also build a more robust and sustainable collaborative model for us to work with all constituents in our industry and in our end-to-end businesses. This will help us attract higher-quality customers and partners, ensuring longer and sustainable growth.

Tarang Luo, UBS.

(spoken in Chinese) Let me translate for myself. My question is about volume. As we actually noted that the industry has experienced more or less notable, like volume slowdown recently. So just curious about the underlying drivers behind it then more related to the pricing recovered recently?

And also, how should we think about the volume growth for next year? And also, any potential changing in competitive landscape of competition dynamics and the volume slowdown going forward?

(interpreted) Yes, indeed, thank you for your question. We have noticed a low on absent decline or deceleration in the industry. The recent announced October average growth of the industry is low-single digit, and that's been not seen for a long period of time. So we think that the recent deceleration in the industry growth is primarily due to the price increase driven by the evolution -- anti-evolution policy. This adjustment where overall logistic price has increased and has a greater impact on low margin and highly price-sensitive e-commerce merchants, resulting in a decline in that segment of the parcel.

Overall, the sector's parcel volume mix is shifted again towards a better structure with higher economics. Leading express delivery companies with stronger service capabilities and well-established product portfolios are poised to regain their competitive position. In other words, for those that typically gained volume from lower-priced packages will be impacted greater negatively.

Looking ahead to next year, we expect the industry volume growth to perhaps stabilize and most likely to stay around 10%. This sector is shifting away from a single focus on volume growth towards higher quality as well as quantity development, with market resources increasingly gravitate towards service quality and operational efficiency. The future reshaping of the competitive landscape will be driven by ongoing regulatory influence alongside corporate self-discipline and standardized operations, paving the way for a healthier competitive landscape and sustainable long-term growth.

[Lujan Lam], [CTX Securities].

(interpreted) And I guess my first question will go with cost reduction. So if the anti-evolution policy continues into 2026, considering that the industry CapEx of 2025 would be actually set for a higher growth rate expectation, so would this possibly bring any challenges in our cost reduction is a lower cost growth shown in 2026? And as a result, could we be shed more some lights on the cost improvement in 2026?

And the second question would be regarding to the competition structure. So as we can see that after setting price for some parcels in the major markets for some like in Guangdongyu and other province, would it lead to some more focused -- shift of the focus on the price competition from the lower calibrate to the higher one? And I guess that's my question.

(interpreted) Thank you very much for your question. Yes, ZTO has always been focusing on our cost efficiency. In the first development of our company, we -- because of attention -- because of our attention in capacity and infrastructure development, our competitive cost advantage is very apparent. And then as the industry progress, you saw that various other peers have also invested in facilities, equipment as well as transportation capabilities.

You saw that our competitive cost advantages across the industry is becoming more close to each other. We think that the focus now is not just in transit and line haul because out of the four segments of the end-to-end services, we have collection as well as delivery. For the total end-to-end cost reduction or cost efficiencies, we have initiated work in, for example, the 3+1 effort so as to continue to improve the cost equation across the whole process.

We invested in technology, invested in higher efficiency in matching the capacity as well as the demand for capacity. We have helped our network partners to improve their automation capabilities as well to improve their efficiency allowing, for example, the couriers to have more time in focusing on their delivery work, at the same time, reducing the outlet overall last mile cost.

We do believe that with the existing operational layout, the cost advantage will eventually diminishing. However, with increasing attention to the end-to-end all segments coordination and integration in reducing cost, improve efficiency, not only the transit and sortation segment of our business will continue to lead in cost -- as well our cost efficiency as well as our network partners will gain advantage in becoming the lowest cost in the last mile as well as the pickup. We -- so hence, have high confidence in maintaining our cost leadership going forward.

And then the second part of your question relates to what we will -- what we have observed going forward in the smaller packages becoming a lesser component of the total volume. So what we do, we will, based on the capacity layout of our whole network appropriately allocate and matching the resources.

For example, in the middle and western part of our network, we should be able to gravitate more towards some policies for higher wait. And from an overall perspective, we believe we do have high confidence in managing the policy in addressing the shift in the mix of our volume. Again, we'll continue to focus on our balanced approach in developing volume, scale, and a reasonable profit level all under the premises of high quality of products and services going forward.

Apologies. Please proceed.

Yes. We believe this will conclude our call for today. Again, thank you, everybody, for joining us, and we look forward to have further discussions with you offline.

Thank you. This concludes today's conference call. We thank you all for attending. You may now disconnect your lines, and have a wonderful day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.