ZTO Express (Cayman) Inc.
Q3 2018 Earnings Call Transcript

Published: 15 Nov 2018

[Operator:]

Hello everyone, and welcome to the ZTO Third Quarter 2018 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Sophie Li, Investor Relations Director. Please go ahead.

[Sophie Li:]

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

[Meisong Lai:]

[Foreign Language]

[Sophie Li:]

Okay. First, let me translate for Chairman. Hello, and thank you, everyone for joining our call today. Our business achieved another solid volume growth and a strong financial performance during the third quarter of 2018. Parcel volume increased by 36.5% year-over-year to 2.1 billion. Net income was RMB 1.06 billion, which grew 47.7% from last year, all thanks to parcel volume growth. ZTO's market share in terms of parcel volume increased 1.4 percentage points to 16.6%. ZTO continues to solidify industry leadership position with scale advantage as well as superior earnings quality. Our strategy remains which is to manage the healthy pace of growth in relationship to the overall industry and consistently expand our market presence while achieving targeted profit growth and improving quality of service and customer satisfaction. During the third quarter, radical pricing practice still existed, especially in areas with high concentrations of e-commerce merchants or goods. Following our second quarter pricing strategy, we kept our focus on effective parcel growth by protecting existing volume and associated profits, then providing appropriate amount of incentive to steer towards incremental parcel volume that are profitable. While growing volume, we continue to direct attention and resources towards strengthening our transit and sorting capability and productivity improvement. In an environment of rising costs such as that of fuel and labor, our combined transit and sorting hub's cost per parcel declined CNY 0.09 year-over-year during the quarter. At the end of the quarter, ZTO owned and operated over 4,000 transportation trucks, including 2,270 15- to 17-meter long high-capacity vehicles. 200 of which were added this quarter through digitalization, intelligent control technology and the process improvement initiative in smart route planning, improved safe utilization, on-time loading and dispatching, sorting automation, integrated with dynamic weighing equipment, our operating efficiencies improved consistently for the past three quarters. Cumulative of the first three quarters of 2018, our parcel volume grew 38% year-over-year and income from the associated line-haul transportation and sorting hub cost combined all increased by 20%. Continuously and with focus, ZTO has made systematic investments in infrastructure, technology-driven research and the innovation, which gradually yet consistently delivered operational efficiency gains to where economic benefits are maximized and in sync with the pace of steady volume growth. Early investments in scarce resources combined with the modern generational approach through automation that are both effective and cost-efficient is unique only ZTO among scaled express delivery companies in China. This is one of the fundamental reasons why ZTO is more profitable today and why we are in a much better position to achieve sustainable healthy growth for many years to come, taking full advantage of the tremendous growth opportunity within China's express delivery industry. In addition to strengthening our own operational capabilities and efficiencies, we continue to focus on the stability of our overall network and empower our network partners. For those always in regions that have exceeded certain level of volume, we decreased the number of network players and plan for regional resource integration. Implementation of standardized pickup and delivery fee schedules will enable more and more express couriers become entrepreneurs versus contract employees. As of the end of the third quarter, there were 9,500 network partners, with the increased number of 4,160 direct network partners. The stability of our network is founded on cohesiveness created by the ZTO brand, customer satisfaction, shared success culture and fair network policy. Speaking about brand recognition and customer satisfaction, our service quality center has been focusing on five effects throughout the year, including process implementation, resource integration, application of technology, enforcement enhancement, service upgrades. We consolidated 19,000 customer service personnel across our network onto one technology platform to serve over 500 regional centers and quickly improved response rate and processing speed. According to the data released by the State Post Bureau, we ranked first in customer satisfaction during the quarter plus the lowest number of complaints amongst some of the operators. During China's momentous Singles' Day shopping festival on November 11, our order surpassed 115 million. Parcel volume exceeded 87 million. So far, the peak number of delivery reached over 50 million. All these record highs indicated trust and reliance by our customers as well as ZTO's superior capability to handle the sheer volume of parcels through our network. 2018 is near the end. Based on our forecast, this year, we'll increase parcel volume by at least 2.2 billion to reach over 8.4 billion for the year of 2018. And our projected net income will increase approximately RMB 1 billion to reach approximately CNY 4.1 billion for 2018. Looking ahead, we are optimistic about the long-term growth of the China express delivery industry. Total parcel volume for China's express delivery market is poised to achieve an unprecedented annual growth of 10 billion from 2017. And with 50 billion base, we believe China's express delivery market will continue to expand. As the pillar that supported rapid growth of the Chinese consumption and e-commerce, express delivery industry will continue to be an enabler for the future economic growth. ZTO will continue to monitor market condition and industry trends, and manage our pace of investment and growth accordingly. With our strong team and financial resources, we can stay on course of our strategy and further solidify our capabilities and leadership position and deliver sustained profitable growth and value creation for our shareholders. With that, let's ask our CFO, Huiping, to walk us through the details of the financials.

[Huiping Yan:]

Thank you, Chairman Lai. And hello to everyone on the call. As I review our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentage changes refer to year-over-year comparison. In summary, ZTO achieved an in line parcel volume growth of 2.1 billion, increasing over 11 percentage points faster than the industry average. Meanwhile, adjusted net income exceeded the high end of our guidance for the quarter to reach CNY 1.06 billion. Our strategy of continued expansion in market share while maintaining high quality of services and profitable volume growth is well executed in the third quarter. Revenues increased 34.7% to CNY 4.23 billion, mainly driven by increase in revenues from express delivery services, which increased 23.3% to CNY 3.69 billion as a result of 36.5% volume increase and offset by per parcel price decrease of about 8.1% year-over-year, or CNY 0.17, which was comprised of CNY 0.05 due to decreased in weight per parcel; CNY 0.03 normal subsidy for label usage; and CNY 0.09 for volume incentive. The freight forwarding business we acquired and started consolidating during the fourth quarter of 2017 contributed CNY 291.2 million of revenues. Revenues from sale of accessories was CNY 200 million, mainly consisted of sales of thermal paper used for printing of digital waybills. Total cost of revenues increased 45.1% to CNY 2.91 billion, which includes CNY 282 million in cost associated with the freight forwarding business. Going into further detail of cost of revenue, line-haul transportation cost was CNY 1.35 billion, an increase of 22.7% from the same period last year. As a percentage of revenue, line-haul transportation cost decreased to 32% from 31 – 35.1% last year, driven by lower weight per parcel, increased usage of self-owned vehicles, more efficient high-capacity transport trucks and improved route planning. Sorting hub operating cost was CNY 765.9 million, an increase of 30.7%. As a percentage of revenues, sorting hub operating cost decreased to 18.1% from 18.6% during the same period last year, mainly due to an increased level of automation in our sorting facilities, which partially offset the continuous increase in labor cost per headcount. As of September 30, 2018, 78 sets of automated sorting equipment have been put into use compared to 41 sets same time last year. The average number of sorting hub headcount increased by 17 – 17.2%, which is well below the increase in volume of 36.5% during the quarter. Combined transportation and sorting hub costs for the quarter decreased by CNY 0.09 per parcel net of increases, which increased – net of increases of cost, which helped absorb a large portion of per parcel price decline. Cost of accessories was CNY 119.2 million, an increase of 28.2%. The increase was in line with the 57.1% increase in the sale of thermal paper for label printing. Other costs were CNY 388 million, an increase of 74.5% compared to the same period last year, primarily consisted of

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Nicky Ge from China Renaissance. Please go ahead.

[Nicky Ge:]

[Foreign Language] My question is about our fourth quarter guidance. Looking at the guidance, actually, the volume growth has decelerated a lot – a little bit. Just wondering whether we have adjusted our market strategy or are we still targeting 10% outpacing the total market? And looking forward to the 2019, what is our market strategy going forward? And how do I see the market growth of – in next year?

[Meisong Lai:]

[Foreign Language]

[Huiping Yan:]

Thank you, Chairman. Let me help translate. There are three questions, so if we may, one by one, elaborate. The first question. Fourth quarter, our guidance, it seems to be – for the entire China market, it seems to be soft. If you look at the third quarter, the price for the entire express delivery industry is declining, which still indicates a pressure or, in other words, competition pressure comes from the growth potential of the industry. So we still believe there are growth potential. However, in the fourth quarter as you also noted from the Postal Bureau, the e-commerce volume does have a downward adjustment. So we are, on one hand, focusing on our strategy to continue to grow our market and at the same time, monitoring what's happening in the marketplace. Our guidance is appropriate at this time, not conservative, neither aggressive. The second question for the total market, are we changing our strategy. Mr. Chairman went into more elaboration on that part of the question. If you look at the overall industry in 2017 to 2018, an estimated CNY 100 million growth, that is a – CNY 1 billion growth, I'm sorry. That's a significant growth and unprecedented. For ZTO we have looked into our past. Our absolute volume growth is consistently increasing year-over-year. For example, 2017, so [Foreign Language], CNY 1.7 billion last year and then CNY 2.2 billion estimated for 2018. And these growth indicated a tremendous opportunity in the marketplace as well as our focus on the following

[Nicky Ge:]

[Foreign Language]

[Operator:]

Thank you. Your next question comes from Ronald Keung from Goldman Sachs. Please go ahead.

[Ronald Keung:]

[Foreign Language] I have two questions, Lai, Huiping. First is about the industry, where we have seen online retail growth decelerating in the past few months but the passive growth has actually held up quite nicely. So glad to hear anything that you're seeing on the ground including ticket size or anything that has contributed to a more healthy parcel growth that we're seeing so far. The second question is could you break down a bit on the ASP this quarter? Like what you've done last quarter about how much was the decline contributed to the weight decline and the incentives, and we'd like to hear about the direct shipment and key accounts, whether those have contributed to the ASP changes.

[Meisong Lai:]

[Foreign Language]

[Huiping Yan:]

Let me first translate the first question answered by – for the first question. And then I'll answer the second one. Yes, indeed, if you look at the overall e-commerce that there are downward adjustments. But if we look at the entire industry, commerce in China will continue to grow on a large base, particularly if we look at some of the areas that are not fully developed yet or perhaps the spending power is not completely released yet. For example, the rural area and international. As we mentioned earlier, e-commerce in China, the growth of it is supported greatly by the effectiveness and cost advantage of express delivery businesses. And going forward, it will continue to be the supporter of this growth in China. And we are still optimistic and we remain focused on the longer-term longevity of the entire industry's growth. And then second, Mr. Lai emphasized on the fact that there are factors that are not within our control. So we are focusing more on our own capabilities and building our own capacity and efficiency. If you are able to take a relatively stronger position in competitiveness, then you are able to win at the end. If you consider the fact that we have grown consistently, continue to increase the absolute volume in our history and consistent results in our efficiency gain, based on those, then we have higher confidence in the fact that we will succeed in the long journey. Our focus on profitability as well as customer services are supportive of our entire volume growth and market share gain to get up to a higher level of proficiency and earnings quality. So it's important for us to continue to maintain focus on our own capability as opposed to distracted by potential short-term uncertainties of the marketplace. And then for the second question, the breakdown of our ASP. For the overall comment is that the ASP decline are in line with our expectations as well as consistent with the market's competitive condition. For the third quarter, the 8.1% or CNY 0.17 decline is broken – breaking down – broken down by the following three main drivers

[Operator:]

Thank you. Your next question comes from Eric Zong from Macquarie. Please go ahead.

[Eric Zong:]

[Foreign Language] I have two questions. The first question is regarding the parcel pricing trend. So I wonder what's the parcel ASP trend so far in the fourth quarter. And also, I found like in October month the industry parcel ASP declined by 4.5% year-on-year. So on a Q-on-Q basis, have you seen the parcel ASP which is higher than the third quarter? So my second question is regarding on cost. So the unit sorting cost declined by 4% year-on-year. So I feel that China is a little bit below expectation compared with the second quarter, which we saw a 6% year-on-year decline. So I just wonder what's the reason behind this trend.

[Huiping Yan:]

Thank you, Eric. First of all, if you look at the fourth quarter, generally speaking, the weight per parcel will increase. So the ASP will – naturally will decline, and that's what we are seeing. The price increase that we implemented started in November. So there is a blended effect there but still per parcel-wise, we believe there are pressure because of the weight increase. The sorting facility, let's say a little bit more on that, elaborate a little bit more on that. And indeed, the year-over-year efficiency gain is not as apparent if you just look at the sorting hub cost. There are good reasons behind that for specifically this quarter that we had just experienced. The labor cost, first of all, increased per headcount even though we have a total headcount increase well below the volume increase, as well as the fact that if you think about sorting machine – automation machine implementation, it's a gradual process. There are various segments of the use of the equipment. It's currently, first of all, covering a portion, about 50% or so, of our total sorting hubs, not all of the sorting hubs have installed because comparing to the volume, we believe there is an inflection point where utilizing people is still more cost-effective. As we gradually improve and increase the automation installation, you should see continued efficiency – release in efficiency gain. Sorting hub implementation, as I mentioned earlier, it's – as it crossed the entire process of unloading, sorting and reloading onto the truck will take a good – it will take a process as we retool and recalibrate the destination outputs of all the stations. All these are to be planned and in an overall – from an overall perspective. Looking forward as more volume coming in, the automation machine that we have installed, together with the dynamic weighing machine that's integrated into our automation sorting equipment, will gradually and consistently release efficiency.

[Operator:]

Thank you. Your next question comes from Edward Xu from Morgan Stanley. Please go ahead.

[Edward Xu:]

[Foreign Language] I've got two questions. First is regarding the ASP trend because Mr. Lai mentioned that in fourth quarter, you are going to be more balanced on the volume growth, market share and the profitability side. So does that mean that the ASP decline will narrow? And what do you expect the overall trend for the industry for present competition over the next six to nine months? That's the first question. Second question is that regarding your new services and products, are you planning to promote some more products that can better differentiate your services rather than pure pricing competition? And what is the progress so far?

[Meisong Lai:]

[Foreign Language]

[Huiping Yan:]

Let me translate. Our strategy has been consistent throughout the past year, which is to balance the three factors

[Operator:]

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

[Sophie Li:]

Thank you, operator. In closing, on behalf of the entire ZTO management team, we would 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 let us know. Thank you for joining us today. This concludes the call.